A Proposal that Could Benefit Both Crombie REIT and Halifax.

This is the fourth post that was inspired by the eviction of 2 small businesses from Scotia Square Mall in Halifax.  Scotia Square mall is owned by Crombie REIT, so this is a follow up to the letter I wrote about them on Feb. 2nd.

This story alarmed me as I think it is a symptom of a larger problem plaguing cities across Canada.

In looking for more information about Crombie REIT I found this article in the Herald which points out that Crombie soon plans on selling Park Lane Mall, located in downtown Halifax.

Aha, perhaps here is an opportunity to turn what at the onset was a sad, frustrating story into a happy one.

Perhaps here is an opportunity to test the whole idea that an Ethical REIT could be created which would lower rents for small businesses in the Halifax Regional Municipality (HRM). 

I don't know Park Lane Mall well at all, and don't know about the units that are currently vacant, though there appear to be quite a few:  http://www.crombiereit.ca/PDF/factsheet_24.pdf.  

My guess is there are many small business owners in the HRM currently paying high rent who would jump at the chance to have a stable, long term location that would hopefully be more reasonably priced.  Maybe a few small business owners with complementary skill sets would see the opportunity to merge together into larger businesses that could be more robust, or even just share one rental space.  

Maybe there are owners of venues of locally made-products who could come together and share their skills and resources for the great benefit of the makers of this province.  Cheaper rent = lower overhead = lower consignment rate = more $$ in local makers' wallets and more opportunity for the public to afford to buy local.

Maybe Mike Savage, the Mayor of Halifax would see the value of this project and assist it by ensuring the property taxes are reasonable, to help reduce overhead.  Before other business people think, "woah!" bear in mind all the government handouts that have been given to other businesses in this province.

Maybe the local media would promote the project so well that tradespeople would give good prices for necessary renovations in return for the positive press.  

Maybe Park Lane Mall would present an opportunity to build community downtown.  Maybe it could turn into a friendly gathering place where more senior members of our community could share their expertise in all sorts of business skills with younger entrepeneurs; to ensure that their businesses make sense and thrive.  Can we not see how this could benefit the entire province?   Maybe, over time, it could become an oasis for residents and visitors committed to buying local, and a sort of "Noah's Ark" for small businesses.

This project wouldn't have to deliver a large salary to a CEO, or worry about growing revenues for investors and maintaining a 15% return.  It would produce a return though.  A fair, sustainable return that would be guaranteed by the equity in the building and the collection of monthly rents.  This equity would increase as any mortgage was paid down by rent, and hopefully via appreciation of the mall.  Perhaps the building, or parts of it, could be turned into commercial condos which the more established businesses could buy from the REIT, or rent-to-own.

I'm not talking about a free ride for businesses, or charity.  I'm just talking about reasonable rent, and a fighting chance to make a decent living as a local, small business owner.   It would also be an opportunity to create something interesting for Halifax, that wasn't just a pile of foreign-owned chains. But imagine if this mall turned into the reverse of Scotia Square, and instead of given the boot, small business was given a break.  Existing "chain" tenants would still pay fair market rent, this would shore up the income needed to run the place, while providing opportunities for our local businesses. 

Maybe CEED would like this idea, after all, they assist entrepreneurs; where are these entrepreneurs supposed to set up shop?  It has occurred to me that commercial rents in Halifax may be on par with those seen in other Canadian cities which might have a much larger population.

Maybe Mr. Clow, CEO of Crombie REIT would see the opportunity to rebound from a public relations disaster by agreeing to sell Park Lane Mall at a fair price, or even as a rent-to-own arrangement.  Maybe Crombie executives would lend their expertise in the financial realm to ensure the project would be a success.  One thing I've noticed is that super creative artsy types often aren't very good at 'money math'.  Maybe the Sobey's family would bring snacks to the grand re-opening, seeing as Crombie REIT originated via Sobey's.

Maybe given actions we've seen by Crombie REIT to date, the above paragraph is far fetched, but it is fun to dream.

Now, I think, this idea needs to be thoroughly dissected and critiqued:

I don't buy that Crombie REIT would be dumping Park Lane Mall if it was actually an awesome investment.  If it was, I think it would make more sense to keep it; that would be a lot of equity building up from all those rents.  

Given Crombie's actions with its other properties I'm pretty critical of what they say.  To quote the article about Park Lane's sale:

“Our rationale for the sale is that, despite it being in a strong urban market like Halifax, it is a non-core asset in our growing national retail and office portfolio and, as such, presents an opportunity for us to recycle capital into accretive development and growth,” Clow said.  

I wonder if the plain English translation for this is something like "This property doesn't support giant executive pay hikes while providing big returns to our investors so we've decided to dump it".

My guess is that the operating costs are high and tenants able to pay the rent are hard to find (some of the spaces for lease are quite large).  

The "anchor" tenant for Park Lane is a movie theatre that was just taken over by Cineplex.  Now there's a risky business these days, now that so many people have giant televisions and home, and accounts for things like Netflix.  

Plus going to the movies is expensive, so many other expenses are going up (like rent, mortgages, property taxes, gas, utility bills and groceries) so the "let's go to the movies" budget, a former popular pastime for the middle-class, isn't as possible anymore for many people.  The gap between the rich and poor is widening.  When have you ever seen the "super rich" taking in a movie?  And people living cheque to cheque would probably be more likely to stay home and watch something.

At the same time, to critique this critique, a pile of creative types might find an awesome way to revise that theatre if the anchor tenant ever pulls out.  Think about the potential for taking in films while munching out on locally made treats.  Think about bringing back things like "Rocky Horror Picture Show".  Now there's a movie going experience you can't replicate on your big screen at home with Netflix.   Think about hosting lectures.  Here's one article I found on redesigning theatres, and I only spent a few minutes looking into it.  

Maybe downtown Halifax could use a supercool "revival house" or "repertory cinema" like bigger cities have, where university students could unwind by taking in classic movies on the cheap.  Foreign films, in particular, are more fun to watch on a big screen as they make subtitles easier to read.

I have no idea about how Park Lane is heated or where if it has any design features that would enable the use of Solar.   So I have no idea if the building can be "greened up".  Maybe it can, maybe it can't.  These are more things to look into.

Anyways, this is a much happier thing for me to imagine than a future where REITs spin out of control and we're left with a Halifax with only big chains to eat and shop at, and overpriced commercial units sitting vacant because nobody has a hope in hell of selling enough stuff to keep them rented, let alone pay for living expenses and staff. 

In previous post called The Nova Scotia Pottery Emergency, I describe an idea for a big consignment store that would sell Nova-Scotian made products at a low consignment rate.  I called it my 80/20 vision, I've had it for awhile. It would be a sort of anti-Walmart.  Maybe this store concept could evolve, and become an anchor tenant.

What ever happens, as ruffled as I was about the story of Ray's and Taste of India getting the boot, it was so nice to see how so many people picked up for these small business owners.  It indicates that there are people in Halifax long for community and a diversity of interesting small businesses.

Whether somehow procuring Park Lane for the sake of protecting habitat for local entrepreneurs would make financial sense and be a good idea or not, I have no clue.  My only fear would be that the transaction would be born in positive intention, but end in mismanagement, corruption and greed, like the story Animal Farm by George Orwell.  Perhaps were it to go ahead, all involved in the project could all meet regularly to watch the Animal Farm cartoon together in the mall's theatre.





Perhaps there would need to be a conservation biology-style "management plan" for the mall, in an attempt to conserve the integrity of the vision and corruption-proof the project.  Perhaps the mall would need to have a legal 'conservation covenant' attached to its title, as land trusts do for conservation properties.

Maybe now that so many people shop online, buying a shopping mall is a crazy investment.  Maybe Park Lane Mall will be for sale for years.   Who knows.  Or maybe out of commitment to their unit holders Crombie REIT will feel obliged to hold out and sell this property for some big price that would render the project impractical.

In any case, it is something to think about!

***

Feb 8 - I sent the above post around to a couple of people to "pre-test it' before sharing on #downtownhalifaximin .  Someone pointed out that this mall's value is around 50 million, which would be hard to raise compared to what the Seaport Market cost.  

I don't know much about the financials of that project, but unlike Seaport Market, Park Lane already has some established tenants that I'm guessing are paying high rent.  Park Lane also has much more lease-able space.

I realized what I didn't point out is that most real estate investments are leveraged, meaning, that people or companies with lots of equity can end up using the bank's money to buy more buildings without having to physically raise the cash themselves through working and saving. 

Leverage can either make you a lot of money, and it can also lose you a lot of money.  Here's an article about how it works. 

Perhaps this would be something that CEED could get a mortgage for, or, indeed investors would feel comfortable pitching some money into a REIT for a downpayment.  The deal here is, I think, the REIT would have to be set up by an actual investment company.  Maybe Crombie REIT could help in this since, from a financial standpoint, they are good at making money for their investors.  With Crombie REIT's vast amount of assets maybe they would be ok with financing the sale of the mall as a rent-to-own, at a reasonable interest rate, for a fair price.  Maybe this would be the most efficient way for help, if residents of Halifax agreed that it was a good idea.  Maybe it would be an opportunity for Crombie to really give back to the community and exchange bad publicity for good publicity.

Here are some numbers I came up as a really quick study:

If the mall is worth 50 million, that translates into a mortage payment of 260k/month if the entire purchase price was financed at 4%, amoritized over 25 years.  This scenario would mean zero cash would have to be raised (no money down! no fundraising campaign!).

Divide 260k/month by the leasable square footage of the building from the fact sheet: it is 164k sqft.  That works out to $1.6 per square foot.  so $1600/month for a 1000 square foot space in park lane mall, mortgage cost.

Then there are expenses: taxes, insurance, utilities, maintenance, repairs, upgrades, cleaning, a salary for a leasing agent.  Accounting and bookkeeping costs.  Then the whole financial part of it.  This would be a giant project that would take many supporters so I would hope there would be a volunteer board representing both business-types and creative-types.

I have no idea what expenses would come to, but to be quick about this, I'll double it.  Hopefully this would be generous. so add another $1.6 per square foot.  Now the total is  $3.2 per square foot, or  $3200/month for 1000 sqft of space.    is still way better than the 5k/month ray is paying for a little stall at Scotia Square.  I'm not sure what are rents downtown... $20/sqft I think?  or more?  Perhaps here is an opportunity to develop an awesome, funky international food court.  Maybe businesses that are currently renting space at Scotia Square would follow Ray's over and relocate to Park Lane. 

I'll point out here, though, that I think the Park Lane location might not be as ideal as the Scotia Square location in terms of proximity to lunching office workers leaving their cubicles for a snack.

REITs usually have to factor in cost of vacancies, and damage/repair incurred by tenants, but I still think that were rents to be ratcheted down a building could operate efficiently at 100% occupancy.

I think people may not realize that banks make it super hard for normal people to buy their first home, but they make it very easy for companies to acquire many properties. 

Maybe there needs to be more education among right-brained creatives as to the nature of finance and money math.  Maybe this why so many left-brained (math) types seem to be good with their money, and so many right-brained (artsy) types end up working for and renting from the left-brainers, and going broke.  

Maybe we need to literally have a "meeting of the minds".  Left-brainers, how about finding a right-brainer who is working for you or renting from you to explain finance to.  Right-brainers, maybe we need to be engaging the left-brain set more with community music, art, and dance.  I think people used to come together more to do these things.

Anyhow I'm running out of steam in terms of blogging about this topic, and looking forward to presenting this for #downtownimin   

The truth is I don't even live in Halifax anymore, so I have no attachment to this idea one way or another, even if it does make sense.  Maybe it will help, maybe it won't.  Who knows.

 In any case, I do think everyone wants the same thing for Nova Scotia: a healthy economy.  And I think to get there, there needs to be more dialogue between the younger creative types and the older money-managing types.  Maybe this could be a start!