How About a Nice Cup of Joe?

Jacobs Java - 17th & Ray, Spokane, Washington This post may contain affiliate links.  Learn more by reading my disclosure.

Jacobs Java - 17th & Ray, Spokane, Washington

This post may contain affiliate links.  Learn more by reading my disclosure.

Spokane, like most cities in Washington State, loves its coffee.  To look at the amount of java business done in this town, you’d think it’s almost as important as air or water. 

In late 2011, while driving on Ray Street, I noticed the logo for a check cashing business had been reversed on its pylon sign.  I immediately pulled into the parking lot to discover the business had recently closed.  There was no “for sale / for lease” sign on the property.

I had long kept my eye on this location.  I thought it had been wasted as a payday lending store and was perfect for a drive-thru coffee stand.  The location had three things going for it:

1)     Ray Street had the highest Average Daily Traffic (ADT) count on Spokane’s South Hill;
2)     It
was located on the corner of a lit intersection; and
3)    
It was on the “going to work” side of the street.

If you haven’t come across that concept before, “going to work” is the flow of traffic towards a downtown core.  You can reverse that idea and have a “going home side” of traffic.  Certain retailers (such as coffee companies) want to be on the going to work side of traffic flow while others (banks) wants to be on the going home side. 

Immediately, I called my investing partner, Kevin.  “I love this corner,” I said.  “Let’s find the owner and see if he’ll sell.”

It took Kevin under two hours to get a meeting for the next day.  Initially, the property owner was reluctant to sell, but he agreed to meet us for a walk through of the building.  He was a landlord of considerable experience and had been in the commercial real estate game for many years. 

When we toured the building, the property owner said, “I haven’t been in here for almost ten years.”  He then commented on its condition and all the things that would need to be updated.  It seemed like he wasn’t excited by the idea of spending money to repair the building.  We told him we didn’t want the building, just the dirt so updating it wouldn’t appeal to us either.  Kevin and I broached the idea of purchasing the property for redevelopment.

The property owner’s reluctance to sell was based upon his desire to continue getting a stream of income.  We floated the idea of seller financing and he agreed.  It took a couple days to set a value of $230,000.  We knew the property would move at that price, even in its condition – the location was too good.  After nailing down the financing terms, we went to work.  Although though the price was more than we wanted to pay, we did it because we knew its future worth.  Also, we knew were running against the clock so arguing about price for too long could cost us in the end.  The payday lender had just vacated and we’d gotten to the property owner first.  We believed other developers, investors and brokers would soon approach him for this property (and they did).

The property owner had several environmental reports from work conducted previously.  The property had been a gas station before its conversion to traditional retail uses.  He gave us copies of all reports and invoices.  This saved us a chunk of time and expenses.

We were given ninety days for due diligence.  Kevin and I used this time to find a tenant.  I contacted the leasing representative for Starbucks.  They were looking for a site in the area to relocate a store which had no drive-thru.  Their rep said they might have interest, but (at that time) would often take up to six months to approve a site.  The economy was still working its way out of the Great Recession and things moved slowly back then.  I asked him to send the site to his client, but advised him we wouldn’t wait for six months (hoping, we wouldn’t have to).

Kevin then asked the Jacobs Java brothers if they would be interested.  They were emphatic with their “yes” and said they’d wanted that site for years.  We met with them in Kevin’s office.  It took one hour and we hammered out a deal.  They would be the tenant on the site and our partners in the dirt.   I can’t disclose rent terms or cap rates here.  Regardless, it was a great deal for both sides (landlord and tenant).

We closed on the property in January of 2012.  It was one of our smoothest transactions to date.

As the owners of the dirt, we had to deliver the property completely scraped – no building and no parking lot.  The only thing that would remain was the pylon sign.  It was larger than the existing sign code would permit for that site so we didn’t want to remove it.  Below are some pictures of the demolition work.  It was my first opportunity to buy a building and knock it down.

It took us only a few weeks to fully prep the site and turn it over to the brothers who then went to work.  It was a great experience to watch the site turn from a functionally obsolete building to a bustling coffee stand.  The process was a bit longer than we anticipated, but that was due to some design issues.   

When construction was completed, the corner was reborn with a higher and better use.  On any morning, there are cars in both directions getting various coffee drinks through the two drive-thru windows.

LESSONS LEARNED

If you spot an opportunity – don’t wait.  

That was the first lesson from this project.  We got lucky that we saw the vacated building first and called on it before anyone else.  Had we waited, we would have missed out. 

Always stay alert to opportunities while you're out and about.  You'll never know when one will pop up and you'll need to take action.

Could we have gotten Starbucks? 

Who knows really?  At the time of this post, Starbucks still hasn’t selected a spot to relocate their store in question (more than five years later).   This area of Spokane has a very low vacancy rate for retail (less than 4%) so opportunities are limited.

We could have dragged our feet for months in hopes of getting them to finally consider us and we still weren’t guaranteed a “yes.”  Instead, we made a choice to go with a local operator with a proven track record.  In return, the relationship has turned out fantastic.  We’ve bought another property with the brothers and continue to look for new opportunities. 

A lot of this business is about relationships and we ended up with a good one.

Could we have gotten more rent? 

Possibly, but we were more than happy with what we got.  We wanted a big return on the project and we achieved it.  There’s a saying that is apropos here: “Pigs get fat while hogs get slaughtered.”

Should Kevin and I have bought it ourselves?

You’ll see this question pop up on other projects I’ve done with Kevin.  It often comes down to a risk versus reward discussion. 

We both believe in putting together these deals and bringing in various partners.  It spreads the risk and allows us to get into various deals.   It also increases our exposure to new partners.

By joining forces with the Jacobs brothers, we had a partner with a further vested interest to see the property well-maintained.

 Should we have developed the property and sold? 

No.  We’re working to create a portfolio for cash flow.  That’s a long-term plan that we’ve put in place for ourselves.  We may sell something down the road if an opportunity presents itself, but at this point we need to stay true to our vision.

Got a question about this deal?  Feel free to ask. 
I look forward to hearing your thoughts.