Risk Redux

Developer Steven Kossoff has a knack for turning doubts into demonstrable success. Can he do it during a recession?

Steven Kossoff's $30 million gamble on turning an abandoned Winn-Dixie warehouse in Sarasota into a thriving distribution center took 18 months and lots of aspirin to pay off — and that was mostly during a good economy.

But despite the recession chomping away at the commercial real estate industry on the Gulf Coast, Kossoff isn't done yet with the risks. He's now undertaking the next phase of that project, a 144,000-square-foot office park to be built in front of that 950,000-square-foot warehouse complex, known as the Meridian Distribution Center.

“The reality is that there are some horrible economic times out there,” says Kossoff, managing director of the Clearwater-based Meridian Development Group. “But even now there are businesses that are growing and expanding.”

To be sure, those businesses are scarce in many of the industries long associated with growth on the Gulf Coast, such as anything real estate related or tourism-based. One area Kossoff projects will be a source for clients in the next few years is in medical billing and insurance companies, especially if and when new federal health care laws are passed and implemented.

The office park, to be called the Meridian Business Center, is off of Clark Road, a few miles west of Interstate 75 and about five miles south of downtown Sarasota. It includes up to eight buildings, with two planned at three stories.

The plans also include a 52,000-square-foot Imagine Schools charter school that can hold up to 900 students, for which construction began Jan. 21 and is expected to be complete by Aug. 1. Construction on the first building to be used for office space is scheduled to begin when 50% of the space is leased, which Kossoff and his leasing agents project could be by the latter half of 2009.

All of the buildings are being built under Class A and green-building guidelines, from top-line light beams to solid core doors to providing natural light in a majority of the space. Those features and the offer to custom-build each property only adds to the cost — and it would seem, the risk.

Sarasota-based Realtor Loyd Robbins, whose firm Kossoff hired to market the office suites, understands the skepticism involved in moving ahead with a project during so such a tough economy. But he's been buoyed by the interest and stream of phone calls that have come in the past few weeks, which, while not closings, are more action than the dead period the market went through at the end of 2008.

“We don't want to be dumping more product on the market and be putting out more space than the market could absorb,” says Robbins, whose family-named firm includes his father, Harry Robbins and his sons Kevin and Troy Robbins. “It's a little bit of: if you build it, they will come.”

Even that business model, of course, has been stymied by the economic downturn and the lack of lending. On that front, Kossoff has again defied odds: He recently received $9 million in financing to build the Imagine school. The loan is from Tampa-based American Momentum Bank.

Odds beater
Kossoff, although not oblivious to the economic conditions, says he has a slight case of dejà vu with this phase of the project. After all, it was in January 2006 when many in the Sarasota commercial real estate community snickered at his $30 million purchase of the Winn-Dixie property.

The conventional thinking back then was that Kossoff would fail at trying to turn the property, which had been deserted for two years, into a viable site.

Plus, Kossoff and his New York-based private equity partners had to spend $400,000 on consulting and legal fees to wade through the lengthy local permitting process a year before he was able to sign up tenants.

Kossoff beat the doubters by turning the property's improvements and its location into an asset. He boasted that even though the center wasn't in Tampa or Orlando, roughly 87% of Florida could be reached in a day's drive from it.
He contrasted that stat with his study that showed only 67% of the state could be reached in a day from Orlando and the I-4 corridor.

It made sense then, when Bradenton-based retailer Beall's — a $1.2 billion company that prides itself on delivering the Florida lifestyle to Floridians — signed the first lease on the property in May 2007. The company took a 200,000-square-foot block as a local distribution hub.

Neither Beall's nor Meridian officials disclosed the lease rates, although Kossoff did say it was at current market rates, which would put it at about $1 million a year.
Kossoff told the Review after that deal: “I feel like this vindicates me for what people had said about the project not being able to work.”

But he wasn't done.

In June 2007, Kossoff signed his second big tenant, Dayville, Conn.-based United Natural Foods, a publicly traded organic and natural food distribution company. United signed a lease for 400,000 square feet of space.

That deal was followed by one from Cocoa-based Rilon Management, a freezer and cold storage firm that signed a lease for 80,000 square feet of space in August 2007.

Those leases gave Kossoff a 75% occupancy rate for the project. It also led to the property recently being reappraised at $55 million, making his original purchase of the property a clear triumph over the risk.

“We played it right,” says Kossoff. “We didn't get overextended and didn't get into too much debt.”

'Excellent opportunity'
The risk is new again, however, with the office park portion of the project.

The offices are planned for about 15 acres of the 60-acre property, just outside Palmer Ranch, a master-planned community. The plan is to space the eight buildings out over the property and mix it in with landscaping and a pond.

In 2004, when Kossoff and his partners first studied the area, the initial plan was to turn the entire property into a warehouse/distribution center. But after Kossoff spoke with Loyd Robbins, he made the switch to office space.

“We felt there was an excellent opportunity to do a Class A office park,” says Robbins. “We felt it would be a great concept to make this a mixed-use project.”

In addition to several projects in the Clark Road corridor of Sarasota, Robbins's office-focused real estate work stretches to more than 15 current projects his firm is working on in Manatee, Orange and Polk counties. His son, Kevin Robbins, is working on the Meridian project with him.

One stark difference between the warehouse phase and the office phase lies in the tenant recruitment strategy.

On the warehouse, Kossoff says he never looked at only the micro-Sarasota market, instead focusing on statewide and national tenants. But office space, says Loyd Robins, is a decidedly hyper-local market.

So, says Robbins, the empty offices and growing vacancy rates in Lakewood Ranch, for example, doesn't mean the Clark Road area of town is suffering, too. That's how the Robbins' intend to market the property.

“You have to look at the micro-corridor,” Robbins says. “There are markets within a market.”