Two reports suggest Mercantile renovation remains economically unfeasible
By Martin Kidston/MISSOULA CURRENT
A Chicago-based development firm that once looked at renovating the Missoula Mercantile said it walked away from the project due to economics, according to information submitted last week to the city's Development Services.
Clark Street Real Estate is one of several buyers that has considered a full renovation of the Mercantile over the past three years. Like the others, however, it chose not to pursue the project, saying it would lose millions of dollars bringing the structure up to basic occupancy.
“Based on the cost to renovate the existing building and the rental rates this project could achieve, the economics of our proposed redevelopment proved unworkable,” said James Kurtzweil, principal of Clark Street. “The location and market are strong, (but) unfortunately the condition of the building made a redevelopment scenario for us completely unfeasible.”
HomeBase, located in Bozeman, has emerged as the latest potential buyer for the Mercantile. The firm is looking to purchase the property and preserve its historic elements in a new downtown hotel.
As part of its demolition application, the firm was asked to submit additional information to the city. Provided last week, the information included a cost analysis prepared by CTA architects, a report prepared by DCI Engineers on the building's integrity, and additional cost estimates provided by Clark Street regarding it's own earlier proposal.
“We responded to a request for additional information from Leslie Schwab at the Historic Preservation Office,” said Andy Holloran of HomeBase. “We provided all that information and data at their request.”
According to the analysis by HomeBase, the cost of renovating the Mercantile sits at roughly $13 million. Land costs, design work, engineering reports, insurance, bank fees and other associated costs bring to the total renovation cost to more than $20 million.
Given lease rates across the district, the figures suggest that HomeBase would lose $6.4 million renovating the building. Other firms have come to a similar conclusion.
“Based on the cost to renovate and other development costs – and compared to what rental rates and what the market will command – it's clearly uneconomic,” Holloran said. “That has been similar to the Clark Street approach and analysis, and my guess is that it's a reason why this building has sat vacant for six years.”
Clark Street came to a similar conclusion after conducting its own cost analysis. In its letter to the city, the real estate firm said it looked at renovating the property and placing a single, large-scale retail tenant on the ground floor.
Clark Street said it had secured the interest of an organic grocery chain and proceeded to budget the project. However, Kurtzweil said, the cost of renovations drove the leasing price too high.
“In our discussions with the grocer, the rental-rate range for this property was approximately $12 per square foot,” Kurtzweil said. “The redevelopment cost estimate was prepared by a reputable Montana-based general contractor with a total cost estimate of $8.8 million. Even by increasing the rental rate to $18 per foot, the proposed redevelopment stood to lose millions.”
While HomeBase continues to purchase the Mercantile and navigate the city's application process, one rival buyer – SGRE Acquisitions – has accused the building's current owner, Octagon Capital Partners, of not working to market the building on a national scale.
The accusation mirrors that of some Mercantile advocates who believe Octagon hasn't done enough to find a buyer willing to save the historic property.
“The listing agency, ZillaState, lacks a national affiliation and apparently only posted the listing in the regional (Multiple Listing Service) and on its website,” SGRE said. “This is a highly material fact as the pool of developers in Missoula proper is quite small.”
But Octagon said more more than 20 potential buyers with national clout have looked at the property over the past few years, including Clark Street and SGRE. The later firm entered into a contract with Octagon to buy the Mercantile but backed out after performing its due diligence.
According to Octagon, SGRE determined that its own plans for the Mercantile needed to be altered to achieve the desired use, which added cost to the project. Octagon said SGRE terminated the contract and submitted a second contract that sought “significant owner concessions which were neither reasonable, nor viable.”
While interest in redevelopment was high, ZillaState broker Jed Dennison said that few tenants have shown interest in occupying anything but the ground floor as retail. Redeveloping the property for office space is economically unfeasible.
“In our attempts to lease the building, we found great interest for the ground floor retail, especially along Higgins (Avenue) and Front (Street), but the basement and second-level leasing activity was minimal,” Dennison said. “The redevelopment of the Mercantile building will prove very difficult to lease, particularly the basement and second floor spaces.”