Commercial Real Estate Quarterly
Dealing in trouble
Turning losers into winners is Tetra Cos. mission

Virginia Business
December 2005

Some developers won’t touch problem properties. If there’s a zoning issue, property dispute or environmental concern, they figure it’s a headache they don’t need. Yet troubled properties have turned out to be winners for the Tetra Cos. in Virginia Beach. For 10 years, the private commercial real estate company has built a niche by taking on difficult deals, and today it has $200 million worth of assets under management, says principal and co-founder Gil Holt.

The key in turning around a sour deal, says Holt, lies in “matching the asset to the market. Usually, the asset has just missed the market.” A previously troubled project can fly if demand still remains for what the property has to offer or some other value can be created. Still, that’s a thin line to walk at times, concedes Holt, who first gained experience in working with distressed properties in the late 1980s when failed thrifts were forced to turn over many of their properties to a federal trust.

With in-house engineering, financial and legal resources, Tetra strives to bring a product to market quickly, reducing risk for its clients and investors. "They've got project managers that stay on top of jobs, which helps the contractor get the work done," says Dennis Lynch, executive vice president and one of the owners of KBS Inc., a Richmond-based general contractor that has worked with Tetra on three apartment projects. "It appears that they have a good vision, and that it's working," adds Lynch.

In fact, there are upsides to distressed properties. For one thing, there’s less competition for the land. Plus, the land may be available for a lower price. “It’s the old adage about making money on the buy. If you can get in at a lower cost, it can be worthwhile,” says Tetra’s other principal and co-founder, Mike McNally. In some cases, Tetra has been able to pick up properties at discounted prices that have close-in locations and municipal amenities already in place, such as water, sewer and drainage.

Centerbrook Village in Suffolk provides a good example of Tetra’s troubleshooting strategy. For 15 years, local developers had been eyeing an area next to Obici Hospital for commercial development. But it had multiple owners, including Liberty Baptist Church, which owned land in the middle of a 50-acre tract that developers wanted for a mixed-use development.

With its location close to a hospital and at the intersection of state Routes 460 and 32, the land offered profit potential. Tetra began assembling the five independently–owned parcels. Altogether, it took five years to acquire the tract. Two of the key parcels were owned by the church and the Virginia Department of Transporta-tion. Tetra and VDOT decided on a swap. In exchange for the land, Tetra agreed to build two commuter park-and-ride lots.

A meeting with the church deacons went better than expected. McNally recalls that two of the deacons were engineers. By agreeing to sell some of its land, the church saved the expense, about $250,000, of installing water, sewerage and a retention pond. Plus, the congregation had a chance to have a voice on what would go on the adjoining land: a $44 million, 132-unit apartment project geared for residents over 55, who want to live close to a hospital, along with some retail. The apartments are under way and construction should be complete by spring 2006. The retail strip is under construction and includes a Walgreens, Wendy’s and Ruby Tuesday’s restaurant.

Tetra is developing another mixed-use development, Brooke Run, in Henrico County. It acquired land for that 68-acre parcel for about $550,000, — property that’s valued at about $5 million today, says Holt. By the time Tetra finishes building 40,000 square feet of retail and two towers of 240 units for senior housing, the investment’s total value will be about $41 million.

“That was a matter of going in and looking at things differently,” says Holt, explaining that an original plan called for using only a small portion of the land for a strip shopping center, similar to one nearby.

Tetra has developed other commercial and residential projects throughout the Southeast. The company has 20 employees with directors in five markets: Richmond, Virginia Beach, Raleigh, Columbia, S.C., and West Palm Beach, Fla.

In today’s market of high construction costs and rising interest rates, the company plans to stick with its market niche. Apparently, this is one business that doesn’t mind waiting for a frog to turn into a prince.