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Firewheel Village is a retail shopping center located at 3178 Lavon Drive (Hwy 78) in Garland, Dallas County, Texas (the “Property”).
The sponsors of Nexregen Firewheel Real Estate Investment Trust (the “REIT") purchased the Property on May 24, 2007. The Property’s form of
ownership is a partnership called the “Operating Partnership”, and the REIT is one of the partners in the Operating Partnership. The REIT’s
percentage interest in the Operating Partnership will increase as shares in the REIT are sold, up to a maximum 90% interest. The REIT’s sponsors
will continue to own the remaining 10%, which has been purchased on the same terms and conditions as are being offered by the REIT.
Recently Renovated Property
The Property’s location is just south of the southeast corner of Highway 78 and the President George Bush Turnpike (Hwy 190). The Property consists of
14.5 acres upon which sits a 148,870 square foot building. The tenants are Big Lots, Hobby Lobby, Mardel, Hancock Fabrics, Tuesday Morning, and Peeks Carpet and Tile.
The Property is a former Wal-Mart store that has been expanded and subdivided into six (6) tenant suites. An existing Wendy’s restaurant and a Taco Bell restaurant under
construction along Lavon Drive are owned by those restaurants and are not part of the Property.
Area Dynamics: Expansion Ahead
The Property is located in a fast growing and dynamic retail corridor in the Northeast Dallas area. The President George Bush Turnpike has recently been extended to Lavon
Drive (Hwy 78). The North Texas Tollway Authority (“NTTA”) has received authorization to begin Right of Way purchasing efforts relative to the further 10-mile extension of
the Bush Turnpike to I-30. Per the NTTA, plans are to begin construction in 2008 and for the entire 6-lane Turnpike extension to be open in 2012.
The national mall developer Simon Property Group opened the super-regional mall Firewheel Town Center in October 2005. This mall is located in the northeast quadrant of the
President George Bush Turnpike and Lavon Drive (Hwy 78) intersection, is anchored by Macy’s, Dillards, and AMC Theaters, and provides a tremendous regional draw to the North
Garland area. Both Lavon Drive (bordering the west side of the Property) and Crist Road (bordering the east side of the Property) connect to Firewheel Town Center.
The Property is located on Lavon Road (Hwy 78) between two other shopping centers. Directly to the north of the Property lies Kohls and Home Depot; and directly to the south
lies Albertsons. Other area retailers include Lowe’s, Wal-Mart, Sam’s Club, Target and Office Depot.
Much of the area’s remaining land developable for shopping centers is controlled by a single owner. This landowner is currently building a shopping center just to the northeast
of the Property along Crist Road, to be called Firewheel Plaza. Firewheel Plaza will contain Best Buy and Petco, among other retailers.
Given the draw to the immediate area provided by the Firewheel Town Center mall, we believe that the trade area extends at least 5 miles in each direction. Demographic studies
indicate that 227,000 people in 75,000 households reside within 5 miles of the Property, with an average household income of $81,000.
In summary, the Property is located in a shopping hub that will only increase in influence as the local retail trade area continues to mature and as the President George Bush
Turnpike is extended.
100 Percent Leased with Renewal Opportunities
The Property is 100% leased to six (6) retailers. These include:
- Big Lots (NYSE:BIG); 1400 stores in 47 states; 24% of the Property; lease expires Jan. 2013
- Hobby Lobby (privately owned); 385 stores in 30 states; 40% of the Property; lease expires Sept. 2012
- Tuesday Morning (Nasdaq:TUES); 790 stores in 47 states; 8% of the Property; lease expires July 2010
- Mardel (privately owned; lease guaranteed by Hobby Lobby); 26 stores 6 states; 17% of the Property; lease expires July 2020
- Hancock Fabric (operating under Chapter 11 Bankruptcy); 9% of the Property; lease expires July 2015
- Peek’s Carpet and Tile (privately owned); 6 stores in greater Dallas area; 3% of the Property; lease expires November 2009.
Significant Upside on Rental Rates
Most of the tenants have options to renew their leases upon the expiration of their current lease terms.
The average rental rate per square foot for the Property is $6.58 per year. This rental rate is less than 50% of market rental rates in the immediate area. We believe that
the spread between the Property’s rents and local market rents will in fact increase over time, as the retailing hub around the neighboring Bush Turnpike continues to mature.
In this regard, upon the expiration of existing leases or upon tenant default, we believe that considerably higher rents can be achieved.
The purchase price of the Property, inclusive of all costs and fees paid to the Advisor and others, is approximately $13,488,000, or roughly $91 per square foot (relative to
the building size). We believe that the cost to build a shopping center in the immediate area like the Property, including land, cost of construction, etc., would be more
than $91 per square foot.
The Property has a brand new mortgage loan (funded May 24, 2007) in the amount of $10,400,000. This amount is roughly $70 per square foot and approximately 77% of the
Property’s purchase price. The loan matures in May 2017, and is payable “interest only” for the entire term at a fixed rate of interest equal to 5.70% per annum.
Cash Flow and Quarterly Distribution Checks
The annual mortgage payments equal $3.98 per square foot. The existing average annual rental rate being paid by the Property’s tenants total $6.58 per square foot.
The existing tenant leases provide that in addition to rent, each tenant is responsible for its proportionate share of most of the common area maintenance, taxes and
insurance costs associated with the Property. Expenses associated with property management, Operating Partnership management, capital improvements, and others, are
not reimbursed by the tenants. In spite of these non-reimbursed expenses, it is anticipated that the mortgage payments will be covered by net cash flow and that
the excess cash flow will be available for distribution to our investors on a quarterly basis.
Challenges & Solutions
One of our tenants, Hancock Fabric, is currently operating under Chapter 11 of the U.S. Bankruptcy Code. Hancock Fabric filed for bankruptcy in March 2007 and at that
time, announced the closure of a significant portion of its 400 stores. Hancock Fabric (which occupies 9% of the Property) has indicated that it intends to continue to
operate its retail facility in our shopping center. Rent is being paid on a current basis. It is impossible to predict the ultimate viability of Hancock Fabric as a
tenant in our Property; however, its rental rate of $6.25 per square foot per year is considerably below market in our opinion. If Hancock Fabric were to reject its
lease in the bankruptcy proceedings or otherwise default under the terms of its lease, we believe that we could re-lease its space at a significantly higher rent.
Exit Strategy Goals
Our intent is to hold the Property for 3 to 7 years and sell it when we believe that we can achieve a sales price in excess of $105 per square foot. Recall that we have
paid roughly $91 per square foot to buy the Property and our mortgage loan totals approximately $70 per square foot; hence our equity investment is around $21 per square
foot. If we sell the Property for $105 per square foot, we will have made a 67% gross return on our initial investment, before costs of sale and fees due to our Advisor,
in addition to interim quarterly cash flow distributions.
We believe that the Property will increase in value due to three primary reasons: 1. Most of the existing leases provide for periodic rental increases. 2. Upon lease
expiration or tenant default, we believe that we will be able to re-lease tenant suites for higher rents than are currently being paid. 3. As the immediate trade area
continues to mature, we are of the opinion that local shopping center properties will rise in value. There are no guarantees that we will be able to sell the Property
for a profit.
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