Master Development Sets Auction for Condos

NEWPORT BEACH, CA-Master Development Corp. will conduct a three-day online auction of six of the units at its 48-unit Las Palmas Business Park in Santa Ana from Nov. 16 through Nov. 18. Bryan Bentrott, executive vice president of the Newport Beach-based development and investment firm, tells GlobeSt.com that the company will employ the new online auction platform developed by Marina Del Rey-based AuctionPoint, which is designed to put brokers in control of the auction.

The Las Palmas Business Park is an 11-building, 230,000-square-foot project of units ranging from 2,500 to 15,640 square feet at 1501-1609 E. McFadden Ave. in Santa Ana. Master Development has sold six of the 48 units and has two more in escrow at the project, leaving 40 more to be sold. It began marketing the industrial condos for sale in mid-2008 after it created the for-sale product by renovating an existing multi-tenant leased project that was built in the 1970s.

Minimum bids for the Las Palmas units will range from $95 to $125 per square foot, but Bentrott says those are minimum bids only and not strike prices. The company’s most recent sales have been in the range of $155 to $160 per square foot, and it hopes that the auction will generate the kind of interest that might even push prices higher.

If the November auction goes as hoped, Master Development plans to take another five or six units to auction at a later date. Bentrott explains that the Newport Beach firm is not under the same kind of pressure to sell as some condo project developers because the Las Palmas park is 80% leased and Master Development is breaking even on the project at current rents. The company has its tenants on short-term leases so that, when it thinks the market is right, it can allow some more leases to expire and offer the condos for sale. “It’s kind of a chess match,” Bentrott says in explaining how the company tries to weigh whether it has the right number of units for sale in the right sizes to match market demand.

Master Development has been selling the Las Palmas units at the rate of about one per month lately and could continue on that path, Bentrott says, but it chose the online auction route as a way to speed up the process. The company chose the AuctionPoint platform for its emphasis on broker control of the auction and for a commission structure that Bentrott describes as very reasonable.

“One of the things I love about their (AuctionPoint) platform is that it enables brokers to get paid and allows owners not to have an unbelievably high cost of sales,” Bentrott says. In Master Development’s November auction, for example, the company has a 5% commission allocation, with 3% going to the procuring broker if there is one and 2% to the company’s listing broker, Gillett Commercial. In addition, AuctionPoint charges a 1% fee to the buyer. Some other auction companies ask 5% or 6% for their services alone, so if a seller were to pay that charge and then offer the same 5% commission pool to brokers, the seller’s cost to sell could reach 10% to 11%, Bentrott adds.

Interestingly, Bentrott says, none of the buyers thus far have been existing tenants. “Our experience after doing a few of these is that people who are tenants tend to be tenants for life, versus others who see the wisdom of buying and do so when the time is right,” Bentrott says.

Even in the go-go years when industrial and office condo conversions were hot, sellers and brokers could make the argument that buying is more advantageous than renting, Bentrott says, even though out-of-pocket monthly costs for owning were higher than those for renting. But the argument for buying is even stronger now because, although rents have fallen, sales prices have fallen too and the gap has narrowed between cost of owning and cost of renting, the Master Development EVP says.

At the height of the market, rents reached about 90 cents per square foot per month, versus costs of $1.30 to $1.50 per square foot per month to own, but sales remained strong because―thanks to the benefits like appreciation and depreciation associated with ownership―”It made all the sense in the world to buy,” Bentrott says. With rents now at about 70 cents per square foot and ownership at about $1 per square foot, owning still costs 30% more per month than renting but the appreciation and depreciation advantages are even more attractive, he says. One of the obstacles to sales, however, is that people these days “are very focused on that monthly out-of-pocket figure,” Bentrott says.

Other factors that stalled industrial and office condo sales were the same as those that affected all of the economy: the plunge in home values and the capital markets crisis, rising unemployment and other economic bad news that made prospective buyers hesitant to make a major decision like buying a building or a condo unit, Bentrott says. “Now that people have seen that the world isn’t coming to an end, that we have come down in pricing somewhat and that the rental-ownership disparity has narrowed, the prices work for the buyers,” he observes.

Bentrott estimates that all of the units at Las Palmas will be sold within about three years after Master Development began marketing the condos, which is about a year longer than it might have taken before the downturn. If the park had been vacant, he says, the units might have sold out in a year and a half when the market was hot, but Las Palmas was nearly fully leased when Master Development bought it, so it would have had to wait for some leases to expire.

Master Development has no other for-sale projects now besides Las Palmas. “There are many condominium projects and many for-sale projects that have struggled during the downturn, so we feel fortunate to be able to carry this project until time starts to work in our favor, the economy gradually recovers and, hopefully, we can upgrade our pricing over time,” Bentrott says.