Police moves costing plenty

Buying buildings may be good deals

The temporary displacement of Raleigh's police headquarters could mean handsome deals for two property sellers in a credit-crunched real estate market.

The City Council this week approved the $6.23 million purchase of a 46,000-square-foot office building from Builders Mutual Insurance.

The building at 6716 Six Forks Road in North Raleigh will be used as a temporary police headquarters. Starting early next year, it will house the police chief's office, detective division, field operations and administrative services until 2012. That's when a 17-story public safety center is due to replace the city's 46-year-old downtown headquarters on McDowell Street.

The city also is negotiating to buy a downtown warehouse-turned-nightclub -- a deal that could put evidence storage and a district station in a burgeoning section of downtown.

At first blush, the city appears to be paying too much for the properties. Private investors have been offering Builders Mutual roughly 15 percent less than what the city is willing to pay. And the downtown property sale could be worth more than twice what the seller paid less than a year ago.

But brokers say, and property records indicate, that the city is taking advantage of a buyers' market.

"When you put it all together, it's not a bad deal," said Jim McMillan, an investment broker with Grubb & Ellis/Thomas Linderman Graham in Raleigh. "It shouldn't reflect poorly on the city."

Two years ago, the Builders Mutual building could have fetched at least 3 percent more than what the city is offering.

Back then, scores of companies were expanding or moving to the Triangle. Lenders, comforted by the growth, were willing to front investors 90 percent of the cost of a building. Frenzied bidding ensued; property prices aimed skyward.

By the time Builders Mutual listed its building, the slowing economy began to pinch lenders. Banks tightened up, often asking hopeful investors to fork over more equity. Fewer investors are willing -- or able -- to buy now, taking the heat off prices.

The building's assessed tax value is $6.41 million, or $139 per square foot. But private investors have offered only between $110 and $120 per square foot for the Six Forks building, said Bob Van Wormer, a Colliers Pinkard broker who is representing Builders Mutual in the deal. The city's offer: $135 per square foot.

Buyers who occupy their own buildings are generally willing to pay about 15 percent more than investors who would risk leasing up an empty building -- especially in a soft economy, brokers say.

In this case, the city had few alternatives. The only other existing building that was big enough and available for sale -- within the city's schedule and preferred locations, that is -- carried a price of 40 percent more, said Gregg Pollard, a city real estate services manager. Building new would have cost even more.

And leasing temporary offices for 225 workers proved more costly than the prospect of buying an older building, moving in and eventually selling it.

"When you finish up [leasing] you haven't got anything to show for it," said Julian Prosser, an assistant city manager. "You might as well buy it and resell it."

Aim: Buy low, sell high

The city plans to occupy the Six Forks building for at least five years. By then, the economy will likely be in recovery mode and buyers may abound. If not, the city could decide to keep the building and use it as a district station or other city agency offices, Prosser said.

"You would assume that five years from now, that they'd be able to recoup their price, if not more," said Ben Kilgore, a CB Richard Ellis broker who specializes in commercial property sales.