With plans to take advantage of a new federal tax program, Charlotte-based Grubb Properties has acquired one of the largest office buildings on Chapel Hill’s Franklin Street and is eyeing a major renovation for the aging office tower.
Grubb bought the 137 E. Franklin St. building and its corresponding parking deck on Rosemary Street for $23.5 million earlier this month, according to county records. The building, which dates back to the 1970s, last sold in 2014 for around $26 million, according to records.
It marks the second major investment the Charlotte-based developer has made in Chapel Hill recently. On the other side of town, the company is currently building a new office building at the Glen Lennox apartments, a housing community that the company has owned for several decades.
Clark Spencer, a senior vice president for investments at Grubb, said the company was attracted to the building because of its location within a federally-designated “opportunity zone” that stretches from East Franklin Street to Estes Drive.
Grubb is currently in the process of raising $200 million for investments in opportunity zones and has plans for an investment in downtown Winston-Salem already.
Opportunity zones are a new feature in the country’s tax code that allows developers to earn savings on capital gains by investing in economically disadvantaged areas. Most people aren’t likely to think of Franklin Street as a disadvantaged area — though the census tract is home to a lot of students, many of which are renters and don’t have full-time jobs.
“It is a bit of a head-scratcher why it is an opportunity zone,” Spencer admitted in a phone interview, though he noted that the building likely wouldn’t be getting a much-needed renovation without it.
The designation was created during the Republican tax overhaul in 2017 and it created nearly 9,000 zones across the country. Investors stand to get deferrals on capital-gains taxes and other taxes if they hold investments in opportunity zones for at least 10 years.
Dwight Bassett, the economic developer for Chapel Hill, said earlier this year that Chapel Hill had two eligible tracts for the program, the other being near Merritt Mill Road, as designated by the Treasury Department. Ultimately, the town decided to submit the East Franklin tract for consideration.
The Treasury Department’s designation for the East Franklin tract was likely due to the large number of student rentals in the area, Bassett noted.
“We had a lot of concern from residents (near Merritt Mill) because of the designation of this opportunity zone, but it really is designated for commercial investment” and not for residential investment, Bassett said in March.
Bassett added that so far there hasn’t been any other interest in investing in the zone.
Over the next two years, Grubb plans to pour tens of millions of dollars into renovating the building, completely re-doing most of the glass facade on the backside of the building and updating the office layouts within it to a more modern configuration.
The building’s facade on the Franklin Street side was re-done in recent years, but the occupancy rate for the 120,000-square-foot building declined to around 35%, a dismal number for the middle of downtown Chapel Hill.
The previous owners “set a lot of expectation and re-did the facade but didn’t re-do the upstairs or the corridor,” Bassett said in a phone interview on Friday. “Potential tenants couldn’t catch the vision of where it was going. ... We think now that (Grubb) will re-invest in the building and it becomes basically a new product, it will be easier for the market to get into.”
Spencer said the large vacancy rate there is actually good for renovating the building since they won’t have to do construction around a lot of tenants. The CVS pharmacy located at the bottom of the store won’t close during the renovation, he said, and they are beginning discussions with some of the other tenants about what is best for them during construction.
“We are working on various avenues of leasing (the building) back up and talking to a number of organizations,” Spencer said. “We are looking at certainly some new corporate tenants. And we would love to get a co-working tenant in there. That could be really beneficial for the town and the university.”
Matt Gladdek, the executive director of the Downtown Chapel Hill Partnership, said more updated office and co-working space is sorely needed in downtown Chapel Hill, especially for young startups and companies that spin out of the university’s research arms.
“What this really represents is an opportunity for new partnerships in that building and for businesses that need access to the university for research and innovation,” Gladdek said in a phone interview.
It could also be a boon for many local businesses on Franklin Street that have to navigate the summer months when there are fewer students in town to shop and eat.
“Creating a secondary use outside of the university that is constant is going to be really important so that our businesses can deal with the boom-bust cycle.”
Spencer said the renovation will likely take two years to complete.
“We have got a lot of work ahead of us,” he said. “I think it is really going to change the aesthetic of the building to be more contemporary because it does have a little of a tired look to it.”