Case Study: East Bay Energy Project Proves Big Upside Can Still Come from Existing, Fully-Leased Buildings

Mynt Systems, Sharp Development, Sonic Manufacturing, Landmark Exchange Management, Fremont, 47951 Westinghouse
Courtesy of Sharp Development

By Meghan Hall

As fire season creeps up, once again bringing with it debates over the efficiency of PG&E, landlords are looking at how to make properties both more environmentally friendly and operationally affordable. Sometimes it can be difficult to measure the true upside of energy upgrades to building; however, the recent sale of a Fremont manufacturing asset gives unique insights into the gains that are possible, even for recently renovated, fully-leased assets.

Located at 47591 Westinghouse, the property was owned by Sharp Development prior to its recent sale. The 82,408 square foot property sold for $29.6 million, or about $360 per square foot during the fourth quarter of 2021 to Dublin, Calif.-based Landmark Exchange Management. Landmark secured a $16 million loan to acquire the asset, and the cap rate on the deal was about 5 percent. 

Part of what made the deal so successful, however, was Sharp Development’s recent energy upgrades to the property. Sharp had owned the manufacturing facility since 2011. At the time of its original acquisition, the property was only about 50 percent leased, and Sharp undertook a value-add project that upgraded the flooring, lighting and other aspects of the building. 

From there, Sonic Manufacturing fully leased the property–and grew quickly. In 2016, Sonic asked Sharp if it was possible to upgrade the property with two additional HVAC units, for which they would pay for via rent over time.

“We [said] we can do better than that,” explained Sharp Development’s President and Owner Kevin Bates, who coordinated with Mynt Systems to evaluate options for the building. “They were thrilled.” 

In addition to the HVAC, Sharp Development elected to drive the project to net zero. New lighting, window films, a TPO Cool Roof and 1,030 kW of solar were added. Overall, the gross project cost was about $3.33 million. Notably, upgrades were completed in 24 months, without any disruption to Sonic’s manufacturing operations.

“These are once every 20-year upgrades and they were all mid-lease on a completely operating property,” said Brandon Tinianov, Mynt’s head of strategy. “It really is a nice paradigm shift in what can be done to a fully-developed property when normally that would be stalled until it was empty.”

The benefits were immediate: While the project increased Sonic’s rent by about $300,000, it reduced their power bill by $350,000, even though Sonic was running two, 16-hour shifts per day. For Sharp, the extra $300,000 in rent enabled the company to put a market cap rate on the property and recover not just their original costs, but an additional $58 per square foot of value. With the upgrades in place, Bates estimated the property was generating about $0.51 per square foot per month of free power. 

“Having innovations like this project have helped us thrive, in a place where not everyone is thriving. You can’t just do it the old way, you need to look for solutions like this,” said Sonic in a statement.

The upgrades, which occurred in three phases, also could not have come at a better time. As fires continued to impact the Bay Area and PG&E struggled under the weight of public criticism and deferred maintenance, energy prices were rising rapidly. 

“They were insulated from a 37 percent utility charge increase over the same very short period. PG&E will go up almost 20 percent this year,” said Tinianov. “They had insulation from that price escalation, which continues to supply benefits for the tenant and makes them more viable as an operating entity on a daily basis.”

Bates added, “By the time their lease matures, who knows what the power situation is going to be.”

Tinianov noted that if Sonic were to move locations, they would likely be paying “double” in power costs. In an already expensive market such as the San Francisco Bay Area, such savings are pivotal, and while it is unclear what the future holds, they are likely to encourage tenants to stay in place longer. However, for the property’s new owner, there is also a potential upside: should Sonic vacate, new ownership could release the property at a “significantly” higher rate because of previously captured value.

Financial documents shared with The Registry show that post-sale Sharp achieved a 5.34x return on its investment. The property’s value was increased by $10.44 million in under two years. Additionally, the upgrades offset the equivalent of burning 95 million gallons of gasoline over 20 years, reducing carbon dioxide emissions by 32,000 metric tons.

For Sharp Development, the returns were beyond what was previously estimated, and the project team concurred it was the right move overall.

“I always believed it would add value overall,” Bates noted. “…[But ] it drove the [sales] price up a little bit more than I expected.”

Bates continued, stating, “This is the first manufacturing building we drove to zero net energy. For these product types, it is an absolute no-brainer. The returns are very, very strong, especially for something that is for leased and pretty much occupied.”

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