How to flip a shopping center and make $52 million

Shoppes at Chino Hills

It was 2010 and the Great Recession was wreaking havoc on the regional economy. Unemployment ran in double digits and one of every five dollars spent in California retail shops had disappeared.

So who would have thought it was time to buy a shopping center? Especially a new, untested one, with 1-in-4 stores vacant, being sold by a lender who had repossessed the center when its developer hit bankruptcy?

Meet Manouch Moshayedi, a veteran of the computer memory industry who runs MX3 Ventures, his family’s real estate investment firm in Newport Beach. MX3 had been investing in real estate for three decades, from small residential properties to modest office spaces.

Nothing ever on the scale of a 380,000-square-foot shopping and office complex. But Shoppes at Chino Hills presented a rare opportunity.

The project was the cornerstone of a new urban heart in the city of Chino Hills, built on the same site as a brand-new City Hall, Civic Center, library and police headquarters. The Shoppes offered the proverbial ground floor opportunity in an emerging downtown – and at a steep discount to its reported $200 million construction cost.

Moshayedi’s family fund outbid several larger competitors to win the center for $95 million, $60 million of which was borrowed.

But why was Moshayedi thinking in early 2010 that it was a great time to be buying real estate – especially a higher-end, higher-profile retail center?

“Avoid the herd mentality,” he said.

His hunch, it turns out, was richly rewarded. MX3 just sold The Shoppes for $147 million to Dunhill Partners of Texas. That’s $52 million above the purchase price. Including the positive cash flow from running the center the past five years, plus the beauty of leverage, MX3 enjoyed average annual returns of more than 40 percent on this bet.

“They’re astute, contrarian investors,” says Ryan Gallagher, senior managing director at the Holliday Fenoglio Fowler brokerage, which worked on both MX3’s purchase and sale of The Shoppes. “They have done very well. They have a real knack.”

Conventional wisdom has long placed the community-oriented shopping center on real estate’s endangered species list. The big box giant discounters were going to grab chunks of local sales. Much of what remained would be gobbled up by online merchants.

Who needed to go to neighborhood stores when anything could be acquired either in one trip to a retailing giant or with a few clicks on the home computer?

That logic does make shopping center management a daily challenge, but the right mall with the right mix of merchants is still a winner. The secret is that going shopping isn’t going shopping any longer. The new concept is a blend of looking, buying, eating and entertainment in a cozy setting.

The Shoppes at Chino Hills is not what you might expect from Inland Empire retail. The Costco and Wal-Mart are across the 71 freeway. This is a walkable collection of stores with appeal to younger shoppers, including brands like H&M, Forever 21, Victoria’s Secret, Trader Joe’s, Bruxie waffles and Smash Burger.

It’s got a hip look designed by architects Altoon Partners, the folks who created Fashion Show on the Las Vegas Strip.

“It’s a beautiful property,” Gallagher says. “It’s a wonderful time to harvest an investment.”

Moshayedi learned some tough business lessons in the ultra-competitive tech trade as co-founder and a one-time CEO of STEC, a Santa Ana company bought by computer storage giant Western Digital in 2013 for $340 million.

His MX3 is typically a long-term investor. But this year, with The Shoppes’ stores all but full, its office space sold out and rents on the rise, investors were clamoring for trophy real estate like this. So, MX3 decided to sell. Broker Gallagher said there was some foreign interest, but when that fell through, Dunhill won the bidding.

“It was a good experience,” said Moshayedi. “Obviously, what we did was consistent with the economy getting better.”

Now Moshayedi and MX3 have a problem we should all have: If they don’t want to pay a huge tax bill on capital gains from flipping The Shoppes, they must act quickly to reinvest the proceeds of the sale.

But as opportune as the timing was to buy The Shoppes in 2010, today’s market for commercial real estate may be the complete, opposite as investors rush in.

“Real estate is absolutely pricey,” Moshayedi said.

Still, Moshayedi says his family is seeking office space to buy either by the Orange County coast or in Silicon Valley. The family reportedly paid $25 million in 2012 for the 47,000-square-foot Mariner’s Mile Marine Center on Coast Highway in Newport Beach.

Moshayedi plans to go back to the family’s traditional investing philosophy: long-term ownership. He says that works especially well when real estate is popular, because the extended hold can mitigate or erase any negative financial impact of overpaying when real estate is in high demand.

“If we get a good property in a good location, it will do OK even if we pay top dollar,” Moshayedi says.

Buy high, and sell even higher. It’s riskier, but it can also be rewarding.