Guest: Al Callegari
Topics: Walgreens, DLC Management

Transcript:

Chris Ressa 0:08
This is retail retold the story of how that store ended up in your neighborhood. I’m your host, Chris RESNA. And I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by deal see management

Ressa 0:30
Good morning, everybody.

Ressa 0:32
Thanks for joining the show. Today I have Al Callegari from DLC management. Al is the head of DLCs ground up development. And I think today we have an interesting story for you about a Walgreens in Paterson, New Jersey.

Ressa 0:51
Al has been in the commercial real estate business for over 30 years. He spent the first 20 years of his career on the corporate real estate side at such prestigious companies as at&t, Burger King and CVS. He joined DLC to lead DLCs ground up development team about 10 years ago. And we are thrilled to have him here on the show. And so welcome now.

Al Callegari 1:18
Thank you for having me, Chris.

Ressa 1:20
So today we are going to talk about a Walgreens store in Paterson, New Jersey, which I think is a really unique story. And so why don’t you tell us a little bit of how that process started to get Walgreens to be the site selector and choose the location for Walgreens.

Callegari 1:45
So Paterson, New Jersey is a very, very dense community. Okay, and St. Joseph Hospital where the store is opposite, it’s right at the main entrance of the hospital, is probably central to the business in that district there. IT services the hospital, as well as the community, Walgreens had tried for a number of years to find a location in that area to no avail targets drifted off of the target that they had on Main Street, getting half a mile in either direction down Main Street, which is away from the target where the store should be located. So we approached this when we got this assignment from Walgreens, to look at developing not only a real estate site, but also a business for them. So we targeted the main entrance of the hospital. At that entrance was no parcel that would be large enough to accommodate a Walgreens store. We went about finding various combinations of assemblages, that would give us a landmass that would work for a store to service the hospital. But we also looked at the ability to buy a business pharmaceutical business for them, that would then get moved into the store so that it would have a base of business when it first opened. A lot of times when we look at ground up development, we’re looking at it from a real estate perspective. But from the clients perspective, it’s really a business development operation that we’re looking to get into. And we approached that in this particular location in that matter, we’re developing not only the site, but the business for them there. So we ended up at the end of the day, putting together eight parcels, five different owners, and facilitating the acquisition of a major pharmacy that was in the area so that that business would move into the new store on day one.

Ressa 3:46
So in order to get this Walgreens open, you had to buy eight different pieces of land from five different owners and a pharmacy where their tenants in these buildings,

Callegari 4:00
yes, there were tenants in all of the buildings that were there,

Ressa 4:04
then you had to terminate tenants from their spaces.

Callegari 4:08
Correct. Part of the transaction was getting not only the coordination of all of this on, but getting a relocation package built into the acquisition price. So that closing, none of the tenants who were owners of the property could be relocated, and some who are not owners of the property, but surely a tenant or a lease could be moved out, particularly in one of the buildings, which was a residential building.

Ressa 4:34
Wow. So one of them was a residential building where so there were eight parcels how many of the parcels were residential versus commercial?

Callegari 4:41
Three of them were residential. Three of them were commercial. Wow.

Ressa 4:46
And so you have to buy these figure out relocation scenarios. You have to knock it down, build a Walgreens, sure. There’s a ton of approvals you have to go through to to get that done as well. We know the tenant wanted to be there. Did the community want this at the time, you know, sometimes there’s resistance did the community want this,

Callegari 5:07
there was really no resistance from the community. But there was resistance from the planning group, because this was in a central business district. And they were looking to redevelop the district in a manner which was not consistent with how we would want to put a retail store there.

Ressa 5:25
Got it, those are always challenging to figure walk through that.

Callegari 5:29
They hold the approval hand. So it makes it difficult to work with them as well.

Ressa 5:34
So this is fascinating, because I think a lot of the listeners hear their thing about how a store got there, it’s maybe one or two deals, this is so many deals tied up in one it’s, you know, buying of different parcels from different owners. It is making deals to relocate tenants, it is making the deal with the tenant that the standard deal or the retailer. And so there’s a lot of different moving pieces here. I think one of the things that happens in deals is and I imagine happens to here at some point is is deal fatigue, I think in development it takes to you have an idea to actually get that to actualize takes a long time. How long from when you started looking for sites to the store opening? How long was that process? I can’t imagine it was five minutes?

Callegari 6:23
No, not at all. It was clearly a little over two years, because from what we started contacting individual owners to one’s door got opened.

Ressa 6:33
Wow, that’s actually faster than I thought. Yeah, that’s pretty impressive. Two years, I think the those some of those deals must have gotten done pretty quickly, even though there was a lot of deals because to move all that I’ve seen one deal take longer than two years, let alone I’m sure you’ve in your career I’ve worked on, you know whether it was at 18 T Burger King, CBS worked on a deal that took longer than two years. That’s impressive. What do you think attributed to the speed to get that done so fast? Well,

Callegari 7:00
there’s a reason for it. And you don’t want the tenants you don’t want the owner is talking to each other, it will do nothing but drive up the price over a period of time. So everyone was contacted really at the same point in time. We knew beforehand how many parcels we needed to make this work. And we started contacting very systematically every owner within a week to eliminate the timeframe that they would have for coordinated talking with each other.

Ressa 7:31
And any, any of the owners difficult.

Callegari 7:37
They all were difficult, quite frankly, even down to the very end of the project when we were not only buying from the five individuals, but we were coordinating a closing date for all five properties on the same date as well. So they were all difficult in terms of their own individual needs. And some of the groups had partners and some of the partners as time went on, within any one buying group or getting antsy with the transaction

Ressa 8:07
in two year timeframe, I think is incredible to do that. But you did mention the most difficult was the planning board

Callegari 8:15
Planning Board was difficult because they were looking to have a continuity along Main Street where it was retail which will be developed on the front property line. They were looking for the community to be a walk to community and there was residential in this area. So theoretically, it could be a walk to type of a retail environment. But Walgreens the tenant needed to drive to capabilities not a drive thru. But the ability to have people in the community drive to the pharmacy to have parking and then leave.

Ressa 8:48
I would hope there was some understanding that you know what Walgreens doesn’t pay for what they provide to a community especially a community like this and you know, having a hospital right there is a real basic human need. And so the having people drive to it is critical for the viability of the business and clearly they eventually got over what what was the what was the breaking point where they said you know what this is this is good for us.

Callegari 9:17
There were two planning boards that were involved here. One is at the city level, the city fully embrace the property and the project okay, they really wanted Walgreens there is another Walgreens store that operates within Paterson that’s extremely successful in services that community but it’s on another side of town. The county planning board was the most difficult here because they were holding to their let’s call it an academic perception of how it should be redeveloped as opposed to the reality of how it could be developed.

Ressa 9:49
Got it. So I’m assuming there was some master urban plan that the county had and this didn’t jibe with it. Correct? Yeah. Got it.

Callegari 9:57
Is it another part of this? That’s Making it a little bit difficult as well, that the site after it’s assembled has a significant grade differential from the front of the site to the back of the site. So there’s a 25 foot grade differential between the property line in the front and the property line in the rear. And so to put a put a building up on well,

Ressa 10:20
So how big is that the land area we’re talking about to give everyone some frame of reference?

Callegari 10:25
It’s ultimately it’s when assembled, it’s about three quarters of an acre.

Ressa 10:28
Wow, still still pretty tight. In non urban areas, would that have been too tight for a freestanding? Walgreens?

Callegari 10:37
Probably, yeah, probably.

Ressa 10:38
So each of these parcels were less than a quarter of an acre? Yes. Yeah, got it.

Callegari 10:46
Some of them were just simple taxpayers, where there’s a single family home on it in a densely populated urban area,

Ressa 10:53
where most of them owner occupied or most of them, you know, rental properties who

Callegari 10:58
are owner occupied, and one was a three story rental, almost a single room occupancy type of a rental situation. And some of them had been abandoned in the other parcels, the houses had been abandoned.

Ressa 11:12
Got it. And so now, you assemble three quarters of an acre, and you run into a challenge that I face all the time, which is grading challenge, right? Whenever you’re building in, you know, whenever I hear grading challenge, all I think are dollar signs, right? You know, at the end of the day, anything, you know, with technology, today, almost anything can physically be done, there’s very little things that you run into that are like physically impossible, it’s just sometimes to get to the outcome you’re looking for that physical transformation is rather expensive and can sometimes blow up deals. So that’s the first thing that comes to my mind when you say grading change, because I’ve had physical challenges that have been problematic. And they happen in the integrated shopping center or office buildings all the time where you have great changes. So talk to us about this great change. So the

Callegari 12:05
site and now, Walgreens as a national tenant has prototypes. Obviously, this was a non prototypical site for them, we ended up with a prototypical ground level of retail space for them. And what we did was we on the rear property line, okay, which 25 feet above the front property line, we were able to put in a retaining wall, and that became the back of the building. And that became the basis for putting a mezzanine, almost the full floor mezzanine on top of the ground level retail. So the in the rear of the building, deliveries came in through the rear of the building. The second level, it came down to the retail level on an elevator. And the first floor retail was all just pharmacy and open space for retail products.

Ressa 12:54
So I think that’s really talking. I think that’s really interesting in just in, you know, commercial real estate and the corporate real estate world, that design, how much of that was the developer idea and selling the retailer on it versus the retailer, giving you the ideas

Callegari 13:12
that was DLCs design, we envisioned how this could work, so that we could then have a ground level of retail that would sustain the sales that were needed in this area. And we also would have parking in front of the building at the same point in time. In the urban environment, the city, five boroughs. Many times the stock rooms are placed in the lower level in the basements. And there’s no reason in a suburban situation which is functioning like an urban environment. You can’t put the stock room on the second level, because you can bring merchandise down through the same material and the lift that would bring it up from the cellar you bring it down to the ground level.

Ressa 13:53
You mentioned the five boroughs of New York City. I’m assuming you took experiences from your doing CVS stores in Manhattan, which are urban environments, no different than Paterson, New Jersey, you know, sometimes much more complicated. Those experiences help frame the design here.

Callegari 14:13
Absolutely. When I was at CVS, as a director of corporate real estate for them in the tri state area, which included the five boroughs of the city, I did well over 200 transactions for them, and you kind of bumped into every type of situation, urban and suburban that you could bump into. And all of those experiences meld into a base of knowledge that helps you when you look at something, not look at what’s there, but look at what could be there. And that’s really the key to finding a successful business development and a retail development.

Ressa 14:46
So one of the things though with that is when you’re dealing with large organizations, and they have prototypes, and this is their lane and this is what’s successful. Soon as you step out of that that call causes a change in operations marketing, it causes a change to real estate and change causes concern for people. How did you get Walgreens over the hump that this was a viable solution to the challenge,

Callegari 15:14
it became clear that it was a viable solution to the challenge is because we were able to give a retail floor, okay, just to retail and pharmacy that was larger, in fact than what the prototypical ground level retail floor would be if they had their stock room and back offices on the ground level if it was a single level prototype. So we gave them more space on grade by moving everything else upstairs. And that comparison helped sell the operators on our understanding that, hey, I’m getting a bigger prototype on grade even though it doesn’t look like a prototypical building.

Ressa 15:51
So How soon did you know that was going to be something you had to do? Was this part of the process in a development like this? Are you doing this simultaneously before or after the very beginning, when you’re talking to the people about buying their parcels?

Callegari 16:07
Everything is going on simultaneously? Okay, we’re looking at a layout and various layouts by various assemblages, to see if what I’m trying to buy, what I’m trying to assemble will actually work from a design perspective. So it’s all going on at the same point in time? Well, I’m not sharing that with the individual property owners, I am in fact sharing that with my client, to get them to buy into what could be there.

Ressa 16:32
So that grade change, how much did that affect affect the construction costs,

Callegari 16:38
it impacted it probably by 15%. But again, you know, because of the great differential, the site needed a retaining wall and the rear. And so we engineered it so that it was just part of the rear of the building. So the rear wall of the building, both on the grade level, and on the mezzanine level was, in fact, the rear function does the rear retaining wall for the property.

Ressa 17:03
So I think you mentioned something earlier that I’m sure the listeners are your ears are burning, which was you had to orchestrate the buying of a pharmacy.

Callegari 17:14
So two of the properties that we were looking to acquire, were owned by an individual that owned a pharmacy, this gentleman who owned the pharmacy was soliciting business from the hospital, directly across the street, the filling his business from his retail store, at the hospital, but in about 2000 square feet. So it was not a retail store. It was just a backroom pharmacy operation. He had a business, and he controlled properties that we were looking to acquire. And so those efforts merged into one discussion with him, buying the business, buying the properties from him, and then bringing him over ultimately, to be an employee of Walgreens in their business.

Ressa 17:58
Wow. So he became an employee to what was he a pharmacist,

Callegari 18:03
a pharmacist? Yes.

Ressa 18:04
So that’s fascinating, I assume, of all the things that happened, maybe the planning, but was that deal in him the key linchpin because he controlled real estate he controlled the business was, was he the key linchpin to making this successful,

Callegari 18:21
he ultimately decided not to sell us the property after he had decided to sell his properties. So we then went back and acquired another property in the other direction, up Main Street, to replace his landmass with more landmass. But we still continue to download a discussion of buying his business and him coming over as a pharmacist. And that ultimately was what made the business happen the deal.

Ressa 18:45
So he, he still owns the, I guess, adjacent property to the Walgreens today. He didn’t want to, he didn’t end up selling that. The but he did sell the business and became an employee that is beyond creative. And you don’t hear about that too often. So of all the things that happened in this story, you know, was there a point in time where you thought everything was going to blow up like this, this Steel’s now going to die? And if so, what was that?

Callegari 19:14
You get that feeling almost any given day?

Ressa 19:18
With real estate, yeah.

Callegari 19:20
With these five individuals, you could you could get that feeling on any given day, right? The worst part of the deal was dealing with the individuals, okay, some who were elderly, and had to deal with their children who had their own ideas of how things should be going and how things should be happening. Some of the properties were owned by partnerships where there were three partners. Two of them were committed to sell one was not because he was not in need of any kind of proceeds. He wanted to get out of the deal at any one point in time and had to be drawn back into the transaction. Wow. And at The end of the day, all deals, all the properties closed on the same day. So, on the day of the closing, the property owner on the rear Street, decided he wasn’t going to move. He wasn’t going to vacate. And he didn’t want to go through with

Ressa 20:16
the closing. Of course, why? Why would anything go smoothly? The individual had

Callegari 20:21
issues. Okay. So that day I get in my car, I’m out there dealing with him in his house, which is a shambles and working with him to get them to vacate. Wow, which you ultimately do.

Ressa 20:36
Wow. Did you have to vacate that day?

Callegari 20:38
That was the last day otherwise the deal would not close? Oh,

Ressa 20:42
my God. Did you take them in your car?

Callegari 20:47
No, someone else?

Ressa 20:50
Got it. Wow. That is by the seat of your pants for sure. And so that’s the the acquisition in the assemblage of the property? Was there a time when either on the deal side with the the retailer with the tenant that you thought the deal would die? You know, that you questioned the commitment because of how complicated and cumbersome this was?

Callegari 21:10
The commitment from the retailer, Walgreens was not in question because of the complications of the deal. What was in question was the acquisition, because the price of the assemblage and the building were getting so expensive, they really needed the pharmacy business to start day one when they opened the store. And so that particular acquisition, which was a different transaction was key to the deal. And without that happening, the deal ultimately would not have closed.

Ressa 21:39
Wow. So without buying the pharmacy, so we’re talking this, this shows really geared toward the real estate part of the business. But without buying that pharmacy. That deal probably employs everything

Callegari 21:53
correct. And with that pharmacy, the store opens in Paterson, the more of the top 10 stores in the country within your water. Wow. So and that’s the chain with 1000 Plus stores.

Ressa 22:05
That’s insane. All the cap was there. We mentioned that the assemblage the acquisition, the tenant. The other piece to that was the, you know, the city and the county. Was there any grave concerns on the county? Or did you guys know that eventually you would end up getting the county to, you know, see your perspective.

Callegari 22:27
There, there were no grave concerns with the city. And there were grave concerns with the county. The county was adamant about the building be on a lot line in the front of the property. And we went through our application from the county planning board at one meeting just to give them food for thought that we went back at a subsequent meeting. We clearly told them that if we didn’t get the site plan approved the way we had drawn it, we were not going to go forward with the with the deal and demonstrated to them through additional drawings why their request was not possible and why it was done feasible.

Ressa 23:04
And so what the county was looking for is the traditional walkable urban environment retail shopping where you can’t park you just walk in go and pop in. And so with the the key that they didn’t like about this was the fact that it was built for driving there was parking and there was a drive thru.

Callegari 23:24
Yeah. No, no drive thru, but there was parking in front of the building.

Ressa 23:27
Got it. That’s what they didn’t want to have. Right. Interesting. Are you seeing that a lot today?

Callegari 23:35
It still goes on today. But I think the urban planners are being a little bit more flexible in terms of depending on where the site is, depending on what the needs are of the community and more of the planners are more and more embracing change because of the economic environment we’re in. Retailers not necessarily clamoring to be in their communities to the extent that they used to be in their communities, and getting the ability to get a readable for their downtown’s, which they desperately need in some communities.

Ressa 24:07
What’s a readable for everyone here?

Callegari 24:09
readable is nothing more than someone who’s going to pay taxes, improved for property and have a longevity to their business so that they’ll be there for a period of time. Generally, the national retailers are desirable for this.

Ressa 24:23
Yeah, totally. They they definitely create a revenue stream for the municipalities from a tax base during

Callegari 24:31
employment in community. They generate taxes, property taxes, but they also generate a tax base for the community as well.

Ressa 24:38
Well, that’s a phenomenal story out. Is there anything that we didn’t talk about that we should talk about?

Callegari 24:45
About that? No, I think we covered most of the basis. You have to have a staying power. And one of the things you can’t do is get discouraged on any given day. And you just look and you come back and you listen, you Don’t react to the insanity sometimes which is being thrown at you just think about it, and you come back at another point in time, hopefully a calmer day, a calmer moment. And you put forward a rational idea as to how to resolve the individuals issues.

Ressa 25:15
Yeah, I think just in general business and you call it react to insanity. Someone says something or does something in your immediate reflex is, I need to respond to this. And you’re just feeding into that. And sometimes it’s taking a step back and formulating a plan of how you will react to that. I think that is sage advice there, as you call it, don’t react to the insanity. I like that learn to listen. Fair enough. So you have this breadth of experience of doing, you know, ground up development, from the Burger King to at&t to CBS. And now doing it on the developer site. Anything in this transaction that you took away, that you now apply to your everyday that after all those years of experience was new to you.

Callegari 26:08
A thing to take away is a reinforcement, okay, of a commitment to a logical approach to solving ecological problems, the only way that it works, not giving up, continuing to come back to the problem with a resolution. If it doesn’t work at that point in time, take a step back for a period of time, and then come back at the problem again.

Ressa 26:31
Well, that’s great advice. This is our second episode. So at the end of the show, where we’re still formulating what our kind of rapid fire as the podcast world talks about. But we have two questions that we did ask on our first episode and want to ask you so one, what is the best piece of real estate advice you could give to anyone

Callegari 26:52
looking at real estate from a business development perspective, not a real estate development perspective, and look at the site’s with an eye toward a creative eye toward what could be there versus what’s there now, how to how to satisfy the business needs, not just the real estate needs.

Ressa 27:10
That’s fantastic. And I think that more people going into it with that lens will probably yield a more and more creative results, especially in a disruptive world that we continue to evolve into. Last question, what extinct retailer, would you love to see come back from the dead?

Callegari 27:36
I actually thought, a concept that never really got executed very well. Brewers bagel bakery is a concept that I thought was great. But it never seemed to get executed, at least in the metro areas. All that well. It’s still in some areas, and it still does some fairly well in those areas. But as a concept, I think I would like to see that comeback.

Ressa 28:00
That’s an interesting one, an interesting, take a business that, you know, needs to be revitalized, maybe the one that I loved going to as a kid was Boston market that’s still around today, but they’re not in expansion mode. And they haven’t done you know, at least that meets the eye to the consumer, anything, you know, as fast and revolutionary as some of the others. But from a product perspective, I love the rotisserie chicken, I think it’s, I think it’s pretty good product. And

Callegari 28:29
it had a phenomenal concept, just a concept that was vulnerable to competition, and they got into the rotisserie chicken, then the whole meal replacement business. And every supermarket put in a whole meal replacement section to compete with them. And so why make two stops when you can make one at the supermarket and pick up the same chicken that you would pick up it was the market. Interesting. I mean, that’s how I viewed

Ressa 28:55
Yeah, no, totally. I think that is interesting perspective. Going through a drive thru, though, to pick up the fence, you know, the fence, my wife going to pick up a family dinner at Boston Market for relatively, you know, inexpensive compared to other things. And pulling in the drive thru grabbing it and going is, is pretty convenient. I’ll be it. We don’t have any Boston markets near me today. But it was a concert by length. Anyway, that’s all our time out. I really appreciate it. Thank you so much. It was a pleasure hearing this story. This is you have a breadth of experience and knowledge that I think is uncommon in this industry. And that story was phenomenal. So thanks for coming on.

Callegari 29:37
Thank you. Thanks for having me.

Ressa 29:41
Thank you for listening. This is Chris stress on retail retail. For more information, please visit our website VLC ng mgmt.com