Unsold cold storage facilities crowd San Joaquin Valley market
by Tim Linden | June 22, 2009
Fresno, CA-based Z&S Fresh Inc., a fresh fruit grower, packer and shipper, recently put its $11 million state-of-the-art cold storage and packing facility on the market to cover some outstanding debts.
When owner Martin Zaninovich met with some of his creditors in early June, he laid out a scenario that on paper seemed very reasonable. The modern facility has less than a $5 million mortgage, leaving lots of equity. Combined with the firm's accounts receivables, there appears to be plenty of money to pay his PACA debts as well as the bank that holds the mortgage on the cold storage facility.
And the firm may well sell the facility in quick fashion. But the "For Sale" sign has gone up in a crowded market with the facility competing against at least 10 others for a shrinking number of buyers. "These are challenging times in the tree fruit industry," said Dan Kevorkian, farm department manager for Pearson Realty, which he called the largest agricultural property specialist in California. "Because of that, we have seen a number of facilities come on to the market."
Mr. Kevorkian said that the double-digit number of "For Sale" signs is unusual and does create a bit of cold storage facility logjam, but he was optimistic that buyers would be found. "They will be absorbed over time ... but it will take time."
He said that these facilities are very highly specialized for a specialized use. "You have to find a buyer that has a business plan that fits the facility."
Typically, Mr. Kevorkian said, about a half-dozen cold storage plants are sold each year, meaning that there is almost two years of inventory on the market. He said that a large operator can take an existing facility and "make it work," but the less retrofitting the better, so most buyers look for a facility that closely matches their needs. "These facilities are typically owner-occupied; these are not sold to investors."
Agricultural real estate appraiser Stan Xavier of Correia-Xavier Inc. in Fresno, CA, said that as with most properties, "location means everything." He said that if a facility is located close to one of the two major north-south freeways that run through the San Joaquin Valley, it increases the property's ability to be shifted to a non-agricultural use. "If it's inside the [Highway] 99 corridor, it opens it up to alternative uses."
Mr. Xavier said that most industrial building buyers find it much less expensive to retrofit an existing building than to start from scratch. He agreed that the market for cold storage facilities is fairly well saturated at this point, but he added that there is always demand for a major facility with good freeway access. A modern facility will not sit on the market for too long, he said. Conversely, an older fruit-packing facility located on a ranch miles from the freeway may be much harder to sell, he said.
Ron Silva, owner of Ron Silva Realty, also in Fresno, was fairly optimistic that each of the dozen facilities on the market would find buyers. He said that there is a lot of inventory on the market, but added that there has been good movement, noting that three other cold storage facilities sold in the past three months. The oversupply has created a bit of a buyer's market, and he said that some new buyers have surfaced.
But he added that all buyers "better have some [financial] strength" when they start looking for a lender. "Banks are very tight right now. It is even difficult to cover land sales," which he said are typically easier to finance.
Mr. Kevorkian said that while "financing is certainly a consideration, before these companies start to look for a facility, they usually have a balance sheet to support the financing."
For fear of prejudicing the market, Mr. Kevorkian would not speculate about the price for which the Z&S cold storage facility might sell. He said that when a price appears in print, it tends to create a market all by itself. He did say that it is a top-notch facility, and one would expect it to bring top dollar - whatever that is in today's economy.
Mechel Paggi, Fresno State University ag economist and the director of the university's Center for Agricultural Business, said that it is very difficult to ascertain why so many facilities are currently on the market in California's Central Valley. "It has been a very, very difficult few years for valley agriculture in general and specifically for the tree fruit industry," he said. "We have seen some real major players fold up the tent - companies I would not have expected to close their doors."
He said that Z&S Fresh's financial difficulties "are just another symptom of the disease."
Mr. Paggi said that it is difficult to identify the root cause, instead indicating that there are many factors leading to the current problems. He said that the agriculture economy is under stress at the same time that the world economy is shrinking. Repeating a common refrain, he said, "These people are producing a product that people don't have to buy. When things are tough, people cut back, and this [fresh fruit] may be an area where they are cutting back."
But looking specifically at the facilities for sale, Mr. Paggi said that slow economic times also offer opportunities, and this appears to be a very good time for a strong company to expand by picking up one of these facilities at what could be a bargain price. He said that a judge is expected to rule June 18 on the bankruptcy sale of a San Joaquin Valley tomato processing facility (SK Foods), and that this will be very telling about the relative strength of the valley's ag economy. The economics of that facility look very promising, which points to a bidding war that should drive the price up. If there are no or few buyers for that facility, Mr. Paggi said, that would not bode well for the tree fruit facilities, where the economics are not nearly as strong.