Final Descent

Today we begin our final descent into the development program. One day before the final class of presentations, and Brant and I feel as if we have exhausted all resources of information, and have little left to add to our presentation. Now we are slowly collecting the date we have gathered over our 5 week journey in order to funnel our thoughts into a collection of comprehensible ideas that maybe somewhere someone might be willing to fund.

We met at 10:00 to begin the final touches on our presentation; hopefully we are not missing anything. See you tomorrow.

Will you take a check?

While my counterpart is concentrating on the design, I was looking into numbers. Using the deal structure providing by Mr. Geesling, I infused our numbers that we have to work with: construction, acquisition, soft costs, potential rents, conservative underwriting and investor returns. I decided to do a Best Case and Worst Case cash flow.

Cash Flow Excel

Speaker Week 2

This week was the second round of speakers set up for our class. The two speakers lined up for the class were for marketing...bummer, because I really wanted to hear what the lawyer was going to say. I am not sure if that is because we attribute so much to lawyers, or that I truly wanted to hear this person speak???

One of the marketing speakers was Mrs. Mund, of the Jarod Mund clan. And having lived with a pregnant woman for 9 months, I applaud her attendance in our class on a Saturday morning. She shed some light on the marketing aspect of residential, as most of our projects will more than likely have their highest and best use as residential (at least to begin with). Her marketing program for real estate is very similar to my own (which was refreshing to hear): get as much done with FREE mediums, then pay as little as possible for the print!!! Speaking of print, she concurred with what I was thinking regarding the print venue of marketing: for this demographic, it is on its last leg. The demographic that will be most enthralled with the south-side and a project like ours, is going to be the young Maven (if you had not read Gladwell's book, The Tipping Point, you should...no matter what field you are in). And the way to reach them is through Internet publicity and "social media".

The second speaker was Cody Payne, which he gave his opinion on why certain assets yield higher rents...better assets.

Mapping the Comps

Today was a day for comps...both residential and office (Brant has the retail). Because I am a visual guy, I decided to put the comps on the map with a description of each unit. Our numbers come out to be very close to what we assumed woudl be the going rate.

Most residential units are commanding a $1.10-$1.20 PSF; our best case scenario is going to include $1.15 PSF.

Residential Maps

Our office space came out to be slightly less that what we predicted, at around $.90-$1.10 PSF; this is too far off what we want to be for Best Case, therefore, as predicted, most units will not rent as office.

Office Map

Brant was in charge of retail comps, of which he also sent them to me in a map (sorry, no link).

Speaker Week

This week's class was allocated to professionals from different specialties within the development process to enlighten us on the "in's and out's" of the field. We had three scheduled speakers, and all three showed up.

The first speaker was an architect turned marketer turned developer. His story was unique in that he graduated with a degree in architecture and business (MBA) and decided to pursue his passion for business. After creating a marketing company, found that he still had the itch for redeveloping older buildings and, with a built in tenant (his company), decided to undergo the restoration of the Awalt building in downtown Dallas. From the perspective of a successful redevelopment, he told stories of how they took advantage of "decor" and development process from a fore-gone ear and juxtaposed them with modern technique and aesthetics. The one key he stressed (and I agree) is don't fake it; if its not old, don't try to make it look old, just bring in the new and mesh it with what you have. Great topic and speaker; he will be good to know for future endeavors.

The second speaker was more of a "question and answer" setting, where we fired our lending and finance questions her (Lorie Houston from Wells Fargo) way. The short of what she said regarding the lending environment today: there is no way around the personal guarantee! She did bring up a few good options for those of us finding it difficult to raise the funds. One option that Brant and I had already begun researching was the SBA 504 program (She actually discussed the SBA 7A, but I think the 504 works better for our situation).

The third speaker was from the city of Fort Worth. Her position as the Deputy Director of planning and development allowed for great conversion pertaining to zoning ordinances, necessary paperwork for the city as well as various incentives offered by Fort Worth for projects such as these.

The information provided in this class session was informative and incredibly useful. It allowed us to think of areas where we might not be as well versed as we should be regarding our individual properties. For instance, I know that after hearing Dana from the city speak, I need to become much more well versed in the zoning, platting, and municipal restrictions on my property and ways I can get around (bend) those rules to help my project. Lorie Houston gave some creative financing alternatives to think about, and the design discussion brought about by our architect friend made us think about using old material in a whole new light. Can't wait for the next class: Marking, Law and Construction.

Construction Costs

Today I met with Royce Coker, owner of Coker Construction. Royce has spent most of his adult life in construction, the majority of which has been spent in TI work for commercial real estate; however, because of the economy, he was let go from his previous position which has spurred him on to starting his own company. So, I thought what better person to go to with our construction numbers.

After discussing with him the logistics of our property, showing him pictures and giving him drawings and layouts, he came up with a break down of numbers that seemed to match pretty well with the numbers Brant and I had come up with (at least from a holistic standpoint; he shed a vast amount of light on what the numbers would actually go for). Brant and I had figured staying within $25-$30 for the overall construction, and the best case scenerio that Royce gave was $27.00 PSF.

The only number we threw at him was the cost of the overhead doors, which Brant secured a quote for from BP, a total of almost $48,000!!! For six doors?

BP does more than Oil

Brant contacted the company in charge of overhead doors, BP. We received a quote. We used to think this project was feasible.

The quote we received was $46,000, which is 1/3 of our budget. The doors are nice, but, really???

By the way Brant, we need a proposal.

On Saturday, Dr. Forgey tasked us with recruiting guest speakers for each process in the development spectrum; my lot fell with the lender. This actually worked well with my list of phone calls that I needed to make this week, as the majority of them were to perspective lenders on the project. So my tactic was to first, ask for money for our project, and depending on the rapport built during said conversation, present them the opportunity to speak to our class.

And so the week began. I started Monday by making a few preliminary calls to perspective lenders, going through my list of lenders found on the Fort Worth South website. The same story from the week before; no appetite. However, my scenario, thanks to Dr. Forgey, had changed a bit. This time I was asking for TI loans.

One of the new names I was able to ferret out from some lender contacts I have was one Brandy Headington from first National Bank. She told me that she would have one of her managers contact me to let me know if anything was available for that type of project...still waiting for the phone to ring. So, from that point, I decided to go straight to the horses' mouth with the proposal. I found the information for the owners (Prescott Interests) and floated our ideas to Richard. After 3 unsuccessful attempts to get off the phone with me, he finally agreed to look at the elaborate proposal that I and my architect were putting together and put it in front of the investment committee for approval. (By the way Brant, we need to start putting together an elaborate proposal).

The reasons Richard gave for "not being interested" were as follows

1. Time: he feels the development/lease-up process will take too much time, therefore creating a large opportunity cost to him and his committee.
2. Not comfortable with the cost: he sees this as a project that could fizzle out mid-stream, forcing him to pony up the costs to finish the job, just to sell the property at a loss (by the way, they have already written off the property as a loss)
3. No partner needed: I threw out the idea of JV, and he said: "We are developers ourselves. Why the hell would we take on a partner. Plus, if we thought this property could go res [residential], we would have done it ourselves."

So, in our proposal we will be sure to include:

1. Quotes from contractors on how short the construction process will be. In the meantime, we will agree to a "first right of refusal" spot if any prospective buyers/tenants come along.
2. Show that no cost will be due from them in the "rent differential" equation. In fact, there will be less cost to them under our scenario than current, as our master lease will cover expenses.
3. Stress the time to travel to this site (43 miles) and the hassle we will relieve if we are able to take on this project and manage the outcome.

Our presentation will include much more than this, but it is good to know what the objections of the other side will be before you make your argument.

Circumventing Challenges

This Saturday was class number 2 where the first hour was spent debriefing the past week. All three groups seem to be on the same page with one another: assets are overpriced (at least for our appetite) and lenders do not have much "appetite" for tenant properties. So the discussion led to ideas on circumventing the problems we face. The possibility of Joint Venturing (JV) with the owners was always in our back pocket; in fact, the broker for Park Place threw out a few scenarios of what we could do for seller financing. He is on my list of people to contact this week to get a better handle on what he was referring to and the details of said scenarios.

The other idea that Forgey threw out was essentially a rent differential return. The basic theory is this:

• Begin with a lower price per square foot master lease which you enter into with the owner. This lease is simply going to cover the cost of ownership (insurance, taxes, etc), so will be a sub-market lease. This will only work on properties that are not currently rented, and have very little activity.



• Next, pre-lease the property for the use you intend to market it as; for our case, it will be pre-leased as office and residential (or a much smaller retail space, but this is probably the least likely)



• With the pre-lease in hand, secure a TI loan. These are easier to get than outright purchase as the lender can use the pre-leased tenants as backing for the loan. Because the modifications needed on Park Place are minimal (HVAC, Plumbing, partition walls and kitchen/bath amenities), the TI loan should come in at a relatively low cost ($30/square foot)



• As long as what you (the master tenant) have pre-leased the property for is more than the cost of the master lease (your lease with the owner) and the TI payments (amortized over the lenght of the master lease), you can reposition the property for a profit.



• Obviously, the lower the master lease and TI loan, the higher your return.

The scenario fits well with this building, as it does not require a lot of "work" and will be relatively low maintenance fees on going throughout the master lease term. The owners "profit" in that they are no longer paying for an empty building and at the end of the master lease term, can sell the building at the NOI our lease was generating. By that time, the RE market should have turned, as well as the Southside of Fort Worth, leaving the owner with a substantial return.

Our task this week is to present our ideas for both JV and Rent Differential to the owners of the property.

The remainder of the day was spent searching comps (office, residential, retail), researching historic and planning parameters of the area, as well as beginning the presentation packet for the owners laying out the dual scenarios.

100% of space used

The building we chose offers variety, location and most of all flexibility. Here is the layout that Brant designed (nice work partner).

The design works well with the goal of attaining maximum usage of 100% of the space. The units are long and narrow, but offer more functionality than 3 story town homes (how many times are you going to get the garage [read bottom floor] and realize you left your keys/wallet/sunglasses on your beside table...3 stories up). With this design, you enter from the street side with approximately 30 feet of open space to be used as living/dining/front office. Then your open kitchen maintains the flow of the space, with all "utilitarian" items (sink, dishwasher, refrigerator) along the side wall, allowing complete open views. The only blocked view comes from the partition for the restroom (obviously for privacy) on the back wall of the kitchen. Walking through the corridor leading to the back space, you open to either a bedroom/back office/garage space. The design works for anyone interested in the area: resident looking for functional living space, small office unit with front and private office space, medical office with waiting and exam room...the possibilities are endless...sort of.

FHA 220 Packet

Ken Byrd, with Fort Worth's division of FHA just returned my call and offered to send a packet of information with approved lenders. My call to him was initiated by my research on HUD's site under the redevelopment of multi-family real estate. He was a little shocked at the size of the parcel (6700 square feet), as he usually deals with much larger projects. I should expect the packet in the mail in a few days.

FYI, I asked if he could email it to me, and he said it was too large.

Feet on the Street

Today was a task of on the street research. Because we were denied our "dream" project of repositioning an old gymnasium into loft style apartments, Brant and I hit the beat to find a new property.

We began at 9:00 am on Tuesday at the school. Both of us had previously outlined the area of the TIF in the Southside, and looked online for potential properties. After a few minutes on the computer, and a brief conversation with Forgey in his office (amazing, no red bull), we loaded up in the Tahoe for more sightseeing. Our first stop was with Richard Kelley to shake the bushes for any lead possible. We spoke with the receptionist to discover whether or not they were working on any possible redevelopments or knew of any "old building" owners willing to sell; no luck. They informed us of all the projects Eddie Vanton (their regular source of income) was currently pursuing, but no new leads. This only wet our appetite for a unique building, as we knew he was probably looking as well.

Our next stop lead us to the "glass shop" on Magnolia where a new sign (since Saturday) had been posted. It was a contractor advertising his remodeling service...so I called.

He informed us that a glass shop had actually purchased the building and was in the process of remodeling. I told Casey (the contractor) our situation, which lead to another lead that we pursued. He informed us of a building he owned that he was willing to sell. We pursued...and kept pursuing, as this building was WAY SOUTH!!!! It really was a great property, but too far south for what our project demands.

On our way back north, we checked a few possibilities that Brant had found on Saturday while we were enjoying the local flavors at Fred's; no luck.

En route to yet another property, we stopped at a promising "for lease" sign at 1612 Park Place Lane (how's that for an address...marketing idea?). The building held its promise in:

1. Location: located directly across the street from retail and popular eating establishments

2. Aesthetics: Building holds great "historic" appeal without the cashe "warehouse" look

3. Physical Obsolesce for what it is currently used as: retail with minimal parking

I think we had finally found our project!! I called the leasing broker and found they were eager to entertain an offer for sale. I scribbled the sales price, gave my email for posterity sake, and we were on our way. Actually, we still entertained a few other options, but in our hearts, we knew we had found the ONE.

By lunch, we had our blueprints from the broker, as well as an offering memorandum, of which, 90% was useless information. The broker is still only pushing for this property to be a retail store focusing on fabrics (as those were the closest competing businesses listed). The architectural drawings and layout were a great tool to have for Brant so he could do some mock-up drawings of what we can do with the space.

Our next stop was with Mike Brennan of Fort Worth South. Upon telling him of our idea, his face lit up like a 3rd grader at Christmas. He then proceeded to tell us of his ideas for that exact block of Park Place; a busy yet logistical nightmare for the planning type such as he. Lunch is an incredibly busy time, with people creating their own parking spots. His ideas are to introduce medians, street life promenade feel and established parking, but he knows he will push back from owners of buildings like the one we are eying. Our idea to reposition this as residential (according to him, with 0 parking restrictions/requirements) was God-send; he then would not have to deal with parking issues for this retail building...it was all coming together in his plot for Park Place (insert twirling of mustache). From there, we discussed our idea for "overhead doors" in lieu of the existing window space, and he had little push-back. He gave us a name at the city's historic preservation department to run our idea by; however, the push back subsided once we gave him a few examples of what we were actually referring to when we said "overhead door".

Tax credits were the next topic to come up, as we continued our "overhead door" discussion. From our understanding, the doors can be added with little push-back from the city, as long as tax credit are not being sought; if however, we are counting on tax credits, some investigative work will need to take place of whether or not they would be allowed. From my perspective, the glass front overhead doors we are proposing are no more/less historic than the display windows currently being used. However, to be sure, we will run both scenarios in the DCF model to see which alternative gives the best bang for our buck.

The remainder of the afternoon spent in Fort Worth was more property searching; we just wanted to make sure we had exhausted all resources so as to not fall into the same problem with the first building we chose. Nothing else came close, so we decided to pursue this gem.

Research

A day of research of the area was in store for today. As one not familiar with Fort Worth area, I needed to acclimate myself to the nuances of Southside, and the best place to do that is from the source of reemergence for the area. Near Southside's website provides a vast amount of information, including a section for developers on the proper channels of protocol for projects, design standards, and overall goals for the local parcels of real estate.

Further research led me to a podcast (albeit from 2008) of Mr. Brennan, then an integral part of Fort Worth South INC. discussing goals, plans and ideas for the area. The full one hour podcast can be found here. Its worth a listen, if only to understand basics like TIFFs, NEZ and Form Based Code.

I shall continue my quest for information on the area tomorrow, possibly from Fort Worth Planners themselves.

The Inaugural Task

The rules have been stated, the players identified and the area delineated; our project studio has begun.

This Saturday marked the first meeting of what could become the first development project for most of the students in the MSRE program at UTA. The objective is simple (on paper; finding the actual building is another story): find a building, preferably one that is for sale, that has or at one time had, garage door type entry points, and reconfigure it into residential space. The project budget is $500,000 and must be in the "Southside" area of Fort Worth (south of downtown, east and north of the two major medical hospitals).

My partner is Brant Mullen, an architect turned developer in training. I am sure his time spent in NYC will help in our ability to recreate the same Urban Vibe in the Southside of Fort Worth. Our initial choice for a property turned out to be bloated in price; although, I think the price fit what the building could actually become. Never the less, Brant and I were left without a site. So the search continues for our diamond in the rough.