Feasibility and Suggestions for First Time Commercial Development

[Samuel R. Harden]

Hello:

I have a dream to become involved in commercial development, but have no experience in this field. Hopefully you all can help me put together the pieces of this puzzle so I can determine whether it is feasible at this point in my life.

There is one piece of property I have specifically been eyeing. This property is a large downtown property which would sell for next to nothing (and no outstanding taxes), but the renovation costs would be more than considerable. Further, recent developments make this point in time the best opportunity to grab the property while it has no value, as either its valuation will likely increase soon due to the development of adjacent property or it will simply cave in from lack of rehabilitation. The bones are great and the architecture is amazing, but the inside would be a full renovation on all floors.

I believe I have a great vision for what this property could become that lines up with the needs of the community, but I'm not entirely sure how to begin putting the theoretical into action. Is it possible for someone without the capital to pursue a goal such as this through financing, or would finding a partner with access to considerable capital be the only way to secure financing? Is the magic number I'm looking to come up with in order to obtain financing 25% of ARV? Would you suggest approaching the commercial tenants that would fit the vision before considering the acquisition aspect? Or should acquisition come first and commercial tenants come second?

Really, I'm starting at point zero here, so any suggestions/checklists/resources on building this vision into a plan that either investors or commercial lending units at banks would even consider looking at would be hugely appreciated.

Thanks in advance for your time.

[William Jenkins]

Lot of questions and variables on this, but here it goes....

Your City of Toledo and mine of St. Louis, MO are very similar in demographics, development trends, etc.  Commercial development in these cities is very different than what you may see in some of the hot areas of California, New York, etc.

Buildings and building sites in our cities are a dime a dozen.  Like you, we have some beautiful and very ornate buildings that have gone into disrepair.  You can buy these buildings for nothing (literally $0 in many cases), but then comes the question, what do you do with it.  Despite the low price, it is not cheap to own these things.  Taxes, insurance, city nuisance violations, minimal maintenance (roof patches, door boarding, etc.) can eat you alive.    

In our markets in order to make commercial development work on the scale that you are talking about, you have to (a) tie up the property via an option agreement (b) work on your development plans and find the tenant or use for the property and then (c) work the Fed, State and City to provide historic tax credits, tax abatements, enterprise development zone credits, etc.  There are probably a dozen different credits and incentives out there for the property you are looking that would help fund the project. 

Now you are probably thinking.... that's great... not only can I get a property cheap, but I can also get free money to develop it too....  Win Win. 

Not so fast.  Biggest problem here is who is your tenant, or what is your use?  Got a tenant (that is not easy to do by the way).... That great, what lease rate will they pay?  Their rate probably won't back into your development cost either and that's where your tax credits and development incentives come into play.

There was a large (just under $100M) project in my City that I represented the ownership group on a few years back.  Almost 1/2 of it was financed with federal and state historic tax credits and other development incentives.  It didn't survive.  The numbers just didn't work.    

It's a tough game and you need deep pockets.  It would be nothing to spend $500k trying to make a play on that building with no positive end result.