Main Spotlight: Breaking Barriers to Acquiring Commercial Properties
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At the 2022 Main Street Now Conference in Richmond, Trey Sherwood and I did a presentation entitled “Think like a developer and take charge of the real estate in your downtown.” The workshop covered the real estate development process and highlighted Trey’s work with the Laramie Main Street Alliance, where they emphasize being their own developer. At the time of the presentation in May, we were about three months from completing the upper floor residential units at the Laramie Empress Lofts. The lessons we learned through this project are applicable for any Main Street program that wants to become an active partner in their local development projects.
When your organization is contemplating a critical redevelopment project, the first step is to understand who owns the property, and how you can get control.
Control doesn’t mean you have to buy the property outright, though. If the building has been vacant for a long period of time, consider offering a purchase contract with an extended closing time, such as 12 months. Under this scenario, the purchase price is set, and the owner is obligated to sell so long as you meet the terms in the contract. This might mean placing a deposit that gets credited to the sale price at closing.
With the Laramie Main Street Alliance, the Empress Building had fallen into a state of disrepair over many decades. The roof collapsed in the 1990s, and the City of Laramie stepped in to take possession of the building. It took another couple decades to complete the environmental remediation and demolition work before the building was deeded over to the Laramie Main Street Alliance for development.
In 2018, the Alliance was able to leverage a state economic development grant and partner with the Big Hollow Food Co-op, a locally serving grocery store to build a three-story building. While the grocery has been a success, the third floor, which had been targeted for residential units, was left vacant due to cost overruns. The third floor was a “shell,” a generic term in development that means the utilities were extended to the unit but nothing else. The space was a blank room with cement floors and exposed walls and ceiling.
The Alliance took up the residential development in late 2020 with a preliminary financial analysis and market study. The analysis indicated that the rents from the residential units combined with the rent from the grocery on the first floor could support enough debt to finish the third floor.
For Main Street organizations seeking to promote development, it is important to establish a clear project vision. What do you want? The goal can range from housing to employment to historic preservation. These are all worthwhile goals each with different considerations. From a developer perspective, nothing is more frustrating than working with a local organization that can’t articulate what it wants.
Real estate development is all about managing risk. Developers want to know that you will have their back when something goes sideways, and trust me, something always goes sideways. The first step is ensuring you have a clear vision and making sure that the vision aligns with the development opportunity.
In recent years, housing has taken the forefront in Main Street communities. From my experience, no matter the size of the Main Street or the location, the demand for downtown housing units, especially unique upper floor lofts, is always much higher than the supply.
Generally, units where people sleep have more building requirements. Residential requires at least two points of egress, usually front and back. It may require the installation of fire sprinklers, and two-hour fire separation between units. Elevators could be necessary to meet the Americans With Disabilities Act (“ADA”) requirements. With the Empress Lofts in Laramie, because it was a new building, it included an elevator and fire sprinklers already.
Plumbing is a big factor that is often overlooked. For an office use, a single bathroom and small kitchenette may be adequate. For a residential unit, you need full bathrooms and kitchens. Even if the space had previously been used for residential, the bathroom spaces can be inadequate for modern use.
We were dealing with new construction in Laramie, but the plumbing was not laid out properly and we needed to relocate some of the water lines and drainage pans. This required us to cut into concrete, which was a raucous ordeal for the grocery store below and lead to a delay in our timeline.
It’s important for Main Street managers to be prepared for opportunity. Keep in mind, a good real estate project will take about two years to complete. For the Empress, we started with the analysis in December of 2019 and the first residential tenants didn’t move in until September of 2022.
Know what you want and what you are willing to support so that you can react quickly when an opportunity presents itself, but also be ready for the long-haul.
The Laramie Main Street Alliance offers a valuable lesson regarding being your own developer. Human capital is as important as financial capital.
All developers rely on a team, and so should you. If your local bank isn’t on your Main Street board, they should be. Because they had bank representation on the board in Laramie, we were able to gain insight on potential loan terms and financing requirements. They were also familiar with the project and the history of the organization, which made it easier to obtain financing on competitive terms.
Cultivate your relationship with the real estate brokerage community as well. Local brokers know which buildings are for sale and who may be interested in making an investment. It’s their job to understand the market, so pick their brains and use that insight to your advantage.
Don’t forget general contractors; someone has to do the actual work. A good general contractor can help with estimating and understanding building limitations. Often, general contractors have business development staff that will walk buildings with you and discuss issues that may not be apparent such as plumbing deficiencies.
In the Main Street world, we love buildings. For many of us, it’s why we got into the business of Main Street. We fall in love with the architecture, the brick work, and the styling that you just don’t get in newer cookie-cutter development projects.
Developers don’t care about buildings, though. They want income. Ok, that’s not totally true. Many developers are drawn to more interesting projects, as even they get bored with repetitive suburban developments. However, this doesn’t change the fact that income matters when thinking about real estate development.
When you are building out your vision, it’s important to understand how much you can charge for rent per unit, and the surrounding commercial lease rates. Understanding lease rates is an important way to track overall economic health of your Main Street. If lease rates are going up, it is a sign of active local investment. If they are stagnant or going down, you may have some issues.
With the Laramie Empress Lofts, we initially estimated that each unit would rent for $850/month. You should always start with a conservative estimate since it’s easier to adjust up than down. We were fortunate in Laramie, with the housing market ascending, that by the time the units came to market in September of 2022, they were rented out at $1,550/month. There were other issues with rising construction costs, but the higher rent meant more income to the Alliance.
With stabilization, the units will generate over $50,000 per year in project income. After debt service and other expenses and when combined with the rent from the grocery store, the residual income to the Alliance will be over $30,000 per year. That money can be used to pay for staff, complete other projects and support the operations of the organization into perpetuity.
Because the Alliance understood income in the real estate terms, they made an informed decision to act as their own developer. The revenue generated from the project locally will stay in the downtown and be reinvested for years to come. When you partner with a developer, the project revenue accrues to the developer. It is worthwhile for Main Streets to consider acting as their own developers if the circumstances make sense.
Real estate development is difficult, there is no other way of stating that fact. For the Laramie Empress Lofts, we dealt with a whole range of issues from inflation, noise complaints, and construction glitches that were no one’s fault. It’s just part of the process. The electrical service line from the meter was not installed properly during the previous construction and we had to run a separate service line at substantial cost. We had to change the configuration of the plumbing and redo a granite countertop.
Despite the challenges, we were able to work through the issues and successfully complete the project which provided much needed quality market rate housing units in downtown Laramie, Wyoming. Think about that: what had recently been vacant space is now housing for residents that patronize the local businesses and support the downtown.
It’s important to create your own history. The projects that you can complete today provide benefits to the community forever.
This is an area where I take off my real estate developer hat and celebrate Main Street. Developers take their financial returns in four-, seven- or ten-year thresholds. When you can complete a project either with a partner or as your own developer, the local Main Street takes that financial and cultural return forever.
Always remember that we are in the forever business.