Rehab Buildings

In almost all of our client engagements we begin with a Discovery Stage. The major component of that stage is a project analysis call where we provide an initial recommendation about the property’s viability. Sometimes the trickiest projects to evaluate are those outside of major metropolitan areas but we can still make a solid assessment of the property without ever visiting the location. How? The 40-75-15 Rule.

The 40-75-15 Rule is something we developed and has served us well for a long time. It’s based on several decades of experience observing three factors that tip the scale for or against a property’s potential:

• Is the property within 75 miles of a major metropolitan area?

• Is the property more than 40 miles away from that major metro area?

• Is the property within 15 miles of an interstate highway?

If the answer is “yes” to these three questions you have significantly increased your chances for a good investment. The reason this works is because it’s accounting for the path of predictable growth (which we affectionately refer to as POP-G). For instance, a city in southern Wisconsin that falls within the 40-75-15 Rule will eventually be part of the Chicago area. That’s a good place to be now before more growth happens.

Like many rules in business there are some exceptions. If, for example, a town doesn’t fall neatly into the 15 miles from an interstate highway but has a good commuter rail line or bus system then it may not matter how much further from an interstate highway it is.

In all of these cases people have changed the way they work and that’s driving this expansion. They may like the city but they like some distance from it too. They can get more property cheaper and they can telecommute too. They can have big city advantages with a small town life and small town expenses. Those people will need restaurants and coffee shops and retail stores. Perhaps your property will be able to meet that growing need. Applying the 40-75-15 Rule can help you figure out if that’s likely to happen for you.

When it comes to commercial real estate, the people who make the best deals keep a realistic perspective throughout the entire process. Of course that’s easier said than done. Sometimes people are so in love with their property they can’t see it for what it really is.

It’s common for a property owner who inherited their great grandfather’s old factory to think it’s worth a lot more than it is. The more memories and feelings you have for a property, the less likely you are to have a realistic perspective of the property’s true value and potential. If you’re in love with your property too much you may very well be disappointed when you find out what it’s worth.

With Friends Like These…
Misperceptions about a property are also caused by other people. It’s possible your friends and family have been fibbing about the property. They may tell you it’s worth a lot more than it is or they may not understand the full implications of their brilliant ideas. For instance, you may have had friends say your building would be a great spot for retail stores, but would they also welcome the increased traffic, new parking lots, and all the other things that come with a retail space? Possibly not. It’s one thing to like the idea of something. It’s another thing entirely to like all of its realities.

The Outside Advantage
An experienced outsider can be both a breath of fresh air and deliver a painful reality about what your options really are. It’s fine to have strong feelings for the property but what you need most of all is a desire to know the truth about it. Perhaps it’s a winner with huge opportunity. Wouldn’t you want to know that from someone who’s available as an advocate for you? If it’s far less than a winner, you should know that too. At least you will be able to make realistic decisions afterward. Ignorance may be bliss sometimes but ignorance is expensive and painful in real estate. Set your feelings aside, if only for a moment, and find out what your options truly are. We’d be happy to help. We have a great plan to help you discover the truth.

Let’s assume you’ve made this decision: you want to keep your building/property and you think you want to invest in it and restore it because you think you can make some money. Have you considered that there are relationships in the community that you need to make this process better for you?

Questions You Should Be Asking:

• How well do you know the mayor?
• How well do you know the economic development person?
• How well do you know the city planner?
• Which of them don’t like you and why?
• Which of them like you and why?

If you have truthful and honest answers to these questions, you’re well down the road toward finding out if your rehab project can be successful because you need their support. The smaller the town, the more important you are to the city’s politicians.

Public officials are your friends and your enemies. If you don’t know the city officials you’re in trouble. Start networking with them today.

Now think about some other groups you need to know like the neighbors around your property. Have you met them? What do your neighbors think you should do with the property? Beyond city officials, they can make your life much easier or much harder as well.

The old adage “location, location, location” does not necessarily apply to functionally obsolete buildings. With obsolete property, an action plan might actually be more important than the location. After all, if the location were really good, the building likely wouldn’t be obsolete in the first place.

When you’re talking to a bank you need to sell them on your plan of action. You have to begin by answering these  three questions for them:

1. What happened to the company that used to be there?
2. What industry did that building serve and what’s the state of that industry today?
3. What’s the current neighborhood around the building/property like?

If the building is so old and neglected that nobody wanted to take the hard work of fixing the building to do something with, then there may be opportunity. What that “something” is, is the big question. The fact of the matter is that things have changed in that area since the property was first abandoned.

For instance, if your property is in a floodplain, that’s an obvious reason why the building might be vacant now. But is it possible to rebuild in the floodplain or is it time to turn it into a marina? That’s THE way you need to view those kinds of properties.Water can be your friend. If your property is on the shore of anything, there may be a market for a boutique hotel, waterfront dining or a series of interesting shops for a destination retail location.The answers to these questions are necessary to have a meaningful conversation with your bank.

Lenders will be listening for the solutions to these problems. That’s why an action plan is necessary. A solid action plan with solid answers significantly increases the likelihood that your bank is going to say yes to your project.

If you nneed some additional action plans, we can help you brainstorm. Perhaps that problem location is just an “undiscovered nugget” awaiting some new mining/thinking to polish it up!