Eat This Building

I’m writing this note Thursday morning, October 1, 2009, just after reading the cover article in the Dallas Observer about the Re:Vision Dallas project. You can read the entire article here: http://www.dallasobserver.com/2009-10-02/news/are-the-plans-to-build-a-green-sustainable-building-of-tomorrow-smack-in-the-heart-of-downtown-dallas-some-pipedream-or-a-reality/.

The article is fair—sympathetic but skeptical. And the picture of me is pretty flattering (thanks to Brandon Thibodeaux who did an amazing job—and thanks to him as well for permission to replace the current frightening picture on my blog with this shot), so all in all I’m happy:

I could have done without Robert Wilonsky’s description of me as sporting “a gray beard obscuring a baby face”. But, dang it, I have to admit that the description is probably accurate enough.

There’s one issue raised in the article that I want to discuss today. It’s this brief comment that echoes something I’ve heard many times:

If those with money can't make a go of their European crossroads, such as the Glen at Preston Hollows project promised for Walnut Hill Lane and North Central Expressway, or their mini Manhattans, like the one stillborn near the Galleria Dallas, then how in the world will a nonprofit make a go of a highfalutin hilltop in the shadow of City Hall?

There are a whole lot of misconceptions buried in this one question, so I want to spend a little time unpacking them. First, most for-profit developers, even when they have money, don’t put much of their own money into their own projects. The money to do big real estate deals is mostly borrowed, and it’s borrowed in tranches with the top tranch usually demanding an outrageously high return. Fortunately we have available a fine, very comparable project of about the same size in about the same location from just last month, the Continental Building. You can pull up the complete City Hall briefing here: http://dallascityhall.com/committee_briefings/briefings0909/ECO_ContinentalBuildingRedevelopmentMercantileAmendment_092209.pdf.

Let me walk through the financing for that project, and if you have the patience to stay with me, I think you can see why it isn’t really any harder for a nonprofit to put together a significant project than a for-profit.

Sources

$27,687,000 HUD 221-d(4) Loan

This was borrowed money through a federal program. Nonprofits can borrow at even better terms.

$7,600,000 Section 108 Loan

This is a subsidized advance on CDBG money that the City of Dallas can request from HUD

$2,500,000 DDDA Private Placement Bonds

Another form of borrowed money, maybe the for-profit has an advantage here.

$2,000,000 Housing Dep't Grant

Self-explanatory, and should be even more available to nonprofits.

$7,150,000 Historic Tax Equity

Available to anyone, as long as you follow the rules.

$10,196,000 Equity

Finally some real money from the Developer -- but keep your eye on the ball!

In addition, the developer will get $22,525,288 in TIF money (probably delivered six or seven years down the road). I’m relatively sure that that money will be used to pay off the Section 108 Loan, the Private Placement Bonds and pay back the equity. If I did the numbers right, the TIF money is sufficient to do all that and put $2,229,288 back in the developer’s pocket. In short, after the TIF comes in, the developer has none of his own money (or his investment partner’s money if he got somebody else to put the money up) in the deal.

There’s no reason a nonprofit can’t do the same thing, except better. Nonprofits are exempt from sales tax on purchases, and those purchases are typically about half the cost of building the project. That means the nonprofit is ahead 4% or about $2 million on a project this size right from the beginning. Nonprofits also are eligible for a number of grants that for-profits aren’t. Best of all, as a nonprofit, we don’t have to make a big profit, or much of one at all. We only need enough money to keep the doors open.

Contrast that to the deal at the Continental. According to the City of Dallas’s briefing, the rate of return on investment (ROI) on the Continental Building—before the TIF monies—is 7.71%. Then, remember, the TIF gives you more than $22.5 million. A 7.71% ROI on the developer’s equity for seven years is $5,502,781. When you add the TIF monies in, then the ROI is increased to 38.55%.

Let me recap. I can build the building 4% cheaper and Central Dallas CDC doesn’t need to make a ROI of 38.55%. Somewhere in the briefing documents, I would bet, there is also a Developer’s Fee (probably buried in the $11,295,000 of soft costs). A typical fee for the developer on a project this size would be about $4 million. That’s ten years operating costs for Central Dallas CDC. We don’t need more than that.

I know not everybody is willing to work out the math, but the truth is that a well run nonprofit ought to be able to put a project together much cheaper than a for-profit. Giving up the 40% profit on the deal is a heckuva cost savings. Or, to look at it another way, it would cost a for-profit developer $70 million to build the same project—Re:Vision Dallas—that we’ll do for $50 million.

There are some very smart, very capable for-profit developer’s, but if you give us a $20 million head start then I think we can come out ahead. Aces and kings will beat queens and jacks every time—it doesn’t matter how smart the different players are.