12-22-06
So, do we get our space or not?
I have to blame the butterfly. No matter how many times I revisit the last two months, I keep returning to that damn butterfly. You know the one. Little snit flaps his wings in Brazil, a tornado goes off in Texas? Our position vis a vis the space is definitely butterfly related.
If you recall from my last article in September, we were waiting to hear from the landlord about the possibility of a whole new building. While I was not sanguine about the build schedule (and thought that the structure would be extraordinarily expensive), I was excited about the possibility.
The architect and I drew up some new plans for a new dual-story structure, with 17' ceilings in the performance spaces and a shop fully integrated with the backstage areas. Two rehearsal spaces, a classroom, a bar. We’re going hog wild, just us and AutoCAD. I contact the contractor to let him know about the delays, but sign a contract for the work. Either he’s doing the interior build-out for the new building or the complete renovation on the old structure. I contact our sublessor to let them know about the delay. And I settle back to wait.
Several things have to happen before we know which path we will pursue. First off, the landlord has to meet presell expectations for his condominiums next door to secure the second round of financing. He has sold 10 units; he needs to sell 12 to achieve the magic banking number of 50 percent. Subsequently, we need to get aldermanic and neighborhood approval for the build-out in September, three months to draft plans for permit and budgeting, then financing while the permits are submitted, construction to start in May of 2007. I am concerned that this project is going to get much larger than I can handle.
We submit our preliminary drawings to the landlord’s architect and wait for the zoning committee meeting. I don’t hear anything for a month or so, and am concerned that we will miss the meeting. I arrange another meeting with the landlord.
In his office, he says he has two more issues we need to discuss before moving ahead. First and most important, the partnership has decided not to build the new building because of cost. We will be renovating the existing space, as per our original plan. I’m more relieved than disappointed since cost overruns were becoming a serious issue for me. Besides, I’ll be getting rent reimbursement for our spring production to make up for the planning delay.
He also is concerned about the water supply. As the restaurant tenant will be ready to move in by June, he will have to pave the courtyard and keep it open for the summer. Therefore, we will not be able to have water brought to the construction site until October. This will cause a three month slippage in our plans. I agree, with the caveat that we extend our free rent period to make up for the delay.
And when can we sign the original lease? Thursday – the bank is reviewing it and he needs to get their approval for the financing for his portion of the build. OK, I say, I’ll see you Thursday.
Thursday comes and goes… Friday… the weekend… I leave a message Monday. Tuesday afternoon he calls back.
We have a problem.
So, over the previous three years, the real estate market has been softening. The bank is hesitant to finance his portion of our build-out. Only nine of the units have been pre-sold and the total financing he needs to complete the build-out is causing the bank some concern. Our lease has not eased their concern. How, asks the bank, will this theatre put $500,000 into renovation and how will they make it back? (Answer: we don’t.) Why would the lessor do this? (Actually a complicated question.)
But the real problem is not our lease, it’s soft sales in the real estate market. Banks over-loaned to developers and, without the pre-sales, are reluctant to extend credit. Buyers are moving much slower, and the speculators that have been driving the housing market have pulled back. Buyers are slower to move on a new development because of a current glut in the entry-level condominium market.
All fascinating to the real estate speculator, but I’m just a renter. What do I care?
Amongst other issues facing the partnership, the bank won’t lend the $250,000 the landlord has committed to in the draft of the lease. This, obviously, is a problem for me, as I then am nearly $350,000 short for the construction required. What sort of rent consideration can he offer? It will take six years of rent to cover the additional commitment, plus interest.
Sadly, no. The partnership would like to sell the property and get out, but can’t do that with a rent abatement of such an extraordinary length.
Perhaps, offers the landlord, we would like to purchase the property ourselves? He’s worked up some numbers. With “only” $400,000 down on a purchase price of $950,000, we’d start saving money in the fourth year of occupancy compared with the current lease. Maybe we could run a capital campaign before the holidays to raise it? I laugh and laugh.
I’m not interested in purchasing, since I can’t build the building out and pay the down payment at the same time. I did some math and countered with an offer for $200,000. The situation is even worse: as the softening real estate market has declined, interest rates have risen. The rates now float around 8.25 percent for commercial loans. To make up the down payment, the income-free term we were getting under rent abatement in our lease, the additional investment and the interest costs, we could only afford purchase price of $200,000. This is significantly under the market value of the land.
The landlord countered with $700,000. I returned with a figure of $205,000. I checked with several banks to see what sort of loan I could establish. They laughed and laughed, feeling that I would not make up my investment in the property. No matter how many times I explained I didn’t want to recoup the investment, they couldn’t loan that quantity to a new arts organization with limited renewable assets. I returned to the landlord and offered $210,000. We stalled out.
So, where do we stand? As of today: No building. No lease. No theatre. The landlord is looking for a group of people to go in on the building purchase (for the theatre and restaurant space). I hope he’s successful. Perhaps some speculators will appear that would like a long term tenant on the property so they can flip it in a decade. Meanwhile, after consultation with the board, I’m back on the streets, looking for an alternate location.
As the landlord pointed out, had he but committed to the lease when we finished it a year ago, we wouldn’t be in this predicament as the market had not yet weakened and loans to small developers not yet tightened. Water under the bridge at this point. I mainly feel foolish for having put so much hope in this one property. As each new development occurred, resolution was just around the corner. I’ve spent a considerable amount of money in planning and drafting costs, all of which might be pointless. I have hit the streets again looking for a new property and we’ll start again in the New Year. Or maybe we’ll be back in Edgewater with a newly invigorated owner and new partners. All part of the fun.
Of the many decision trees I worked out, concern over rising interest rates and falling prices in the residential housing market were factors I never considered. Damn butterflies.