Good Will Hunting (very long) - Posted by Eric C
Posted by Eric C on July 03, 2003 at 12:18:02:
There seems to be a trend is accelerating right under our noses and many of us aren?t even aware of it ? it?s the public?s current fascination with memorabilia. And while Ebay and the Road Show are perhaps two of the more visible recipients of all this frenzy, there are definite rumblings in the RE biz as well. Think renovation and restoration. Of course this is old news to the SFH set, but other than government (and private donor) grants, until lately there hasn?t been much of a driving force in most commercial markets. In fact, I have to admit that I didn?t fully appreciate the tremendous amount of sentiment regarding these issues.
Many of us have a renovation (in the SFH biz they?re called rehabs) or two in our past. Some even make it the focus of their business efforts and make substantial improvements to properties once they acquire them.
Ok, I understand that. But personally, that ?rehab? thing has never been a comfortable fit for me. I hate nasty surprises (and renovation is full of those), I don?t like untidy schedules, and I?m not fond of re-work. You know what re-work is, don?t you? Its where you dig into a problem ? spending money and time in the process? only to find that:
a: the problem is far worse than you were led to believe;
b: most of the time, effort and money spent to this point has been wasted;
c: a new, more costly approach is now required; and
d: the project lease up and end date is getting further and further away along with your dreams of a ?quick and easy? profit.
Maybe its just me, but these things never ever seem to work out as planned, or re-planned, or…
Hey, give me a chance to build new any day. I?d gladly fight with yet another city official rather than deal with one more call from my on-site guy saying ? Uh, boss, … we have a small situation here.?
Spare me. Please.
So, with my bias (blatant prejudice is more like it) fully disclosed, I have to tell you that I?ve been monitoring the ?shoreline? and I am more than a little surprised at my findings. I guess I should have seen this coming.
Back a few years ago there was a major consolidation going on in the Movie biz. No news there, huh?
A lot of the properties came available because of changing market conditions (and too many screens ? can you say, market saturation? ) stayed on the market for a very, very long time. After all, how many movie theaters do most towns need, anyway? Couple that with functional obsolescence, poor locations, and mediocre demographics is it any wonder that these properties quickly became white elephants (of a sort).
Some were converted into churches. Some into classrooms for local community colleges. But there were so many of them. And even at the prices offered, there was just too much room for error (at least for me). So, I wiped them from my radar screen until a couple of guys hit my office in search of money.
That?s how a lot of deals begin for me. I guess you could say that I often look for chances to rework deals rather than properties.
Anyway. Seems like a major move/cable/television/ conglomerate (who shall remain nameless or insolvent or both) finally found someone willing and eager (and a bit naive as well) to take on one of their oldest properties.
To be honest, this was a glorious project in its day ? about 1929! You know the type: soaring ceilings, velvet curtains, winding wrought-iron staircases, highly detailed facade, gilded box seats ? the works. This is the kind of property where you still find collectible movie posters behind the stage and the words ? Air-Conditioned? are only now fading from the weathered side of the building. No expense was spared in its initial construction and top notch materials and workmanship were used throughout.
But that was then and this is now. This property was closed in the late sixties and re-opened only sporadically when individuals (or groups) tried unsuccessfully to make it a destination point once again.
Fast forward. The two brave souls in my office were in the midst of making yet another try to get this elephant on its feet. Their deal was in progress with the new corporate owners who inherited this property (along with many others) through mergers, acquisitions, etc. Talk about a ?don?t wanter?, this corp couldn?t shed this property fast enough.
Anyway, the dynamic duo found themselves in this deal but without any money. Now, if you think that this was in any way a deterrent to closing the deal, you need to rethink your concept of a truly motivated seller.
My first look at this deal came when it was just a day or two away from close; they brought it to me to look over and to try to tempt me into ?investing? with them. Right.
My comments were clear and to the point:
- You have to capital for much needed improvements beginning with a new roof;
- Even if you managed to draw people to your location there isn?t any parking;
- Everything needs to brought up to code (there?s an understatement);
- Insurance ? what insurance? No liability. No Fire/Hazard coverage. No nothing.
- You have no business plan - what about competition? Margins? Payroll?
- Have I mentioned that you have no money?
In short, it was a disaster. They had no money to repair (replace) the aging HVAC - this in a climate that boasts summertime temps in the 100’s! There was no screen, no projector, no fire sprinklers, no escape stairways, no ADA bathrooms or seats, no cash to pay employees, no way to pay for the insurance the city would require the place to have before it would be allowed to open. They couldn?t even get enough cash together to pay for their permits!
These two guys were screwed. No wonder the corp was so eager to move this dog. But, did this daunt these two fellows in any way, shape or form? Nope, not a bit.
On learning they were going to do this thing anyway (come he&& or high water), I asked them if I could negotiate (on their behalf) with the increasingly anxious Seller to see if they could make this deal any sweeter.
Turns out they could. In fact, they could (and did) make it much better (far better than even I expected).
First off, it turned out the corp owned more properties (besides theaters) in the same town and across the country. Locally, this included about a city-block of small retail/office spaces that held a national loan company, a tailor, some quasi-gov?t agencies, etc. (all paying rent with long leases ? in the case of the loan company it had been in that location since 1971). They also owned another theater (small street theater) which was built along side of another space used as a warehouse by the local hospital.
They threw all that in. No extra charge.
After mentioning the high cost of equipment to them, it was discovered that they had seats, projectors and lenses, as well as a full size screen (in great condition) all in storage.
They threw that in too.
And as a final gesture, they made two more concessions:
- There would be no interest on the deal; and
- These folks would have a right of first refusal on all the corps other (dysfunctional) property across the State.
OK, so the deal still sucks. But it?s better than it was,… a whole lot better.
In the meantime, I made sure that these two would be movie moguls got their story out to the local paper (which always likes it when high profile properties change hands ? especially when those hands are local).
They did that. And boy, was I surprised. I expected a reaction ? a little blurb on the business page and maybe a shot at the local nightly news. But it was far more than that.
It seemed that virtually everyone in this town of 150K was excited. Individuals, companies, agencies, city officials ? everybody. And they did something truly unexpected. They kept this deal alive.
Money was raised, equipment was donated, skilled craftsmen gave generously of their time and expertise, city codes were waived (temporarily), and wonder of all wonders ? the city allocated money (grant money) to pay the insurance premiums.
The media ate it up. Story after story ? TV, newspaper, local and regional magazines all ran complimentary articles complete with color photographs, interviews, etc. And this media frenzy continued for months.
I wish I could tell you that this story has a happy ending. It doesn?t.
Like so many ill-conceived partnerships this one consisted of two personalities ? the ?talker? and the ?doer?. It was doomed to fail. This combination (or one like it) occurs so often that I usually refer to these types as Mr. Inside (the worker) and Mr. Outside (the public face).
When these two get along and have mutual respect for one another, they can accomplish great things. But when one of them (usually Mr. Outside) begins to believe in his own press releases, … well, you get the idea.
Unfortunately, this ?partnership? ended badly. And publicly.
Mr. Outside finally came to the conclusion that the project wasn?t going to match up with his ?vision? so he took off with the money (and much of the equipment). You know all that “donated” stuff?
He just ran away and left Mr. Inside in charge of damage control. No explanations. No notes. No apologies. He just wasn?t there anymore and neither was the checkbook (no big loss there).
Old story. If you stay in this business for any length of time, you?ll hear variations of this over and over again. Often, the stories are true.
To his credit, Mr. Inside stepped up to the plate and didn?t flinch when the media, the cops, and everyone else came calling. He just answered their questions as honestly as he could and buckled down to ride out the storm.
Here?s where I come back into the story ? seems Mr. Outside had also borrowed some funds and pledged partnership assets as collateral (surprise, surprise). Guess he needed some traveling money.
Anyway, what we ended up doing was:
- Donating the main theater to a non-profit ( I managed to get them a grant to cover the majority of the renovation costs);
- Make sure the city had a right of first refusal (fully transferable) to partially protect them from anything like this in the future;
- Sold the smaller theater to a dance troop (paying most of Mr. Outside?s bills in the process);
- Signed the hospital to a long-term lease for the adjoining space and then sold the property; and
- Traded the right of first refusal to another RE company in exchange for their property directly across from the theater (which we demolished and made into a pay parking lot).
I know what you?re thinking ? what happened to the city-block properties? I ended up with them for my services and I still own them today.
And don?t feel too bad for Mr. Inside either ? he was able to pay everyone off, put a little cash in his pocket and he now owns the parking lot (free and clear) across from the theater (and one of the very few downtown parking lots in this city).
In fact, almost everyone ended up better than where they started ? except for the missing Mr. Outside who was found and who faced some minor criminal charges ? he spent about a year in custody, was fined, and now I hear the IRS is paying him a long overdue visit.
But that?s beside the point.
What surprised me about this deal was the tremendous amount of goodwill surrounding this property deal. I?ve never seen anything like it ? not in 30 years (more or less in the biz). People wanted to see this deal (and these guys) succeed. Even after the one jacka$$ disappeared, folks were still willing and eager to see this thing work.
I ask you, when?s the last time you had the ?wind at your back? as a developer? When has a city council, planning department, or code official ever ?greased the wheels for you? with no immediate prospect of benefit to themselves? When has the media ever been so complimentary, so helpful, so sympathetic, and so effective? When have people sought you out at parties, or on the street to wish you well, shake your hand and give you money, time or equipment?
I can?t speak for you, but I can tell you that nothing remotely like this ever happened to me. Never. Never. Never.
So what was the difference this time? It obviously struck a chord with many people and on many levels ? nostalgia, history, civic pride, … some of these? All of these? More?
It did teach me a lesson. I haven?t been paying enough attention to some of these trends and that?s going to change.
Who knows, maybe I?ll even get to where I like the word ? ?rehab?.
PS - this deal wouldn?t have worked as originally proposed ? no matter the structure. Too many changes, too much money needed, too little experience. However, there was the making of a really profitable SERIES of transactions had they been able to ?see past their own hood ornament.? Although, we were able to salvage this thing and make some money, what could have been accomplished had they taken those steps initially rather than be forced into them? In other words, they could have ?had their cake and eaten it too?. By transferring the riskiest (and most costly) property to a group who both wanted it and could afford it, these guys could have still been front-page heroes. All the other property would have been gravy, pure gravy.