Non Profit Real Estate Development: Stable, Affordable Space for Manufacturing

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1 Non Profit Real Estate Development: Stable, Affordable Space for Manufacturing Urban Manufacturing Alliance Pre Convening Webinar October 7, 2014 Joan Byron Director of Policy Pratt Center for Community Development

2 Why nonprofit industrial real estate? Manufacturers need stable, affordable space rightsize and right quality - but good space is hard to find: Legacy industrial buildings: large, multi-story buildings built for occupancy by a single user Emerging manufacturing sectors need smaller spaces, often with specific attributes Subdividing large, old buildings involves significant cost and risk Small to mid-sized manufacturers rarely have the financial or technical capacity to acquire and develop property Nonprofit Real Estate Development Webinar October 7, 2014

3 Legacy industrial space: large, multi-story buildings with large floorplates Nonprofit Real Estate Development Toolkit Preview UMA Convening October 3, 2013

4 Very large spaces built for large-scale operations by a single user often with rudimentary (or no) mechanical systems. Subdividing and modernizing large, old buildings involves significant cost and risk Nonprofit Real Estate Development Toolkit Preview UMA Convening October 3, 2013

5 Different cities present different market challenges: In hot markets, other users (residential, retail, office) can pay higher rents than manufacturers for space in desirable locations. In cool markets, landlords can earn modest rents from passive uses, like storage, while incurring very little cost or risk. Either way, landowners and investors have easier ways to profit from their properties. A for-profit owner may rent to industrial users as a holding strategy, only to convert the property to higher-paying uses when the market makes that possible. Nonprofit Real Estate Development Webinar October 7, 2014

6 Cool market: Newark Land costs ~ $20/SF Industrial rents ~ $5/SF Commercial rents ~$50 Hot market: Brooklyn Land costs > $200/SF Industrial rents ~ $12/SF Commercial rents > $150/SF Non-industrial users rents drive land costs too high for manufacturers to afford Industrial rents too low to finance development costs Nonprofit Real Estate Development Webinar October 7, 2014

7 Nonprofit developers play a critical role in preserving land for industrial use, especially in markets where other uses would generate higher returns

8 Greenpoint Manufacturing & Design Center 1155 Manhattan Avenue GMDC s first project City-owned in rem property 1974 Sold to GMDC 1990s 360,000 Sq.Ft. 76 tenants, 350 workers nice, but not too nice Brian Coleman, CEO GMDC now owns and manages 475,000 SF in 4 buildings 99 tenant firms, 508 workers, $65 million/year total revenue Nonprofit Real Estate Development Webinar October 7, 2014

9 what developers do: the development process Identify, hold, and acquire property Assemble the development team architects, engineers, contractors Assemble short-term and long-term financing Manage the project through all phases: Pre-development > construction > occupancy each phase brings its own costs and risks Nonprofit Real Estate Development Webinar October 7, 2014

10 Development timeline (idealized) 0 6 months 9 months 12 months 24 months How much you ve invested due diligence.acquisition...construction...rent-up permanent financing site identification site control...design & permitting...marketing.full occupancy & operation Each phase has its own risks. Nonprofit Real Estate Development Webinar October 7, 2014

11 Development timeline (idealized) 0 6 months 9 months 12 months 24 months How much you know How much you ve invested due diligence.acquisition...construction...rent-up permanent financing site identification site control...design & permitting...marketing.full occupancy & operation Each phase has its own risks. Meanwhile the developer s investment of time and money keeps growing Nonprofit Real Estate Development Toolkit Preview UMA Convening October 3, 2013

12 Development timeline (idealized) 0 6 months 9 months 12 months 24 months How much you can control How much you know How much you ve invested due diligence.acquisition...construction...rent-up permanent financing site identification site control...design & permitting...marketing.full occupancy & operation Each phase has its own risks. Meanwhile the developer s investment of time and money keeps growing The ability to manage risks at each phase enables skilled developers to succeed. Nonprofit Real Estate Development Webinar October 7, 2014

13 DEVELOPMENT AND OPERATING PROFORMA - MULTI-TENANT INDUSTRIAL BUILDING, HOT MARKET DEVELOPMENT COSTS CAPITAL STRUCTURE OPERATING CASH FLOW (after lease-up) Land & Building Acquisition Cost $10,000,000 Equity $7,000,000 Development Cost/SF $75 Debt $15,500,000 INCOME Total Development Cost $22,500,000 Loan-to-Value 69% Gross Potential Income $3,150,000 Term 15 Vacancy $315,000 Rate 7.00% Effective Gross Income $2,835,000 Yearly Debt Service ($1,701,817) EXPENSES PROGRAMMING RENTAL INCOME Operating Expenses $600,000 Lot area 100,000 Small Space Rent / SF 15 Real Estate Taxes $450,000 Building Gross Area 300,000 Gross rent from small spaces $1,800,000 Replacement Reserve $150,000 4 stories occupying 75% of lot Large spaces, Rent / SF 9 Total Expenses $1,200,000 Small industrial spaces (<10,000 SF), 40% of gross area 120,000 Gross Rent from Large Spaces $1,350,000 Large industrial spaces, total area 150,000 NET OPERATING INCOME $1,635,000 Management offices 7,000 Gross Rent, Entire Building $3,150,000 Common Area + Circulation 23,000 Vacancy / 10% $315,000 Annual Debt Service ($1,701,817) Rentable Square Footage 270,000 Effective gross income/year $2,835,000 Building Efficiency % 90.00% CASH FLOW AFTER FINANCING ($66,817) RATES BUILDING EXPENSES Vacancy / Uncollectible 10% Operating Expense/SF $2.00 It's hard out there for a developer Income/Expense Escalation 3.00% Real Estate Taxes/SF $1.50 Replacement Reserve/SF $0.50 Nonprofit Real Estate Development Webinar October 7, 2014

14 DEVELOPMENT AND OPERATING PROFORMA - MULTI-TENANT INDUSTRIAL BUILDING, HOT MARKET DEVELOPMENT COSTS CAPITAL STRUCTURE OPERATING CASH FLOW (after lease-up) Land & Building Acquisition Cost $10,000,000 Equity $7,000,000 Development Cost/SF $75 Debt $15,500,000 INCOME Total Development Cost $22,500,000 Loan-to-Value 69% Gross Potential Income $3,330,000 Term 15 Vacancy $333,000 Rate 7.00% Effective Gross Income $2,997,000 Yearly Debt Service ($1,701,817) EXPENSES PROGRAMMING RENTAL INCOME Operating Expenses $600,000 Lot area 100,000 Small Space Rent / SF 15 Real Estate Taxes $450,000 Building Gross Area 300,000 Gross rent from small spaces $2,250,000 Replacement Reserve $150,000 4 stories occupying 75% of lot Large spaces, Rent / SF 9 Total Expenses $1,200,000 Small industrial spaces (<10,000 SF), 40% of gross area 150,000 Gross Rent from Large Spaces $1,080,000 Large industrial spaces, total area 120,000 NET OPERATING INCOME $1,797,000 Management offices 7,000 Gross Rent, Entire Building $3,330,000 Common Area + Circulation 23,000 Vacancy / 10% $333,000 Annual Debt Service ($1,701,817) Rentable Square Footage 270,000 Effective gross income/year $2,997,000 Building Efficiency % 90.00% CASH FLOW AFTER FINANCING $95,183 RATES BUILDING EXPENSES Vacancy / Uncollectible 10% Operating Expense/SF $2.00 Income/Expense Escalation 3.00% Real Estate Taxes/SF $1.50 Replacement Reserve/SF $0.50 Shifting the balance between small and large space users makes the project work. Nonprofit Real Estate Development Webinar October 7, 2014

15 a successful developer pulls it all together

16 Skillsets of successful developers Understanding of market Rents Manufacturers space needs size, access, ceiling heights, power, water, etc. nice. but not too nice. (Brian Coleman, GMDC) Access to financing Short-term (high-risk) financing, especially to gain control of good sites (often self-financing usingequity from previous projects) Financing for construction & soft costs during development Long-term financing after completion to free up capital for future projects Property management Marketing and lease negotiation Building management, maintenance, cash flow, etc., etc. Mission-driven approach to tenant selection and leasing Nonprofit Real Estate Development Webinar October 7, 2014

17 Hybrid industrial development models Mixed use to complement and/or cross-subsidize manufacturing Office Residential Artist / artisan live-work Retail / production Turnkey nonprofit acquires and develops property for a specific industrial user Incubators nonprofit industrial development (startup vs. expansion risk) Public-private partnerships nonprofit development and management of publicly-owned land or buildings via ground lease or deed-restricted sale Nonprofit Real Estate Development Webinar October 7, 2014

18 How local governments support nonprofit industrial development Development partner via public or quasi-public entities Lender upfront capital for early stages long-term financing / bond issuer Land use & zoning banning or restricting non-industrial uses technical assistance e.g. matching manufacturers with spaces & financing Infrastructure transportation & utilities environmental remediation Strategy-driven land disposition structured RFPs land banking Nonprofit Real Estate Development Webinar October 7, 2014

19 Challenges and solutions Upfront capital for early, high-risk development phases Self-financing Earnings from completed projects Borrowing using completed projects as collateral Banks, including CRA-eligible lending Philanthropy growing interest in social investment (vs. risk aversion) Shortage of suitable, affordable sites Fiscally-motivated zoning; hotels, retail, and high-end residential are viewed as generating RE, sales, and income taxes Economic development policies that undervalue manufacturing Property management driven by mission some inherent challenges curated tenant mix forbearance but rent roll is key to refinancing Competition with bottom-feeders playing by the rules (codes, labor practices, environmental regulations) costs money Nonprofit Real Estate Development Webinar October 7, 2014

20 Effective Portfolio Management: Public and Non Profit Interventions Urban Manufacturing Alliance Pre Convening Webinar October 7, 2014 Tom Dalfo Senior Vice President Philadelphia Industrial Development Corporation

21 Effective Portfolio Management Fundamental question: What role/need do you hope to play/fill in the market? Role Industrial preservationist? Market maker? Other? Duration Reposition sites/buildings for acquisition & development by private sector? Long-term owner/manager of the asset? Non Profit Real Estate Development UMA Webinar October 7, 2014

22 Effective Portfolio Management Corollary question: What are you going to manage? Land? Buildings? Both? Needs to be a focused & thought out strategic decision. Want to avoid becoming an accidental developer. Non Profit Real Estate Development UMA Webinar October 7, 2014

23 Effective Portfolio Management Non-Profit Interventions needed for Land: Assemblage & planning Environmental clean up Demolition Infrastructure upgrades Development incentives/designations Patience Non Profit Real Estate Development UMA Webinar October 7, 2014

24 Industrial Market & Land Planning Nonprofit Real Estate Development UMA Webinar October 7, 2014

25 Private Craft/Artisanal Development Nonprofit Real Estate Development UMA Webinar October 7, 2014

26 Effective Portfolio Management Non-Profit Interventions needed for Buildings: Environmental clean up Selective demolition Infrastructure upgrades System upgrades/reconfiguration Development incentives/designations Urgency Non Profit Real Estate Development UMA Webinar October 7, 2014

27 Oxford Mills Vacant former lamp factory Part of a multi-site design competition focused on industrial re-use industrial sites Concept Live-work space for formerly homeless families Actual Project Offices & housing for Teach for America Nonprofit Real Estate Development UMA Webinar October 7, 2014