Interview With Dan Botwinik
Interview with Dan Botwinik
Dan Botwinik - Dan
Richard Merlino - Rich
Dan: What I figured I’d talk about today was a conversion I did of a rectory in Salem, Massachusetts, into four apartments with some tax credits. Rich had suggested that I talk about working with contractors and dealing with tenants, so I figured I’d try to keep the first part of the presentation quick and just go through some slides on this particular deal that I worked on and then kind of a little bit more fluid, and if you guys have particular topics that are of interest, I can certainly talk more about that.
This is a property that I purchased back in 2015. I put together a lot of slides, mostly just images and thought I would just kind of run through them quickly and give you guys a scope of the deal and kind of how it came together. I really enjoyed working on this project, so I’m kind of excited to put this together and just get a chance to share it with you guys, so thank you for having me.
This is a property. It’s in Salem, Massachusetts. It was offered for sale by the archdiocese. They wouldn’t let anyone permit it before purchase, so I was able to get it for what I thought was a pretty attractive price, $490,000 for a little under 11,000 square feet of gross area. I was able to buy it with a loan that gave me an interest-only period to kind of figure what I wanted to do with it and some flexibility to then work with the bank once I got something permitted ideally. That was how I got into this project.
A few photos of the building to the rear here, the side. Really cool building, built in the 1800s and it has a really nice character with the floors. You can see this is the main atrium, and some really cool old fireplaces. The building had a lot of character, but what it didn’t have was a way for me to immediately make money with it, which is obviously concerned when you go into a deal, specially when you start paying taxes and holding costs. You want to figure out what you can do. I decided that it was a cool enough building, that I would figure something out and it was a little bit hard to raise capital for it, which is sort of traditionally what I tried to do in deals because I didn’t know what I was going to do, but I didn’t want to take the gamble and try to put something in the other.
I met with a local and state tax credit consultant and figured out that I’d be able to get some state and federal taxes, tax credits, and that was a pretty involved process. I’ve done a couple more at this point, but that was what made a lot of this kind of make sense. At the same time, I was working with a GC to try to get them to GC the project and let me see. This is actually. Do we have another [inaudible 0:03:26]?
Sure. Yes, the pros for getting tax credits is pretty involved. You had to start with a building that qualifies or you need to get it qualified, which typically means that there is something cool and historic about the building. Maybe it was used for manufacturing or maybe it just fits into a neighborhood that’s already been approved by the state and federal agencies that oversee that in terms of being a qualifying historic district.
Then in terms of actually getting the credits approved, there is a process where in my case you hire a consulting firm that spent $30,000 worth of their time to put together quite a lengthy presentation about the current condition of the building, photos of the building, and then you work with an architect and spend another good chunk of money with them to put together a plan for how you’re going to restore the building in a way that keeps a lot of the original and historic elements.
It gets quite involved and ends up creating a lot more complexity in working the project, but ultimately, it allows preservation of a lot of the really cool old buildings that might not otherwise make economic sense for developers to maintain.
All right, so hopefully fewer words in this version. Essentially I had purchased this building in trying to figure out what to do with it. I met with the neighborhood and explained that I wanted to convert it into a seven-unit building. They thought that a two-unit building would be more appropriate, which for 11,000 square feet was not really what I intended. I would not have been able to make the money with it.
There were some other uses I considered by right. I could have tried to Airbnb the property. I also thought about moving into the property if all else failed and end up with an 11,000-square foot mansion but decided that was a little bit more than I really needed. Ultimately, because I had the potential to get a significant amount in tax credits, which I knew that I’d then be able to sell if I can line up an investor for them, I decided that it was worth trying to get it permitted and see what I can do. After quite a bit of back and forth, I was able to get a compromise where we ended up getting four units permitted.
One of the major issues that was important to the neighborhood was the parking as well as the density. Ultimately, they were able to let me build four units instead of two units but took quite a bit of back and forth and discussion. I kind of ended up with that compromise. They also wanted to make sure there was adequate green space.
One nice thing was that in my original negotiation for the property because I wasn’t sure that I’d be able to access the yard in the rear of the property, I was able to get the archdiocese to give me six parking spots across the street, which definitely came in handy with getting the property permitted.
Ultimately, we hired a GC to give us a guaranteed maximum price, hoping that they were going to come in at a number under $1 million, but they came in at $1.6 million. That’s when we decided that it made sense to handle the construction in-house and geared up to do that. Then I brought in an investor at that point to recoup my cash out of pocket and begin the project.
I mentioned a little bit about the parking. This is a view of the drive aisle that essentially we had down the right side of the property. You can see there’s a bump out. Even with that bump out gone, there’s still only about a 9-foot drive aisle between 161 Federal, which is the property we’re working on, and the adjacent two-family, 165 Federal.
We did get this drive aisle approved, but we knew it just wasn’t a great solution and decided to try to pursue other solutions with all of the others. Ultimately, this property in the rear, which is called 2 Griffin Place, we were able to purchase for $400,000 and if you look at this top view, you can see this is the property originally purchased and over here, this is 2 Griffin Place.
What we were able to do is create an additional driveway in through here and then access all this as parking rather than having to come through this drive aisle. What that did actually was it let us to put additional parking spaces here and here that we otherwise would not have been able to park in because they would have just been part of the driveway.
That ended up being a really elegant solution. You can see this is what we ended up with. We had these four parking spaces here for 2 Griffin Place, the structure, and then these four parking spaces plus another couple here for 161 Federal. We were able to remove the bump out to open up the driveway on those parking spots, and we developed 2 Griffin Place. It actually ended up being quite a profitable project in its own right.
We had to sell out, we had three units there, so we dug out the basement, excavated that, and we were able to capture a lot more living space. We paid a certain price per foot going on, but we were selling out for 50 percent more living space when we were done. We sold out for about $1.1 million after putting in sprinklers and kind of doing the full gut renovation.
Really the whole reason to do this project was just to get that additional parking but ended up being quite good in its own right. Then while this was all going on, we were awarded $300,000 in state credits, and then a similar amount in the federal credits and begin the work on 161 Federal.
This is just some of the architectural slides that we came up as we were going through the project. We went through a variety of different iterations to sort of maximize the space. We had to dig up the street to put in the utilities and you can see some of the work we’re doing in the basement. Ultimately, we finished the basement space as well.
Then I’ll show you guys a few sort of after photos. This is the front façade after it was painted up, and the new atrium once complete. They actually had us take the original doors that were hung that kind of went around the building, and we had to hang them in the hallways, close them up and seal them to be fire-rated, but at the same time show where those historical elements were, so quite a lot of things like that that we learned as we went through the project that we weren’t originally expecting but ended up adding costs.
I think it definitely made for a nice finished look but there’s certainly a lot of compromise you make as you go, things that you might intend to do that and end up making more sense for the project.
We were able to save the floors, which is great. There’s actually some crown molding that we wanted to install, and instead we had to put back what was there, which was pretty frustrating because it wasn’t as cool as I wanted to use, but that’s just kind of part of the program.
What is interesting is that after 5 years of owning this property, we have to maintain the property as is as we received the credit four or five years, but at the end of that period, we can change anything we want, absolutely subject to the local building code, but if we wanted to replace a crown molding then, we could. If we wanted to tear down the property entirely, we could, so kind of a funny way it works.
Then this is another view of 2 Griffin Place from the side once we completed it and the rear parking lot. We actually since I think decided that we put in a drainage system that didn’t work that well, so now we’re actually going to end up paving the slot and tying in a new drainage system.
Just to kind of quickly run through the final numbers. We ended up doing a construction in-house. We didn’t save a tremendous amount over what the other GC quoted us, but we were able to end up paying ourselves quite a bit in terms of management fees and development fees, so that helped and ended up with pretty good rentals. We sold the tax credits to a local investor and ended up with good permit done on the property, and so now the intention is to hold it for cash flow for a few years and then sell the condos at that point.
This is the property across the street, 162 Federal, while we were underway in the first project, ended purchasing this property as well, so now we’re just finally wrapping up this project. This is a view of what’s going on here, so another very long process to kind of get this thing going, but we’re now just finishing this and hoping to get our CO hopefully in the new few weeks.
I’m working on 45 Summer Street in Leominster. We were hoping to do something similar on a mill conversion into these 36 units. I’ll wrap up through the slide presentation at this point, and I haven’t talked to you guys a bit about tax credit, stuff for development or anything else that might be more sync to the group.
Rich: Well, I’m going to go around. While I’m looking around for hands, we’ve got one in the back. It’s always somebody in the back row who wants to go first. I’m coming back there, Dave. I promise [laughter]. Can you— Yes, I know. I’m coming back. While I’m going for a lengthy walk, Dan, would you mind just going through just a little bit detail about maybe how you found the property and how you went about financing it. How did you get some of your own cash in and then you brought in a partner in? Could you go into detail a little bit about that?
Dan: Sure! The property was actually on MLS originally. 161 Federal was—interestingly enough for 2 Griffin Place, I’d actually met the seller at another property that had just the neighborhood, and I basically been knocking indoors [unintelligible 0:14:45] and she’s like, “Oh, I remember you.” Ended up selling me the property when she was ready to. Luckily, it coincided with exactly when I needed to buy the property for parking, so those were fortuitous.
Then 162 Federal, I found out one through a broker that found out that I was doing 161 Federal. Often, once you get a little bit of momentum doing something in an area, people start coming to you, just helpful.
In terms of the financing, I used a local lender that I’ve done some work on 161 Federal and then actually two different local lenders for construction on 2 Griffin Place and 162 Federal. The tax credit piece of it made that a little bit complicated because the lender has to be comfortable essentially agreeing not to foreclose on you if you mess everything up because if they did, then the person you sold the tax credits to would lose up the tax credits because part of what you sign up for when you take the tax credits is you agreed not to sell the property for 5 years.
Explaining that to the lenders is a little bit of a complicated thing if they haven’t already had their counsel get them familiar with that before, but each of the lenders ended up loaning us somewhere between 75 percent of acquisition, and I think in every case you probably get 100 percent of the construction proceeds and then put on our own equity for the down payment. For that, I brought in an investor that I’ve worked before to get the equity.
Dave: Dan, thanks for the talk. Very informative. Obviously, there is a point where you’re taking a leap of faith, buying an unpermitted project. What was your sort of worst-case scenario after you had real money up and what types of contingency plans did you have in place like what did you kind of anticipate possibly going wrong in a way that wouldn’t have you here talking about it tonight?
Dan: Right. Well, Dave, you have actually talked about the Dover Amendment, so certainly not something that I wanted to do and then do that if I brought that up with the folks in Salem that they wouldn’t like me very much, but I knew that there was an opportunity to use 161 Federal for some sort of denser housing program if I affiliated myself with a nonprofit, so essentially a rooming house for a nonprofit whether it be a church or a sober house, something along those lines.
I knew that it would be a pretty unpopular card to play, but that would potentially help me get what I did want to get approved ultimately approved. What I didn’t want to do was play that card and become unpopular, and I also didn’t want to risk having a lengthy permitting process. There’s an attorney who does a lot of work in that area and sort of pro bono, and even if I’ve gotten what I wanted to get approved through [unintelligible 0:18:00] as a seven or even a five-unit project, essentially he told me he would file a suit to have that appealed.
A similar project had been in appeal for 6 years and I just wasn’t interested in sort of getting into that fight, just try to be diplomatic and work out a way to get something approved that would be viable. But yes, had I failed, I would have either moved in or Airbnb it, or I don't know but luckily, it worked out.
Dave: Really kind of follow-up specifically to something you just said. With regard to tying it up in court for years, isn’t that one of the primary statements in the Dover Amendment that you can’t make it overly burdensome for someone to execute their plans under the Dover Amendment?
Dan: You probably know more about that than I do, but yes, that particular case was decided for 6 years. They were not trying to do anything with that.
Dave: Got you.
Dan: Yes. Just a typical for-profit development, and I think the neighborhood wanted lower density and so they fought about that for a long time. And so, 6 years’ worth of holding cost. If you’re spending $10,000 or $20,000 on something is definitely not something not a fun way to spend your time in my opinion.
Dave: Got you. I promise only one more question. How efficient is the market for tax credits? Can you explain that process of selling tax credits?
Dan: Sure. The Federal credits are much more difficult to monetize than the state credits. The state credits are simply a commodity. Once you earn them, you can sell them, and at this point, they’re selling for plus or minus $0.90 in $1, so fairly efficient, fairly easy to sell. The federal credits end up creating a lot of extra work in terms of the transaction costs and the complexities. On this deal, just to sell $300,000 worth of federal credits I think probably costs about $50,000 between accounting professionals and attorneys, which is a huge percentage of the sell price. We ended up selling those for around $0.80 in $1, so a much less efficient process.
It makes a lot more sense in a much bigger project. This is around the smallest project where you’d probably try to get the federal and state tax credits monetized. If you can use them yourself, then it makes more sense, but to sell them is pretty expensive.
Rich: You found multiple ways with this project to bring in profit from a bunch of different angles. I don't know if anybody else is wondering what the Dover Amendment is, but I’m wondering what the Dover Amendment is.
Dave: I don't know that I’m the expert. Dover Agreement basically says if you’re seeking a zoning variance, and you are a nonprofit and/or if the tenant is a nonprofit for your plan that you don't have to comply with or go through the zoning variance process. You get to skip that part of the fee planning, but you do have to submit a plan to the town. There’s language it that. It’s basically to prevent the NIMBY, “not in my backyard” type of protesting to dense populations of folks that are not in the demographic that the neighborhood would want, I believe. Dan, any additions?
Dan: Yes, it sounds good to me. I’ve seen a few different programs where you can get something approved, you still have to deal with any sort of code requirements in terms of making sure there is appropriate egress for your proposed use. The life safety has to be there. The first systems, emergency lighting, smoke detectors, sprinklers, whatever sort of life safety codes you’ll need to bring a building into compliance with those, but depending on the use of your project, if it’s for some sort of public good, and this is one of those types, you can essentially skip the zoning process where neighbors can say, “Well, that’s going to block my view, or that’s going to detract from my experience of the neighborhood.”
Sometimes it’s a useful tool to know that it’s out there in terms of trying to accomplish what you’re looking to accomplish even if you’d hope that you’re not going to end up using that as the actual outcome.
Rich: All right, so we had a question in front, we have one over here. While I’m going there, what kind of phone system do you use, Dan, for your company?
Dan: Phone system?
Rich: Yes. Tenants don’t call your cellphone, right?
Dan: I think we use RingCentral. I don't know much about it, though, to be honest, with you.
Rich: I was going to ask a follow-up question. You’re safe.
Russ: This isn’t a question. Just an additional question regarding the Dover Amendment. It can’t be just any nonprofit. There has to be an educational component to the nonprofit. That’s very important. That’s the only key element that distinguishes the different nonprofits. If a shelter has to have some sort of counseling involved with it. It can’t just be a shelter, things like that. So, that’s going to be the trigger.
Rich: Yes. This is advanced. I’m coming to you because you’re convenient, but I’m coming right over there. Also, that wasn’t a personal slice, Dave [laughter]. I also want to ask what kind of calendar does your company use, so that everybody can kind of see what’s going on?
Dan: I use Google Calendar, so I think everyone else does, too.
Rich: Yes, okay. Cool [laughter]!
Dave: Hi! I saw your source of revenue for this project. Of course, selling the tax credit as you mentioned, and the rent I think is somewhere between $2,500 and $3,000. Is that for four units?
Dan: Each one.
Dave: Yes, each one, but I mean not the four units, yes. Were there any other source of revenue on this project?
Dan: I mean I made some money as the GC, and then I was also able to—this is sort of a shell game with the government that you can play with the tax credits, but on a $1.6 million project, you can charge, I guess there is no real guidelines there, so you can charge up to 15 percent, 10 percent, 15 percent as developer fee, so essentially you can pay yourself that money. You pay tax on that money, but then you get to include that in the total amount that you then get 40 percent back on.
Dave: Credit on. Got you.
Dan: Yes, I paid myself some developer GC fees.
Dave: I’m being from Worcester of course, but what was the cap rate for the operating aspect of this project? That’s just the cash outlay so even with the tax credits and credits and certainly getting them reduced in value as a result and put them in those secondary market.
Dan: It’s kind of hard to apply cap rate to it. The way I think about it in terms of the return to me, so I made some money on the fee as going in. When I brought in an investor, that was a liquid event for me. I got my cash out, and I got an extra $50,000 at the time that it came in. Then I paid myself some project management fees as we went.
Dave: That’s the thing capped at 15 percent that you’re talking about, right or is it separate?
Dan: A separate GC fee, which is separate.
Dave: It’s separate, okay.
Dan: I mean it didn’t go in my pocket, but it essentially defrayed the cost of the project manager that’s on my team, his salary. I mean you really make money typically on a project like this, we bought the property for just under $500,000. We were probably into it like I said $1.6 million, but we got a lot of that back. We sold $600,000 in tax credits. Our base is probably more like $1.5 million. We’ve got $350,000 or so left in the deal, but when we go to sell it, that’s when w make the money, which probably sold in today’s market is probably I don't know $2.1 million, $2.2 million in value there, so hopefully $500,000 in profit. Who knows where the market will be in 5 years when the price is up.
Dave: Right. You have to wait, otherwise, you won’t get back some of that credit, correct?
Dan: If we sold this unit, you’ll get back all of the credit?
Dave: All of it. I don't know if it’s pro rata across the units?
Dan: No. Any money that you took, you give back if you don’t hold it for 5 years, I believe.
Dave: Okay because I was like because when I first heard this, I’m like, “This hasn’t capped out anything compared to what I had in Worcester,” but again you’re going for the actual full capitalization specially since you managed the project yourself, it’s probably really good that you didn’t go into GC.
Dan: Yes. I mean you can still take a developer fee that’s separate from that, but yes, if we go into GC, there were a few surprises that we found that I think the ultimate number would have been a lot higher. It could have been tough.
Dave: Yes. All right, thank you.
Rich: All right, so I know you’re not communicating with the residents on a day-to-day basis, but what does resident communication look