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I recently led an $80mm mixed use investment in a 10 derelict properties in an offbeat part of Memphis next to a few large government housing projects. Some tak

I recently led an $80mm mixed use investment in a 10 derelict properties in an offbeat part of Memphis next to a few large government housing projects. Some takeaways reading the article. Banks are not the problem; banks are just doing their jobs by trying to make securable loans. Appraisals aren’t the problem; appraisers are hired and paid to be non-creative and non-biased they assign a value to property. If a group of properties were acquired for next-to-nothing because they’ve been vacant for a decade, it’s tough to assign more than a pittance because there is simply no value comps. The market agrees with the banks and the appraisers, hence not enough people have attempted to concurrently try to develop in Ensley, thus there’s not enough value. What succeeded for us in Memphis is threefold: 1) proximity to jobs, 2) group buy-in of participation into the vision, and 3) some very wealthy investors who believe in the vision. I’ve toured Ensley, I looked at buying that mid rise in the back of the article’s picture, and it’s a neat place. It has the fabric of old small towns that used to thrive. However, I don’t think Ensley has any proximity for high quality jobs or prospects for job growth, so that’s probably square one for Ensley. Historically, this has been “the creatives” who need cheap space but also like to buy expensive lattes And generate a micro economy, but in our case in Memphis, a bank wanted to move its headquarters into the neighborhood, alongside several smaller businesses. Modern day construction is extremely expensive and complicated, to the point that acquisition price in cheap parts of town are a rounding error on the project budget. You need to find a way to guarantee that rents will be sufficient for the long haul, and if you believe banks and appraisals are being short sighted (and they always are..) then you have to provide that guaranty yourself by setting aside a pile of cash or stock to secure the debt. I could write for days on this topic, more than happy to continue discussion offline or elsewhere

nicoburns 6y ago
You say banks are just doing their job. But you also admit that they're short sighted. Doesn't that suggeat that they're not fulfilling the role that we need them to fulfil in society. I don't want to live in a society where you can only take on a project like this if you are wealthy or have a wealthy backer. Do you?
- ethagknight 6y ago
  Banks job is to get money out there door and get it back with interest as agreed in loan documents. When I say short sighted, I intended to convey a lack of imagination for the future. Banks are asking, “how does this debt get serviced day1? Day30? Day365? What could interrupt those payments into the future? They do not buy into “but imagine what this will look like in 5 years!” that isn’t their job, that’s the investor’s job. As for the wealthy gate keeper fulfilling a role in society: Well, generally yes I support that with the caveat that HNWI s are required for an $80mm risky investment, but not for a neighborhood coffee shop investment or for a business owner moving their business into Ensley, creating jobs in Ensley. But there must be people with money making decisions against the risk, and that’s important. Here’s why: why invest in Ensley vs the same investment in the middle of nowhere, Alabama? Why shouldn’t the US Government (the ultimate wealthy gatekeeper) invest in a bespoke vision for a large luxury mixed use community in the middle of miles of farmland? Because the investment doesn’t work, a total waste of money! The Ensley investment, as proposed, is an investment that doesn’t work. Capital is limited, capital flows to the highest risk adjusted returns, blah blah blah, and there are similarly dilapidated parts of Birmingham AL that have received massive investment because those investments DO work. Investors are investing in those parts of town instead. It’s a sliding scale balancing opportunities, risk, time and effort, and investing in an unproven area is risky proposition and someone needs to step forward to personally take on the unmarketable risk. For someone who knows what they are doing, there is tremendous opportunity for value. That’s what my company does. There may be a path forward for Ensley, and I suggest starting with direct job creation, not finishing out a dilapidated building and hoping someone shows up to pay rent. If this person from the article wants to invest in Ensley, starting very small could be a ticket, building a case for investing in Ensley, and then convincing others to come along side, but there must be a leader taking a load of the initial risk, as well as ongoing risks, and those risks are great. I should also mention, real estate development in general is incredibly complicated, risky, and difficult, even when the odds are in your favor starting out. Just getting the building open to public (Fire and life safety regs) is a major challenge, let alone ever making a return on investment. We typically receive plenty of rejections for loan proposals for development deals, or offers with onerous terms that are intended as a “nice way of saying no”.
greenie_beans 6y ago
What is considered "proximity" for jobs? Would that be considered jobs in the neighborhood or adjacent neighborhods? It's not terribly far from downtown Bham.
- ethagknight 6y ago
  Thats an open question, but for us it is within a long walk or a short bike ride to a lot of high quality jobs. For Ensley, you are most likely hopping on the interstate to get to work. Once you have to get on the interstate, why not keep going another few miles to a stronger economy? Or even better, why not just invest closer to the jobs? For a Bham specific example, there are probably very low cost properties closer to UAB or Regions. To make the case that someone SHOULD invest in Ensley, the investor has to make that case defensively for why Ensley instead of 3 miles east closer to downtown. The biggest issue for Ensley, not mentioned in the article, is that Ensley was built as an industrial village for Tennessee Coal and Iron (TCI) with an absolutely mammoth manufacturing facility alongside Ensley (largest in the world, per wiki). TCI was acquired by US Steel and US Steel relocated and expanded the plant to Fairfield. Now that the jobs are gone, Ensley has struggled to survive. I would imagine the completion of I-20 was the final straw, since it is now easier to access cheaper land further out. It is unfortunate, but not unreasonable.

nicoburns 6y ago

You say banks are just doing their job. But you also admit that they're short sighted. Doesn't that suggeat that they're not fulfilling the role that we need them to fulfil in society. I don't want to live in a society where you can only take on a project like this if you are wealthy or have a wealthy backer. Do you?

ethagknight 6y ago
Banks job is to get money out there door and get it back with interest as agreed in loan documents. When I say short sighted, I intended to convey a lack of imagination for the future. Banks are asking, “how does this debt get serviced day1? Day30? Day365? What could interrupt those payments into the future? They do not buy into “but imagine what this will look like in 5 years!” that isn’t their job, that’s the investor’s job. As for the wealthy gate keeper fulfilling a role in society: Well, generally yes I support that with the caveat that HNWI s are required for an $80mm risky investment, but not for a neighborhood coffee shop investment or for a business owner moving their business into Ensley, creating jobs in Ensley. But there must be people with money making decisions against the risk, and that’s important. Here’s why: why invest in Ensley vs the same investment in the middle of nowhere, Alabama? Why shouldn’t the US Government (the ultimate wealthy gatekeeper) invest in a bespoke vision for a large luxury mixed use community in the middle of miles of farmland? Because the investment doesn’t work, a total waste of money! The Ensley investment, as proposed, is an investment that doesn’t work. Capital is limited, capital flows to the highest risk adjusted returns, blah blah blah, and there are similarly dilapidated parts of Birmingham AL that have received massive investment because those investments DO work. Investors are investing in those parts of town instead. It’s a sliding scale balancing opportunities, risk, time and effort, and investing in an unproven area is risky proposition and someone needs to step forward to personally take on the unmarketable risk. For someone who knows what they are doing, there is tremendous opportunity for value. That’s what my company does. There may be a path forward for Ensley, and I suggest starting with direct job creation, not finishing out a dilapidated building and hoping someone shows up to pay rent. If this person from the article wants to invest in Ensley, starting very small could be a ticket, building a case for investing in Ensley, and then convincing others to come along side, but there must be a leader taking a load of the initial risk, as well as ongoing risks, and those risks are great. I should also mention, real estate development in general is incredibly complicated, risky, and difficult, even when the odds are in your favor starting out. Just getting the building open to public (Fire and life safety regs) is a major challenge, let alone ever making a return on investment. We typically receive plenty of rejections for loan proposals for development deals, or offers with onerous terms that are intended as a “nice way of saying no”.

greenie_beans 6y ago

What is considered "proximity" for jobs? Would that be considered jobs in the neighborhood or adjacent neighborhods? It's not terribly far from downtown Bham.

ethagknight 6y ago
Thats an open question, but for us it is within a long walk or a short bike ride to a lot of high quality jobs. For Ensley, you are most likely hopping on the interstate to get to work. Once you have to get on the interstate, why not keep going another few miles to a stronger economy? Or even better, why not just invest closer to the jobs? For a Bham specific example, there are probably very low cost properties closer to UAB or Regions. To make the case that someone SHOULD invest in Ensley, the investor has to make that case defensively for why Ensley instead of 3 miles east closer to downtown. The biggest issue for Ensley, not mentioned in the article, is that Ensley was built as an industrial village for Tennessee Coal and Iron (TCI) with an absolutely mammoth manufacturing facility alongside Ensley (largest in the world, per wiki). TCI was acquired by US Steel and US Steel relocated and expanded the plant to Fairfield. Now that the jobs are gone, Ensley has struggled to survive. I would imagine the completion of I-20 was the final straw, since it is now easier to access cheaper land further out. It is unfortunate, but not unreasonable.