I have two motivations in writing this article for MJ readers, and whoever else might chance upon it. The first is informational, as I assume that some of the readers would like to know how an average person, a novice, with little funds, attacks the decisions and problems involved in a small and typical core renovation project. The second reason is somewhat selfish, as it involves my need for feedback and help regarding what to do with the street level floor of a three story building which is about to be renovated. It seems a given that the two upper floors will be apartments, not only because we have too many empty offices in the core, but offices would require an elevator installation, thus eliminating valuable floor space.
The three-story 225 N. Laura Street building, built in 1904 of wood, with a brick façade added later, is currently occupied at street level by Gus's Shoe Repair. Although Gus's owner, Greg, has expressed his willingness to remain as a tenant, and would consider moving out for several months during renovation, I suspect that, once settled in his new space, he would not wish to engage the arduous task of returning to the location all the heavy equipment and shelving. Additionally, I've determined that by operating another business there myself, such as a restaurant, I can probably make four to six times the net profit with the street level space of the building as compared to the post-renovation rent agreed to by Greg of $2,500.00 per month ($15/sq. ft. x 2,000 sq. ft). Although the lower space has a footprint of 2,400 sq. ft., the stairway to the upper apartments leaves about 2,000 sq. ft. for actual use.
While leasing the street level space to others has the advantage of simplicity, the need to repay the renovation loan with a reasonable margin requires that I utilize the space more effectively by operating my own business.
Beginning within weeks, the upper two floors are to receive more cleanout and basic demo to prepare for apartments. The architect has already completed draft drawings for the two upper levels; each level having one 2-bedroom apartment, and two 1-bedroom apartments. Currently, there are five very small apartments on each floor, which have not been occupied since the mid-nineties. Four of the apartments will have beautiful views of Hemming Park, giving the tenant the opportunity to gaze upon the beautiful oaks and the park people.
The entire building will be gutted, getting new windows, floors, walls, and ceilings. All electrics and plumbing will be replaced, and new air conditioning installed. Each apartment will have its own washer/dryer. The entire building will have a new sprinkler system, which, although not a firm code requirement, is a tradeoff which precludes fire escapes to the outside from each bedroom. Given the wood structure of the building, I am inclined to insist on sprinklers on the ten foot ceilings in any case, as it will be safer, and the building insurance will be less. Of course, being residential upstairs, no elevator is required.
I must offer an opinion about the code enforcement and building inspection departments, including the fire marshal's office. Although it is possible for a building renovator or a builder to engage an initially unreasonable field inspector, in most cases, if you are patient and considerate to their responsibilities, you can work things to a good solution. Or, you can take the issue to one who is above the inspector, and resolve the issue. In my experience, the rules and codes are necessary for safety, efficiency, or simply sound building practices, and are not frivolously designed, as some suggest, to impede your progress. Therefore, I suggest that you listen to the inspector, or his or her supervisor, read the code, and in most case, if it is at all possible, the folks in code enforcement, building inspections, or the fire marshal's office, will bend over backwards to ease your path to a compromise. There are usually sound reasons for the codes and restrictions, designed over decades. And in many cases, because a particular situation is outside of the fundamental reasons for the codes, a good compromise can be agreed upon.
Some estimated numbers. The renovation of the building will cost $500,000 to $600,000, which means about $700,000. I bought the building in April of 2012 for $290,000, putting about $65,000 down, and pay the previous owner, who holds the mortgage, $1,840 per month. Greg is currently paying me $1,700 per month rent. A balloon note of about $192,000 is due in April of 2015.
Since I have no money for the serious renovation phase, I will have to borrow about $800,000 to pay off the $190,000 balloon note and to perform the renovations. My payments on an $800,000 loan, if over 15 years at 5%, would be about $6,400 per month.
Ideally the building income will pay the loan payments, the building insurance, and the property taxes, which will probably zoom upwards, after renovation, from the current $4,800 per year to perhaps $12,000 per year. Therefore the monthly cost demand on the building will be the loan payment of $6,400, plus a building insurance premium of $1,000 per month, plus the property tax of $1,000, for a total outlay of $8,400 per month to own the building.
How is this $8,400 going to be paid? The six apartments on the upper two floors, of which three are already reserved by future renters, will have moderate rent levels. The second floor, losing more space to the stairway, will have a small 385 sq. ft. apartment, a 521 sq. ft. apartment, and a larger, two bedroom 834 sq. ft. apartment. The third floor will have a 515 sq. ft., a 624 sq. ft., and a two bedroom 720 sq. ft. apartment, giving a total of 3,600 sq. ft. of apartment rental space in the building. If the going rental rate is $1.00 per square foot, then the income from the apartments will be $3,600 per month. Perhaps the smaller apartments, with the better views, will rent for a little more than the $1.00 per sq. ft., so perhaps we could expect about $4,000 total per month from the six apartment rentals.
Because of the interest I've seen by people wanting to rent these apartments, with views over the park, I expect to have full occupancy upon renovation. The limited $4,000 apartment rental income is why renting to Greg would place me in a vulnerable situation, as his contribution of only $2,500, plus the apartment rent on only $4,000 would total only $6,500 per month, which would be $1,900 below the $8,400 cost to own the building.
To save the day, I could have a restaurant operation, with an expected gross of $2,500 per day, and perhaps a net income of $400 per day, thereby contributing about $12,000 per month (400 x 30) net income. This figure, plus the apartment income of $4,000, would produce a total income of $16,000 per month from the building, thereby exceeding the monthly building cost of $8,400 by about $7,600 per month. This monthly net income from the building would of course buy a lot of beer and drugs.
But what about certain aspects of the Restaurant, or other options for the street level use?
I have so far assumed that a restaurant would be the best use of the street level spot. Is this a valid assumption? And is a restaurant a use that would most enhance the downtown core near Hemming Park?
A wall on the first floor, down the middle of the building, which could be removed if desired, will allow for two businesses to operate on the first floor if desired, which was probably the case during certain periods of the building's history. Total building width is only 30 feet.
If we were to put a full restaurant in the space, I envision leaving the current small coffee shop in the bookstore environment, and to continue offering "light stuff", the veggie menu, the bagels and the espressos and coffees. The larger restaurant eating locations would be flexible, so that the customers could eat inside, take their food to the sidewalk tables, or to the bookstore café tables. Any opinions on this?
If we were to do the restaurant, and because I and many others are breakfast persons, my intention is to offer a full breakfast, of a quality which will be second to none, seven days per week. Breakfast would begin at 6:30 a. m., allowing an hour and one-half before parking meters wake up.
Although our limited space in the current bookstore café has not allowed it, I've often envisioned a goal of offering a menu and quality of service and ambiance such that people will drive for miles to enjoy it. My hopes is that the upcoming larger restaurant space, along with the time to plan and design the perfect layout, and the hiring of a good chef/manager, will allow us to eventually achieve the goal of offering the ideal dining environment, which would be a great draw to the core. I envision evening hours at a later date. The decisions regarding the type of food for the lunch crowd, and the kind of menus for the evenings, is crucial. Any opinions on this? The selection of a chef for the operation will also be a crucial decision, as I am quite ignorant about food, menus, and food preparation.
Another option is to close entirely the small coffee bar in the bookstore, and utilize the space for more bookshelves. But then, anyone wishing to have bagels and espresso in the bookstore environment would have to carry it over from the adjacent new restaurant. Of course, if the current coffee bar is closed, I suppose the waitresses, who serve the food to the sidewalk tables, could also serve the food to the bookstore patio tables, or the bookstore inside tables. I must admit that I like the idea of keeping the small coffee bar in the bookstore, and then concentrating on a major restaurant operation in the new space.
With this in mind, and with my admitted ignorance about restaurants in general, I hope that the creative posters on Metro Jacksonville, will offer feedback and ideas for the restaurant type, and other aspects of it; or, if the restaurant in some opinions is not the best use, then to offer an alternative use for the street level space at the location, keeping in mind that the lower floor must contribute at least several thousand dollars net income to the operation so that the building cost of $8,400 can be covered, with reasonable room to spare.
Property taxes. As for owning buildings in the city, I pay at this point, about $4,100 per month in property taxes for five commercial buildings. Thank goodness all buildings are occupied and producing income except for the upper two floors of the 225 building. Being seventy years of age now, I figure that by the time I get the loans down to a tolerable level, which will be at the age of ninety, I will begin to think about retiring. I'm already thinking about a second career, perhaps becoming a tap dancer, maybe a professional boxer, or a marriage counselor.
Any core building purchase/renovation project, besides ideally being made to produce income upon completion, must fit the financial scenario of the buyer/developer. The only reason I was able to "do" the bookstore building, purchased in 2006, is because it was small enough so that I could afford to do the project, and it was big enough so that I would have enough space to display enough books "and" offer the café to customers so that I could create sufficient income. As it turned out, the bookstore and the café do about the same gross sales each month. However, because of the heavy costs to the café, the bookstore has greater net profit per month.
So, the significant question for potential buyer/renovators at this point in the stagnated condition of the Jax city core, is "What can I put into this building so that it produces income?" I suspect that there "are" investors who can afford to buy core buildings. But they hesitate for now, simply because they realize that there is no plan, with the depressed core, to guarantee a way to make income with the building. Once the magic vibrancy threshold is reached in the core; that is, once the residence, worker, retail, and visitor populations reaches a certain level, "then" the problem of having difficulty making money with a property will subside. We will see more inclinations to buy, renovate, and engage profitably the new upsurge of people in the core.
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Editorial by Ron Chamblin