Late last week, when AnnArbor.com reported that Stewart Beal was changing tack relative to the Thompson Block, and going after small, unaccredited investors in order to get the stalled redevelopment project moving forward, I decided to reach out to the local developer and ask a few questions. Following are his answers.
MARK: As I understand it, having exhausted other funding avenues, you’ve decided to turn to the community, selling individual individual shares in Thompson Block LLC, the corporation you’ve set up for the redevelopment of the former Civil War barracks, for $10,000. Your hope, from what I read in the recent AnnArbor.com article, is to raise $1.74 million in this way. My first question is, given the local economy, do you think it’s likely that you’ll be able to sell 174 shares?
STEWART: It isn’t exactly correct to say that we’ve exhausted other funding sources, because our plan has always been to sell shares to real estate investors in order to raise the necessary equity capital to complete the project. You are exactly correct, however, in that we are selling 174 shares in the limited liability company we have established for this purpose, which is called Thompson Block Partners, LLC. We believe we will be successful in raising the equity capital, through the sale of shares, which, when combined with our bank financing and tax credits, will allow us to embark on a successful project.
MARK: To be blunt, I think it’s safe to say that there are a lot of people in Ypsilanti who are upset with you right now, given your track record on the project. Given that that you’ve missed deadlines and broken promises in the past, there’s a perception, generally speaking, that you’ve been insensitive to the community concerns. I know that you’d argue that there were good reasons for missing those agreed to deadlines, etc. For the purposes of this interview, though, I’d rather not get into it. I’m just interested to know if you think this negative perception will affect your ability to attract investors.
STEWART: We actually have found that the exact opposite is true. When we speak to people about the Thompson Block, they are overwhelmingly supportive of our project, and they’re really excited about the new designs, which we announced in April, and are working on now. The newly envisioned project will consist of 16 luxury lofts, 14,000sf of commercial space, and 30 parking spaces. We will combine 400 N. River, 107 E. Cross, and 113 E. Cross into one cohesive site, making a very attractive Depot Town corner. The stake holders of Depot Town, specifically those on the Ypsilanti Downtown Development Authority, and the owners of neighboring buildings, have made it clear that they are very supportive. In general, people understand that our bank being purchased by another bank in 2009 and canceling our loan, and then the fire, have led to unfortunate delays, and they are understanding that we have done all we could to save one of the most historic buildings in Ypsilanti. Owners of buildings in Depot Town have said things like, “The building looks the best it has in 40 years”. One member of Ypsilanti City Council recently said, “The City took the action it did in order to ensure that the building is not a hazard to the public. Now that the building is safe, the City should support the project”. Absolutely no one has ever told us they perceive our group as being insensitive to community concerns, but we certainly understand that it’s in the best interest of the community to complete the project for the benefit of all.
MARK: Assuming people want to invest, how would they go about getting involved? Do I understand correctly that you’ll be hosting some kind of event at Sidetrack, and giving tours of the site for potential investors? If so, when is that scheduled to happen, and how do people go about signing up to participate?
STEWART: If someone is interested in investing in the project, they can email me or Tyler Weston, who is with Howard Hanna Real Estate Services. We would then set up a one-on-one meeting to discuss the offering memorandum and the expected returns from such investment. You are correct in that we are hosting an event – called the “Thompson Block Open House” – on August 21st, from 5:00 PM to 7:00 PM. The event is not at the Sidetrack, but the Sidetrack is sponsoring the event, and the first 100 visitors that enter the building will receive a $10 Sidetrack gift card, so they can have a beer on us. The open house should be attended by prospective investors, prospective tenants, and members of the general public.
MARK: According to AnnArbor.com, you’ve already raised $300,000. I was unclear from the article, however, as to whether that money came in as a result of this new offer, or if perhaps this was the money that you’d raised several years ago, when you first set out to develop the Thompson Block.
STEWART: You are correct in that the article was unclear, but we are not going to publically discuss our fundraising success. However, we are prepared to share this information with City staff, so they can monitor our progress if they desired to do so.
MARK: I’d be curious to know who you’re pitching this opportunity to. Are you speaking primarily to Ypsilantians, or are you focusing outside the community? As your father was successful a few years ago selling $50,000 shares in the LLC he’d created to redevelop Detroit’s Broderick Tower, I’m curious to know if, perhaps, you might be looking to some of those same individuals. (As I understand it, he had 23 investors that bought in at that amount, contributing $1.15 million toward the $53 million project.) If you’re going after non-local investors, do you think the business case is strong enough to bring them to the table? In other words, I can see how local people may want to invest because they’d like to see the building saved and the block redeveloped, but, outside the community, investors, I’m thinking, would just care about bottom line.
STEWART: We are primarily pitching the investment to accredited investors who invest primarily in real estate. The definition of an accredited investor is a person who has a net worth of $1,000,000, not including their personal residence, or someone who has made in excess of $200,000 per year for the last 3 years. We can sell up to 35 shares to non-accredited investors per the SEC, however, but those investors must be very experienced in financial matters, real estate, construction, etc. We are seeking both local and non-local investors. Investors range from people who are strictly bottom line-focused, to those who are primarily interested in saving one of the most historic buildings in Ypsilanti.
MARK: Can you say whether or not any local people have invested? I’m curious, for instance, to know whether any factions of the French family might be supporting this new push of yours. How about other notable locals?
STEWART: We, as a general rule, do not identify individual investors unless they are working on the project in a public way. For instance, one of our new team members and investors is Tyler Weston, who many people know as “The Ypsilanti Real Estate Guy”. Tyler has taken on both luxury loft leasing and commercial space leasing for the project. I will say, however, that factions of the French family are very supportive of the project, and have repeatedly stated this publicly – most recently at a Ypsilanti Downtown Development Authority meeting, which is public record.
MARK: As I understand it, you have until the end of August to put a roof on the structure, or be in violation of your most recent agreement with the City. Assuming you don’t get a roof on the structure over the course of the next four weeks, what recourse does the City have?
STEWART: We like to point out that, over the two different agreements we made with City Council, we agreed to do 14 things. 13 of those things have been completed on time, and to the satisfaction of the City. Each one was extraordinarily difficult to accomplish, and we’re really proud of our efforts to save one of the most historic buildings in the City in the face of such adversity. The 14th thing is, “Within 3 years of this Agreement, the exterior envelope shall be completed”. It’s true that some interpret this to say that we agreed to put a roof on the structure by the end of August. Others, however, read the agreement differently. With that said, we very much want to work with the City of Ypsilanti to complete this project on a realistic timetable that works for everyone. In fact, we’ve been working with City staff for eight months to design a process under which to move forward to everyone’s satisfaction. Both the City, and the members of Thompson Block Partners, LLC, realize that neighter party can be successful without the success of the other. We are in this together, and we know that we’ll work well together. We’ve written a really great proposal to the City Council, and we hope they support us as much as City staff has supposed us. What recourse does the City have if it’s their opinion that we have not met the terms of the agreement? The recourse for the City is clear in that the agreement says, “In the event of any dispute regarding the terms of this Agreement or compliance by either party to the agreement, the parties agree to meet and facilitate… before taking any action to enforce this agreement.” We certainly hope to avoid facilitation, although we feel we could navigate that process successfully as well.
MARK: Let’s say I were to buy a $10,000 share, what would I likely see in terms of a return? Would I receive a share of the rents in perpetuity, or would it be more like a loan, where I got back something like three times my investment over the course of the next ten years, assuming that the redevelopment is successful?
STEWART: We would gladly discuss this at length in an investment meeting, but this is not an appropriate place to have this discussion because the answers need to be explained while reviewing 40 pages of documents. We can certainly say that an investor would be an owner of the building until an exit strategy was achieved.
MARK: Assuming everything goes forward as planned, the building is saved, units are rented, and revenues start coming in, where will I, as a $10,000 investor, find myself in the line of folks looking to be paid back? In other words, should I assume that I’ll only start to see my cut once the banks, and your other larger investors have been paid back?
STEWART: Again, we would be gladly discuss this at length in a investment meeting, but this is not an appropriate place to have this discussion because the answers need to be explained while walking through 40 pages of documents. However, in all real estate structures, the banks are paid first, and all other investors, big and small, are treated equally.
MARK: As I understand it, the entire renovation has been estimated at about $4 million, of which you’re looking to raise $1.74 million through the sale of these shares that we’ve been discussing. You also have over $1 million in historic tax credits, and another $1 million in OPRA tax exemptions. And, on top of that, you have some MEDC money, and you’re seeking a DDA facade grant. As much of this money won’t be available until after the completion of the project, though, you’re still going to need other funding sources, right? What other chunks of the financing are in place? Are these $10,000 shares the last piece of the puzzle that you need in order to make the project go, or will it still be in limbo even if you’re able to sell these 174 shares?
STEWART: You are correct in saying that, if we sold 174 shares tomorrow, and the other funding sources were not in place, the project would not start. We need all the pieces to come together as once for the project to start.
MARK: Did I hear correctly that you’re anticipating retail rent in the new Thompson Block to go for $16 a square foot? Given your knowledge of Ypsi real estate, does that seem realistic to you?
STEWART: Yes and yes. In fact, in 2009, before the fire, we had 75% of the commercial space rented at $16 to $18 per square foot.
MARK: The most recent plan calls for 16 “luxury lofts” and 14,000 square feet of commercial space. I suspect it’s way too early in the process for anyone to sign on the bottom line, but do you have any reason to believe that you’ll be able to find tenants?
STEWART: We’re specifically looking for loft tenants now, and have two lofts reserved, with 14 remaining. We would not sign a lease now, but would sign a letter of intent that describes the rent, the security deposit, and when the lease would need to be signed. There are many challengers with this project, but renting the lofts is not one. Our group of investors manages over 300 apartments in the City of Ypsilanti, of which 299 are currently occupied. Also, the West Michigan Lofts in downtown Ypsilanti, where there are 20 lofts of similar style and price, are fully occupied, and have never been vacant for more than a few days in eight years.
MARK: I’ve yet to confirm this, but I recently heard that several of your rental properties around town are on the market. Might this be a Plan B for raising equity capital necessary to redevelop the Thompson Block?
STEWART: We have recently sold a property at 210 Ferris. We sold this property because the land contract had expired and needed to be paid off. The purchase allowed us to pay off the land contract and “take home,” so to speak, $40,000, which will be immediately reinvested in Ypsilanti. We also have 218 Ferris, 806 West Michigan, and 804 West Michigan for sale with Howard Hanna Real Estate Services. Any sale proceeds would be immediately reinvested in Ypsilanti, perhaps as equity capital for the Thompson Block.