Wednesday, June 22, 2016

The Hannah Callowhill Stage: Loan acquired! Construction begins!

Have you ever seriously said the words "I am going to spend about half a million dollars"?
Who am I. What is this life.
I had not, until I bought a theater. These are words that strike terror, and a good dose of imposter syndrome and existential anxiety, into my cheap little DIY artist heart.

Half a million dollars is the ballpark sum we will be paying to gut the property at 103 Callowhill Street, fix and prevent myriad structural issues with concrete and steel, raise the ceiling over the performance space to a height of around 20 feet, and build an apartment on top for Matt and me and our three cats to live in.

Half a million dollars probably does not seem like a ludicrous sum to people who live in New York City or San Francisco or Vancouver or Sydney. Hell, it's not even that crazy for Philadelphia. It is especially not a very large sum considering the finished building will include a commercial space and a second efficiency apartment for us to rent out. We're not spending half a million dollars on just a residence; the property itself is a business. But the words still feel very strange in my cheap little DIY artist mouth.

The problem we faced after purchasing the property last year was that, since we don't have half a million dollars lying around, we needed to convince a financial institution to loan us the money. It took fifteen months of trying! Oh my sweet God Money, it was awful, and I was not even a total noob at financing when we began. I had already been through two residential mortgages and a refinance, a failed refinance, and a failed 203K loan application. I had even paid off a couple of mortgages! I thought I knew what I was getting into.

SIDEBAR: Hey you guys, do you remember the mortgage crisis of 2008? Probably you do. I am actually writing an opera that mildly relates to it, right now. Everyone agrees that mortgage practices were bad when that crisis came around, right? Predatory lending is terrible! It destabilized the economy. Bad bad bad! Banks need regulations, otherwise they will do shady things. Cue: the Dodd-Frank Consumer Protection Act of 2010. Cue: real-world consumer consequences of that act. The failed loan applications that I mention above, and the stress of the last fifteen months? These were consequences of financial institutions complying with the recommendations of Dodd-Frank; the introduction of draconian new standards and verification requirements either disqualified us from loans or dragged out the loan application process for so long that it was virtually impossible to successfully complete. TL;DR: It is now much more difficult for people who aren't already filthy rich to get financing. On one hand, we should be glad that banks aren't giving out money to people who are unable to pay it back, like they did back in the day. On the other hand, WHY THE FUCK DO YOU EVEN NEED A LOAN IF YOU ARE FILTHY RICH. While I agree with the concept of regulations on lending, I see the situation as it currently stands unfolding into a future where only developers, corporations, and the very rich can afford to own land, while everyone else has to rent. I don't know what the solution is, but I do know that in 2008, it would not have taken us fifteen months and multiple failed attempts to get the financing we needed for this project. And I know from family, friends, and acquaintances experiencing similar frustrations—on much smaller and safer loans, even!—that we are far from the only people bewildered by this new reality where a good steady middle-class income, above-average cash reserves, and decent assets are no longer adequate qualifications for lending.

Now take all that whining and horror and increase it by several orders of magnitude with the realization that the loan we need is a commercial construction loan. It doesn't matter that the entertainment zoning variance expired (we will have to reapply when the time comes). It doesn't matter that we are also creating our primary residence. What matters is our intention, which is to create a mixed-use space. Welcome to the wonderful world of commercial lending!

Commercial lending means:
  • interest rates are 1.5% higher than residential loans
  • shorter terms
  • (in case I've lost you, those two previous points mean repayments are much higher than in a typical 30-year residential mortgage, so your income must be higher to qualify for the same loan amount)
  • lower loan-to-value ratio (meaning you can't borrow as much against the value of your asset)
  • higher loan fees
  • an appraisal must be done by a commercial appraiser and literally costs TEN TIMES as much as a typical residential appraisal
Banks see commercial loans as risky because borrowers are more likely to default on commercial loans than they are to give up their primary residence (no matter that it's the same thing in our case). Banks don't like "risky," especially post 2008. Most of the fifteen months were spent going to different institutions, explaining our plan, and being told, "Wow, this venture sounds so cool! I can't wait to visit your theater when it is completed! Aaaaand we don't have a lending product that applies to you, good day!" Banks like to give commercial construction loans to very rich developers who don't actually need the money and thus will be very good at paying it back. They don't like to give commercial construction loans to mom-and-pop artfucks with a crazy passionate idea for a venue.

At one point, we pinned a lot of hope on Wells Fargo, because they were "our" bank. All our accounts were with them, and both our previous mortgages, and our investments too! (Fun fact: we didn't actually open a single one of these accounts with Wells Fargo; over the course of about five years, they acquired all the institutions that held our assets and liabilities and suddenly we had five different Wells Fargo products, wheee.) They liked us, right? They knew we were a good bet and wanted to work with us, right? Wrong!! They were a complete waste of our time, and they pulled our credit reports three (!) times each and tanked our scores. Thanks for nothing, Wells Fargo! If we didn't like our financial advisor so much, we would absolutely tell you to go screw yourself and take all our business, such as it is, elsewhere.

Long story short: a chance encounter at the Weblinc Christmas party last year led us to JSK Financial Consultants, a firm which, as their front page says, accommodates institutions and individuals with creative “out of the box” financing solutions. In plain English, we promised them a 1% fee to find us an institution willing to play ball, and since they know lending people and are knowledgeable about different institutions' preferences and restrictions, they can do all the legwork without forcing us to play spin the bottle with yet another bank.

And thus, callooh callay, a couple of weeks ago, after about three months of exhaustive form-filling and hoop-jumping, we were approved! A bank said yes! A small local bank, that incidentally was just bought by Univest, which is still kind of local, but a little less local. (Do you think it too will be bought by the very non-local Wells Fargo eventually? Let's wait and see.)

And then we immediately received bills for: the aforementioned appraisal fee, building permit fee, zoning application fee, 1% origination fee, loan document fee, government recording charges, aforementioned fee to the loan consultant, MEP engineering fee, a $13.5K interest reserve, an expensive builder's risk insurance policy, our architect's final balance ... it was a spectacular hemorrhage. Suffice to say: goodbye cash. It was nice seeing you in my bank account for a few months after the sale of our Philadelphia house, but now we must part forever, and here's hoping I don't ever need you for a future emergency.

SIDEBAR: A week after we closed on the construction loan, I had the opportunity to talk shop with a guy who not long ago decided to buy a small theater (although it is 2.5 times the capacity of ours). The first thing he did when he heard I had done something similar was crack jokes about bottomless money pits, and much knowing, slightly hysteria-tinged mutual laughter was had. Although he also said that it was good that my theater was very small, and also good that it was in a large(r) market because it would be easier to run and make profitable. Here is a picture of me having this conversation, over crabs, as one does. 
Can you feel the squeeeee tonight? P.S. That's fellow Aussie Lezli Robyn on the left. Fellow theater owner in center.
Almost the moment the loan closed, we dove into demolition. We cleared everything out of the theater and invited some friends over to start the process of gutting. Many and massive thanks to Mike VanHelder, Megan Cullinane, Jeff Yucis, Art Shvarts, Luis Mercado, Jessica Lennick, and our Downingtown neighbor Melvin Rowland for showing up and attacking our walls and floors with hammers.

Melvin, I, and Mikey contemplate the destruction we have wrought. Photo taken by Matt from the stage.
After this act of stress release, it was time to turn our baby over to the professionals, who finished the demo. As I will explain below, the structural elements necessitate the complete gutting of the entire space. Nothing can remain, nothing will survive. We have to do it all from scratch if we're going to do this right.

I am standing where the stage once was. The slab foundation, as you can see, is a mess. But not as messy as it will be.
The first, ahem, stage of construction is going to be ugly and take a few months: concrete footings, pilasters, and steel I-beams will form what is essentially a giant cage on the inside of the structure, supporting the weight of an additional story and the ceiling of the theater, including the grid. Matt and I put our heads together and sketched out the skeletal results from the somewhat confusing structural plans:

Structural elements viewed from the southwest. The wall at the lower right is the storefront facing Callowhill Street.
In the rear of the building, framing the 20-foot-tall auditorium, will be eight fully grouted (i.e. filled with cement) pilasters of concrete blocks, with steel I-beams connecting them as dropped beams and ledgers. At the rear of the lobby, there is a steel frame (replacing the crumbling back wall of the efficiency apartment). Then at the very front of the building, another steel frame sits against the facade. At the base of each of these, a footing needs to be dug and poured that underpins the exterior walls (or is doweled into the walls in the case of the steel frame at the front). Each of the footings needs to be about three foot by six foot, and to get under the walls, it need to be about six foot deep. As of yesterday, the holes for these footings are nearing completion:

Welcome to my theater, isn't it beautiful? Very classic.
SIDEBAR: Some people seem quite surprised when they see how much structural work is being done to this building in preparation for the addition of a floor; after all, row homes seem to pop up floors all the time without all this trouble and expense. We, however, are governed by a few complicating factors:
  • Our building is very narrow (16 feet) and very long (100 feet - the new story will be 70 feet long). It is therefore a giant sail, which is not an ideal function for a building. Creating this interior cage prevents shear. You would be hard pressed to find a row home that pops up another floor that is 16x70 feet; additional floors are usually much more square to avoid this issue. (N.B. In other locations, one might choose to pop up two smaller floors at the front of the building to avoid the shear issue without sacrificing square footage, but we can't do this because there is a 38-foot height restriction for our zoning classification.)
  • Building code has changed significantly since most row homes were built: row homes are now required to be capable of standing independently of any adjoining structures. This building was obviously built prior to that regulation, but given the scale of our new construction, we must retrofit it to comply, especially since most of the building doesn't have any adjoining structures anymore.
  • Our walls are a hodge-podge mess: as I explained in the historical overview of the property—and as our contractor has confirmed in his excavations—our building consists of two 275-year-old buildings whose walls were eventually subsumed into a larger row home maybe 150 years ago. Would you trust those walls to bear the weight of a new floor, two adults, three cats, and a green roof?
  • Do you remember three years ago when a building in Philadelphia collapsed and killed six people and the contractors went to jail for manslaughter and the building inspector committed suicide? Licenses and Inspections sure does. Several people in the know have told us that we would probably not have been required to do as much structural reinforcement prior to 2013. But given that I have no wish to cause deaths and I am all for over-engineering, I am not complaining.
So there it is. We are off and away. It is scary as fuck. It is going to be a wild ride filled with unexpected glitches, expenses, compromises, and heartbreaks. But let me leave you with this one extra piece of information:

After closing on the loan, Matt and I celebrated by eating lunch on the floor of the lobby with the doors wide open, rendered shell-shocked and delirious by the crippling debt we had just agreed to shoulder. A group of three people passed by, catching our attention as they peered around the side of our building. We struck up a conversation; they were the owners of one of the empty lots on Front Street that adjoins our building, currently rented by a scaffolding company for storage of equipment, and they were checking the borders of their property because they had just listed it for sale. For $630,000.

I honestly thought they must had said $63,000 when I first heard the sum. As reference, we bought 103 Callowhill Street for $265,000 fifteen months earlier. We wished them well, but at that asking price, I wasn't sure it would sell.

I was wrong in the extreme. The next day, THE VERY NEXT DAY, while our friends were taking to our walls with hammers, two Russian men walked past the building, also curiously peering around the side. Again we struck up a conversation. They had just put in an offer for the empty lot: $700,000. Yes, $70,000 above the asking price. Cash.

This figure approaches what our lending bank's commercial appraiser listed as the final value of our completed building. But if empty lots around us are now selling for similar sums, I think the appraiser's final figure might have been a little low. Suddenly I don't feel so bad about spending half a million dollars in borrowed cash on this venture, or for risking so much buying this building in the first place. If we had hesitated, an opportunity like this might not have come up again in our lifetime, certainly not at this location.

That settles it, doesn't it?

I am going to spend about half a million dollars.

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