1913 Building Proposal Executive Summary / Q and A

September 2, 2020

PURPOSE OF THE VOTE:

The Board of Stewards is asking the congregation to approve a loan of $1.5 million for the purpose of remodeling the 1913 Building. If approved, this loan will replace the current line of credit that was approved by the congregation last spring.

 

EXECUTIVE SUMMARY:

This proposal was submitted by the Property Development Committee (“PDC”) and has been approved by the Board of Stewards (“Board”). The PDC was established by the Board more than two years ago to address three main concerns:

1. Parking controlled by the church

2. Accessibility within the building

3. The future of the 1913 Building

 

The current condition of the 1913 Building is not sustainable. The Fire Marshall, during annual inspections, has given grace to the church about the current condition of the church. However, the Fire Marshall has indicated that there is an expectation of progress in upgrading the 1913 Building for continued use in an acceptable condition. It is clear that significant changes and upgrades will be needed in the near future for Central to be able to continue using the 1913 Building.

 

FOUR OPTIONS FOR THE 1913 BUILDING:

Over the past two years, the PDC has examined and researched four primary options for the future of the 1913 Building:

 

1. Demolition of the 1913 Building – Demolition is expensive, would leave a gap in the building, and would likely be challenged by the local historical society. A challenge by a local historical society would result in a lawsuit and Central incurring legal expenses and it is not clear that Central would prevail.

 

2. Sale of the 1913 Building to Outside Developer – A sale of the 1913 Building would create two significant problems. First, selling the building would prevent the church from having any control of the building or tenants going forward. Second, in order to sell the building, the church would need to separate the 1913 building from the rest of the church. This would require actions such as building fire barriers, separating HVAC, utilities and electrical controls, replatting of the property, and other significant expenses. These expenses would significantly decrease the amount of revenue from a potential sale.

 

3. Rehabilitation of the 1913 Building – It is an option for Central to raise money to rehab then building and maintain control for ministry use. This would be a significant cost and it is not clear how the church would be able to raise enough funds for this project.

 

4. Loan, Rehabilitation and Rental – This is the proposal of the Property Development Committee[JH2] . Central would take out a loan to rehab the building and subsequently lease the space to recoup the cost of the loan and provide income for the church going forward. While the space is being leased, Central would not have access to the space and would not have control of who leases the building. However, Central would maintain ownership of the building and could potentially repurpose the space for ministry in the future.

 

THE PDC PROPOSAL:

The PDC recommends that Central pursue option #4: Loan, Rehabilitation and Rental. Under this proposal, Central will take out a loan of up to $1.5 million to fully rehabilitate the building and prepare it for leasing. Initial analysis shows that the building would turn a profit and provide income for the church by year 3. Losses incurred during the first two years will be folded into the cost of the loan. The loan will come from 21st Century Bank and will replace the current line of credit that was approved last spring. The management of the building will be run by Suntide, a property management company. This proposal has been approved by the Board of Stewards.

 

WHY THIS IS GOOD FOR CENTRAL:

There are three primary reasons why this proposal is good for Central Baptist Church:

 

1. This project directly addresses one of the primary tasks of the PDC, a solution for the 1913 Building. It will also likely address our need for elevator between the main level and the second level of the church. (The third task of the PDC, expanded parking, has been addressed). With this proposal, the PDC will have addressed the three issues it was tasked to find solutions for.

 

2. This proposal intends to provide additional income for the church going forward. This income will support ministry at Central and will better position Central financially with diverse income streams, to fund ministry needs.

 

3. Central will still maintain control of the 1913 building. While we are planning to lease the space in the interim, we would still have the option of repurposing the building for ministry in the future.

 

QUESTIONS FROM THE CONGREGATION:

General questions about space:

1. What are some other examples of churches that own and rent/lease property?

 

When the PDC was first considering options for the 1913 Building, Pastor Joel met with Pastor Dan Collison of First Covenant Church. This gave us a vision of how a church could work with other partners in an urban setting that was very similar to ours - with the confluence of stadium, housing and transport. First Covenant Church has utilized their physical property (building and parking lot) to provide revenue for ministry purposes.

 

The connection with Pastor Dan Collison also lead to a relationship with Sara Joy Proppe, a consultant who specializes in working with churches and non-profits in their work with development companies, private business, and government concerns. She has helped us primarily in our relationship with Wellington, but did provide some guidance on the 1913 Project as we were gathering information.

 

2. What would be the net gain from the sale of the building as one of the alternatives that were investigated?

 

Unknown, but minimal at best.  See #2 from “Four Options” above for why this is the case.

 

3. Why does the church want control of this space? If we are leasing this space, we will have no control of who leases the space.

 

The PDC has determined that it is most prudent to retain control of what is likely to become a very valuable property.  We expect this strategy to solve multiple problems with one solution – renovation of the 1913 building, revenue for the general budget within 3 years, and upgraded accessibility on the church grounds.  In the future, we may have an opportunity to reclaim the space for direct ministry use.

 

Suntide/Developer Options:

4. Have we talked to other development groups about the project? What did they say?

 

Seven total developers have looked at the building and the possibilities. Other than Suntide, none of the other developers had space in their portfolio or the expertise to develop the building.  Suntide is an expert in developing older buildings, which is called “adaptive reuse”.

 

5. How will the management company be paid? Flat Rate? Based on rents collected? Based on occupancy percentage?

 

Suntide’s fee is based on the square footage of leased space, at $1/square foot per year.  Unleased space is not charged a management fee.

 

6. In what situation would we be justified in ending any agreements early that we have with the management company, from their end, and from the Church’s end?

 

An agreement with Suntide has not yet been negotiated.  If this proposal is passed by the church, we will work with lawyers to negotiate with Suntide in a way that will protect the assets of the church.

 

7. What other third-party evaluations did the PDC use to evaluate the proposal from Suntide?

 

The expertise of the PDC was used, along with standard financial analysis. The PDC includes members who have strong connections to the Midway business community, extensive non-profit development, experience with architectural design/development, legal expertise, members of the church staff, and church members with extensive knowledge of the history of Central and the building.

 

8. Were other projections given from the other development/Management companies that were involved in the decision process?

 

No, only Suntide offered a proposal for development.

 

9. The written narrative refers only to Suntide Commercial Realty. However, the leasing proposal is from KW Commercial. Is this the same company? Who is the actual developer/builder?

 

From our perspective, they will function as the same company. Suntide Commercial Development is the management company we propose to hire to manage the operations of the redeveloped 1913 Building.  KW Commerical is a brokerage company that works closely with Suntide on potential projects. We have not yet selected a builder for the project

 

10. The leasing proposal was written a year ago, in September, 2019. The world has changed dramatically since then. How have our assumptions changed/remained the same? How have the pandemic and protests/riots changed the commercial landscape in the Midway? Have you requested updated proposal information from Suntide/KW Commercial?

 

With the spread of COVID-19 and the upheaval/riots in our own city, many things may seem uncertain.  However, we know two things have remained constant:

  1. Commercial real estate markets have remained steady in the last 20 years, despite the previous recession (if interested, see CBRE’s 2020 Market Outlook or the National Association of Realtors “Trends and Outlooks Report April 2020.”)

  2. The Lord has a firm plan for our congregation and we at the PDC have felt confident in what has been laid before us. 

Cost/Financing:

11. How much has this potential renovation cost to date (consultants/structural engineers/etc.)? Has this been paid by the Building Fund or the General Fund?

 

We have incurred expenses from three sources in this project. We had a Historical Preservation Society examine the building. We had a Structural Engineer examine the building. We had a consultant (Sara Joy Proppe) help us with a handful of items that have come up over the past two years. The costs of these consultants was paid out of the Building Fund and has totaled around $5,000.

 

12. As we take on more debt for the 1913 project, what is the current debt level of the church? How is the current debt distributed?

 

Central currently has an outstanding mortgage of approximately $147,000.

 

13. What is the plan if we don’t have enough income to service the loan?

 

Should our forecasts not work out the way the data indicates they will, we would be in a position to make a difficult decision.  We could potentially sell the building, opt for a different business model, or find an alternate way to service the loan.  As with any investment, there is a level of risk involved.  We trust in The Lord to work all things for our good and believe that he has set a clear path before us.

 

14. The proposal suggests that there will be a loss the first two year of the project. Where will the negative cashflow for the first two years come from? How will the payment of the loan be changed by the negative cashflow from the first two years?

 

The first two years of income are a very conservative estimate of occupancy (20% in year one, 50% in year two).  As with most commercial properties, this one is not designed to be sustainable at only 50% occupancy, hence a loss in the first two years.  The loan payment would go up, should we in fact need to capitalize any losses.

 

15. How will the increase in monthly payment change the future cashflow if the loan amount is increased to cover the first two years of negative cashflow? What would the new minimum payment be?

 

It is impossible to say what the exact payment would be after capitalizing losses from the first two years, since we do not know what those losses will ultimately be.  Should our conservative forecast play out, we might expect to see an increase of approximately $15,000 per year (assuming a 4.25% interest rate, which is high for today’s rates).

 

16. What happens if in the future there is a negative cashflow event that is not anticipated?

 

The specific nature of a negative cash flow is important for answering this question.  A simple situation such as low occupancy may be written off as a loss on that year’s taxes, while a complex situation may require a vastly different solution.  Needless to say, the PDC and the Board will make every attempt to forecast those situations and work to prevent or control them.

 

17. How would it be handled if the project went over budget, where would additional funds come from to complete the project?

 

The nature of this project is such that a serious overrun on the budget would dismantle the pro forma and necessarily end the project.  To that end, construction estimates will be done early and often, hand in hand with the contractor and architect.

 

18. What happens if it takes longer to become cashflow positive than 3 years? Per the narrative, “most businesses hope to make a profit beginning in year five”. Why do you assume that this project will “start making money for Central in year three”?

 

The data we’ve gathered so far indicates that this project should generate positive income in year three.  See the attached spreadsheet of the proposal for more details. 

 

19. There are two spreadsheets entitled Rent / Income Estimates. A three-year projection is within the KW Commercial proposal. A ten-year one is attached separately.

 

a. On both estimates, what is CAM/TAX income?

 

CAM is Common Area Maintenance.  TAX is indicating that some taxes are also included in this charge.

 

b. The 3-Year lists $0 real estate taxes. The 10-Year lists roughly $30,000 per year. Which is correct?

 

The three-year forecast assumed the church would not pay taxes on the project.  However, through subsequent research by the PDC, it was determined that the church will be required to pay taxes on any income not directly related ministry activities.  Since collecting lease payments is not the same as fund raising, we will be required to pay taxes on any net income.

 

c. The 3-Year lists 5.00% loan payment. The 10-year lists 4.25% loan payment. Which is correct? Or have interest rates changed since this proposal was written?

 

The interest rate is not yet determined, but each forecast assumed a conservative (though different) interest rate.

 

d. The 3-Year lists an $850,000 loan. The 10-year and the narrative list a $1,500,000 loan.

 

Suntide did an initial construction estimate for us, which produced a sum of approximately $852,000.  However, this does not account for soft costs such as consultants, permits, taxes, etc.   

 

20. The narrative’s FAQ #7 asks “How did the PDC arrive at a $1.5M budget?”. The narrative then refers the reader to Appendix B for more information. Assuming that Appendix B is the 10-Year Rent / Income Estimate, the only project cost information is the Improvements line with two amounts, a total and a cost per square foot.

a. What additional expenses are included to make the leap from $50.12/sqf and $852,000 on the Suntide Appendix A Costs page to $88.24/sqf

and $1,500,000?

 

See answer to letter ‘D’ above.  Additionally, $1.5M is at the top end of what the expected rent can support.  That is, if much more than $1.5M is spent on the project, we would be hard pressed to make any money on the project.

 

b. How did you determine the $88.24/sqf cost?

 

$1.5M  / 17,000 sf = $88.24/sf

17,000 sf is the amount of space we would like to have as leasable.  The 1913 building is approximately 9,000 gross square feet per floor, with two floors.  Allowing for 1,000 sf of non-leasable area yields 17,000 gross square feet of rentable space.

 

c. What is the percentage of contingency included in the cost budget?

 

5% for a total of $75,000.

 

21. How will the church be protected from the legal liabilities?

 

We do not have a final agreement yet. These type of concerns will be negotiated in the final agreement once the proposal is approved.

 

22. What is the status of the Neighborhood STAR Program request for a grant and/or loan?

a. How much money did we request? If we are successful recipients, how much might it lower the amount that we must borrow commercially?

b. Will the congregation be given an update on this application before a vote is taken on this proposal?

 

In answer to all above: Central did not receive any funds from the Neighborhood Star program.

 

23. Per the KW Commercial proposal, the building zoning will require an Identified Use permit. Where are we in the process of exploring the viability/likelihood of obtaining this permit?

 

Obtaining a change of zoning or conditional use permit will be the first priority, should the congregation approve this proposal.  Having spoken with city officials and drawing upon the experience of PDC members, we do not anticipate any issues on this front.  However, such approvals take time and this will be initiated during the first phases of design.

 

Demand:

24. Our neighbor Spruce Tree currently has 25000 square feet available (17% of their total making them 83% leased not 98% as stated in our packet) at $15 a square foot.  With this vacancy down the street, why would a company rent from us for the same or higher rent (packet showed $16 a foot) and park in an unsheltered area and walk outside in all the elements to get to their office or visit said office? Is our estimate for class C space too high when a class B space a block away has the same rent and their current availability exceeds our expected total availability?

 

Our property has two attributes that we think will set it above other class B/C spaces: historic character and flexibility. Spaces that have history and character are highly desired by up and coming companies, especially technology companies.  It will be critical that the final design of the space retains this character.  Additionally, we would offer companies the flexibility to divide space more freely than a space like Spruce Tree (which does not allow for division at all).  This way, we attract more tenants than by simply offering a single, unalterable space.

 

25. Do we have any concerns about office space being developed across Snelling?

 

We believe that office space constructed across the street will most likely by class A space, which should not affect our pool of potential renters.

 

26. Do we want to have office space with stained glass windows? Are businesses interested in renting offices with stained glass windows?

 

The stained glass windows will need to be removed and replaced with energy efficient windows.  This will need to be done with much care, so as to preserve them both physically and culturally.

 

27. How might the fact that a church owns the commercial space affect the pool of potential renters? Is it a disadvantage that we will have to overcome?

 

Potentially, yes.  However, this may also be an advantage.  Those who may not agree with our mission would likely self-select out of the pool, thereby providing us with a pool of renters more likely to be aligned with our values.  Additionally, some may see a church as a trustworthy landlord and be more attracted to the space.

  

28. Are we concerned about the rising crime rate in the Midway?

 

While the church is concerned about rising crime, we also see development is happening regardless of that concern.  Everyone developing property in this area takes on some level of risk associated with crime. 

 

29. What can be expected during a recession in the future? How has past recession impacted commercial properties in the past? What will we do to be prepared for those times?

 

Past recessions have hit the commercial leasing sector only modestly.  During the previous recession, commercial leasing dropped by 12% in 2009, but rebounded to +3% in just two years.  Rent growth has been modest, but positive, since then.

 

Parking:

30. Where will tenants and customers park? Will this impact parking for the church?

 

Tenants and customers would park in the new parking lot or at Spruce Tree.  Business hours generally do not conflict with church activities and providing parking also allows for additional rental income.

 

31. Will we include parking spaces (during business hours) to the tenants? All of the comparable properties included in the KW Commercial proposal do include parking.

 

See above.

 

32. Do we have a plan for additional parking? What is the plan for additional parking for the church, the parking lot is not enough to handle the church’s needs?

 

See above.  We believe the church now has sufficient parking for the congregation during typical business hours. We will continue to explore ways to expand our parking as they present themselves.

 

Scope/Timeline:

33. Will the renovation be just the 1913 building or include the 40’s building as well?

 

Only the 1913 Building will be remodeled.

 

34. How long before the construction is completed, there was not a timeline that I saw for when they would begin leasing space?

 

We anticipated design and construction to take approximately 35 weeks.

 

35. Does the committee have more detailed documents related to space design plans?

 

We do not as this time.  Once an architect is engaged, draft floor plans may be available within 8 weeks.

 

36. Does the committee have a more detailed construction estimate than the one-page summary that was attached to the proposal?

 

A more detailed estimate cannot be completed until architectural design has been at least partially completed. 

 

a. Architectural / Engineering costs are Zero and are to be planned for in Soft Costs. Are Soft Costs part of the total costs listed or in addition to the $852,00 total?

 

Soft costs are in addition to the construction estimate.  The final cost is referred to as the ‘Project Cost’, which includes both construction costs and soft costs.

 

b. Is it realistic to assume that existing detection / alarm system is adequate? Did the existing system detect the recent intruder?

 

It is most realistic to engage the alarm company to determine what is sufficient or not.  Such considerations will be done during the design phase.

 

c. How many sets of restrooms—one or two? If two, the cost isn’t included in the total.

 

While only one is planned for, these types of considerations are typically determined during the normal course of design. 

 

d. Are window coverings included in the Tenant TI Allowance portion of costs? If not, is it realistic to have no window coverings?

 

Window coverings are not included in the current budget.  Considering that all of the windows face north and west, it is reasonable to not include window coverings at this time.  However, such amenities may still be included in the budget, should it be determined necessary and financially feasible.

 

Ministry Impact:

37. How does keeping control of this property further the mission of the church?

 

For a full answer to this question, we would direct you to the “Why This is Good For Central” portion of the introduction. We believe that this proposal will allow the church to address the 1913 Building, provide revenue for ministry in the next 3 years, and will allow control of the building if our ministry needs were to change in the future. We believe that even with losing the space of the 1913 Building in the immediate future, that we currenly have enough space for the ministry of Central. Keeping control of the building allows us to be flexible going forward.

 

38. Have we thought about what it will mean for the youth to be in the basement?

 

We have. This proposal will be a change for the Youth Program at Central. However, the current setup is not sustainable for the long term as we need to rehab the 1913 Building one way or another. With this reality, there will need to be changes in location for the Youth Program even if we don’t specifically follow this proposal. We are currently re-purposing space in the Gray Room (below the Sanctuary) and other parts of the lower 1962 building to better serve our Youth Program. Among the additons will be new classrooms and new restrooms.

 

39. What is the budget for renovations to relocate the Youth program to the Gray Room? Will this come from the loan, any existing Building Fund cash, or from the General Fund?

 

We do not have a specific budget at this time. As we consider the changes we want to make, new classrooms and new restrooms, we are anticipating a total cost of around $50,000. This money will come from a combination of the refundable gift Central received from the Foundation and Retha Berndt estate gift.

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