Blog Post

Commercial Development: Teale Street

BEFORE & AFTER

PROPERTY NARRATIVE

If you just perused the B&A photos, you can see what a massive transformation project we undertook. This was my second commercial development project, the funds for which came from our first development project eight years earlier.

My partners and I decided to tempt commercial real estate fate again for a few reasons, but one of the primary was for closer parking! Our last building didn’t have any onsite parking, and we felt that if we could cash-out on that building, and do another project that had parking, we would be way better off. Let me explain.

Breaking ground on the second building we bought for our business in Los Angeles. And yes, we staged this photo for a “funny” FB post.

Commercial real estate projects in Los Angeles literally live and die by parking. It’s a precious resource in a big city that doesn’t have an effective public transit system.

The long short is that if you want to build something new, or convert an existing building to a new use, you have to meet parking requirements for that use. In the case of this building, it was 2 spots per 1000SF of space. Our goal was to increase the SF to 12,500…so that’s about 25 spots.

We managed to create that many spaces by installing 9 hydraulic car lifts, to provide 18 spots, along with 7 other ground spots. We also had to fit a 1200 amp transformer on the lot to cover our new electrical service, which took up a ton of space with clearances, so it was a very VERY close call on this project actually working out.

9 gorgeous hydraulic car lifts
1200 amp transformer taking up prime parking real estate

But parking was just one of the many challenges along the way to completion of what turned out to be a beautiful building!

We actually first looked at this building when it was being renovated by another developer. They had bought up three buildings on the block and were trying to make a campus, with consolidated parking on this building’s property. They were trying to install a three story rotating lift hydraulic system.

Long short…even though they owned the buildings and were renovating them, they could not get the parking approved…so they decided to cut their losses and sell the three properties individually. I think they lost money on the deal unfortunately, but it created an opportunity for us.

When we first looked at it, they had plans to put in mezzanines (like we ended up doing), and wanted to sell us a complete building at full price. That didn’t interest us because there would be no value left to create with the deal.

But as I said, they couldn’t get the parking approved for the campus, and I guess they weren’t able to pivot the project. So, they called us 6 months later, and said they would be willing to sell us the building and the lot as is, with incomplete construction, and no mezzanines, but at near market value for the ground floor square footage of 8500sf.

This was something I was interested in, because if I could get an extra 4000sf of steel mezzanine across the finish line, that would be worth upwards of 4million dollars!

I was surprised they didn’t just hunker down and do this..but I think they had been beaten down by the city, and had a bunch of frustrated investors on their hands, so they just wanted out (but I really can’t say for sure).

Anyway, we decided to hop on what would be another insane roller coaster ride of a project. Like with our last building, and my residential projects, I did the layout myself, and gave it to the architect to make it legit for the plan check. These were my initial plans…which remained largely intact. (Doing this probably saved us over 100K. And we till spent about 200K with the architect!)

We did a six month escrow again on this building, witch gave me time to do some initial development exploration and get the financing in place. We did another SBA loan, and got into the purchase and the majority of the construction for about 10% down. Unfortunately, we had to pony up more out of pocket cash to finish then construction. But, in the end, our cash vs project total cost was about 16%…still very good.

Getting to closing was harrowing of course, with the deal almost falling apart multiple times. Environmental inspection issues were a thorn again, but we overcame those.

But then my contingency clock ran down, and the seller hustled me for a 200K purchase price increase, in order to give me two more weeks to get my funding approval. That made me insanely angry and frustrated…but he had me cornered…and he played his hand.

Anyway, we closed, with no ready-to-issue plans…again. My hope was that we would be building in two months time. Then the city threw a traffic study requirement at me, which cost 7K and 3 months of delays. We finally started construction 5 months after closing.

Within the first two weeks of construction, my contractor had tossed out about 350K in change orders, which is when I realized they were not going to be my friend through this. It fact, they became my worst enemy. It was eight months of arguments, threats and attempts at extortion. These are the guys that give GC’s a bad name.

It was so bad that I pulled about 8 trades out of the scope, and took on managing them myself. I set up a plastic desk right next to the GC’s onsite superintendent (who by the grace of god, was super cool, and the only good thing about that company).

Anything that was “permit critical” they handled, and mostly everything else I handled. I managed things like all the low voltage install, millwork, painting, finish carpentry, countertops and flooring finishes.

I eventually even took over getting our new 1200 amp electrical service installed…along with our parking lot completed. Luckily, they were separate permits, so I could tackle those with my own subcontractors, whom I found directly. It was a somewhat unusual situation, I think.

What drove me to do this was that I knew if I didn’t do it, my company would have to close and we would be filing for bankruptcy. This GC tried to screw me for overages so egregiously at every opportunity, I had no choice.

So, I decided the only way I was going to get them to cooperate with me, was by utilizing my lawyer and our construction contract. Initially they actually told me they would stop working unless I signed their change orders. Luckily, that would have been a breach of contract, which they eventually acknowledged, and then resumed working along side me.

By my most minimal calculation I saved 700K, and at least 3 months on the construction schedule, by doing all this. I don’t think they ever saw anyone take on what I did. But literally we had used all the cash we had, so I simply didn’t have more money to give. AND we had a time clock on when we had to be out of our old building.

I can say with 100% certainty, if I had followed their suggestions and advice, my life would be very different right now. We would have never finished the building on time, so our company would have been kicked out of the old place with no where to go. It would have been devastating.

Plus, we would not have had the cash to even get the new building completed in order to sell it! I very likely could have lost everything except my retirement accounts (which are protected from bankruptcy).

Me, Kristin & Luca. I was much more stressed, and 60lbs heavier, back then!

Suffice it to say…it was a very stressful year for me! But we had multi-seven figures in new equity the day we moved in. That kind of value doesn’t come easy. It was so intense, it actually pushed me to rethink my whole life…hahah! (I was not the best dad to my new son that year!)

But, as the old saying goes…”All’s well that ends well.” That is definitely the case here. Honestly, with all my interventions, the actual construction got done in less than eight months, which is pretty astounding by any measure!

We could have even moved in in a comfortable time frame if it weren’t for one final hanging chad: our new electrical service from Southern California Edison! It was the final straw that almost broke the camel’s back. It was just about one year from when I initially put in the order for that service, that it was actually up and running.

And as you can imagine, it would have been hard to run a business without electricity. Man, that electrical service had me literally biting my fingertips off. Getting a utility company in LA to do anything in a timely manner is as impossible as…actually…I’m not sure anything is as impossible.

The day my transformer was installed, I literally popped a bottle of Champagne…and had a drink with it.

11 months after my order, a pack of dudes finally showed up and installed our power. It would be another month before the power went live.


So that’s the (short story) of Teale. I still have too much PTSD to share all the details. And let’s be real…if you are still reading this version you’re a serious champ as it is!

PROPERTY FINANCIALS

Being I own this property with partners, I won’t share very specific financial information, as to respect their privacy. I can say that we created multi-seven figures of new value with both the change-of-use and the new square footage.

Currently, we have almost doubled our cash investment with this project, when factoring sales commissions. That is on paper for now however. I’m writing this during the Covid-19 pandemic, so it’s hard to know what that will do to commercial real estate values in the short term.

However, I am confident that if we can make it another 5-10 years with this building, it will be a windfall at cash-out time! Fingers crossed!

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