TOP 5 FACTORS TO CONSIDER IF YOU ARE GOING TO INVEST IN A MILL STYLE INDUSTRIAL BUILDING
There’s no doubt that plenty of real estate opportunities exist in the hundreds of old mill cities that dot the American map. High population density and dated infrastructure are common and many of these cities are actively pursuing physical and cultural revitalization projects. Worcester, Massachusetts is a perfect example. These projects attract all types of investors and more and more often we’re fielding questions from those interested in mill style industrial buildings. Investing in a mill building is a whole different ball game than house flipping or buying rental properties. Let’s run through the 5 major considerations to start with if you’re thinking about buying and renovating a mill building.
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1. CARRYING COSTS
First and foremost, you need to have a long term financial plan that starts with your ability to handle carrying costs for up to a decade. That time period will certainly vary depending on the size and scope of your project, but the point is the same: you need to have a plan for when you run into hiccups that destroy your anticipated/hoped for timeline. The game is over if you don’t have the finances or means to offset the costs. You need to have a plan to cover ongoing expenses that include electricity, your fire safety system, sewer bill, taxes, and the big one: insurance. These buildings are not cheap to insure…for obvious reasons.
Nexus Property Management® founder and CEO, Nick D’Agnillo, purchased the old Feldman Furniture building in the heart of Downtown Pawtucket in 2014. With the offer of seller financing on the table, D’Agnillo jumped at the opportunity to join the revitalization of downtown. His vision included a relocated local Nexus office, a franchise headquarters office, a conference area and meeting place, along with over twenty luxury lofts. Eight years later, that is still the vision, but it’s been a predictably slow process. The offices and conference center were operational within the first year and the plans for the lofts came together by 2019, but much of that vision is still a vision. Centreville Bank recently stepped up with a loan offer that our team accepted. We look forward to getting a commitment letter sooner than later!
The reality of mill style buildings is that they’re a pain in the neck and being patient is part of the game…that’s why so many lay in disrepair…but it’s also part of why the upside is so great. There’s a lot of value if you play the game right. By focusing on those offices first, D’Agnillo created a revenue stream ASAP. He also rented out the garage section and other areas for storage. In short, he created a plan to cover his carrying costs.
[LEARN MORE: WHAT IS SELLER FINANCING, WHAT ARE THE PROS AND CONS?]
[LEARN MORE: IS SELLER FINANCING RIGHT FOR YOU AND YOUR PROJECT?]
2. ENVIRONMENTAL CONCERNS
Benjamin Franklin famously quipped that you can count on two things in life, “death and taxes”. Well, if Franklin were around today he’d add another thing to his list. It is inevitable that you are going to run into environmental concerns and costs to remedy them if you buy one of these properties. Whether it be asbestos, lead, or some other containment, the reality is that these buildings were used in ways that don’t come anywhere close to environmental acceptability today.
To revisit the Nexus building in Pawtucket, D’Agnillo has spent about $75,000 just on environmental concerns (so far). There was a buried oil tank under the building that needed to be pumped, filled with sand, and capped. Not cheap, and not as rare as you'd like to think.
[LEARN MORE: SHOULD YOU BE AFRAID OF A CITY’S VIOLATION, ZONING, OR INSPECTIONS DEPARTMENTS?]
3. USABILITY
It’s also vital that you consider your vision and how it stacks up with the vision of the municipality. Obviously cities prefer a vacant mill to be utilized and used to add value, but communities and city governments can be difficult to work with if they’ve got something in mind and parties can’t see eye-to-eye. The short of it is that most local entities want these buildings renovated to get the greatest value possible, so in the spirit of letting perfect get in the way of good, you can experience pushback that you didn’t expect. With that in mind, you’ll need the cooperation of zoning boards for variances, and cooperation on tax treaties to help make your project affordable.
This shouldn’t need to be said out loud but…just because you bought the property doesn’t mean you get to do whatever you want with it.
Nexus strongly recommends that you take advantage of an Exploratory Period. With an Exploratory Period you sign a Purchase and Sales Agreement and then take six months to talk with other pertinent parties such as the zoning board, the fire department, etc. to fully appreciate the wider scope of your project and the obstacles that may exist. You’ll then have a better idea of what’s needed before you purchase the property and can better prepare for those otherwise unexpected expenses.
[LEARN MORE: IS THE RHODE ISLAND HOUSING MARKET SHOWING SIGNS OF IMPROVEMENT?]
4. LOCATION
Mill style industrial buildings were strategically located based on their industrial or commercial needs from years past. Being close to a dammed river and railroad tracks likely does very little for your modern ambitions. Is the location of the mill you’re interested in suitable for what you want to do? Of course there are tons of variables in terms of areas these buildings are located but very commonly we find them in communities that are very dense with sparse commercial activity. Crime may be high and litter is frequently common. Are there variables beyond your control that will interfere with your goals? If your building is in a tougher part of the city can you attract tenants to the area?
A very common obstacle is parking. New England mills and factories in the 18th and 19th centuries were built to be walked to. Is safe parking available nearby? Are there current issues with traffic or might your development create traffic that will lead to pushback? Are there any nuisances like this that could keep you from your goals?
Conveniently, the Feldman Furniture building that D’Agnillo purchased was known as Arnold’s Garage with as many as 176 horse stables back in the 1890s and was later converted for vehicle storage in the 1920s. No doubt this solution to parking in the heart of an industrial city was a big reason for the purchase of this location.
[LEARN MORE: REAL ESTATE INVESTING SUCCESS IN MILL CITIES]
Nexus Property Management's Pawtucket Headquarters has a rich history. Here it is as a furniture store in the 1980's...the location is ideal for converting into a mixed-use property thanks to indoor parking and centralized location in Downtown Pawtucket.
5. CREDIT AVAILABILITY
Are there credits available that can help make your project more affordable and more attractive? Often, there are grants and opportunities for you to get money from local, state, and/or federal governments to assist in renovating aged and vacant buildings. Not only is it in your best interest to succeed with your project, but cities are also jumping at the opportunity to revitalize something that’s dormant and symbolic of better times that have since gone. You want to find out if your building is in an opportunity zone? Are there rebuild credits available? Are there other grants or low interest loans? There are financial professionals out there that can assist in tracking down these opportunities and taking these steps should be a part of your Exploratory Period.
At Nexus, D’Agnillo was able to secure about 60% of the project through local, state, and federal grants and credits with the help of Mike Leshinsky of Leshinsky Finance. Again, these entities are in the business of helping businesses grow and find opportunities to do so. You need to do your homework and find out what incentives are out there to help you.
[LEARN MORE: RHODE ISLAND BUSINESS SPOTLIGHT: MIKE LESHINSKY OF LESHINSKY FINANCE]
RECAP & NEXT STEPS:
If you’re interested in investing in and revitalizing a mill style industrial building, you need to have a vision that is affordable, realistic, and aligned to the community. These projects can take a long time and they can be very costly, but the good news is that governments want you to succeed and they create incentives to help you find success. On top of that you need to have a financial plan to cover your carrying costs. Your project is going to take years to complete. You’re also going to run into environmental issues that will inevitably be costly and time consuming. Don’t worry…it’s just part of the process.
Ensure the location you’re choosing is suitable for your project and take the time to go out and meet the parties that will impact your project during an Exploratory Period. You want to discover your points of resistance prior to getting going on your project, not in the middle. And as always, contact Nexus Property Management and our team if you have any additional questions or thoughts you’d like to dive further into.
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