Why do we like historical assets? We'll cover that in this episode.
My name is Kenny Wolfe and I’ve been a real estate syndicator and investor for over eleven years; in this time, I’ve built a successful real estate investment firm, Wolfe Investments. If you’re new to the show, make sure to subscribe so you’re notified when a new episode comes out.
Connect on Facebook and YouTube: Kenny Wolfe
Why do we like historical assets here at Wolfe Investments? Find out in this video.
Welcome to Real Estate Investing with Kenny Wolfe, the show with weekly topics designed to help you learn how to build your ideal life through real estate investing. My name is Kenny Wolfe, and I've been a real estate syndicator and investor for almost 12 years now. And in this time, I've built a successful real estate investment firm, Wolfe Investments. If you're new to the show, make sure to subscribe, so you're notified when a new episode comes out.
What does a historical asset look like here at Wolfe Investments? So far, it's been taking outdated, vacant office buildings and converting them over to mixed use, but with a high percentage of that building, ending up being A class multi-family units. We're taking an old office building, converting each floor into 10, 20 units per floor. All A class. We're talking granite countertops, brand new cabinets, state-of-the-art appliances, beautiful fixtures. What we're left with are just immaculate views. Typically, these buildings are between 15 stories. Some as high as 30 stories tall, and very well located. What we're looking for on these historical buildings, and usually office buildings, one, we highly prefer them to be downtown because we're looking for a walk score and about the mid-eighties or higher, that way going into it, we know our residents can walk to Starbucks, walk to other entertainment venues because we know when they're looking for a new place to live, they see this cool hip, office that's converted to A class multi-family.
They're also going to be looking at the location. Where's the dry cleaners? Where are the restaurants? Things like that. That's what our residents look like. We have to look at these historical assets and the repurposing of them through their eyes. The other thing, is we highly prefer the office buildings or whatever building we're buying, to already be on the National Registry of Historic places. We have worked with some of these office owners where these buildings were not on there and got it there. That adds about nine months to about a year of work, for us to buy the building. We make that a part of our contractual close, that it has to hit the National Registry of Historic Places because it's a big benefit to our investors. I'll talk about that here in a second.
I want to talk about why we like investing in these historical assets. I love it because I'm a history of buff, but we get to breathe new life into these old buildings. We're taking vacant or mostly vacant properties and breathing new life into them, drawing more folks living in these locations, which also helps the cities out. The cities love us typically to come in and take these, what we call zombie office buildings, to repurpose them to more modern use. It brings more vibrancy to their town. More jobs and more people that are going to be able to walk to the restaurants in downtown. Overall, it's a win-win with the city and us as the developer. Most of the time, these office buildings that we're buying, there's very little deferred maintenance. For those that don't know, deferred maintenance is where every year you have to reinvest.
You should reinvest your money back into the property to keep the property up, looking nice, functioning properly. For those that have vacant office buildings or maybe 20% occupancy, whatever it is, if it's that low, they're going to be tempted possibly to defer that maintenance or defer the capital needed to put into the property to make it look nice and operate functionally. But the flip side is a lot of these buildings that we're buying are massive. At the smallest, I think we've bought, was 140,000 square feet, and the biggest is almost a 500,000 square foot building. These are our usually institutional investors. They do typically put in the money that's required to keep these properties nice. Usually there's a little deferred maintenance, but it varies from property to property. We mark everything that's deferred on our initial walkthrough at the property.
Because they're historical, we have to do a court scorecard. We must talk to the National Registry of Historic Places. We submit our plan to them and show them what we're going to keep as historic. We go back and forth a little bit. Basically, they tell us what pieces of the building are, whether it's marble staircases or wood paneling walls or the lobby. There's pieces of that property that we need to keep historical and we want to--it's definitely that charm that we get with the finished product. Where it's not historical it is basically being gutted. We're installing new electric, new H V A C, new plumbing, and new elevators (most of the time). What we're ending up with is this beautiful historic building.
New life has been brought into it; at the same time, it's got brand new systems. Our operating expenses are going to be a lot lower compared to maybe something that's built in the seventies and eighties, when we haven't upgraded those operating systems yet. Another really cool thing about these historical assets is that what I consider the ultimate upcycle. A good example is, we bought 45 e review. It's in downtown Cleveland. It's almost a 500,000 square foot office building, former AT&T headquarters. We're going to convert it to 367 A class, multi-family units in the building. If you compare that to what the materials it would take to build a brand new 367 unit multi-family property, we're saving a lot of brand new materials, which is a very green way again, we're recycling an old, outdated office building and breathing new life into it.
What's cool is, we can typically use the exterior, maybe it's granite, maybe it's steel, glass, the windows we can usually reuse. Obviously we're not having to pour new cement. There's just a whole bunch of savings that we get on material usage compared to a ground up multi-family property. It varies from property to property. Some office buildings we can reuse more than others. It just depends on the age, the deferred maintenance and some other factors as well. Whatever we can save is a huge savings compared to ground up multi-family on the materials that we have to use in the project. Another big piece to investing in the historical property are the federal and state historic tax credits. That's a lot of jargon right there, so let's break it down. What is a historic tax credit?
Usually, investors like you and me can't really use these tax credits. Usually we sell these to bigger investors. On one of ours we had Warren Buffett's company, we had JP Morgan Chase, we had Monarch, we had those kind of investors that want to buy this. They'll pay you 85 cents on the dollar, sometimes 90, just depends on the state you're in and the federal tax environment and their need for it at the same time. So there's a little bit of a sliding scale, but, we sell those off. The federal is a guarantee, once it's on the National Registry of Places. The federal grant is 20% of your hard construction costs. Say we're going to buy a building, and it's going to take $40 million for the hard construction costs of that building.
That means from the federal government, we're going to get about $8 million in grant money in terms of grant money in year five. But we sell it to these other investors. They pay us 90 cents on the dollar. You can kind of see how that's a big benefit, a big boost to our property. On a property of that size, if it's $40 million construction cost, maybe it's a $13 million purchase, we had to raise maybe $5, $6 million. If we're getting $8 million, 70, 80% of that, we basically have already doubled our investors' money, on the equity side, just from the federal grant, on top of that, sometimes we get state grants as well. In each state it's very different. In Texas it's more kind of a guaranteed thing. Ohio, it's very competitive. Each state is very different. In our underwriting, if we know we're going to get the state we underwrite that.
If it's a competitive thing, like in Ohio, we don't underwrite it, it's just additional gravy. We have won at once. We won it last year. We think we'll win it a second year as well for another asset we have in downtown Cleveland. But, those are huge benefits. Because again, just from the federal loan, typically we're doubling our investors' money (or close to that, if not more) just from that grant. That's a guaranteed thing. We do have to make sure we check the boxes at the end of the project, but we hire a consultant at the beginning. She walks through the property during construction, to make sure we're saving those historical pieces so we can score high enough for it to turn into a grant. We know that's pretty much a shooed in thing. We also sometimes get incentives from the local communities because these cities have a vested interest of breathing new life into these buildings.
These zombie buildings are just a drag on certain sections of their downtown. When we talk to these cities, they're very excited when we come in and show a plan to reimagine this building. Obviously we're going to be putting in two, 300 sometimes, multi-family units. People are going to be living there, they're going to be walking to restaurants, they're going to be walking to retail. The cities see a big boost on their sales income tax, when we come in and do a project like this. They're very incentivized and encouraged when we come in and say, we've got a new plan, a new vision for this building. Obviously we're an investment company, so we're looking for big returns for our investors. These adaptive reuse, where we're taking historical office buildings and converting them to multi-family.
These fall underneath our development arm here at Wolfe Investments. The types of returns our investors are not really looking for is cash flow today. Obviously if the property has any occupancy, we've got to clear it out. We have to do the construction and they have to release the property to get revenue back in the door. There's not going to be any cash flow for the first two years or so until we release it back up and get revenue back in the door. But why do our investors like these properties? Not just because they're historical--they can point to it out to their friends and say "invested in that." But they also get big appreciation on their money. If we're taking an office building and maybe they're getting $20 a square foot potentially in revenue a month or a year on that. On these multi-family A class, we're getting more like $36 a foot or more.
Obviously, revenue on our repurpose is much larger compared to what it was when we bought it. That's why we received this big value gain for our investors, which is really awesome. Typically, we see about a three X return. If you put in $100,000 it should be worth about $300,000, right around year five. That's on paper because what happens is around year two or three, we've created the vast majority of that value. Because we've done the rebuild, we've leased it backup, we've got much higher revenue coming in the door. A lot of value has been created. Say we go to a lender, we do a cash out refi and pull out about maybe 50 to 80% of the initial investment that those investors invested--put in a $100,000, you're going to get back maybe $50,000, maybe all the way up to $80,000 of your money back out of the deal.
Then we hold it for another 5, 7, 10 years, whatever that is compared to, when we look at the sales price, when we can maximize the sale, and get highest returns for our investors. That's all market based, but after we do the refi, then it cash flows quarterly to our investors based on the operations of the asset. To recap why we buy these historical buildings, number one is I'm a huge history buff. I love being able to point to an asset that we own that has had a historical significance of impact on the community where we own the asset. Our investors love this too. They like to point to it with their friends, their family and say, "Hey, I own a piece of history." It's pretty cool. We also love being part of the solution for our housing shortage in this country, because what we're doing obviously is we're taking underutilized assets like office, that we need less of today, and converting it to residential where folks can live, work, play, and definitely fits more of the need today than it did as an office building.
And lastly, we love being a part of these historical buildings because we added massive value, for not only just our investors, but for the residents that live there and call the place home, in a really cool historic building--all while we have a big impact on the key communities that we're involved in.
This has been real estate investing with Kenny Wolfe. Thanks so much for listening.