A Rehab Project Gone Awry
In the fall of 2006, my wife and I bought the Old Washington School in Esko, MN. No one would finance this purchase, so we took the funds from our retirement plans. The zoning board and visitors attending the meetings grilled us for about four hours about our plans. They told us what we were restricted from doing, and wanted to know what our five year plan was. Some people at the meeting wanted assurances that no troubled individuals would be there, that there were no recreational facilities, no automotive, … Some individuals, including one board member, wanted us to submit five year plans for the project as well proof of income and ability. By the end of the meeting one of the neighbors threatened to sue us if we didn’t pay for half the cost of a new fence between properties. Her distrust in the sewer system also brought her threat of water monitoring. After a lengthy discussion on the gym, I threatened to withdraw our purchase request if they kept to their demand that the gym not be rented out.
We began moving our stuff in with the expectation that we could move in after adding a kitchen and bathroom. However, we were issued a stop work order for some demolition and adding some non-structural walls. That was fine, we didn’t know. We submitted some basic plans and requested a building permit and then were rejected. The building inspector told us at that time we would need architectural plans, a master electrician, and a master plumber [and as we found out later, much, much more…structural engineer, mechanical engineer, and fire alarm experts].
We received a basic permit allowing us to perform demolition, and nothing more. I set off to do that while the designs were drawn and submitted.
We scheduled meetings with many plumbers, who largely skipped them without calling. One came, said he could do it only to withdraw a week later. Another came, but he was more interested in what others were doing than performing the job we needed. We didn’t need people around who couldn’t work with other people. Ultimately, we got a plumber from just north of Minneapolis/St. Paul. He started fine, but then disappeared without finishing the job. After numerous letters and calls, we contacted the State Attorney General’s office and the Department of Labor (DOL). As things progressed, he risked having his license pulled, and negotiated a reduced rate for us and finished up per his agreement. One additional problem we had was that most plumbers didn’t do their own drawings.
The electrician underbid the project and requested more money. We paid it and then he needed more yet, and then still more…
Every time we thought we were getting close to getting a permit issued, the building inspector would throw something new into the mix and force us to resubmit. He wanted everything on a set of perfect drawings, and demanded new ones even when minor changes were added. In fact, after the final submittal, the building inspector refused to issue the permit, or specify in writing exactly what was outstanding. His position always shifted and he refused to put his requests in writing. We contacted the DOL and suddenly he [the building inspector] signed the permit. Unfortunately a year later we would face the same delays and opt for a full-scale investigation -- that report is still pending.
The building inspector requested a plan reviewer for the project and passed everything onto him. The plan reviewer, in turn, would charge us for his time. This seemed unnecessary, as the building inspector was very familiar with this building, as he had spent 13 years in it prior to us buying it. He was also the administrator of building codes in Duluth, MN, and was supposed to be an expert. Whether or not it was intentional, or negligence, this building inspector nearly derailed the project altogether. He placed such a large burden on the owners that he nearly bankrupted them, while keeping them out of the place they owned. His interpretations of the code turned out to be erroneous or simply made up.
In all, it took 30 months from the date of purchase to get a Temporary Certificate of Occupancy. Believe it or not, the building inspector has said at one point that there was no such thing. Did he not hear the request correctly or was he testing the owners? Either way, he was very reluctant to issue one. Without the nudging of the state investigator, I do not believe it would have ever happened.
Financing was also a nightmare and continues to be. No one would borrow money for the original purchase and only Wells Fargo would participate to any extent after that. I refused to let them bail out, and kept lowering the amount we would accept just to keep the project alive. It took nearly six months after our first meeting to finalize the loan. Our desperation was obvious and they took full advantage of it. We received a loan for $100,000 less than requested, there was no deferment period [the first payment was due in 20 days], the interest rate was 9.1%, and there were prepayment penalties if we paid it off early. Rather than provide another $25,000 in the loan, the banker suggested Wells Fargo credit cards for this same amount to cover the gap. This resulted in higher monthly payments at a higher rate. We also had to open a savings account for a minimum of $500 and have a checking account with them. The deal was good for them, but a last resort for us.
These terms made it difficult and costly to continue, but the project needed to proceed. The boiler had already quit, water pipes burst everywhere, and an unheated building would have led to additional problems. Wells Fargo agreed to talk about more money when we ran out, but balked when the time came. They desperately wanted us to talk to other banks and organizations. We did and came to a dead end each time. Either it didn’t fit their lending requirements, policy, or mission. The fact that it was a non-traditional multi-residential building with the owners living there was the primary reason no one could borrow us money.
- The Northland Community Fund wouldn’t do it because it didn’t fit the type of funding they usually did. The same went for the NE Entrepreneurial Fund.
- The Carlton County Economic Development Corp. (CCEDC) unanimously approved the loan, only to see the County Commissioners split their vote 2-2. This resulted in its rejection because a majority vote was required. Ironically, one of the commissioners voting no sits on CCEDC, but was a no show the day of the vote. They didn’t only fail us; they failed the group they had entrusted to make these decisions. If you’re going to go against the board you sit on, you owe them the decency of relaying your feeling prior to meetings you miss. They all receive the same information well in advance of the meeting.
This was the first known denial by carlton county commissioners of a recommendation by the CCEDC in the last 4 + years. Why this one?
- Members Community Credit Union wouldn’t do it because they felt there wasn’t enough equity to guarantee their loan. The biggest farce was the ultra-conservative appraisal that was completed. It resulted in a value that wasn’t much more than some large houses that has much less square footage (about ¼ or 1/5 as much) and earned no income. The appraisal was basically a cost approach that took account only those monies already paid into it. There was no credit for the work we did or the income it would generate. What value did it really possess other than to keep us from borrowing more money? Overall, we had 30% equity in this large endeavor – and the original appraisal, even if based on cost alone would surely be higher now. After decades of banking with the credit union, it makes one wonder why one stays with them when they pass on your project and yet fund others.
- AgStar said it didn’t handle loans like this, neither did many of the local banks. I tried online, generated a few calls, but nothing panned out.
- We looked for outside investors, but had no success.
The financial market had all but dried up. Banks were not borrowing to anyone who did not have near perfect credit scores, lower debt ratios, and a lot of cash available. In fact, the representative from Wells Fargo asked us to fully pay for the project before requesting a loan. I told him, “If we had the money, we would have no reason to get a loan.” Why would I pay them interest, particularly higher than market rates, for a project I could pay for outright? Sure, they would make money, but I would lose even more.
Until the "lending" institutions actually start "lending" money, there isn't much hope for the building sector and the many people dependent on it.