I got another story. I feel the need to tell this story because somehow it has become the belief in Rowlett that only commercial development is good. This can become an infectious disease if not perceived in it's proper light. I will agree that commercial development is desirous, however only to the extent that it compliments the good tax base influences that already exist. There are various studies that set out what percentage of commercial development should ideally be a part of any tax base. Probably, for the most part, these are good studies, however these studies are guidelines. They are not chipped into granite blocks. Every town, just like every person, is just a little bit different. Towns, and people, have good things and bad things happen to them. Rowlett is fortunate. We have a lot of good things influencing our future. We must be sane and informed about our decisions for future development. We must stay adaptable to fully utilize the good fortune that comes our way. To fail to do so because of some stupid rigid dogma is just plain lunacy.
Now my story. I used to be a Vice President of a very large real estate development lending institution. It was one of the largest in the USA. We knew a couple of things about real estate development. One of the things we knew was that commercial lending was the super star of the lending business. The glamorous buildings with the glass modern fronts, the large number of stories, and the addresses in the best part of any major American city was the place to be. Our plan was to not experiment. Our plan was to go to the best markets with the best developers and build the best commercial buildings. That's a good plan. Leave the speculation and experimentation to others.
However, we did not forget residential development. In fact, we were very active in residential development; perhaps the largest residential lender in the country. We liked residential. From a purely money making point of view, residential was good. For example, it takes about 6 months to build a house. After completion, the buyer closes on the house and the construction lender is paid off. The lender promptly puts the money back out into the market into another house construction loan. Therefore, the same dollar goes out the door twice in the same year. Because of fees, that really helps the income.
Commercial is different. Those buildings take longer. Usually a commercial deal is structured for three to five years, depending on what's called "the takeout." The Takeout is the permanent lender making the usually 20 year mortgage. They pay off the construction lender when the developer starts paying on their long term mortgage.
Being in the business a long time, I was exposed to several "market reversals." Being "seasoned," I was experienced in "working out" of distressed loans. There is only one thing worse that looking at $30 million worth of empty houses. That would be $30 million worth of empty office space. Any seasoned "work out" specialist would much prefer to be working on a $30 million residential problem than a $30 million commercial problem. The reason is that one can, with very rare exception, start some type of cash flow with houses than with commercial space.
You can just about always rent a house for some money. It may not be what you need to yield your desired investment, and you certainly don't want to own the houses, but they will cash flow something. The houses will stay on your books as "real estate owned," but they will be an earning asset, at some number. Of course, it is much easier to sell a house than an office building, albeit at less price than the lender would like. Then the lender has to write off the difference.......but they get most of their cash back. There are exceptions to these generalities.
Vacant office space can, and probably will, sit a very, very long time before sufficient market returns to start renting space or looking for buyers. Furthermore, the prices at which the space rents or sells for is far below the number to recapture the investment. Therefore, it is probable a large "writeoff" will be incurred by the lender.
The above is why we liked residential a lot. We would lend into the high end commercial market, but we always made sure we had compensating residential loans to back it up, in case the market went south. We could always cash flow something out of residential.
Now, why did I tell that story?
I told the story to demonstrate that any commercial development has some down sides. Commercial development is not always the darling of the real estate world. It's usually the most glamorous but not always the right focus of the work at hand.
There is only one place near Rowlett in which there is a chance to achieve the commercial growth that has been touted as possible. That area is on the south side of town. It is absolutely imperative that Rowlett cut some kind of deal with the City of Dallas for Robertson Park. Rowlett must annex that land into our city limits. It is the only chance we have to become a noted commercial address. The acquisition of Robertson Park would give Rowlett access to developable land on a 23,000 acre lake with Interstate 30 going right thru it. You don't have to be terribly creative to conjure up what this could do for Rowlett. It would be an unbelievable opportunity for our town.
What about residential development to smooth out the overall development risk? You've been fed bogus data on North Shore ever since Rowlett 2020. I see absolutely nothing that says North Shore should be commercial. In fact, I see all kinds of evidence that North Shore should be high dollar residential. Rowlett 2020, the consultants, the previous city manager, the planning department, the P&Z Commission and the City Council blew it. We got flim-flammed. That was the power of the previous city manager.
I've got some more to add to my story of when I used to be a loan officer. When we were presented a commercial deal in which the proposed borrower wanted a three year term, we always structured a deal with at least five years of interest carry. If a five year deal was requested, we always structured a 7-8 year period of interest carry. There was just too much risk that the developer would miss his business plan projections and it was better to structure a little longer term for the deal. We didn't know what, if anything, would go wrong, but the odds were that something would. If the deal was good for five years, it was good for eight years.
Now, the reason I brought this up was because of the question that Robbert Bloemendaal asked City Council. Essentially, he asked, "Is it worth waiting 30 years to find out if commercial was going to work in North Shore?" He never got an answer. I think everyone purposely dodged him. It was a good question and no one had an answer. I don't think anyone knew how to calculate an answer. The question was just swept aside. Add some more time for any market reversals.
I calculated the answer in my letter to City Council on 11/17/14. I posted it on the blog on 11/18/14. You might want to re-visit that post. You will not like the answer.
We have new elections coming up in another 18 months. I would suggest that everyone start deciding what kind of people are needed to lead this town. Use your head, not some slobbery hype.