Successful real estate investors have a ‘workable plan’ to execute their vision
Radhika Reddy and her partners have worked on more than $2 billion of public-private finance transactions across the United States. But an old industrial building on East 40th Street in Cleveland stands out as one of her most memorable deals.
“My broker said don’t buy it,” says Reddy, founder and partner at Ariel Ventures LLC. “Even though it didn’t make much sense, when I looked at the view, I thought I could do something unique. You can’t buy that view.”
Through the wear and tear, she could see an attractive event space that would ensure a steady revenue stream to complement the rent she collects from building tenants. And she went on to create the Ariel International Center, a premier event venue that hosts more than 120 events a year, providing a gorgeous view of Lake Erie and the downtown Cleveland skyline.
“It’s not easy to get tenants, but the cash flow from the events helps subsidize expenses,” Reddy says.
That ability to craft a workable plan and execute a vision for the space you’re acquiring is critical to successful real estate investing, says Reddy, who has 35 years of experience making deals happen and stimulating economic development in Ohio and beyond.
Her latest venture is Lorain’s former Spitzer Hotel, which is slated to reopen next summer as a 55-room hotel.
“For 13 years, there has not been a single hotel in the city of Lorain,” Reddy says. “No developer would come forward to do anything because we have a lot of poverty. But we have taken the risk. We are mission driven. We want to be a catalytic project to transform the downtown area.”
In this week’s Master Dealmakers, we spoke with Reddy about the complexity of real estate investing and why it takes more than a big-picture vision to come out ahead.
Seizing an opportunity
Life is often about changing direction when opportunity comes your way. I started off in international banking and international finance and tax. The New Markets Tax Credit (NMTC) Program was introduced in 2000 and attracts private capital into low-income communities by providing a modest tax incentive to private investors. We ended up seizing that opportunity and becoming a national specialist. It led to public-private finance opportunities, opening financing for real estate and business projects.
Seasoned developers typically have a good accounting or controller position in house to advise them. But not everybody who develops is a seasoned developer. Some people just buy buildings thinking they can rehab them. People come to me and say, ‘I’m getting this building for nothing. I really want to do this and this.’ OK, how are you going to pay for all these costs? What happens if you don’t get the tenants? It’s a speculative building. You still have to pay real estate taxes, insurance and utilities even if you don’t have enough tenants to pay for all that work. You have to be thinking, how can I make this project work?
It’s not just about acquiring the property, the land or the building for cheap. It’s the cost of rehabilitation and the rental rates, which in Cleveland are very low. So you can’t just buy a building, expect the cash flow and not think about what it’s going to cost you get to the property where it needs to be.
Let’s say you get a building for $50,000, and by the time you do all the rehab to the masonry, the HVAC system and the roof, you’ve spent $10 million. You may never recover the cost of that rehab work. You may be getting a building at a low cost, but now it has negative value. You have to analyze your potential tenants and your available opportunities to create cash flow.
It’s not just doing the building, but becoming part of the community. With the hotel project in Lorain, we’ve had a lot of community meetings to get buy-in from the community. Everyone is excited that someone is doing something big and bringing so much investment downtown. With six new businesses coming in, it’s revitalizing the downtown and motivating people.
We are all trying to figure out how to work together and make something for Lorain. For that type of transformative target on a real estate project, you need to have a vision, a drive to make a difference and the support of the community.
On urban projects where rent is really low, you need to put together public-private subsidies to make the cash flow. There are all these products out there that you need to know about and learn to use for your building. It’s important to understand what other sources there are to help you, such as the NMTC Program. If you don’t have experience as a real estate investor, it may help to partner with an architect or somebody in construction who can guide you through the permitting requirements, the regulations and what it takes to put together complex financing. It’s not easy. It’s very specialized. Public-private financing is a pretty unique niche. Use the support of others who know how to help you get it done.
The Last Word
You need to have good multitasking and negotiating skills. Keep people honest when you’re negotiating to get work done. Sometimes the other party will try to give you much higher pricing than you expected. Don’t be shy to negotiate. Sometimes people include too much of a margin and make the project not very feasible. Always try to get three bids so you get the best pricing.
Try to get references so you get quality people. It’s about doing good research. Someone could give a lower price, but not be able to deliver the project on time. Maybe they have a small staff and don’t have the quality you need.