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Expansion Group Meeting Minutes
Hannah, McAllen, Mike, Hillary, Molly, Daniel, Gatlin, Caroline, Donny, Jessie, Victor, Steve, Bridget, Annika
Daniel: Inspection happened last Thursday, no report yet, but phone call. Basic condition issues will be presented in the report, in an investor-friendly way (with cost values and perhaps lifetime estimates for the building).
Mainly, they talked about lousy repairs done by the current owners. Roofing material, for example: flashing and overhangs installed wrong.
The cracking on the side walls are all on a fake brick veneer, not foundation problems, but it wasn’t sealed properly. The veneer is not structural at all. They went through crawlspace, attic, etc., no mold was found, no major issues.
The permits on this construction were started, but not closed. However, legally, the property is NOT permitted as apartments. It is single family permitted. If we want to live there, we need to do some things: Best case – we need an architect and civil engineer to submit a site plan to the city. It would cost low $10,000’s to do this. This assumes we don’t need to actually change anything. If things go normally on this case, it might be about 4 months. That means we fund 4 months of vacancy in addition.
Caroline: the recognized use is single family? Wouldn’t we be able to have some people live there under the single family permit?
Daniel: I didn’t think to ask that – it’s possible that would work. Not sure if that would add a complication or not. Under that, up to 6 people could live there.
Caroline: were there other buildings under consideration than Tillery?
McAllen: Yes, but they weren’t as good.
Jessie: If he’s operating illegally, won’t the city know from the inspection?
Daniel: This was a private inspection, but when we talked to the city, we might have gotten them in trouble
Molly: Can we blackmail them?
Daniel: There are a lot of dark arts in real estate. Austin is talking about maybe moving to yearly inspections to avoid this type of situation.
Gatlin: What are the ramifications of your thoughts today?
Daniel: So far, we don’t know enough to rule out the Tillery property. But the best case scenario is worse than we thought a few days ago, due to the 4 month vacancy process.
Hannah: We were thinking of doing a small movein like that.
Daniel: Yes, but we wouldn’t want people currently there to stay there, illegally under our watch.
Mike: There are a lot of unknowns. Can NP pursue this without creating a lot of risk for itself?
Daniel: I don’t think we can negotiate the price down anywhere near where we’d need to to make it work. They can sit on the property for years in the current situation. We still might be able to make it work, but that also might be pushing it.
Victor: That’s assuming the architect and civil engineer find nothing major wrong?
Daniel: Yes, but it seems likely there is substantial work that we’ll learn about.
Bridget: Is it not possible to call them out on it, and have them deal with the city realizing they’re operating illegally?
Caroline: Can we have a frank conversation about it, what we would need out of the deal, what they need out of the deal?
Daniel: If what they think they can do is to sell to a developer, they’re going to bulldoze the buildings anyway and not deal with the permits. According to the city, you can put 17 3-unit apartments in there. The deal currently is, we will deal with the permits – they are paying us extra for that.
Ruth: I looked into their permits online, then toured the property. I saw things that would cost up to $10,000 or more unless the current construction is grandfathered in. But now we know that won’t be possible. I feel comfortable saying it would cost tens of thousands of dollars to get the electrical system up to code. I don’t feel that the property owner is motivated to sell quickly, he’s got it working now (and for the last 8 years) and can still continue to do so.
Victor: This property was misrepresented.
Daniel: They never formally said it was an apartment, or made representations about it. That’s why we have these investigation periods – to check the legality, etc.
Jessie: There is some disingenuousness on their part. We can go back to them and say “you have to come down on the price, or we can’t make it work.” Caroline: Having worked with landlords who aren’t following the law know this, and they might be willing to negotiate because they are vulnerable.
Steve: It sounds like concealment, and there is possibly leverage with concealment.
Hannah: It’s not looking as attractive as it was yesterday. I guess it’s worth pursuing somewhat. If the inspection comes back looking reasonable, the next step would be to talk to him.
Daniel: What makes this the only great property? I saw plenty of properties that could work during your search. The criteria for what will work, or what is better, is subjective. We stopped looking for new places 5 months ago when this came along.
McAllen: I am still getting new property listings, but they are pretty small. I haven’t been passing them on; they’re under 5000 square feet.
Hannah: With what we know now, maybe we should start circulating those again.
Mike: Would the inspection tell us much about whether the apartments are up to code? Daniel: The inspector would assume that they are permitted as apartments, and give us those results. Some things will come up, but we’ll still have to hire another inspector to come through and look for code issues.
Caroline: What is the likelihood of other properties having common spaces? That seems really unlikely. We can look for something where we can create a common space through renovation. With the architect and civil engineer: what is the likelihood that the other properties we’d look at would require us hiring them? Daniel: I think the Tillery property is unusually squirrely. City now has 70 inspectors, but they only used to have 2. The city knows there’s a lot of stuff under the rug. Back when they were short handed, the folks east of I35 didn’t get inspected. Even so, this property seems extra squirrely.
Ruth: The permits that weren’t closed, an inspector had failed the property because of X Y and Z. In other words, they WERE inspected and they failed because issues were found.
McAllen: Mike and I, as far as I know, started this search. Making common space was a priority from the start. A lot of the properties we’ve looked at were too far away, or around heavy commercial traffic, or was in a good location with a good price, but with huge structural problems. There was always a reason why we rejected them. But we will go back and double check them now. Daniel, do you know when we’ll get the results?
Daniel: Sometime this week. They’re a little backed up on writing them this week.
McAllen: I will get back in touch with Matt Rob (realtor) and research feasibility of other properties. I can re-forward the listings to the group.
Ruth: Maybe just talk to Matt and reiterate what we’re looking for.
McAllen: He’s never stopped sending me the listings, but I’ve just seen no feasible properties.
Caroline: I know foreclosures, and I see listings for large houses all the time. Hannah: Please forward them to the list.
McAllen: I think we’d already have those, but send them anyhow.
Daniel: Austin allows 6 people in a house. Consider 2 or 3 adjacent houses, within a near distance of each other. Maybe they are within a block of each other. There are co-ops that operate this way even with shared meals and a central kitchen. When I was talking to the head of permitting today, say that we wanted to build a new building. It’s not an apartment, but it’s a central kitchen. They said that was fine – the central kitchen just can’t be one of the normal units’. They could have a shared pantry, etc. But it has to be a separate kitchen. So sacrificing one or two units from a normal apartment, to make a kitchen and/or common space is entirely legal.
Hannah: What if we had multiple normal houses but one had a really nice kitchen that we made the central kitchen? Daniel: If the individual apartments can lock themselves safely away from the common kitchen, then it’s OK.
Hannah: We nixed a place in Hyde Park. It would need renovation - I think it had 12 units, with living room and kitchen. We never did look inside, but we wondered how much renovation it would take to carve out more bedrooms and common spaces. I’m thinking a more free-flow conversation might be better since our assumptions about Tillery were just blown out of the water. Is it worth NASCO to hire the engineer and architect now?
Daniel: I think it’s now like a 5% chance this will happen, but if the inspector says everything is superficial and not structural, which is unlikely, then maybe we’re OK. I’ve gotten some gut feel from the inspectors, so I can continue to get at least some information that way on how feasible getting it up to code is. If it’s not feasible to get it up to code, it’s not worth spending the money on the architect. We’re out maybe $1000 on the inspection process. We may or may not be out $500 for backing out of the deal, and we might be able to save that as well. So unless it looks _really_ likely that we are in the “best case scenario” we should save the money for inspecting our next property.
McAllen: The only thing we have that the seller wants is that he likes what we’re trying to do. He’d like to sell to a group of folks like us. I’m doubting he likes us to the tune of dropping the price in half, though.
Caroline: We don’t know the seller’s finances. It’s possible he wants the cash up front, and we do have that going for us. At Rosewood, we negotiated the price down from $17,200 for $4500 for renting the whole property. They settled at $5000. You just have to have the conversation, and have it in a certain way.
Steve: The reciprocal of that is that we’re helping him out, if he avoids a civil concealment case.
Daniel: They have their own real estate attorney, and they have many properties. They signed a number of disclosures saying “we don’t know anything”, so don’t hold your breath about suing him. The worst that can happen in a negotiation is that he says “No.” I’m not taking anything they say at face value. There’s “no way” they could close after 2012. Maybe that’s just smoke. But I wouldn’t take it at face value that they like us. He’s not a small mom and pop shop.
Victor: They seem to have precluded the solution we want.
—break for a few minutes—
Gatlin: Due to what we’ve learned, we’re invalidating the rest of the agenda tonight.
Victor: How do people feel about a multiple house co-op?
Jessie: In a city near Davis, CA, permaculturists took out the fences in a back yards and joined up to create a communal space.
Caroline: There are lots of innovating things you can do that are exciting.
Hannah: It would also be nice for people who have different levels of comfort, to fit in there somewhere. “I really want to live in a quiet house.” “I want a pet-friendly house”. Etc.
Caroline: The loud vs. quiet thing is huge. Some people really want a sanctuary, some people want a live center where people visit and talk. If takes a lot of thought to make a space function for everyone.
Annika: I can’t live in a co-op, because being Muslim, my parents wouldn’t come visit me since men and women were living in the same space. If there are different options (like a separate house) for someone like me, that would be great.
Gatlin: We’re used to a certain model, and we make a lot of assumptions about what co-ops need to look like. I’ll look through MLS and see what types of options are available – maybe we can shatter some of our preconceptions about how it must look.
Caroline: In East Austin, there are a lot of smaller houses, older houses, lots of dirt.
Hannah: When the Super Co-op was built, there was much derision among the co-opers. But now it’s great! It works. Another option is cheaply priced land, and seeing if building is feasible. It’s a secondary option.
Daniel: It’s not the thing that NASCO Properties has experience with. We deal well with renovating existing structures. The closer NP has gotten to new construction, the harder it’s been for NP to track that process and how it works. Our gut instincts have been developed to be helpful for renovation, but we’d need help with all the complications for new construction. Plus, new construction pretty much always costs more than renovation.
Ruth: New construction would be a whole lot more intensive for Daniel and other NASCO staff. The fact there is all that time during construction when money is being paid out, and no money is coming in, is problematic.
Daniel: Construction loans are also different than purchase loans. Purchase loan might be 6% for a 30 year mortgage, 10% down. But with a construction loan, you have to be constantly in the loop with the contractors, because they pull the money from the loan a little at a time, and you want to manage this. You’ll be paying a 10% rate, too. Then, when the construction is done, the loan must convert, and it’s difficult. The fixed cost upfront for civil engineers and architects means that we’d want to build something big to amortize the cost. To make it worthwhile, we need to talk about a 30 or 40 person house.
McAllen: I have a friend of a friend who works for a natural building company. There are materials that cost substantially less than traditional construction, and can sail through the city’s processes, (Victor) so long as at least one has been done in the city before.
Hannah: We had a dome and earthship developer visit Sunday. She’s in Bastrop and having visitors this weekend. I sent an excited email about domes earlier. The dome folks will do electrical wiring and interior work too.
Ruth: I’ve spent a lot of time in a dome. They are kind of weird, hard to use the space. I wouldn’t want to live in one.
Hannah: Go and be in one before you’d sign on to one. The lighting is limited, and it feels different. They run more efficiently in terms of energy (50% better).
Annika: What is our new timeframe?
Hannah: We just won’t know for a while. Sorry.
Gatlin: I’d like the group to consider, given that we have a NASCO to expand under, I like the idea of buying small 6-person houses while we can, and make them all under the CHEA umbrella. It’s way different than what we’re used to, but it might be something that would work.