Dilweg Smells Money in Mold

I once toured a distressed property with an investor who specializes in turn arounds. The stench in the old apartment building was terrible.

"Ah cat urine! That's the smell of money!", my client bellowed joyfully. He makes a nice living taking one man's nightmare and converting it into another man's gold, or however that saying goes. It's not a new business model. Sam Zell has made a fortune with a similar philiosphy and Tom Darden has raised a multi-billion dollar war chest to rehab polluted properties. Now local real estate entrepreneur Anthony Dilweg is taking on a smelly diamond in the rough, too.

It's quite a story in which the building has traded hands between Dilweg and Merisel twice over the past few years. You can read Jack Hagel's account of that saga here (newsobserver.com Second go-round nets a bargain), My interest in the story is the economics of the deal:

Building: 61,000SF
Address: 305 Gregson Drive, Durham, NC
Cost: $1.98M ($32.46/SF)
Planned renovations: $7M ($114.75/SF)
Cost to aquire and renovate: $147.25

Lets assume a cost of capital of 8% or about $13/SF. If it takes a year to deliver, the buildings cost will be about $160.25/SF.

Assume Dilweg and his investors require a 10% return on this investment would price the base rent at $16.03/SF per year. Add another $5/SF for operating expenses and viola we're at $21.03/SF rents.

AD says he can deliver it for under $22 and compete in Durham. I think he's right!