Low interest rates, competitive construction pricing, an improved bank financing market and the use of alternative financing sources (such as the federal government's EB-5 program for foreign investors seeking visas) are helping to spur more development and construction activity in the area, said Gary Gorman, chief executive officer of Gorman & Company.
"Non-traditional capital is resulting in projects getting built, and banks are starting to make loans again. We're getting good (pricing) numbers from subcontractors. And interest rates are as low as they are going to get," Gorman said. "Now is a pretty good time to build."
Gorman & Company, which has a Milwaukee office at 310 W. Vliet St., has done numerous developments in southeastern Wisconsin. Since 1996, the firm has completed 17 affordable housing apartment projects in Milwaukee. The firm also has done projects in Racine, Kenosha and Sheboygan.
In recent years, Gorman & Company has been one of the most active developers in the redevelopment of the former Pabst brewery complex in downtown Milwaukee. Most of the complex is owned by The Brewery Project LLC, formed by Zilber Ltd. founder Joseph Zilber. Some properties within the complex have been sold to other developers and Gorman & Company has been more involved than any other developer. In 2008 Gorman completed a redevelopment of the former Keg House building at the Pabst complex into the 95-unit Blue Ribbon Lofts apartment complex.
Now, Gorman & Company is working on three other projects at the former Pabst brewery.
The firm is building Brewhouse Inn & Suites, a 90-room hotel, within the former Brew House and Mill House buildings at the Pabst brewery. The hotel is expected to open in March.
Gorman & Company also is working on plans for a 60,000-square-foot office building that will be constructed just west of the Brewhouse Inn & Suites. The office space will be marketed primarily to small firms that want to be located near the Milwaukee County Courthouse and would benefit from shared office services. Gorman hopes to break ground on that project in October.
In addition, Gorman & Company is in the early stages of planning a 100-unit market-rate apartment development that would be built at the northeast corner of Juneau Avenue and North Ninth Street, just south of the 48-unit Brewery Point senior apartment development that is under construction.
"We're finding very strong demand for apartments because people are reluctant to buy homes. They are reluctant to sign a mortgage," Gorman said. "Our occupancy rate for our apartment portfolio is in the mid to high 90s. We have found that people want to live in a place that's interesting and different and close to downtown."
Gorman & Company also is working on two central city projects in Milwaukee that have received tax credits this year approved by the Wisconsin Housing and Economic Development Authority (WHEDA). In the first project the company plans to acquire and renovate the 20-unit Edgewood Terrace building at 5329 N. Teutonia Ave., a 10-unit building at 2958 N. 2nd Street and 15 duplexes. In the second project, the company plans to acquire and rehabilitate 45 single family homes.
Financing is key
Gorman & Company is adept at attracting non-traditional financing sources for projects, and it often gets involved in deals that are more complex than what many other developers will take on. After a conference call several years ago with Zilber Ltd. executives about the complicated financing package for Blue Ribbon Lofts, Zilber, according to vice president Mike Mervis, asked his executives, "Do any of you understand how that deal was structured?" "I don't think anybody took a stab at answering the question," Mervis said.
Gorman received $15 million in capital from foreign investors through the EB-5 program for the $19 million Brewhouse Inn & Suites project. The firm, one of the first developers in the area to take advantage of that federal program, is in the process of gaining approval for 22 foreign investors through EB-5 to provide $11 million for its office building project at the former Pabst brewery. So far, 17 of the 22 investors for the project have been approved by U.S. Citizenship and Immigration Services.
Gorman predicts EB-5 will be an increasingly attractive financing source for developers. The 200-room Marriot hotel project under construction in downtown Milwaukee, and developed by Jackson Street Management LLC, was also financed by foreign investors through EB-5.
"It was a source of capital when there wasn't any available," Gorman said. "(Its use by developers) is going to be inversely proportionate to how difficult it is to get financing from traditional capital sources."
Many developers turned to nontraditional funding sources, such as EB-5 or the U.S. Housing and Urban Development (HUD) 221(d)4 loan guarantee program, to finance deals when the banking industry stopped lending for real estate development during the Great Recession, Gorman said.
"In 2008 and 2009 (banks) weren't in business (of making loans)," he said. "Now they're back in business. They want to make loans. But they are more conservatively underwritten."
When banks stopped lending for real estate developments, it took some time for developers to adjust and tap into other financing sources, Gorman said.
However, Gorman & Company was better prepared than most developers for the challenging capital markets. The firm has made complex real estate developers its forte since the company was launched in 1984.
While attending law school at the University of Wisconsin-Madison, Gorman clerked for the state Commissioner of Securities Office. In that role he often reviewed real estate deals.
"That was my first experience in how sophisticated real estate deals were structured," he said. "I was looking at it from a regulatory perspective."
After graduating from law school, Gorman practiced law with a Madison firm and handled legal work for several real estate matters.
After four years with that firm, Gorman left and started a real estate company with two partners. The company got off to a slow start and within 18 months the other two partners had left the venture.
Early on Gorman decided to take advantage of his legal expertise to focus on complex real estate deals that required complicated financing packages and government agreements. A major motivation was the 1986 tax reform law that created the Section 42 federal affordable housing tax credit program. Gorman was one of the first developers to take advantage of that program, in which tax credits are provided for units offered at below market rents. Tenants must meet income level requirements to qualify for the units.
"The deals got done," Gorman said. "I learned a lot about it. That became a core competency that we have never stopped doing."
Gorman & Company has done 55 projects, most within the last 15 years. About 90 percent of them utilized the Section 42 affordable housing tax credit program and about 20 percent utilized historic tax credits.
When the Section 42 program was created, few developers were pursuing the tax credits. Gorman said his first request involved a short visit to the WHEDA office and the tax credits were quickly approved. The credits became more popular after institutional investors began to invest in the projects in 1988, Gorman said. Now each year numerous developers with projects throughout the state apply for the tax credits in a highly competitive process. Gorman & Company typically has 4 or 5 projects a year seeking the tax credits.
"We've never been shut out, but we often don't get every one that we ask for," Gorman said.
As a major component of its business strategy, Gorman & Company executives often goes to cities and ask their leaders what development projects they would like to see done.
"It's an interesting conversation," Gorman said. "Often times there's dead silence (in response), because they've never been asked that question."
The projects on the wish lists from city leaders are often difficult to develop, otherwise they would have already been done. Gorman & Company tries to find a way to get the projects done, and typically seeks support from the cities for the use of Section 42 and/or historic tax credits, and/or the company makes a request for tax incremental financing (TIF) or federal block grant funds.
"It's a simple strategy that results in complex processes," Gorman said.
Gorman said he enjoys the tangible benefits that the company's projects have provided for communities. For example, the firm's 98-unit Historic Fifth Ward Lofts apartment project in 2001 was one of the first revitalization projects in Milwaukee's Walker's Point neighborhood.
"That was very much a pioneering project," he said. "You didn't have condos south of the Third Ward (as there are today). The project was successful and others followed. Now there's a lot of activity down there that wasn't there before. We like to think we had something to do with that."
The company has also done several projects in "some tough hoods," which Gorman said has helped improve those neighborhoods. The company's employees have taken pride in those projects, he said.
"People want a job where they feel good about what they do," he said. "They're doing well by doing good."
The employees are the biggest key to the company's success, Gorman said.
"My role has evolved to the point that my job is to attract and retain talented people," he said. "The bulk of the work gets done by the skilled people that we have. Our senior people like to say they wish I'd take longer and more frequent vacations because things go smoother when I'm gone. I think they're only half joking."