Housing Rehabilitation Company Business Plan

MADISON BUILDERS, LLC

147 Middleton Street
Kansas City, Missouri 64109

The mission of Madison Builders, LLC, is to capitalize on supply shortages and vacant land to provide quality, affordable housing for the city's middle class.

• EXECUTIVE SUMMARY
• COMPANY
• MARKET
• ORGANIZATION
• FINANCIALS

EXECUTIVE SUMMARY

Madison Builders, LLC, will construct 10 single-family market rate dwellings in Kansas City Circle. The current site of this development, to be called Jackson Place, consists of vacant lots owned by the Land Reutilization Authority (LRA). These homes will maintain the aesthetic appeal and characteristics of typical dwellings found within Kansas City, featuring brick facades and detached garages.

Potential customers include those currently living in the city and those wishing to return to new construction in familiar neighborhoods. A licensed real estate broker with an understanding and successful track record in the city market will assist in the marketing/selling of these homes. Jackson Place lies within a predominantly African American neighborhood, thus the target market will be African Americans who are able to spend about $190,000 for a house.

Madison Builders will capitalize on supply shortages and vacant land to provide quality, affordable housing for the city's middle class. Because of shortages of prime housing on the city's north side, many residents choose to move to surrounding counties to find the house of their dreams. The LRA land has been vacant for years, not creating any tax revenue for the city. Madison Builders will create value for both the city and the consumers.

Madison Builders has been rehabilitating distressed properties in the city since 2001 and wants to shift its focus to develop and build new residential dwellings, following in the footsteps of the great-grandfather of Madison Builders's founder. Each project has brought new challenges that have been met, with profit margins increasing from 10.9 percent to 21.4 percent. A stable of qualified subcontractors has been assembled and will be able to bid on this development. Outside legal counsel and accountants are being used to provide Madison Builders with the expert advice necessary for success.

Madison Builders is currently working with the Kansas City Development Corporation (KCDC) and the Land Clearance for Redevelopment Authority (LCRA) to purchase a single-family residence for rehab and sale in the southern part of the city. This small-scale project will enable Madison Builders to develop a working understanding of the various agencies, people, and processes involved in city redevelopment. Because of the growing number of new home starts in the area, Madison Builders will work with the 3rd Ward Alderwoman Roxanne Mulberry and the LRA in the coming weeks to acquire the necessary parcels of land.

Madison Builders will seek a combination of private and public funding for the land acquisition, development, and construction costs. A portion of the public funding will be in the form of free land, with the LRA assigning the parcels of land to Madison Builders. The remaining $300,000 in public funding will help offset development and construction costs. Development costs, estimated to be $128,675, will be financed with a 2-year, interest-only loan. Madison Builders wants to break ground on Jackson Place in February 2005, with the construction of a display home. The remaining nine homes will be built in a 3-phase period, with the final homes being sold in June 2006. Total construction costs for Jackson Place will be $1,596,000.

COMPANY

Company Description

Vision Statement

Madison Builders, LLC—bringing old world pride and craftsmanship to Kansas City neighborhoods, one development at a time.

Mission Statement

The mission of Madison Builders, LLC, is to capitalize on supply shortages and vacant land to provide quality, affordable housing for the city's middle class.

Objectives

• Acquire the land for the development.
• Secure financing for the project.
• Develop relationships with Kansas City Aldermen and other influential people/associations to assist in this and future developments.
• Construct a display home to help drive sales of the remaining homes.
• Sell the remaining nine units prior to their groundbreaking.
• Adhere to project timeline and budget.
• Provide consumers with living accommodations that they will be proud of through the end of their ownership period.

Company Background

Madison Builders, LLC, began in 2001 to rehabilitate distressed properties in Kansas City. Madison Builders is currently working with the Kansas City Development Corporation (KCDC) and the Land Clearance for Redevelopment Authority (LCRA) to purchase a single-family residence for rehab and sale in the southern part of the city. This small-scale project will enable Madison Builders to develop a working understanding of the various agencies, people, and processes involved in city redevelopment. Madison Builders will contact the 3rd Ward Alderwoman Roxanne Mulberry and the Land Reutilization Authority (LRA) in the coming weeks to negotiate a deal for the vacant lots necessary for this development proposal.

Madison Builders wants to make the switch to new residential construction to carry on the tradition set forth by the founder's great-grandfather. Joseph Schmidt, a German immigrant, came to America and settled in Kansas City in the early 1900s. He built many homes in what is now known as the Dutchtown neighborhood, a community founded by German immigrants located in the southern part of the city. The legal descriptions of these homes refer to the area as Schmidt Subdivision. There was even a street named after him, Schmidt Place, which had its name changed to Prosper in 1918 due to the anti-German sentiment during World War I.

Product & Industry

Product Description

Name

The name Jackson Place comes from one of the greatest boxers to ever come out of Kansas City, Marvin Jackson. Jackson moved to Kansas City as a young boy and graduated from Central High School as an honor student. He is one of the only boxers to hold world titles in two weight classes at the same time: featherweight and welterweight. Jackson retired from boxing in 1952, amassing 99 wins, 15 losses and 7 draws, with 85 KOs. Just nine years later, Jackson became one of the first inductees into the International Boxing Hall of Fame. Many boxing experts rank Jackson as one of the three top boxers of all-time. During retirement, Jackson became a minister and devoted much of his time training young boxers and running the Downtown Boys' Club in Kansas City.

Location

The proposed site for Jackson Place is within the boundaries of Kansas City Circle. Kansas City Circle is rectangular in shape and is bordered by Morrison Avenue, Mark Avenue, North Washington, and Willow Street. Kansas City Circle Park, one of the only linear parks in Kansas City, runs between Maple Lane, Hoover Avenue, Johnson Street, and North 23rd Street. There are many vacant lots and buildings that are in disrepair owned by the LRA within this neighborhood.

There are a couple of developments within Kansas City Circle that makes Jackson Place a viable idea. The first is Kansas City Circle Estates, a 16-home single-family development created by the Flatterly Development Company. The homes are adjacent to Kansas City Circle Park on North 23rd Street, with square footage ranging from 1,700 to 1,900. Almost all of the homes have been sold, with sales prices near $225,000. The former Gregg-Stine Site, located at 1700 Mark Avenue, is being offered through a Request for Proposal (RFP). Although the exact use of this 34-acre site has yet to be determined, there is a high likelihood that market rate housing will occupy a large percentage of it.

Madison Builders's initial proposal was to build Jackson Place in the 2200 block of North Faust Street. On Friday, April 9, 2004, Gerard White facilitated a meeting with 3rd Ward Alderwoman Roxanne Mulberry, 3rd Ward Alderman Cornell J. Huxley, Sr., and Madison Builders's founder, George Schmidt. Alderwoman Mulberry stated that the initial site is part of a much larger area that will be offered through an RFP. This means that a sizeable amount of land will be developed on a much larger scale than a 10-home development. Alderwoman Mulberry is open to the concept of Jackson Place and has other parcels of land available in her ward, but wants to know that Madison Builders can secure financing prior to allocating that land.

Number of Units

There will be a total of ten, single-family units built.

Appearance

Each of the ten units will be a detached, single-family dwelling. All of the units built in Jackson Place will be constructed with brick facades and siding on the remaining exterior walls. There will be fences installed around the backyards of each home. There will not be curb cuts for driveways because each home will have a detached garage with an alley entrance. There are many beautiful homes within Kansas City Circle and the concept is to compliment the existing dwellings. Other neighborhoods in the city have had infill properties built, usually consisting of frame construction, vinyl siding, and lacking any of the architectural detail that makes the city a great place to live. Different brick and siding colors will be available.

Amenities

Workforce

Madison Builders will do its best to make sure that no less than 25 percent minority-owned businesses and 5 percent female-owned businesses will build Jackson Place. A female minority will not count towards both categories.

Concerns

There are two main concerns at this point in the development process. The first is financing and the second is environmental. Financing is crucial to any development. Acquisition and development costs, although fairly low due to the number of parcels owned by the LRA, will be recognized early in the process. Gap financing might need to be established to protect Madison Builders if the homes do not sell, and these sunk costs have already been recognized. Another financing concern is that of the consumers. Programs are available through the Board of Aldermen that can cover the majority of closing costs and some other incidentals when purchasing a home. Madison Builders must negotiate with Alderwoman Mulberry to make these funds available for the purchasers of Jackson Place.

Environmental issues are abundant throughout the entire city. Many of the buildings that have been torn down over the years were simply dumped into the existing foundations and covered with dirt. Many sites have oil and gas tanks that have ruptured, causing leaks into the soil and water supply. The cost to clean up these sites is very high and could possibly halt the progress of this development. Any agreement that Madison Builders enters into will have an escape clause in case such environmental hazards are found on the site.

Industry Description

The Kansas City Development Corporation (KCDC) is an umbrella, not-for-profit corporation with the goal of fostering economic development and growth in the city through increased job and business opportunities and expansion of the city's tax base. Its own Board of Directors governs KCDC and its employees serve as staff support for the city's seven economic development authorities, two of them being the Land Clearance for Redevelopment Authority (LCRA) and the Land Reutilization Authority (LRA). LCRA recommends development incentives such as tax abatement, tax-exempt revenue bonds, and eminent domain for commercial, industrial, and residential projects in redevelopment areas approved by the Kansas City Board of Aldermen. LRA receives title to all tax delinquent properties not sold at the Sheriff's sale. They also receive title to properties through donations.

According to the 2002 North American Industry Classification System (NAICS), code number 236115, which is New Single-Family Housing Construction, provides the most accurate code. According to the 1997 Economic Census Data, Missouri had a total of 3,204 companies in New Single-Family Housing Construction, consisting of 14,220 employees with sales of more than $2.5 billion.

A promising sign for this industry is the growing number of building permits issued during 2003. According to the U.S. Census Bureau, Kansas City issued 171 single-family permits in 2003. These permits had associated construction costs of over $25 million. This would average $146,199 in construction costs for each new home. Including overruns, Jackson Place would incur $149,625 in construction costs per home. In 2002, the city issued 150 single-family permits, accounting for over $22 million in construction costs. In 2001, these numbers were even lower, as 126 single-family permits were issued, with construction costs of just over $18 million.

Revenue is realized when a residence is sold. Proceeds from the sale of a house must cover the construction expenses for that house, plus the various fixed costs associated with the land acquisition, development, and overhead costs associated with running the company. A prominent Kansas City developer says that his company recognizes a 12 percent profit margin on its sales. This is what Madison Builders will strive for with Jackson Place.

MARKET

Market & Target Customer

The market for Jackson Place consists of middle class African Americans in the Kansas City Metropolitan area who desire new homes in the city. Unlike most consumer goods, every person does not want, or need, a new home. For this reason, it is difficult to place a definitive figure on the number of consumers interested in Jackson Place. Assumptions can be made, based on other homes being built in the area, namely Kansas City Circle Estates development located on North 23rd Street, adjacent to Kansas City Circle Park. The Flatterly Development Company is building the 16-home single-family dwellings, with square footage ranging from 1,700 to 1,900. Construction began in July 2003 and to date, all of the lots have been sold, with each new home selling for around $225,000. The exteriors of these homes remind consumers of a typical city-style dwelling with garage access via the alley. Interior upgrades include everything found in most suburban home developments, including decorative moldings, flooring upgrades and kitchen and bath improvements. Phase 2 of this development will begin once additional parcels can be acquired. Based on the price point and amenities offered, demand for Jackson Place should far exceed the supply of homes.

There are three main groups of target customers for Jackson Place. The first group consists of African American families currently residing in Kansas City Circle. The parents range in age from early 30s to mid 50s with at least one child. These are the residents who appreciate city living and what it offers, but want to move up and out of their current living accommodations. At least one of the parents works, probably in an office or other professional capacity. This group will be called "local families."

The second group consists of younger African Americans, mid 20s to 30s, who are looking for their first house. These consumers are either recently married or desire a larger living space to accommodate children in the future. Much like the "local families," this group works in a professional capacity, probably in the city, and views this development as providing convenient access to their jobs. This group will be called "upstarts."

The third and final group of target customers represents the African Americans who want to return to the city after living in surrounding counties. This group, similar in age to the "local families," also work in professional jobs. Some in this group might be married with children, others are single. The common bond is a love of the city. This group will be called "transplants." Because two thirds of the target audience is coming from outside the boundaries of Kansas City Circle, the average income level of $25,000 should not raise a flag to Madison Builders.

Competition & Competitive Advantage

There are several new home developments being built in the city. Flatterly Development Company has sold out of lots in her Kansas City Circle Estates development. Flatterly is looking to secure additional parcels for Phase 2 of the development. There are other infill projects occurring, where one home is built among existing homes. This might satisfy some people, but the sense of community might be gone considering infill homes usually look nothing like their neighbors. Another competitor to Jackson Place is the various loft developments in the city. These are the three main sources of competition. Within Kansas City Circle, Madison Builders could not find other developments of new single-family detached dwellings with similar characteristics for under $200,000. Two things will help sell the homes at Jackson Place—their price point, and the fact that some people prefer a detached dwelling to that of an attached townhouse or loft.

Marketing Strategy

Overall Strategy

The overall strategy relates to the mission of Madison Builders, LLC; that of capitalizing on supply shortages and vacant ground to provide quality, affordable housing for the city's middle class. The city does not offer many new single-family homes for middle class African Americans. Because the LRA wants to promote development, they will offer their vacant lots for free to Madison Builders. These savings will ultimately be passed along to the consumer.

Once Alderwoman Mulberry sees that Madison Builders can secure financing, she will allocate the parcels necessary for Jackson Place. Madison Builders hopes to have the parcels no later than June 2004. From July 2004 to January 2005, Madison Builders will work with architects and the city planners to finalize the home plans. The display home will break ground in February 2005, with a scheduled completion of early June 2005. Once this home is complete, potential consumers (namely the local families, upstarts, and transplants mentioned earlier) will see the value that Madison Builders offers. Although prices will start at $190,000, additional features and square footage options could increase prices closer to the $200,000 threshold.

Contracts will be accepted before, during, and after the construction of the display home. The remaining nine homes will be built in three, three-home phases. Homes will be built in the order contracts were accepted.

Sales Plan

Before the first house of Jackson Place is built, Madison Builders will work to notify the various media outlets in the Kansas City area about the new development. This PR effort will specifically target the Kansas City Star, both from a real estate and a special interest story. The PR effort will also notify local real estate agents of the development. Special publications, those targeting the local families, upstarts, and transplants, will also be utilized. This will create interest in the homes and lead to the successful completion of one of the objectives, that of selling each home before construction begins.

The responsibility of selling these homes will be awarded to a local real estate broker who understands and has a successful track record with the city market. This broker will be responsible for placing the homes of Jackson Place in the computerized MLS system for other agents to obtain information about them. Madison Builders has allocated $1,500 per home to pay for the necessary advertising, i.e., newspaper, real estate show on cable access, flyers, etc. In exchange, the broker will receive a 5 percent commission. No broker has been retained as of yet, but a company such as Flatterly, or the contacts that Mr. White can provide, would be viable options.

Madison Builders must sell the Jackson Place development to potential brokers. With the strong family ties that the company has in new home construction, this development will be the first of many to come. Future sites can and will be developed, not only in Kansas City Circle, but in the surrounding neighborhoods as well. Once Madison Builders proves itself as a new home builder and gains the increasing confidence in the lending institutions and local politicians, the size and quality of its developments will improve exponentially.

Competitive Plan

This is an area where Madison Builders might request the assistance of the hired broker. Whether through mailings or other correspondence, Madison Builders can get a leg up on the competition by listening to what consumers have to say. A questionnaire pertaining to the preferences of consumers can go a long way in deciding which fixtures or cabinets to place in a display home. Once the display home is built, face time at the home will help Madison Builders in understanding the needs and desires of those prospects making the big decision of purchasing a new home. Flyers can also be left at the home in order for these prospects to answer questions regarding what they thought about the home, not only from an aesthetic sense, but also from a quality perspective. Once the homes are sold, Madison Builders will conduct 6-month and 1-year follow-ups to determine the satisfaction of each consumer in Jackson Place. These follow-ups will provide Madison Builders with the information to improve their product and service in the future.

ORGANIZATION

Legal & Organizational Structures

Madison Builders, LLC, was established in January 2001 and registered its Articles of Organization with the Missouri Secretary of State.

The mailing address of Madison Builders, LLC, is 147 Middleton Street, Kansas City, MO 64109.

George Schmidt is the sole member of this limited liability company. As such, there are no employees; other services are contracted with various organizations.

Key Personnel

George Schmidt started Madison Builders, LLC, and is looking to transform the company and develop vacant lots into new residential dwellings. The key for Madison Builders is to continue its tradition of building and maintaining relationships. As Madison Builders ventures into this new territory, new relationships must be formed—a strongpoint of the company's founder.

The founder's background includes three years of rehabilitating homes and three years of marketing experience. Profit margins have increased on the properties from 10.9 percent to 21.4 percent. The founder will complete his Master's of Business Administration in May 2005, improving his analytical skills to make wiser decisions with regards to prospective developments. Madison Builders's current process of working with the KCDC and LCRA to acquire a property in the southern part of the city is beneficial, as it provides a real-life example of working with government agencies in the city.

Related Services

Location

The physical location of the office for Madison Builders, LLC, is the home of its president. This is key when determining costs associated with this particular project. Large sums of cash could be spent for office rent and equipment during the time period to negotiate terms with the city. By operating out of the house, costs are significantly reduced. At this point, there is no plan to change the current system.

FINANCIALS

Critical Risks

There are three main risks when accessing the Jackson Place development. The first is the risk that the market for new homes could decline. Although new home starts continue to climb, there will come a time when that production begins to level off, and eventually fall. The second risk lies in the interest rates. Mortgage rates are beginning to increase, albeit at a slow pace. Once the display home is under construction in February 2005, there's no telling where the rates might be. The third risk is costs. One example is the current steel situation, where China is retaining almost all of their supply in order to build for the Olympics, thus causing shortages and higher prices in the U.S. Similar pricing could occur on other items and cause construction costs to soar, or possibly, shut down the job.

The following section presents a cost breakdown by home and a cash flow statement. This is typical for housing developments as cash flow is the most important aspect of the financial section. This is why balance sheets and income statements have been omitted from the plan.

Cost Breakdown by Home

Assumptions

• Total sources include sales price, development loan, construction loan, and public financing.
• Overhead includes administrative, tax preparation, and attorney's fees.
• Acquisition and development costs include title, soil tests, civil engineer, architect, surveys, rubble removal, and utility connections.
• Insurance includes general liability and builders risk.
• Sales and marketing costs include all marketing, advertising, and commission.
• Construction costs are $95 per square foot and overruns are 12% of construction costs.
• Loans and interest include the construction and development loans.

Assumptions

• Construction will begin on the first home in February 2005.
• The display home will not be sold until June 2006.
• No more than three homes will be under construction at any one time.
• Ground breaking will only occur once a sales contract has been received, with the exception of the display home.
• Development loan consists of development costs and architect fees.
• Construction loan includes 12% overrun charge.