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In 1983, the economy in Denver, Colorado was in great shape. By 1987 the only people making money was UHaul. Everyone was leaving. The economy had tanked.

Investing in Denver

In 1984 we went to the Municipal Credit Union and opened an account because my wife was a city employee at Denver General Hospital. They had a unique program where you could borrow $125,000 minimum for a home purchase. We found a home that needed work, was well located, and could be purchased for around $100,000. We purchased the home with our 12% interest mortgage and immediately started looking for another investment property to spend the balance of the $125,000 mortgage.

We found two homes that were moved by a developer to two lots he had purchased. He got the homes for next to nothing because they had to be moved immediately from a site where another developer was building new homes. Back then you could buy an FHA financed home and assume the mortgage for only $45. My wife and I purchased two homes, next door to each other for $58,000 each plus closing costs. We only needed an approximate total of $2,800 to purchase both homes and assume the two existing mortgages. These were non-recourse loans. That means if we walked away from the homes, stopped payments and left the country, all the lender could do was foreclose and if there was a shortfall the original borrower, not us, may or may not have had to come up with the difference owed the bank.

I started a new construction company and within one week I had my first contract. My wife and I would walk at night in one of the wealthiest neighborhoods, Cherry Creek, place attractive flyers in mailboxes, and the phone started to ring. We were both working full-time and investing in real estate.

We now had three homes in Denver and it was time to look for another project. I found an abandoned looking building at the corner of 34th and Williams, in Denver. After months of negotiating with the minister who owned the building, we agreed on an $85,000 purchase price. It had 28 units. We were able to get an FHA 221 D4 mortgage which is an FHA insured mortgage for buildings with more than four units and we were able to borrow an additional $85,000 from the City of Denver for zero percent interest, no payments for 10 years, and an $80,000 mortgage at 2% interest with no payments for three years. We also received an $8,500 grant for new concrete paving. The City required us to build only two bedroom units in return for the low interest and creative financing we were offered.

To purchase the building, the United Bank of Denver wanted a co-signor. I was still new to Denver without much of a local track record so I went out and found another investor. It cost me half the ownership but made doing the development possible. My new partner and his wife, along with myself and my wife all had to be on the deed and on all the loans. The bank and City now had four co-signors.

We closed on the building, and went through the very tedious mortgage application process with the lender and the City. We began demolition and removed about thirty dumpsters of material from the building including the demolition of about 10 garages. We were told that the police and fireman would no longer go into the building if it had interior hallways, because it was too dangerous. They required every unit to have its’ own exterior entrance door. Police and fireman had previously been hurt inside the building going after drug dealers, putting out fires and lawbreakers in the building. We had to put an iron grate above the stairway that led to the basement laundry so that tenants could look down and make sure no one was lurking before they went down the steps to the laundry. The stairwell had to have a shatterproof light that was hard to destroy. We had to build a second floor rear deck with ingress and egress steps for the second floor tenants. In return we were promised section 8 certificates for all the tenants the first year only. We agreed to the terms. The architect completed the drawings, the City accepted them and with a very tight budget we began to rebuild the building.

The loans required the City, the architect, and an FHA inspector to approve each of the draws to be reimbursed after each segment of the work was completed. The City and FHA inspector was easy to deal with but our architect was always fighting us on the amount of work completed. He was paid about $28,000 over the course of the design and project phase of the contract and became one of the biggest problems to overcome on the project.

From an economic point of view, developers were entitled to depreciate the entire construction cost over a five-year period for affordable housing during the time we developed this building. For example, if the construction cost of improvements to the property was $1,000,000, you could deduct a tax write off of $200,000 each year for five years. Since I had a partner, we could each write off $100,000 each year for five years. If you had a total of $100,000 in income and you had a $100,000 write off then you owed zero taxes that year. There are many other factors but in its most simple form that is how the accelerated depreciation worked.

Issues on Site

About one-third of the way through the job, we started having petty burglaries on the site. Twice the office was broken into and twice the burglar stole battery-powered drills but both times left the batteries and chargers. They don’t work very well without batteries. Then we decided to add security dogs to the site. The second night we had the dogs, a neighbor walked over to the site and said those dogs would run away if he jumped over the fence. My foreman wagered his truck that the dogs would attack the man if he jumped over the fence as he waggled his keys at the neighbor. The neighbor agreed to the wager, leapt over the fence and the two dogs ran away. The man comes back asking for the truck keys. The neighbor was a security dog trainer who knew that until the dogs marked the site and were delivered to the site enough times to become habituated to the site that they would not protect the site.

About two weeks later someone went over the fence and was attacked by one or both of the dogs and left a trail of blood. Just another day at the site. Each morning the dog service removed the dogs from the site. Two dog security companies bid on the contract, one was $10 a day for two dogs and the second company was $20 a day. I asked why the big difference? The $10 an hour company said that they have no insurance and no assets. If someone gets hurt by the dogs after breaking in and sues, the first thing the lawyer wants to know is who the insurance carrier is? If no insurance most lawyers are not interested in the law suit unless the client can pay up front. Most burglars don’t have the money to fund a lawsuit. We were on a budget. We went with the $10 guy.

FHA Requirements

When you have an FHA mortgage and you borrow public funds from the city, state, or federal government, you are required to develop a plan to have a minimum amount of minority and female participation employees and contractors. My philosophy has always been to hire locals on a job site when they are available because I believe local neighbors should benefit from projects in their own communities. I have also been a proponent of hiring ex-offenders who have served their time, need a break and tend to be hard working individuals when hired. We had two laborers I hired who were two of the biggest guys you could ever find. One served nine years for murder and the second served time for unknown crimes. I had a subcontractor who was third degree black belt in one of the martial arts who had just returned from Vietnam. I had a young woman who was a carpenter who lived in the neighborhood all her life. We had almost 65% minority and female owned company participation on the job.

The job took about two months longer than I figured. The inspections were not always easy to schedule. I was able to rent out all ten units quickly. The federal government always sent the section 8 checks on time. My wife took a new job back in Philadelphia and wanted me home. Workers tend to slow down a bit when a job ends and unemployment is near. I was about $20,000 over original budget but still within the 15% required in the mortgage for contingencies. All went well for the first year.

After final inspections are complete, you receive your certificate of occupancy from the city, tenants move in, and the rents begin to arrive. You can finally begin to relax. For the first year, the building thrived.

The Denver economy was crashing. The oil industry was in turmoil. Companies were walking away from their wells and their equipment. Many were moving away from Denver. Tenants could go to the most beautiful buildings in town and get cheap rent. Section 8 tenants were moving to the expensive sections of town because building owners who never accepted section 8 were now accepting the certificates. Many of the small developers like us who were located in the higher crime areas of Denver were unable to rent their units. The population was dropping rapidly. It was a mistake to move forward with only one year of section 8 certificate guarantees for such a large project. We should have held out for at least three years or walked away from the project, but no one has a crystal ball.

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