McGraw Construction overcomes disastrous fire

May 18, 2009
| By Pete Daly |
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A spectacular fire in 2007 wiped out a piece of Grand Rapids history and was the major "calamity" in the 20-year history of McGraw Construction. But that was then and this is now.

The Bicycle Factory, a brand-new, LEED-certified, five-story office/residential building on Butterworth Street SW was completed recently and has quickly filled with tenants. It is located just southwest of downtown Grand Rapids and just south of Grand Valley State University’s downtown campus.

The conflagration in February 2007 that consumed the 110-year-old brick building Paul McGraw's company was renovating into apartments was "the largest calamity we've had, for us as a company." But today he says the new building that arose from the ashes is probably the highlight of his career.

"We're very proud of the Bicycle Factory," said McGraw. "The way everything happened — the fire, the rebuilding of everything … it was a Herculean effort by everybody involved, the city, Grand Valley (State University), my staff …"

When the fire destroyed the original building, it also destroyed the historic tax credits McGraw was counting on to help with the financing.

McGraw said GVSU was key to getting the project done.

"They knew we had a struggle to get something going again," he said. McGraw said the new Bicycle Factory would not have happened if Grand Valley had not stepped forward after the fire and asked if they could lease space in a building he still had hopes of erecting on the site.

GVSU is leasing two floors of office space that amounts to about 60 percent of the building, which has about 75,000 square feet of space. GVSU moved into the building in late March, at which point the building was 90 percent occupied, with just 6,000 square feet available. That space can be subdivided into smaller spaces, according to McGraw.

A second major tenant, KeyImpact Sales & Systems Inc., a food service sales agency, will use most of the first-floor space.

The building also has a dozen two-story apartments, each with a deck and two upstairs bedrooms. By last week, eight were leased to young professionals and GVSU graduate students. The apartments rent for $850.

McGraw said the $8.7 million building, which was designed by Beta Design, may be "the first mixed-use LEED-certified building in Grand Rapids." The building shell is LEED certified but a Silver LEED certification will be sought for the tenant interior spaces. They might even end up earning a Gold LEED rating, said McGraw.

So many builders in West Michigan now build for LEED certification that the specialized materials required are commonly available and competitively priced. McGraw said that the green construction movement is a good thing, and it's not a tremendous burden on the cost of a project.

"You hear a lot of people talking about the increased cost, but nowadays it really is very little additional burden," he said, adding it’s quite different than five years ago.

Much of the additional cost due to building for LEED certification is for the fees associated with getting it registered, which may run between $20,000 and $30,000, McGraw said.

With the loss of the historic structure tax credit, McGraw wasn't sure how he would be able to finance a new building on the ashes of the original building.

"Downtown development is so difficult (to finance),” said McGraw. Building costs are higher downtown than for the same type of building elsewhere, because there are more aesthetic restrictions on the style and appearance of downtown buildings. But even if a cheaper type of construction is permissible under the zoning ordinance, if the building looks out of place, it will not be easy to market that space.

McGraw said the typical rent income from downtown construction or renovation projects in cities the size of Grand Rapids is often not high enough to trigger construction financing. Apartment rents in downtown Chicago are high, and people will pay them to avoid a long, difficult commute to jobs downtown. But in Grand Rapids, an individual can rent an apartment more cheaply in a suburb and still be able to get to work downtown in 10-15 minutes.

"So you have a large gap between what it costs you to develop and what the bank will give you" in construction loans. To close that gap, tax credits are a key part of the financing, said McGraw.

The new Bicycle Factory did end up qualifying for tax credits, a combination of brownfield and New Market. With those, Fifth Third provided the rest of the financing required, according to McGraw.

McGraw said he believes there may be as few as 10 projects in Michigan that have involved the New Market tax credit, which he called "crazy" in its complexity but key to construction of the Bicycle Factory. The credit was established by Congress in 2000 and permits individual and corporate taxpayers to receive a credit against federal income taxes for making investments in Community Development Entities, or CDEs. The CDE must, in turn, use the money in low-income communities.

McGraw said Fifth Third did a lot of the “heavy lifting" in the application process for the credit. As an example of just how complicated the process is, he said, "The legal and accounting fees to get that tax credit done are about $400,000," in the case of the Bicycle Factory.

Though McGraw Construction is the developer and owner of the Bicycle Factory, McGraw said he should not be described as a developer.

"We're general contractors. That's our core business," he said.

"We have partners on these developments," he said, although he does sometimes take the lead because so much is tied to the construction process. At times, McGraw Construction serves as a consultant to developers.

For him personally, he said, development is kind of a hobby. “We stopped developing a few years ago, but the fire kind of forced us into a situation: We had to put back on our developer hat and get that project put to bed."

McGraw was 21 when he started his contracting business in 1989. Today, the company employs about 22, and does "under $20 million in sales. We're good size but we're certainly not the biggest in town." Prior to the Bicycle Factory, one of McGraw Construction's most visible projects was the Brass Works Building, which it renovated for the owners.

"We kind of made it up as we went along," he said about his company's work on the building on north Monroe Avenue. Since then, the business has become much more process oriented, he added.

"You could say I was young and unaware back then," he joked.

McGraw Construction remains busy despite the economy. As of late March, McGraw had not laid off any employees and the company had a workload "good through the summer."

"We see a lot of pent-up demand. It's not moving forward yet, but there are a lot of people who had put their projects on hold."

McGraw said he believes we are "at the bottom right now" regarding construction costs.

"The margins are really depressed right now, and the commodity prices have really come backwards. So I think that is going to change quickly because there is so much money washing into the system right now. It's going to push prices very fast."

McGraw also said he believes there is a good chance "inflation is going to rear its head in about six months or so, and that is going to increase construction costs."

"I think people will have to make a choice about buying construction right now" while it is relatively inexpensive — "or wait and pay a lot more."

"It's an interesting time," said McGraw.

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