Banking & Finance, Construction, and Real Estate

The story behind the story of 616 Lofts’ bankruptcy

February 22, 2019
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Ten years ago I stumbled into Grand Rapids — a 25-year-old country kid from Lake Odessa — and founded 616 Lofts. Raised by schoolteachers who built new homes in the summertime, I had the itch and became the first full-time entrepreneur in my family. For eight years (2009-2017), I was 616 Lofts’ CEO. Two years ago I resigned and have since been working on other things, because my journey with the brand I built had come to an end.

Throughout my life, people have always said that I have “thick skin,” but I really don’t — at least, not thick enough. Watching the story of 616 Lofts’ bankruptcy break on the news (yes, along with everyone else) broke my heart. And watching rumors and unfounded speculation fly — like the misconception that the breaking up of the 616 Lofts entity would disrupt the residency of tenants of the Lofts of GR portfolio — has been frustrating. But it’s also par for the course. The truth is that if I didn’t have a family to think of, I wouldn’t bother engaging; I’d simply and quietly be on to the next thing. But I think that having a reason to engage has ultimately been good, because it’s prompted me to take close inventory of what’s happened over the last decade — what’s worked, what hasn’t and what opportunities still lie ahead.

My goal in writing this is simple: First, to honestly share my portion of the story (to the extent that it won’t make my attorney fire me) so that other first-generation entrepreneurs and developers out there can learn from it and, second, to remind myself that life is not a billboard or a Facebook ad. If I’m going to share authentically, it can’t only be the good stuff — it has to be when I’m learning, too.

And man, have I been learning lately.

But before I talk about that, I want to provide a little context on what happened during my eight-year tenure with 616.

A classic startup fairytale

In 2009, on the heels of a recession, I founded 616 Lofts with a mission — a big vision — to infuse community (i.e., residential mixed-use urban development) where it didn’t currently exist. We zeroed in on empty, blighted, and underutilized buildings and spaces across burgeoning neighborhoods of Grand Rapids.

Thanks to great mentorship and the wisdom of thinkers like Simon Sinek, I began creating a Tribe around me, with a Big Hairy Audacious Goal in mind. As I set out to build Grand Rapids’ urban community, I attracted my first employee. It was like YouTube’s Leadership Lessons from Dancing Guy — once one person had the bravery to join in my mad dance, everyone else began wanting in on the party.

Around about this time we struck our first deal, 139 Pearl Street, also known as the Flannagan’s building. We rehabbed the top three crumbling floors into 14 market-rate apartments, and we were fully leased before construction was complete. It felt like I was on to something. At the suggestion of one of the first bankers we encountered who believed in our model, we looked at working in marketing and PR on the next project. Social media and SEO were newer at the time, so I listened to our banker and hired a young digital copywriting genius who got loud with the brand.

The creative inspiration of historic development

Three more similar unique boutique redevelopments tumbled through the pipeline nearly simultaneously — our first public test. I found myself conflicted, and internally felt very awkward when all the attention began. I just wanted to do good work, and the public relations part didn’t feel like work then. It sure does today, I can tell you.

As the son of an architectural drafting teacher, I’m a creative at heart and I simply loved the craft of turning old, unloved buildings into vibrant places. The design process and its spectrum are so vast in real estate development: creating something from nothing, turning strangers into friends, chasing new opportunities, finding the soul in the bones of an old building is all very infatuating to me — then and now.

The next project, 1 Ionia, connected two separate and historic vacant buildings on a main downtown corner and created a home for a newly revamped and also historic Grand Rapids Brewing Company, as well as 25 beautiful market-rate lofts. Again, the building was fully leased before construction wrapped. While this project played as seamless in the media, some incredible, strategic partners pushed this one over the hump for us, and behind the scenes we had our fair share of hanging by the skin of our teeth.

As our portfolio grew, we decided to continue to manage the properties in-house. So we hired a handful more people. It was at this point that my intelligent, impossibly cool new wife Mandy began to offer some constructive criticism about my decision to keep hiring. As history shows: I didn’t listen.

In the meantime, the iconic Kendall building popped up on our radar. An historic five-story red brick beauty at the literal center of downtown that had been vacant for more than five decades became home to four floors of market-rate lofts and a new local Italian restaurant. It again was fully leased before construction ended. Three for three!

All this development activity prompted the 616 Lofts brand to continue to grow. The truth is, however, that I’m a closet introvert. I was learning about public relations on the fly and it was very uncomfortable. Then something changed and I began to like it. Right at the point when my ego was beginning to expand, a mentor called and shared with me an idiom I will never forget: “the spouting whale gets the harpoon.

Meanwhile, I was falling in love with a property that belonged to a troubled loan a banker of ours had brought to us: the church on Prospect. Never fall in love with the asset or opportunity is one of the first things you learn in real estate, yet I fail at this every single time. I fell hard and fast for the church: a well-kept historic neo-Gothic church in a thriving historic district within walking distance of downtown — about as close to literal heaven as it gets in development. If we did nothing, it would be demolished. So we took the project. We added a second floor inside the sanctuary and ended up with 22 of the most innovative apartments I’ve ever seen. They were fully occupied before construction wrapped — again. We were batting 1.000.

The missing pause

I had mixed feelings. My banker was telling me to get the brand out there, while this mentor I really respected was warning me of a future fate. I was confused for a couple of years. Things got lonelier as more people came into the picture.

It was at this point that I began to truly learn the value of ... operations, operations, operations. I believe most leaders can be categorized as either operators or builders. I’m a builder — a creator — and even worse, I’m drawn toward being a catalyst for new things. With four fully occupied and successful assets, you would think I would have been relaxing. But this was when things got really serious. I now had to care for these assets and lead a growing Tribe, all while navigating the reality that I’m a builder, not an operator. This was really hard.

Just as I thought things were beginning to balance out, our stakeholders began calling. “Derek, we haven’t heard anything for a while, how are things going?” We suddenly learned that when people invest in things, they like regular communication. It sounds silly in retrospect. The stabilizing assets were going well; they were full (or filling up as construction finished), and nothing was wrong, so I naively thought that no news would have been perceived as good news. I was incorrect. If you’re new to partnerships, I encourage you to read this paragraph a few more times.

If I could go back and tell myself what to do at this very moment, I would say one word to younger Derek: “pause.

At this point, our company had four of downtown’s coolest buildings (in my opinion), a great staff and everyone loved us in that moment. We should have stayed this size for a while, gotten our legs under us, and just paused. But I didn’t.

More zeroes

Instead, I chose to go big or go home. Whoever said “big deals are just like small deals but with more zeroes” has either never completed a big deal or has been desensitized to it. And I’m not sure which is worse.

But that was the logic I followed going into the next three big redevelopments: 820 Monroe, 720 Michigan and 420 Alabama. The Monroe project sailed smoothly, being our largest historic rehabilitation yet. The underutilized and near riverfront building was revitalized with 87 market-rate residential units and 30,000 square feet of ground floor retail that included fitness clubs, bakery and brewery.

Now we were five for five with historic redevelopments. Everyone in real estate says that old buildings are the riskiest types of development, but my inner Maximizer loved taking something neglected and making it great — and it was working. Nevertheless, I decided to take everyone’s advice and try a new construction project in an underutilized parking lot. The truth is that might have been easier to build, but it became our most challenging asset to date. On the other hand, being located in Michigan’s rapidly growing commerce corridor, it’s also poised to become the most prosperous asset over time. Real estate is funny that way.

Builder or operator?

The Tribe now was comprised of more than 20 people as we geared up to deliver on our property management and community promises. On one hand, I was enjoying leadership, but on the other I still had projects to develop — which was a lot of work to do. I felt handcuffed. It was time to make a big decision.

At some point in 2016, I decided to go all-in on the leadership role. I needed to build out the organization to handle all the operating commitments and responsibilities we had with our existing and growing portfolio, and its stakeholders.

Had my wife known exactly what was happening at this time, she would have encouraged me to take a different path. She would have told me to hire a professional manager to build the organization, and to stay in the lead development role. Because, as she would have pointed out to me, my development skills offered more value than my operational skills (see: builder vs. operator).

Thirty people in, this particular chapter broke my habit of being a people-pleaser. Ray Dalio, the largest hedge fund owner in the world, said it best: “When two people believe opposing things, chances are that one of them is wrong. It pays to find out if that someone is you.

Still, our team successfully completed and leased 420 Alabama, our largest project yet, with 100 units split between historic rehabilitation and new construction in the vacant parking lot across the street. I’m biased, but I think they add something special to the neighborhood. You can’t help but linger when you’re in between the buildings.

While Alabama, Michigan and Monroe leased up, the market began to bring on more units and things started to get competitive. It’s funny to think that $100M of development in, and we were only just beginning to compete with the market in earnest toward the portfolio’s completion.

I’ll never forget the open house event for Alabama. I remember parking with Mandy in the brand new underground parking garage. When we got out of the car, I walked around and mentioned how it looked really nice. Mandy looked at me and said, “Is this the first time you’ve been here?” She proceeded to make me aware that I really needed to figure some things out — and find my passion again.

Shifting roles

A few months turned into another year and I found myself still seeking my identity as an entrepreneur. Was I a developer or a leader? Being both seemed out of the question. I finally had a moment of clarity when an experienced developer found me, took me to lunch, and showed me a different way of doing things. The next chapter became the most difficult chapter by far. Outsourcing our property management to a respected national property management firm was the wisest move to make — and ultimately has been a great decision for the portfolio. But it also meant that we were saying goodbye to the thing that had gotten us there: the brand. It sucked.

At the end of the day, it was the right decision. Now that our large and successful portfolio was built and operating profitably, we needed good old-fashioned real estate operators at the wheel.

The model for build out worked, and all seven assets in the portfolio were thriving — and they still are. As they have been for the last two years: without me.

Moving forward

The partnership with KMG also succeeded in freeing me up to do other things, which I considered a win-win. I resigned from 616 Lofts in late 2017. The portfolio was built and operating, so I simply wasn’t needed anymore. “Let go or be dragged,” I read on a wall somewhere, and it hit me hard. I knew I needed to let go. In retrospect, it was clear I’d attached my identity to my work.

I wish I could tell you that I walked away with my head held high, ready and excited for the next big challenge, but that just wouldn’t be true. I watched the 616 Lofts brand become Lofts of GR. I felt sorry for myself for a year or so, during which I learned that it’s very difficult to be creative and energetic when you’re feeling sorry for yourself.

Over the last two years, I’ve moved forward — then backward, then forward; rinse, repeat — trying to get a bead on the next venture. If my journey with 616 has taught me anything (and I can promise that it has), it’s that people are drawn toward genuine connection and community, and that focusing on projects that have the greatest ROI for the local community is a model for success.

Whatever my new venture ends up becoming, one thing is for sure: it won’t be quite so dependent on the “Derek Coppess” brand. It will be a project that only works through my passing along hard-earned experience to help other upstart entrepreneurs navigate this Wild West we call real estate.