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Adaptive reuse of sacred buildings and schools

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					               The Red Door Church Case Study
                   Cleveland Heights, Ohio
                                   By Robert A. Simons
                                            and
                                       Gary DeWine
                                           with
                                   S. Subha Vyakaranam


       The Red Door Church was originally built as a modest-sized First English

Lutheran Church. It is located on a minor arterial street, on a 1.5 acre lot in Cleveland

Heights, Ohio, an inner-ring suburb of Cleveland. The building has always housed a

Protestant church, until just a few years ago. The original congregation had been

displaced from Chester Avenue in Cleveland due to a street widening project, so they

“moved up the hill” to Cleveland Heights. An 8,000 square foot school wing and daycare

was added in about 1952.


       As is common in rust belt metro areas, population declined and spread away from

the core city. In 1950 the church membership numbered 300, but by 2002 fewer than 50

remained. “We had to ask ourselves, ‘Is it better stewardship to close the building or

continue to struggle along?” said Rev. Robert Hanson, the church’s last pastor. The

congregation voted to dissolve the fellowship than had begun 123 years previously. On

September 1, 2002, the faithful of First Lutheran gathered for the last time. Thereafter,

church was offered on the market as a religious facility.


       When no church-use buyers emerged, the current developers, led by Josh Simon

and Andrew Brickman, operating as Derbyshire Partners LLC, acquired the property for

about $700,000 for redevelopment into residential condos with the marketing name



                                              1
Brownstones at Derbyshire. The Pastor came by regularly to see progress of the

construction, and proceeds from the sale were distributed by the church leaders to soup

kitchens, homeless shelters, and social service agencies. The school wing was removed,

and the church itself was converted to 5 condominiums. The balance of the lot was

developed into an additional 15 residential condos. All homes were custom finished. The

developers built the shell up to the plastering, and then allowed buyers to custom-design

their finish. This allowed for substantial interior changes.


       The project was built in four phases, and sold out within a year and half. The

prices ranged from $174,000 to $550,000, or from $156 to $188 per building square foot.

This is almost twice ambient market levels. The two units that were confirmed resales

sustained market increases of 5% per year. The $8.3 million project netted the developer

a return in excess of 12%, a handsome profit.




Site History


       The Brownstones at Derbyshire, which later became known as the Red Door

Church, was originally built between 1932 and 1936 as the modest First English Lutheran

Church. The original stone Tudor church contained about 12,000 square feet, including

worship space, a basement activities room, and a small suite of offices. The sanctuary is

about 35 feet high at its highest interior point and has several beautiful stained glass

windows.




                                              2
       The facility is located in a pleasant, 1900s vintage “City Beautified” inner-ring

suburban neighborhood on the corner of Derbyshire Road and Euclid Heights Boulevard

in the western part of part of Cleveland Heights, Ohio. The site is about six miles from

downtown Cleveland and about one mile from the Cleveland Clinic-University Hospital-

University Circle cultural area, a powerful and growing economic driver with over

40,000 jobs. The original neighborhood was designed to appeal to the discriminating taste

of the social, business, and professional leaders of the Cleveland community. First platted

in 1892, this is a neighborhood designed on the principles of Frederick Law Olmsted. It is

a mixture of curving and straight streets with graceful boulevards linking to downtown

Cleveland. The city was so named because it sits on a plateau east of Cleveland. It was

once known as ‘Turkey Ridge’ because of the large number of turkeys roosting here.


       The church itself is handsome, constructed from hewed grey granite and

sandstone. The 1.5 acre lot is particularly large, with ample parking and frontage on two

streets. However, as the city’s population declined and spread to outer suburbs, many

parishioners moved away, and the church lost critical mass of membership. Finally, in

2002, it was placed was on the market and offered as a religious facility. A Jewish

synagogue group looked at the facility, but did not buy it, in part because the north-south

orientation of the sanctuary space was incompatible with the east-west needs of

traditional Jewish worship. The building was continuously under non-hierarchical

ownership. Aside from some asbestos floor tile in the basement area, the building was in

good shape when the congregation decided to put bring the property on the market.



Market Conditions



                                             3
        Residential market conditions in Cleveland Heights at the time the project was

built were adequate. Aside from a struggling school district, city income and racial

dynamics were stable. However, the population was dropping perilously close to the

50,000 threshold, where communities must compete for federal CDBG dollars, thus

putting their planning department at risk. Until 2000 when the Cleveland Heights

population was clocked at 49,750, city planners had resisted encouragement of denser

multifamily housing. However, this sobering revelation indicated a new willingness to

accommodate denser projects, such as condominiums, especially those marketed to

yuppies and empty nesters that had substantial property values.

        From a market standpoint, the project is attractive because it is located on an east-

west commuting route (two lanes each way, plus turn lanes with a divided median) into

downtown Cleveland with moderate but not excessive traffic. The property has

immediate access to the University Circle cultural area, with its museums, non-profit

organizations, Case Western Reserve University, the Cleveland Clinic, and University

Hospitals. The site is also located in proximity to the funky Coventry district, which is an

eclectic mixture of retail and non-chain restaurants. Map 1 shows the general area with

local features.


        The 8.7 square mile City of Cleveland Heights contains 49,958 people (2000

estimate), or about 3.6% of the County’s population. There was a 5.7% loss of population

from this city since 2000. (SOURCE?) About 27% of the population was in the 18-34

age group and 15% are of age 65 years and over.




                                              4
       The median household (1999 data) income was $46,731, higher than Cuyahoga

County’s ($39,168) and the State of Ohio ($40,956). The population is predominantly

white (52%) with rest of the population being African American (42%), Hispanic (2%)

and others (Asian, American Indian, and others comprise 4%). About 50% of the people

hold a bachelor’s degree or higher, which is much higher than the State average of 21.1%.

The City of Cleveland Heights had only 3.7% unemployment, which is noticeably low

when compared to the Cuyahoga County’s (6.8%) and slightly lower than Ohio (4.0%).

       There are 20,913 households in Cleveland Heights, out of which nearly 11% live

below the poverty level. This is about 3% lower than the poverty rate of Cuyahoga

County and about the same as that of the State. The city’s public schools are struggling .

There are several universities near Cleveland Heights, so many professors from

Cleveland State, Case Western Reserve University, and John Carroll University reside

there. Cleveland Heights has an excellent public library system. The violent crime rate

recorded was 0.3 per 1,000 people, which is quite low when compared to the Cuyahoga

County.



Housing Market

       This inner-ring suburb had experienced market appreciation rates of about 3% per

annum between the 1990 and 2000 censuses, slightly above average for the Cleveland

metropolitan area. Housing stock is largely brick and colonial style frame homes, dating

from the 1920’s and selling for about $100 per square foot. The project hit the market

window perfectly. In late 2006, the market slowed due to the sub-prime loan fiasco.




                                             5
Marketing time increased, and housing prices for single-family homes dropped about

10%.

       In 2000, The City of Cleveland Heights had a 96% housing occupancy rate,

higher than the county rate of 93%. The homeownership rate in Cleveland Heights was

62%, lower than the 63% figure for the County and 68% for the State. The median gross

rent for the year 2000 in Cleveland Heights was $640, much higher than the $541 for the

county. The average sale price of single family houses in Cleveland Heights in 2000 was

$140,575, more than that of $124,827 in the county. The average sale price of two-family

houses in Cleveland Heights was about $130,000, almost double the county average of

$69,000. The sales price of condominiums in Cleveland Heights averaged $66,026, about

10% higher than the county.

       The City of Cleveland Heights has a housing preservation office that grants loans

and grants, funded by the Department of Housing and Urban Development. Another very

important resource for Cleveland Heights homeowners is the Home Repair Resource

Center (HRRC), a non-profit organization established to maintain and strengthen the

houses of Cleveland Heights. These aggressive housing maintenance programs make

Cleveland Heights somewhat unique, and are a vestige of its history as being a premier

national example of an integration-maintenance community following passage of the Fair

Housing Act in 1968.

       The census tract where the project is located has a higher income, larger

percentage of white householders, higher homeownership, and a substantially higher

average sales price than the city as a whole




                                               6
Redevelopment Process

       The controlling entity prior to redevelopment was the original congregation, the

First Lutheran Church, known locally as the Red Door Church for its distinctive red door.

The congregation had largely moved away, and the building was no longer needed.

       When no religious institutional buyers emerged, lead developer Josh Simon,

doing business with Andrew Brickman as the Derbyshire Partners LLC, acquired the

property for $700,000. The developer team combines Florida and local Cleveland talent.

Simon had earned his BA in Business and had spent time with his family’s real estate

company. He had previously done about eight other real estate development deals,

including converting two office buildings to lofts in downtown Cleveland. He was

looking for his next residential project.

       He first heard about the availability of the church property from a relative who

was playing golf with the real estate agent representing the church property. The agent

was marketing the property with the assumption that it would remain an ecclesiastical use.

Simon liked the existing church building and big lot and thought it would be “fun and

interesting” to convert the existing church into condos (Simon 2007). The size of the

property also allowed for the development of additional new town homes beyond just

rehabbing the church.

       Rezoning was not required because the area was already zoned multifamily and

the proposed project density of about 15 units per acre was well under the allowable

number of about 85 units. The City of Cleveland Heights was helpful in expediting the

approvals, although some friction with inspectors inevitably took place. Neighbors

generally supported the project, with only one adjacent single-family detached property




                                            7
owner voicing concerns about lack of privacy. The issue was that the rear of the carriage

house units was set back in close proximity to the abutting neighbor’s backyard. The

solution was to install frosted glass on the carriage houses’ back windows, which

maintained the abutting neighbors’ privacy.

       The developers requested tax abatement from the City of Cleveland Heights as an

incentive to save the church. Their rationale was that demolishing the church as part of

the development plan made more economic sense than saving the church because of the

higher density allowed on the site by zoning. At one point a demolition permit was

actually pulled allowing the developer the right to demolish the church. Eventually,

though, the city rejected their argument deciding that the abatement was not necessary to

make new housing construction viable in an affluent neighborhood. In the end, the

church was subdivided into five condominiums without the property tax abatement. The

church units are an integral and desirable part of the project.

         Richard Wong, of the city’s planning department was a strong supporter and

facilitator of the adaptive reuse. Richard was a solutions guy. The city’s building

department allowed for changes to the floor plan to be approved in the field by the

building inspector without having to submit plans or commence a new review process.

This flexibility saved much time and allowed for the efficient use of tradesmen.

         With respect to the design and project visioning process: “Units in the church
building, designed by Scott Dimit who was project architect for Forum Architects, LLC
at the time, are three levels (sub-grade, first floor, second floor) and range from 2,500-
3,200 square-feet…….Some units retain the original 35-foot ceilings with Gothic arches
and windows. Some units preserve carved architectural details, incorporating them into
the interior design. Original leaded-glass, pointed-arch windows along the sides of the
building have been replaced with new, higher efficiency windows. Original doors have
been re-used and eight original light fixtures have been retained.” (Schuemann 2004).




                                              8
       With respect to actual construction within the church itself, the entire interior was

gutted and rebuilt with all new carpentry and interior walls,electrical, plumbing, security,

and HVAC, and wired for new technology based on individual buyers' requirements. The

church's stone façade, roof and red door have all been retained, and new curved balconies

have been added. ”Brand new homes were built within the framework of the old church,’

Simon says.” (Schuemann 2004).



Development Plan for the Property

       The development plan remained largely intact, with 20 units proposed originally

and 20 built. The final products included 15 newly constructed units and 5 converted

church units. There are three housing products: 5 prime (but largely new) units in the

rehabbed church itself, 10 townhouse units, and 5 smaller carriage houses with tuck-

under parking. All units have a trademark red door. The design of the new construction

units was inspired by the church building. It matches the steeply pitched main roof of the

sanctuary. The exposed foundation bases were selected to match the pattern and color of

stone on the church.

       The 5 rehabbed church units were largely a gut job, with stained glass features

and exterior doors retained. The architects did a fine job of maximixing the space and

converting the church into three-story yuppie lofts, with 3 bedrooms and 2.5 baths and

averaging 2,800 square feet on a 900 square foot footprint. All new construction featured

granite countertops, top of the line bathrooms, and a master suite on the second floor.

Initial marking prices were $450,000, or $192 per square foot. Parking for the units is

located under the adjacent carriage house units.




                                             9
       The 10 townhouses, with wood frame construction and stone fronts, were new

construction on the out lot and site of the former educational wing. The architects

designed two-story plus loft units, with 3 bedrooms and 2.5 baths and averaging 2,600

square feet on a 800 square foot footprint. All new construction also featured granite

countertops, top of the line bathrooms, and gourmet kitchens. Initial marketing prices

were $420,000, or $168 per square foot. Parking for the units is behind the units, mostly

without interior access.

       The 5 carriage house units are much smaller, second story walk-up loft units. The

architects oriented the units more toward an entry level, with one bedroom and 2 baths

and averaging 1,100 square feet on a single floor with a patio. The same top of the line

features were available. Initial marking prices started at $175,000, but the units were in

heavy demand and later units sold for up to $300,000, or over $200 per square foot.

Developer Simon said that demand for the carriage house units was unexpectedly brisk

and he wished he had more to sell. Parking for the carriage house units is underneath the

units themselves. Map 2 shows the site development layout for the Brownstones at

Derbyshire.

       Resale activity is highly satisfactory. The two properties that resold both averaged

a 5% annual appreciation rate. This is highly acceptable for an expensive product in a

down market.



Project Financing

       Financing was difficult to secure due to the novelty of adaptive reuse in the

Cleveland market. Lenders were not familiar with multifamily development in the




                                             10
neighborhood and consequently could not see the potential financial success of the

project. They wanted to see presales before making a commitment. Financing was

eventually secured through the efforts of a local loan officer of Provident Bank (later

acquired by National City Bank). The loan officer grew up in the neighborhood, and her

local firsthand knowledge provided a sympathetic ear.

       Table 1 provides a summary of the financial aspects of this project. In addition to

the site acquisition cost of $700,000, site preparation cost about $410,000, plus there was

a small amount of demolition and asbestos removal. Soft costs (legal, design, engineering,

marketing, etc.) totaled $630,000. Project hard costs (before finish work) were $5.2

million, and the work was completed in four phases. The finish work was deferred until

units were sold, so that buyers had a large role in determining how the $900,000 in unit

interior finish allowance was spent. Construction financing cost $200,000, which was

relatively low (about 3% of project cost) because of the phased approach of development.

No units were finished speculatively. Profit was taken from the project at the end, with no

upfront developer fee. Overall project cost was $8.1 million, or $180 per square foot, all

costs (except sale commissions) in.



Marketing and Absorption

       All 20 units sold in 18 months. The original marketing plan was that the units

would be sold to employees of two large hospitals within a mile of the property

(Cleveland Clinic and University Hospitals) and the institutional community of the

University Circle cultural district. However, purchasers actually tended to be

suburbanites that wanted to be closer to the city and out-of-towners that immigrated to




                                            11
Cleveland. Interestingly, all of the customer traffic came from a development sign placed

on the corner of Derbyshire and Cleveland Heights Boulevard. A marketing arrangement

for web and print advertising was made with Progressive Urban Real Estate, which was

paid a reduced commission rate of 1.5% for each unit sold. Sales were handled in-house

by the developer. The arrangement with the real estate company was that all inquiries,

either by phone or email, were referred to Derbyshire. The arrangement worked for both

parties. In terms of actual buyers, out-of-towners made up half of the purchasers, with

almost all the premium units in the church going to out-of-towners. Only 3 of the 20 units

were sold to married couples.

       Total sales proceeds after sales commissions were $8.3 million. Assuming 20%

developer cash in the deal, this works out to a return of $188,000, or 12%.




Lessons Learned

       The project was a success. The property is well-located proximate to employment,

and in a stable, established neighborhood with housing prices comparable to the units

being offered for sale. The site was bought cheaply, and the lot was sufficiently large to

allow for a substantial number of new units to offset the fixed cost of site acquisition. No

rezoning was required because the site was already zoned multifamily, and the neighbors

largely did not object to the development. The city cooperated but offered no financial

inducements. The church construction was a gut job, essentially dropping entirely new

units inside the church, while retaining the attractive outside shell. The developer

indicated that the carpentry construction superintendent was important to the interior




                                             12
construction of the five church units. His expertise allowed that work to move smoothly

along to completion. The developer and his architect preserved much of the aesthetics of

the church building. Each unit within the church retains a piece of the small church’s

grandeur. Market timing was excellent, and phased development and deferring finish

costs until buyers were found kept financing costs low. A special arrangement with a

knowledgeable local boutique realtor also kept marketing costs in check. This was a

highly successful project.




                                            13
References

Brickman, Andrew. 2008. Developer. Personal interview, September 2008..

Brown, Mary. 2007. realtor. Personal interview, July 2007.

Simon, Josh. 2007. Telephone interview, November 2007

Schuemann, Nancy Loyan. 2004. “Sanctuary in Cleveland Heights:
Adaptive re-use project transfroms empty church into luxurious living spaces.” Properties
Magazine, Inc. Cleveland, OH December 2004.




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15
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Exhibit 1 Red Door Church Project Development
Costs

1.5 acre former church site
Cleveland Heights, Ohio
Development date 2005-6                                   FACTORS         DOLLAR        PERCENT OF
                                                                          AMOUNT       PROJECT COST
lot size (land square feet)                                 65,340
Floor /area coverage                                         69%
gross building area                                         45,000
net usable space (100%)                                     45,000
# current owners                                              20
# parking spaces                                              40

DEVELOPMENT COST INFORMATION
land/site acquisition (including option), includes
buildings                                                    $10.71       $700,000          9%

site preparation
Remediation: removal of asbestos                             $0.25         $10,000          0%
other site preparation incl parking                          $3.00        $402,000          5%
demolition school building 8,000 SF                          $4.00         $32,000          0%

construction costs
rehab, gut church building 3,000 sf                          $10.00         $30,000         0%
new construction 45,000 SF                                  $114.44       $5,150,000        63%
buyer finish allowance                                       $20.00        $900,000         11%
total building hard costs                                   $135.11       $6,080,000        75%
soft costs
architect planners, legal, surveying, power,                               $630,000         8%
market analysis (internal)                                                  $5,000          0%
subtotal before construction loan                                         $7,859,000        97%
construction loan/carry one year term                     8%, int. only    $251,488         3%
subtotal                                                                  $8,110,488       100%
developer's fee                                                               $0            0%
TOTAL DEVELOPMENT COST                                                    $8,110,488       100%
TOTAL DEVELOPMENT COST/SF building                                           $180

Sales

                                                                          average
                                                                            sales        total sales
                                                             units        price/unit      revenues
                                                                                             $0
Units, for sale in church building                             5          $490,000       $2,450,000
units for sale row houses                                      10         $460,000       $4,600,000
units for sale. Carriage houses with tuck under
parking                                                        5          $275,000       $1,375,000
total gross sales                                                                        $8,425,000
less commissions @1.5% (sweet deal with realtor)                                          $126,375



                                                     17
net sales proceeds                                               $8,298,625
THE FUNDING GAP                                       $188,137
GAP (surplus) AS % OF DEAL                              2%
profit analysis
project equity (20%)                     $1,622,098
return surplus plus developer fee                     $188,137
developers return on equity                             12%




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