Molzer Development Newsletter #2

Ahoy & welcome to the 2nd Edition of Molzer Development Newsletter!

In this post, we are going to dive into updates on my current development project, the Aladdin redevelopment, how I determined the Aladdin was a great opportunity, and an intro on historical tax credits & how they work! 

Disclaimer: I am insane. 99.9% of people SHOULD NOT start with a ten-figure redevelopment of a 99-year-old historic building. Do I fully understand the brain damage I am getting myself in too? No! But I have a killer team & partners at my side and a “do or die” mentality. 

Let’s start with the Aladdin! For those that don’t know, I along with my wonderful partners at Free Heel Capital & supportive investor, recently acquired the Aladdin Hotel in downtown Kansas City with plans to completely redevelop it into apartments. While this sounds super exciting, it is going to be the most difficult thing I have ever done. 

The Aladdin is a 99-year-old historic hotel that has been vacant since March of 2020 when COVID-19 stuck the world. 

Structuring the financing, navigating historic tax credits, and completely reconfiguring the building is no easy task. 

We are 2% of the way there, and it all starts with removing all the furniture from the building. When this place shut down in COVID, everything was left. Yep, you guessed it! 193 rooms of beds, desks, lamps, mattresses, pillows, etc. It is all still there, completely untouched. A true time capsule. 

We have engaged a liquidator to remove EVERYTHING from the building and begin selling everything off. See below for progress pictures as well as “the beach” (the coolest spot in the hotel since there’s no A/C!). 

So how did I determine this project was feasible? Why did I think it would work?

1. Basis

2. Historic Tax Credits

3. Location 

Let’s start with the basis, and I’ll keep it simple: 

When looking at doing an adaptive reuse project (every area is different, this is purely for the Midwest market), there is only so much you can pay for a vacant building. Sure, it might be a 100,000 sqft office building that at its peak was worth $40M+, but now it not only isn’t bringing in ANY revenue, you have considerable holding costs. That value of the building is now technically $0. The land is what you are really buying. 

Obviously, every building & project is different, some already have great mechanical systems, some need structural work, shell space vs already built out, etc. 

When I am looking at an adaptive reuse project, my general rule of thumb is you need to buy the “shell” for <$55/ sqft. 

Why is that? Let’s assume your hard & soft costs are going to be around $200/sqft, + your acquisition costs of $55/ sqft, you are already at $255/ sqft which is pretty considerable. In Kansas City, your rent per square foot on apartments for these projects is going to range from $2.00/ sqft to $3.00, depending on location, quality of work, floorplans, etc. 

The Aladdin was initially feasible because we were able to purchase the building significantly below that threshold. 

Okay, great. We got a good deal on a building. Step 1 is complete!

Now you have a vacant building, that is costing you tens of thousands of dollars a month to maintain. But how does this make any mathematical sense? 

Step 2. Historic Tax Credits 

Historic Tax Creditsare an amazing tool to be able to get a project like this done & make it feasible. How do they work? Here’s a short description:

This specific property is listed on the National Register of Historic Places, enabling it to receive credits upon  redevelopment. 

This designation paired with location within the redevelopment zone allows for new owners to apply for Federal Historic Tax Credits (FHTC) & Missouri Historic Tax Credits (MHTC). 

The credits would need to be applied for post-renovation and would amount to 45% of the project cost. 20% of that is FHTC while MHTC contributes for the other 25%. The 20% & 25% are based on “Qualified Rehabilitation Expenditures”. Things that are attached to the building as a part of the redevelopment. For example; most of your soft costs, legal fees, consultants, framing, paint, drywall, mechanical systems, etc. Things that don’t count are things like appliances & whatnot. An easy way to determine QRE (at a high level guess!!) is anything that can be depreciated, is NOT QRE eligible. 

FHTC has no application deadline while MHTC has biannual deadlines, typically in July and December. This has since changed in Missouri to a rolling application, which makes these types of projects MUCH more feasible. 

Without these, the Aladdin project would not be happening, and we are very fortunate to have consultants, HTC partners, lenders, attorneys, etc supporting us in this highly complicated process. 

For more details about historic tax credits, check out this website as it explains it well: https://www.commercialrealestate.loans/blog/the-historic-tax-credit-explained/#

Now that you have a BASIC understanding of historic tax credits, let’s move on to the final reason we determined this project would work: Location. 

Downtown Kansas City has been on the rise for over a decade, with billions under development over the next 5 years. NFL Draft, 3x Super Bowl champs, World Cup 2026, First Women’s Soccer Stadium, thousands of apartments under construction & more. 

In my next newsletter we will dive into all the exciting things happening in KC, but the big picture is that this building is located at a Main & Main location. 

1.5 blocks from the street car. 2 blocks from the grocery store. 2 blocks from Power & Light District (bars, restaurants, etc.). And most importantly, directly across the street from Barney Allis Plaza, the city’s parking garage & green space that is undergoing a $120M redevelopment. 

This park alone helps this project immensely. In a sense, it becomes future residents’ front yard, with an open green space, walking trail, fountains, dog park, playground & more. Being the only multifamily project directly across the street (and an underground tunnel to the parking garage), this is a HUGE win. 

You made it! You now have a high-level understanding of how to analyze an adaptive reuse project and determine feasibility. Over the next few months, we will dive into more detail on all of these subjects I just discussed, but I hope this provided a good start. 

As with any project, there are still tons of things that need to be figured out in order to actually make this project feasible & we are actively working with those associated parties to get that accomplished. 

I hope this was insightful, and gets you excited about redevelopment as a whole & the Aladdin. As I continue to put out these newsletters, I would love for feedback from my readers on exactly what you want to hear from me, hope to gain, and more. 

Please take some time and write me back recommendations & suggestions and I will do my best to implement them into future posts. 

If you read this and have any interest in participating in future projects with me as an investor, partner, etc. please don’t hesitate to reach out.

I appreciate you all!

Godspeed!

Zach Molzer

[email protected]

www.molzerdevelopment.com