He Bought an Old School for $25K and Turned It Into a $16M Development

Paul Warshauer (00:00)
One of our biggest projects was an old school in New Ulm, Minnesota. And the superintendent announced at a meeting, public meeting. He said, “Well, we’re going to close the school. We don’t know what we’re going to do with it.” I go, “Okay.” So we got involved and we talked to one superintendent and then he couldn’t put the deal together. And then the next superintendent, on his first day of work, calls me and says, “So I understand you want to buy our school.” And I said, “Yeah, we’ll give you 25,000 for it.” He goes, “Done.” And it was a whole square block.

And it turned into a $16 million beautiful development, Emerson Union Apartments on one side and then the State Street Theater on the other.

Dylan Silver (02:10)
Hey folks, welcome back to the show. Today we’re joined by Paul Warshauer, the owner of Grande Venues, where he specializes in acquiring, restoring, and repositioning unique commercial properties with a focus on historic schools, theaters, and hotels. Paul, thanks for joining us here today.

Paul Warshauer (02:27)
Thanks for having me, Dylan.

Dylan Silver (02:30)
Now, most investors aren’t looking at these historic opportunities. What made you realize they presented really an incredible opportunity?

Paul Warshauer (02:41)
Well, I’m glad they’re not looking for these opportunities. There’s more properties for me and my staff. Yeah, I’m in a niche market where we look at old buildings, primarily old hotels, old theaters, and now old schools. I got into it because I saved an old theater in Chicago years ago and I found out the world of historic tax credits, which we can explore a little later, which is almost basically no debt, no equity.

About 35% of your entire renovation costs are paid for by a corporation or an entity that wants to take the write-off on their tax return. So that little secret bit of accounting is what got me into it and I’ve been doing it ever since. Now…

Dylan Silver (03:21)
When we talk about these opportunities and finding these opportunities, typically they’re right in front of us because you might see a distressed older building. Is that how these opportunities come about? Is it literally in passing by, or are folks reaching out to you from across the country and telling you about, you know, “Hey, there’s this building over here that hasn’t had anything done with it, and we think there may be an opportunity for some value-add here”?

Paul Warshauer (03:48)
That’s exactly it. Some people will seek us out on… I’ve got a very simple website. It should be redone, but it doesn’t matter. I’m still getting calls on it. You know, people type in historic preservation, historic renovation. But then when they type in the word developer, which is the person who will either buy the property or set up another entity to buy the property with the group, they find us. But yeah, sometimes we get calls from people where their property is not listed.

One of our biggest projects was an old school in Duluth, Minnesota. And the superintendent announced at a meeting, public meeting. He said, “Well, we’re going to close the school. We don’t know what we’re going to do with it.” I go, “Okay.” So we got involved and we talked to one superintendent and then he couldn’t put the deal together. And then the next superintendent, on his first day of work, calls me and says, “So I understand you want to buy our school.” And I said, “Yeah, we’ll give you 25,000 for it.” He goes, “Done.” And it was a whole square block.

And it turned into a $16 million beautiful development, Emerson Union Apartments on one side and then the State Street Theater on the other. So yeah, these opportunities come to us either we go out and find it or we get calls from people in the neighborhood. Sometimes we don’t have anything to do with it, but “Would you help us sell, you know, our old historic house?”

Dylan Silver (05:08)
Something you had mentioned, Paul, in the green room was this idea of making these older and historic sites official historic landmarks, right? How challenging is that process? Is that something that is, you know, heavy legal and city involvement? What does that look like?

Paul Warshauer (05:25)
It’s complicated but not impossible, which chases away the average investor. To get access to these historic state and federal historic tax credits, you have to put the property in what’s called the National Register of Historic Places. It’s a program that was created years ago by Charles Percy from Illinois.

Which was the only reason a lot of these old buildings survived. Because he went to Europe and said, “God, the government helps these people and we’re not doing anything in America.” So it’s a lengthy process and requires usually an expert to come in and research the house, research the property. And then Part 1 and Part 2 involves an architect. It’s not a lot of money if you find the right person to do the actual listing. The architecture and all the rest of the stuff is a value-added, you know, stuff you have to do later. But yeah.

And the city is not required to help, but their assistance is usually helpful. If they argue against it, which they do in a lot of towns, then you go to another place. If you get zoning issues, pick another property. But yeah, it’s the National Register of Historic Places that actually lists the property and you get a little plaque. And then the big thing is then that investor or tax credit people can feel comfortable that the property is worth investing.

Dylan Silver (07:17)
Now, how, without getting too granular here, what type of tax advantages are involved when you have a national historic property?

Paul Warshauer (07:25)
I’ll give you an example. The Uptown Theatre in Chicago is the Great White Whale. It hasn’t been developed. It’s been closed for 35 years. In 2005, I joined… I was the chairman of the board. And you know, at that time it would have been about $30 million to restore. And now it’s going to be upwards of $70 million, which is not unusual for a 5,000-seat theater. So we found a couple of corporations that were going to participate in this.

So Chevron was the one I’m allowed to talk about it now. You know, big gas company. They have nothing to do with real estate, but they like tax credits. So they wrote us a letter saying if you do what you said, we will give you 19% of your entire renovation costs. No debt, no equity. So Chevron then takes a very small interest, like 0.01% of it, of the LLC. They all, by the way, have to be owned by for-profit entities.

That should be a relief to some of our investors who don’t want to deal with the not-for-profits. So Chevron basically wrote us a letter saying, “You do what you said, we’ll give you $7 to $10 million.” And in these increments, you know, “the first month we’ll give this, we watch your progress,” and so forth. So you’re getting money. That was the federal one. The state also matches it at about 20%. So you theoretically could walk into a deal with 35%.

Of the total renovation costs. These are approved costs, windows, doors, floors, you know, roof, all… Very, very few times they’re not going to cover them. And you can end up with 35%, you know, of your $10 million project that comes in at $3.5 million in cash with no debt and no equity. Banks love it, investors love it, but there’s a lot of paperwork. You have to get the right architect, do the right thing. And again, there’s a bunch of these projects we’ve done around the country where the people do what they’re told.

If you’re trying to cut, you know, kind of cut corners… You know, a school has to, when it’s restored, look like a school. Right, it has to be wide. It has to look like, you know, it was a school. And then there’s apartments on either side and, you know, so forth. But that’s the advantage.

Dylan Silver (09:33)
Let’s talk a little bit about the theater restoration. I know there’s a lot of folks who really see without having an eye for it this tremendous opportunity. Because you go to any older city and you’ll see older theaters throughout these cities. Do the cities themselves typically have a plan in place?

Paul Warshauer (09:53)
They may have a plan, they may have an idea, but our secret, and this is the real important part, is it’s not enough just to save the building.

I mean, I went to Iowa to a small town and nice old lady, millionaire, and she’s “Thank you for coming to help save our theater.” I said, “Hey lady, I haven’t started yet. I don’t know if this’ll work.” And I said, “What do you plan to do on the third night after you open the theater?” She goes, “What do you mean?” I said, “What programming do you have in the theater planned?” “We just wanted to get it open.” “Okay.”

So you don’t have any plan as to how business operates. That’s our big secret, is that we come in and say, “You better not just want to show movies. That ain’t going to work anymore.” You have to be in tune with the community. That’s where the business people in the community and, of course, a lot of the marketing people in a smaller town, you get some kind of economic development person who works for the county. You have to program it and say, “We’re going to do concerts once a month, local concerts.

We’re going to bring in some lecturers, we’re going to do some speakers. Yes, we’re going to show some movies, but we’re also going to have other events in the theater that’ll generate revenue and pay the bills.” It’s not enough just to run a theater anymore unless, you know, you’re an IMAX theater. The big chains, ’cause they can afford the big costs and the big downtime, you know.

Dylan Silver (11:49)
There are some incredibly ornate, elegant, and beautiful architecture theaters throughout the country, which brings a point. How could folks let these properties get so distressed that you have such a beautiful building? Is it simply, you know, poor business practices and folks that weren’t able to cash flow out of these theaters?

Paul Warshauer (12:13)
A bit of it is laziness. Somebody else will do it. You know, you live in a small town, you know, here’s the barber and you know the mechanic and the rest of the whatever… “We can’t afford to do it.” No. But if you get a group of citizens together and work with a developer like me or some other… Don’t just trust an architect, because again, the secret to our sauce is that we come in and help you program for the old building. Is it going to be apartments? Is it going to be apartments for seniors? Is it going to be apartments for young couples?

Is it going to be the one big thing now everybody’s looking at in this country today? Is there going to be workforce development? Can we build some apartments that can afford younger couples and have a baby? And how do we stabilize it? That kind of thing. So those programming elements come from your county business people, you know, the ones that are talking about housing. So the secret to our sauce is what are you going to do with the old building?

Dylan Silver (13:05)
Now, workforce and affordable housing, it seems like everyone is talking about this.

Paul Warshauer (13:11)
This is what we’re getting calls from now. The problem is you have to make it work. Rent, some of it has to be stabilized, some of it has to be fixed. It’s complicated. That part of it, the operation is not our business. We’ll put people in touch with them, but we’ll give you the models that you need. But that really is all technical stuff. And some of these old buildings can’t afford it. I mean, it’s easier to build a cheap claptrap building, you know, brand new, but you don’t get the same value. I think people have pride.

“We’re living in the old school.” “Really? The one that they’re redeveloping?” “Yes.” The outside looks great. You have a nice lobby. They always look good. So it’s doable. But that’s a heavy lift and it’s still possible.

Dylan Silver (13:51)
When we talk about repositioning schools and hotels into multifamily housing, some of these I could see because, you know, if you got a hotel, it’s going to have a bathroom in every room, and a school might have a bathroom in every classroom, something like this. What are the biggest challenges when repositioning these properties?

Paul Warshauer (14:08)
The school, let’s start with the schools. They’re easy. Most schools are set up, they have classrooms. So you start with a classroom as a room for, you know, a unit for an apartment. Now, of course, then you have to add a bathroom and a shower in each of these units. So sometimes maybe you’ll take two classrooms, put them together. It’s not as hard as you think. And then you’ve got 40 classrooms, maybe you get 25 or 30 apartments. So that’s the place to start. You know, the rest of it is what do you do with the empty space?

What do you do with the gym? What do you do with the library? Yeah, what do you do? Well, what we did in New Ulm, Minnesota, is it was a 700-seat theater. Nobody wanted this whole building because they didn’t know what to do with the theater. Well, I happened to have been sitting on a board for a thing called the New Ulm Actors Community Theatre. It was a small not-for-profit group. And I convinced them, I persuaded them, “Look, if we give you the theater for a dollar, can you go out and raise some money?” And we were excited.

So I was serving with two hats. Now the State Street Theater occupies… It’s been there for seven years, very active. They do a lot of grants, they do children’s programming and so forth. So again, it’s all about the programming. What are you going to do with it? Old libraries end up being very helpful. If you do the senior center, it’s easy. You know, that’s the meeting room, that’s the kind of assembly room. Well, you already know what to do with the cafeteria and the kitchens. Most of them are set up for commercial operations, so…

You know, you just need permitting and the rest of it. It’s the big spaces, it’s the gymnasiums and the auditoriums is where we come in especially. Especially if you’re going to do, you know, an apartment complex, you know, what again are you going to do with them? That’s our secret sauce, is how to program for those areas. Now we…

Dylan Silver (16:35)
When you talk about programming and further management of these properties, what immediately comes to mind is that, you know, when you’re programming for a theater, you’re running a vertically integrated business, right? And there’s folks who can come in and do a flip, even a commercial flip, but then successfully running a niche business can be challenging. Even a niche within multifamily housing, like let’s say student housing.

If you go from the standard multifamily housing, apartment complex, even to student housing, not too distant, it can be a challenge. And you’re doing this across, you know, theaters. As a vertically integrated business, what does that look like? Do you have a team in place at each property? Do you have a team that handles each new property?

Paul Warshauer (17:19)
Pretty, but you got us right in the middle of it. We rarely operate after we finish development. We move on to the next project. So we will set up the business model for the next owner. So we rarely manage any of these things. They’re too complicated. We got too many of them. So what we’ll do is we’ll put a management team in place. Most of the investors will sell to another organization that loves just picking up a business ready to go. And most of the time they’ll pick up the management company.

In the case of one of the ones in Iowa, we found an operator who just loved what we were doing. And as we’re doing it, they were giving us advice about, you know, the size of the lamps or the, you know, the stones on the side of the hallway. So they took an active participation. When we finished, we turned the keys over to them and they bought the whole property. So now with a group of their investors, they’re actually doing the operation. They’re different parts of the spectrum, and nobody can do it all. I’ve never found a developer that comes in…

And does historic preservation and then, you know, opens the doors and then operates. That’s not our, you know, that’s not our expertise, so we don’t pretend to. Now, theaters are a whole… The theaters are a whole different story. That requires community effort, and usually a for-profit owner will own the building and then lease the space to a not-for-profit, 501(c)(3), who then can run the theater as a theater.

Dylan Silver (18:27)
For folks who…

Paul Warshauer (18:46)
…but they have a solid base because the money people are watching the payments every month. So there’s a nice balance. They’re always at odds.

Dylan Silver (18:54)
You know, you mentioned that investors are coming in and purchasing these deals. And so I think for folks, you know, myself included and our audience members who are looking at, well, who’s buying these properties, it’s for-profit investors. It could be a fund, it could be a family office, it could be a syndication, right?

Paul Warshauer (19:12)
Yes. Those are the best ones. The big fish are out there. We get for big projects over… Sometimes their limit, their minimum is 20 or 25 million. Some of these projects are 10 to 20. That’s a doable one in smaller towns. So sometimes it’s a bank that puts together what’s called a syndication. They’ll buy the building for their investors. Some banks actually take equity in… They have to be a private bank to do that. But…

Yeah, there are groups and entities, you’re right, out there that will look for these opportunities. We’ve got, you know, a bunch of them that we send out the information just as we’re starting, saying… And, you know, sometimes we’ll have the deals done almost before we break ground. So it…

Dylan Silver (19:55)
Is there anything specific that makes holding these properties challenging because they’re older, or maybe there’s, you know, I don’t know, the maintenance end of it? But when these investors are typically holding, let’s, you know, look at a commercial apartment complex, right? And they’re looking at, you know, a three to five year, maybe a seven year hold time. That could be typical. Is it similar in this space or are there limited buyer pools when you’re in the historic space?

Paul Warshauer (20:20)
There’s, you know… You have to be a specialist in understanding how these properties work. The great advantage when you buy a historic property that’s been restored, the other word is rehabilitated, is you’re getting an old building, but everything on the inside is new. You get new plumbing, you get new electrical, you get new HVAC. So a smart investor will say, “Yeah, we love the outside. It looks good on our annual brochure, it looks good for our investors.” But then you’re right. Then the five to seven year is…

Are we building… Are we building or when we turn over the keys to the next owner, are we giving them at least 10 to 20 years of good operation without a whole lot of maintenance? That’s been our hallmark. We’ve done pretty well. And we also leave great little nuggets. I mean, a lot of these properties, when you buy an old school, people throw out the chalkboards or the chalk rail, the little thing that goes underneath it. But we save all of it because in every apartment we give them a small bit of chalkboard.

And it’s kind of fun, you know. I go through myself on, you know, the day before we open, and there’s the chalkboard and there’s the rail. The rail is the hard part to keep. And I put in a piece of yellow chalk and an old cloth eraser myself in every one of our properties. And that’s kind of cool. We’ve gotten some nice awards for little touches like that, you know.

Dylan Silver (21:40)
These little touches is really what makes an emotion come from architecture. Now, one of the things that I’ve noticed talking with lots of residential investors and developers and flippers and, you know, national corporate developers, even, is when you start looking at older homes, beautiful homes, older Victorian homes on sometimes ranches, these can become distressed, and then folks will look at this and say, “Well…

You know, this doesn’t have as much resale value as we would like. If we were to look at rehabbing this, who’s going to be the end buyer here? We’re going to look at other opportunities.” I saw this actually when I was living in San Antonio. There would be lots of older, very ornate homes and basically very, very distressed. And you’d look at that and say, “That’s a beautiful building. What’s happening there?” Are these older Victorian homes unfortunately just going to…

You know, be destroyed? What’s going to happen with these homes?

Paul Warshauer (22:37)
With great respect, Texas is terrible. They had no problem in Dallas or Houston tearing down some amazing bits of architecture in the ’70s and the ’80s to build these horrific towers. And some of them beautiful department stores. They could have been, you know, amazing apartments and so forth. The smaller towns have a little… Well, obviously they’ve got a closer focus. We’re working in a very small town in Minnesota. Beautiful old Queen Anne style house at the turn of the century. We put it on the National Register.

But nobody can figure out what to do. We only paid 40,000 bucks for the house. Yeah. And we started restoring it, but what’s it going to be? And it turns out the best use for it is a bed and breakfast. Well, that requires a special owner, you know, usually a couple, maybe with a child. And you know, that takes a while to find the right person who’s going to manage it. Now, to find a couple with a kid that wants to buy a bed and breakfast, that’s a miracle. You know, you find somebody like that. Now it takes some advertising.

But there’s a lot of people, younger people that want to do that. Maybe the wife and husband work and, you know, they make the breakfast in the morning and then you don’t really have to do much until the guests check out. But that’s a great use for old houses like you were mentioning. Other things like an old school. There’s a big school coming up for auction. They couldn’t find anybody. We were the only bidders. And we didn’t bid enough. So last week the superintendent says, “We’re going to do a bond issue, a referendum…

And raise three million dollars so we can demolish the school.” Yeah. So we’re going to fight that one because I’ll take half of that and I’ll get a good start on building market-rate apartments, which is what this small town needs. So that’s the extreme, is when the public doesn’t come, you know, and there’s no vision there. They didn’t have any vision to work with developers like… And I’m in the neighborhood. I’m here. So yeah.

Dylan Silver (24:07)
Sharing.

You know, when we mention this idea of, you know, the current owners even saying, you know, “We’re going to…” or the people in charge saying, “We’re going to demolish this versus taking an offer.” Does some of this come down to people looking at… You mentioned an old school, but these older buildings and Victorian homes and saying, “Well, the land value here is really high and we know that the rehab cost for what we’re getting quoted is astronomical. It’s going to make more sense for us to demolish it.” Is that an issue that people are coming across?

Paul Warshauer (24:59)
With as much respect to old properties, it all comes down to dollars and cents. Is a vacant lot in a very special part of town worth more than an old building? Well, there’s an economic value to it and then there’s a cultural value to it. And how do we say this politely? It’s a touchy-feely thing. “Well, we don’t want to lose the old hardware store.” Right. What are they going to do with it? Well, the worst is, and the irony is, they’re going to build a parking lot out of it because they need parking in downtown.

Well, strangely enough, my family started in parking in 1927. I never went into it, but that company became Standard Parking and now it’s bought out by another guy. I would have been a multimillionaire now, but I couldn’t see the value of knocking down buildings to build, you know, parking lots and so forth. But yes, a community can be blindsided by somebody who comes in… Usually it’s an outsider that sees the value, where the local people who are on Main Street are just focused on my little florist shop. “Well, we need some extra parking.”

Or my little hardware store. I use that example a lot. But if the community gets together and says this is a good thing… And again, it takes a community. If they don’t want it, especially in towns of up to, you know, 25,000… I mean, ’cause everybody knows everybody’s business, yeah, in these small towns. And there’s a lot of pride that goes into saving these old properties.

Dylan Silver (26:17)
Now, I’ve seen this, and I’m sure our audience can appreciate this. There’s streets that you’ll come across where it seems like every home on the street is this beautiful old home. So there are… We can call them outliers or examples of where it seems to be the case that streets have made a conscious decision to preserve older homes. Does this happen because, you know, one person starts a trend and does a heavy rehab, root-to-the-studs to keep that old look, and then a second person does it and…

Kind of through osmosis it bleeds down the street?

Paul Warshauer (26:48)
The genius of those… There’s a lot of these cities, St. Paul, Minnesota; Schenectady, New York. There’s a bunch of these that have whole rows of historic Victorian or Queen Anne houses because somebody had the vision to say, “All right, I’ll do the first one, but now I want us to have an association. I want our street to have an association that says, here are the restrictions for what you can do with your house.” Well, you got to be a special person to say, “I’m not going to take my marching orders from a committee.”

Well, if you want to save an old house and you have similar people in the neighborhood that want to do the same thing, yes, that’s a gem, but rare. San Francisco does it all the time. I mean, you know, New York has been less successful. We looked at a building, a seven-story building, downtown Manhattan, gorgeous old thing. So I called the realtor. I said, “You know, I’ve got a couple of investors that want to turn this…” “Don’t talk to me about New York. $80 million just for the building as it is.” Eight stories.

Nowhere else in the world. “Well, if you convert it to condos…” “We’re not going to do it. It’s too… We can get the tax credit for the rest of it, but I was looking for one of my investors who said probably something if it had for 50 million.” “All right, you get a small bungalow.” What? Yeah, so forget New York. Yeah, it’s…

Dylan Silver (28:03)
That’s, you know, a difficult place to buy anything, not just for ultra-high-net-worth individuals, but even on a smaller…

Paul Warshauer (28:10)
There’s always people way ahead of us. Very smart people who have made millions of dollars in New York. Now, Boston, Philadelphia, Washington, D.C., even some of those other cities have value, but there are a lot of restrictions on what you can do in those houses. For sure. Go to the smaller towns, I’m telling you, for developers who want to make some money and make a difference. You know, you leave town, they give you a parade. You know, one of the groups gave me a sash and said, “Thank you, Mr. Warshauer.”

And I was humbled by it. I got in my Cadillac and I drive home. I’m a king in that town. So, but you make a difference and you make money. And that’s bottom line for us. This is not the podcast where you give away money, right? We don’t have a podcast where you talk to people who want to make money. Yeah. Yeah, that’s a different podcast. You want to give away money, talk to somebody else.

Dylan Silver (28:54)
Give away money, fine. We are coming up on time here, Paul. Any new projects that you’re working on and then also anything you’d like to mention directly to our audience?

Paul Warshauer (29:10)
I think every one of you live in an area where schools are closing. There’s not as many kids as there used to be, first of all. I mean the population… I use the census data a lot to find out who’s living where. And this is easy for any of you. You just have to know where to go. And it’s all free. You don’t have to hire a marketing firm or look at a podcast to find out how many people have kids in this town in Nebraska, how many people have this, this, this. Then you start doing your homework. Now schools are going to be coming up.

We’d love to help any of the investors who see a school in their neighborhood. And some of them are listed on, you know, Crexi and any of the other programs that sell. So call us and at least let us have a shot at consulting with you. We don’t have to do the development, but we’ll walk you through everything for a fee. And, you know, I’m an old man with a beard. I travel anywhere. What is it, the old expression? The gray-haired man with the briefcase, he’s the consultant, you know.

I mean, that used to be the expression of the old days. Yeah, here comes the gray-haired man. Now it’s the gray-haired man with the beard and smokes good cigars. That’s me. And I make no apologies at 72 for smoking cigars. So, especially those from the Dominican Republic.

Dylan Silver (30:22)
Longevity. Key to longevity. Paul, thank you so much for your time today. Thanks for joining us.

Paul Warshauer (30:27)
Pleasure. Thanks for having me, Dylan.