Scott Nishimura snishimura@bizpress.net
Dak Hatfield has had a busy time of it in Fort Worth. He’s teamed up on the Magnolia May commercial adaptive reuse project on West Magnolia Avenue that is home to a collection of new restaurants including Spice, and on the remake of the Supreme Golf warehouse into lofts and commercial space, including tenants such as the Shipping & Receiving bar, Paige Hendricks and Fort Worth Bike Sharing. He’s become an expert on the use of state and federal historic and new market tax credits in closing the financing gap in real estate projects.
Hatfield, 39, lives in Fort Worth with his wife and two sons, ages 7 and 4. He sat down recently for coffee and a Q&A at Brewed, a West Magnolia hangout.
How did you get your start in real estate? I graduated TCU in ’97 and shortly thereafter was a banker and then got into ground-up multifamily development in Dallas. From there, I moved to Hawaii and started a company that was rehabilitating military housing. My wife and I [realized] we wanted to raise our kids and have them close to their grandparents, so we moved back and I got back into commercial development developing medical office, office, mixed-use, retail, the whole gamut. I’ve been either an owner, investor or developer.
How did you get into your startup in Hawaii? The military came up with a housing program. A lot of their existing facilities were antiquated, outdated; they needed a lot of work. Our responsibility was to go in and take these antiquated facilities and bring new life to them, by redoing all the interiors. Some of them were 50 units, some of them were 13 buildings that were 200 units each.
How do you get something like that off the ground? My uncle had started a company in Washington, D.C., that had catered to that area. He and I had a conversation. He mentioned there was an opportunity in Hawaii, where there was really not a lot of service. I figured at that time in my life, without kids, it was a good time to take a chance. The first year was probably one of the toughest years I’ve ever gone through, just trying to understand how to do things.
Fast forward, how did the Supreme Golf opportunity present itself? I’d been looking at the area. I had a client that was looking for that type of product, a historic building, something that’s got character. [In the area], there’s a ton of these buildings that can’t be replicated. There’s a lot of demand for them. Fort Worth is growing up as a city and we’re starting to see more of an influx of those creative companies coming in.
How’s that building doing? We had to keep it very simple, and we had to keep our costs down because of the area and because of the market and what we had to hit. We basically took what the building gave us. We’ve been very happy with the commercial side of it, and now the apartments. We have 23 apartments, and we have two left [vacant].
You’ve got some historic federal tax credits in the Supreme Golf property. How did those work? It’s a five-year hold, and you have investors. As you put investment into qualified expenses, you’re able to get a 20 percent [dollar for dollar] tax credit. You’ve essentially got somebody who’s monetizing those tax credits for you. But for those credits, we wouldn’t have the opportunity to make the project work. If your project has the ability to be patient, it’s a way to get them done.
There are also new market tax credits. How do those work? I’m helping several companies here in the D-FW area that are expanding or remodeling, and they’re creating jobs in a blighted census tract. At the end of the day, those companies are attaining about a 17-20 percent net credit that they’re able to apply to that project. If you’re got a project that you’re not able to pull off, this is a great vehicle. On a $10 million project, you may be able to get back $2 million.
Do you have any credits in the Magnolia May project? The State of Texas just enacted a law last year that allowed for a 25 percent credit on franchise tax for qualified expenses. It’s easier to monetize those credits on the state side. You can sell credits you’ve generated to a company that can use them against their bottom line. As far as Magnolia May goes, we had several conversations with the Texas Historic Commission and determined the amount of time to go through that process was not worth the credit we would get. It would have ended up being a $10,000 credit at the end of the day. But for the state credit, you don’t need a $3 million to $5 million project for it to make sense, because it’s easier to monetize.
So you’ve become a bit of a consultant on these credits? I went in looking at ways I could bridge financial gaps and make some of these deals work, and I’ve become a consultant. There’s a project I’m working on in Dallas where I’m acting as consultant and expect to co-develop it. Besides the credits, how do you structure these deals financially? Southwest Bank has been a great partner in a lot of the deals I’ve done. They would come in as a lender, and I have folks I reach out to from an equity standpoint. Each one of the projects has a debt component and an equity component.
What percentage equity do you have to come into these deals with? It’s been anywhere from 20-25 percent typically … either on a loan-to-cost or loan-to-value. The loan-to-cost is really what I look at. I like to see an 80 percent loan-to-cost. How attractive are the adaptive reuse opportunities here? They were a lot more attractive about five years ago. Over the past year, maybe eight months, it’s almost like a land rush where everybody has been flooding Fort Worth, D-FW as a whole. There are investors from all over the nation that are coming into this area. It’s made my job finding those opportunities tougher. I also like to joint venture with the existing owners if they’ve had long-term ownership and they just don’t want to sell it. I’ve got three different projects I’m looking at where I would go in and serve as the developer. Is there any fragility to the near South Side market for restaurants and bars? It’s a good question. Is it potentially overbuilt? I don’t think we’ve gotten there yet. I haven’t seen any restaurants fail. We saw Ryan’s [grocery go out of business quickly], but I don’t believe that was because of a lack of demand. I think there’s still more opportunity for residential. There’s 30,000 people that come in to [work in the hospital district] every day. As you start adding more residential, that’s only going to start creating more opportunities. How’s the retail rent structure on the near South Side compared to West Seventh? I would say almost half. Now you’re getting a different vibe, a different quality product, but I think that adds to the charm. What about parking? Parking is a big problem down here on Magnolia. We haven’t really experienced it on South Main, but I can see it coming. Parking is always going to be a problem whenever you’re dealing with inner core neighborhoods. I think we’ll see more structured parking. The question is who funds that.