Tacoma’s long-awaited McMenamins, and the renovation of downtown’s historic Elks Temple, is delayed indefinitely because the company hasn’t found private investors for the last portion of the financing.
During in-depth interviews last week, company co-founder Mike McMenamin and chief financial officer Larry Dortmund laid out the status of the approximately $20 million project. They said their search for equity partners for the last $6 million to $7 million had gone on longer and been more frustrating than they ever expected.
“It’s been very disappointing,” McMenamin said. “We’ve had so many meetings, and they’re not interested in the project. They’re interested in just the internal rate of return.”
Even if the company finds investors for Tacoma, the Elks project now is second in line. McMenamins first must renovate a historic school in Bothell, a project the company took on after it bought the Elks building.
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The Bothell project also is lacking the equity component. But unlike the Tacoma transaction, done on the private market, McMenamins bought the W.A. Anderson School property from the city of Bothell. The city put deadlines on the deal, requiring an opening by January 2015.
McMenamin didn’t rule out doing both projects at the same time, though he did acknowledge the company hasn’t ever done two projects this large simultaneously.
McMenamin and his brother, Brian, have been in business for three decades, building an entertainment empire of 55 properties across Washington and Oregon. The private company employs 2,000 people and has annual revenues of $119 million, a spokeswoman said.
The Tacoma and Bothell projects mark the first time the company has sought outside partners. The reasons reflect the post-recession economy. The projects are expensive — both in the $20-million range, Mike McMenamin said, and full institutional financing is not as easy to find as it was before 2008. Plus, the company already has spent about $4.4 million to buy both the Tacoma and Bothell properties.
“We’re really heavily invested in real estate now,” McMenamin said. “We have wonderful buildings in the company now, but that’s eaten up our cash.”
The company co-founder is soft-spoken and known for his optimism, and his frustration is clear. A few years ago, the company was so close to a financing deal that McMenamin said publicly it was done. But during two separate interviews last week, he didn’t waver in his commitment to finishing the Elks building.
“We’re totally committed and as excited as ever,” he said. If the company can’t find the right partner, it will “do it under our own power, and it will just take longer.”
McMenamins bought the Temple for $1.2 million in 2009 as part of a deal put together by developers Grace Pleasants and Rick Moses, who planned to build a complementary mixed-use building on the lot to the north.
In 2010, the company entered into a development agreement with the city of Bothell for the Anderson School, built in 1931. The city has twice extended the opening date deadline, most recently to January 2015.
In 2011, plans for the new building on the lot north of the Elks died. McMenamins bought the land for $980,000.
In February it picked up its construction permit for the temple. According to Michael Sullivan, a Tacoma historian working with McMenamins, the company has since:
• Installed a full interior drainage system.
• Installed a building-wide alarm system.
• Installed construction lighting.
• Removed all the drop ceilings to reveal original decorations.
• Removed the old handball courts.
• Removed all unoriginal walls used to partition the building in its later years.
• Removed all carpet.
“My heart is in that project, but I know Bothell will happen first,” Sullivan said. “That doesn’t mean they’ve slowed down at all on Tacoma.”
The Elks Temple now is “basically a big concrete box with a lot of decorative plaster on the walls and ceiling and hardwood on the floors,” he said. McMenamins staff visits weekly, he said. “They’re paying close attention.”
This summer the company asked for an extension of its construction permit, which moves the permit into an inactive status for six months at a time. City officials said there isn’t a limit on extensions.
MEETING WITH POTENTIAL INVESTORS
All this time, the company has had meeting after meeting with potential investors, Dortmund said. First the company used the network strategy: Someone who knows someone who might be interested in Tacoma, or Bothell, or both. When that didn’t bear fruit, the company hired a consultant in early 2013 to find more leads.
“They came up dry,” he said. The search has come back in-house.
“It always seems to get back to return,” Dortmund said. Investors want low- to mid-20 percent, he said. McMenamins’ initial offer is low 10 percent to 11 percent.
That’s negotiable, Dortmund said, but the conversations rarely get that far. Dortmund and McMenamin acknowledge the company is new on the equity scene, but they both expressed surprise at how difficult the process has been.
“You want people who want to invest in this project because they like what it is: rehabbing an old building. Creating a community center. Revitalizing the neighborhood,” Dortmund said. “There doesn’t seem to be anyone we’ve met who can make that connection and say ‘I’m willing to take not as large a return.’ ”
They’ve considered searching nationally, but McMenamin would prefer a local or regional partner.
Dortmund and McMenamin have met with four Tacoma-based investors, Dortmund said, though he didn’t name them. Three just said no. One seemed to consider the project but said it wasn’t straightforward enough. The investor preferred typical categories, such as hotels, apartments or office buildings — not an almost 100-year-old renovated Beaux Arts building with multiple bars, concert stages, hotel rooms and a soaking pool.
“Our stuff is very different, and it was just too far out of whack for them,” Dortmund said. Investors look for “comps” — similar projects to compare with a new one. The only comps for a McMenamins project are other McMenamins projects.
Some people on Tacoma’s investment scene said last week they were surprised to learn about McMenamins’ hunt for cash, though the amount it’s seeking means the search probably focuses heavily on investment funds based in Seattle.
John Dimmer, a tech entrepreneur, private investor and co-founder of the Tacoma Angel Network, said he didn’t know about the equity search. That could be because angel investors typically top out at around $3.5 million, he said, and the Elks project needs twice that.
If local people have that kind of money, it’s usually invested through a Seattle fund, he said. That could be another way Bothell has a leg up.
“I think once you start getting south of SeaTac, the Seattle community starts raising an eyebrow and saying, really? Really, are there any decent investment opportunities south of here?” he said. “Seattle people understand Bothell. I don’t know that Seattle people understand Tacoma. I think there probably is a negative bias.”
Several Tacoma investors brought up the El Gaucho model as a way to pioneer investment. Such a high-end restaurant didn’t exist in Tacoma, so it was hard to prove to lenders that the market would support it. A group of 20-30 local people bought ownership shares in the Tacoma location, providing almost half of the project cost.
“It wasn’t a single investor, it was a number who believed in what they were doing,” said development consultant J.J. McCament. “That’s a way to use a number of people and spread out the risk.”
Dortmund was open to the idea. “At this point we’re willing to talk to anyone about this. If it takes 20-30 people, we’re willing to entertain that.”
Bringing in investors, with the accompanying scrutiny, can be disconcerting.
“Investors who want to invest in the community still want to see a viable business plan,” said Kevin Phelps, one of the original investors in El Gaucho and a former member of the Tacoma Angel Network. “A closed-down McMenamins would be very damaging to the community.”
McMenamin and Dortmund are still knocking on doors. City of Tacoma economic development officials are sending leads, including a handful of agents working with immigrant investors.
One business owner near the Elks Temple was sad to hear about the delay. Kathy Price owns Good Karma, a wholistic arts center at 711 St. Helens Ave., where she can see the temple from her office.
“It does give a little gut punch,” she said Thursday, “but I am not a negative person.”
McMenamin said he doesn’t want to promise a start date anymore.
“Every time I’ve put a time on it, it hasn’t worked out well,” he said. “We have several million into the project. We’re not going anywhere. All the architecturals are done. We have a permit. We own the property. It’s all there. We just need this one piece to put us over the top.”
McMENAMINS’ OTHER ENTERTAINMENT COMPLEXES
The Portland-based brewpub operator has 55 locations in Washington and Oregon, most the size of a neighborhood restaurant. They have just a half-dozen large entertainment venues that are in the same category as what the company plans for the Tacoma Elks Temple. Here they are in order of opening:
Edgefield: Troutdale, Ore. Bought in 1990. Opened in 1991 with the brewery and opened piecemeal after that. Now is 74 acres and includes a 100-room hotel, restaurant, pub, bars, grill, two golf courses, gardens, live music, on-site glass blower and potter.
Kennedy School: Portland. Bought in 1996-97. Opened in fall 1997 and includes 57 hotel rooms, a restaurant, bars, soaking pool, movie theater, brewery.
Grand Lodge: Forest Grove, Ore. Bought in 1999. Opened in 2000. Includes 77 hotel rooms, restaurants, bars, spa, outdoor soaking pool, disc golf course
Olympic Club: Centralia, Wash. Bought in 1997. Opened in 2002. Includes 27 hotel rooms, restaurant, bar, pub, brewery, theater for live acts.
Old St. Francis School: Bend, Ore. Bought in 2000. Opened in 2004. Includes 19 hotel rooms, pub, brewery, bakery, movie theater, soaking pool.
Crystal Hotel: Portland. Bought in 2008. Opening pushed back several years because of the recession. Opened in May 2011. Includes 51 hotel rooms, soaking pool, bar, restaurant, music venue.
Elks Temple: Tacoma. Bought in 2009.
Anderson School:Bothell, Wash. Bought in 2010. TIMELINE OF McMENAMINS, TACOMA AND BOTHELL
Sept. 16, 2009: McMenamins submits a proposal to city of Bothell in “competitive process” for Anderson School.
July 8, 2009: Grace Pleasants and Rick Moses announce Tacoma Elks project involving McMenamins. McMenamins pays $1.2 million for the Temple and land under it.
July 12, 2009: Mike McMenamin puts the cost of the temple rehab at “at least $10 million if not more.”
Dec. 24, 2009: Company spokeswoman tells Daily Journal of Commerce that the temple’s tentative opening date is St. Patrick’s Day 2012.
April 17, 2010: Developers announce plans to move hotel rooms into new mixed-use building, pushing groundbreaking from fall 2010 to spring 2011 and therefore opening to fall 2012.
June 24, 2010: Bothell and McMenamins enter into agreement for Anderson School.
July 16, 2010: During a public presentation about the Tacoma project, Mike McMenamin assures the crowd that the Elks renovation will proceed regardless of the fate of the new mixed-use building.
Jan. 25, 2011: Moses said he expects the new building’s construction to start “somewhere between August and September” and open in the fall of 2012.
“We are really reluctant to open without a hotel. So we kind of have to sync up, “ McMenamin said at the time. “We have to open when the building next door opens because if we don’t, we’re opening without a key part of our operation.” McMenamin said financing for the temple renovation would be half equity, and half from an investment group. He said renovation work would begin at the Temple in another few months.
July 14, 2011: Pleasants pushes timeline for opening back again. “I think we’re looking more like the spring of 2013, “ she said.
Sept. 27, 2011: McMenamins CFO says the company has “competitive alternatives” for financing and plans to start work early next year, with an opening in spring 2013. Pleasants and Moses miss a key deadline for their portion of the project, and the plans for the two buildings part ways.
January 2012: McMenamin says his company will begin work at the temple at the end of January, with a planned opening in the spring of 2013. He says financing is lined up.
Jan. 31, 2012: McMenamins applies for city construction permits. Operators plan to start work in May and open in April, city economic development staff says.
May 2012: Historic preservation consultant Michael Sullivan says McMenamins is waiting on permits in Tacoma and that McMenamin has been working hard on a new hotel opening in Gearhart, Ore.
June 7, 2012: Company spokeswoman says they tentatively planned to start work in Tacoma in August, but cautions “nothing is set in stone.”
July 20, 2012: McMenamins closes on purchase of Anderson School from the city of Bothell. City requires the complex to open no later than August 2014.
Oct. 10, 2012: McMenamins buys vacant lot north of the Tacoma Elks site for $980,000.
February 2013: McMenamins picks up Tacoma building permit. Building permits are valid for five years, as long as some work is done every six months. Developers also can ask for extensions, which in essence renders the permit inactive. Extensions are for 180 days and there’s no limit on how many a company can get.
August 2013: City of Tacoma extends McMenamins permit until February 2014.
September 2013: City of Bothell extends McMenamins’ deadlines for the Anderson School to allow for a January 2015 opening.
Source: News Tribune research and archives