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An Interview with Distinguished Real Estate Alumnus Award Recipient, David Lenz

Posted By David Walsh, Greystar, Wednesday, October 17, 2018

 


Dave Lenz, Founder and Chairman of North Central Group (NCG), was awarded the Wisconsin School of Business Distinguished Real Estate Alumnus Award at the 2018 WREAA Biennial. After working as a commercial loan officer, appraiser, and serving fourteen years as an officer in the 115th Fighter Group of the Wisconsin Air National Guard, Dave founded North Central Group in 1981 with the mission to develop, own, and franchise well-known branded hotels. Dave is a graduate of the UW-Madison Real Estate Program, board member of the University of Wisconsin James A. Graaskamp Center for Real Estate, a founding member of the Board of Directors for the Ronald McDonald House of Madison, and volunteers with several other community organizations.

 

Dave, how did you move from lending and appraisal to development through your career? Was that part of a long-term plan or a goal that developed over time?

 

I think development is a hard thing to come out of school and start with. It didn’t happen that way in the 70’s, so I needed to get a base first. I majored in real estate and finance, and after taking a two-year break from college to train with the Air National Guard, I came back pretty committed to the real estate path. In my last two years I studied under the great teacher and practitioner Jim Graaskamp and worked part time with a commercial lender. At that time real estate finance had the most jobs open within the industry, and I joined Iowa Securities after graduation. Then a credit crisis hit, and lending dried up. I had the opportunity to go work for a savings and loan association doing appraisal and packaging commercial loans for sale in the secondary market. I got a taste of underwriting in that environment and later got an offer from a mortgage brokerage firm in Madison. A partner at that group was also doing small developments and we decided to do our first motel in 1976 in my hometown of Tomah, Wisconsin, with 90% leverage. I was doing mortgage brokerage and motel development at the same time. When the next credit crunch came in ’79-’80 we had four hotels built. My partner was more of an investor and wanted to focus on the mortgage business, but our hotel work had grown to be worthy of full-time attention. That’s when I founded North Central Group.

 

Why did you choose to focus on hotels? What do you see as some of the risks specific to hotels that challenge NCG?

 

My father had built a small motel in Tomah, so I grew up helping work the family business. That’s where I first got the motel bug, but I didn’t think I’d go back to it later in life. Then when I founded NCG, I stuck with hotels because of my background and the family business. I figured doing more than one asset class would be too much as I didn’t have a team at the time. I decided to learn hotels and do it well.

 

A challenge with hotels is that they aren’t considered core real estate, so we’ve always been given a much higher cost of debt - probably somewhere around 50-100 bps higher than the traditional asset classes. However, on our end it still utilizes the key real estate principles. We need supreme location, the right brand, appropriate financing, and we have to be careful not to overleverage. Hotels are a cyclical business, and not overleveraging helps make it through those cycles. We got a bit overleveraged before the GFC when we could finance at 80-85% of cost. We were rolling deals one to the next with 1031 exchanges and kept growing until we didn’t need partners. But then the GFC hit and lenders were asking you to pay down the debt when you could barely make your original debt service payment. We made it through and we’re more conservative now.

 

Can you share a story with the readers of the WREAA Network Blog about a North Central Group project that was particularly gratifying?

 

One of our newer projects, the AC Hotel Madison Downtown, is a site we turned down at first. The dirt was expensive, and we just couldn’t get enough rooms on the site using Courtyard by Marriott or Hilton Garden Inn to make the numbers work. Then another hotel development group put together a plan for the site, which eventually fell through but prompted us to take another look. That’s when we found the AC brand, which was being purchased by Marriott. That was important to us because we have a requirement that we only build national brands. Being a European brand originally, it had smaller guest room square foot requirements, and we were able to add 30-40 rooms to the site. That made the project feasible, but we still had to push through a tough zoning process. We had to prove exceptional design to get a height variance from the city and prove to a neighborhood group that our project wouldn’t cause additional shadows to fall on a Frank Lloyd Wright building on the block. At that point the rooftop restaurant idea in hotels was taking off, and we found Eno Vino with only one location in a strip center on the west side of Madison. We convinced them to do one more location at the top of the AC Hotel where it is now and made sure it matched the finishes and quality of the hotel. We financed the project with a lender that was there with us in the hard times, and the success has exceeded expectations. Now we’re looking for permanent financing before rates keep going up. I think Wells Fargo did a Real Estate Club outing that looked at how you would finance our project. I was happy to see students participate in a hotel case study.

 

You’ve mentioned flying with the Air National Guard, can you describe that experience?

 

I joined the 115 Fighter Group of the Air National Guard in Madison. They were taking one or two new applicants per year to be pilots,, and sent me to the air force to train for a year and half. I came back a fully trained fighter pilot, on alert in Madison. We always had two aircraft loaded at the end of the runway ready for a five- minute scramble. We were tasked with guarding the industrial complexes of this region during the Cold War. Most of that mission was at night, so I’d go over there and do homework and sleep, ready to fly when necessary. I stayed in the unit 14 years flying all sorts of planes before leaving the group to pursue my business ventures.

 

What is your advice for future founders of companies or hotel developers?

 

I recommend you get experience working for a company that interests you. You don’t make a lot of money in internships, but the experience is invaluable. Make sure you see the breadth and depth of many deals. It’s a great education.

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