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How Not to Fail: The Davenport Building Collapse

Posted on Jun 20, 2023, Modified : Jun 16, 2023 jshell55

We’re going to take on the project of understanding How Not to Fail with regard to the Davenport Building Collapse. This tragic event happened a few days ago, and the community is still trying to face the aftermath, because of the loss.

We’re doing this in our ongoing effort to understand human failure. I will never run out of subject material.

Back Story

On May 28, 2023, the Hotel Davenport, a historic hotel-turned-apartment building in the heart of Downtown Davenport, Iowa, partially collapsed.

Five people living in the building at the time were missing, a search was abandoned, and within the last few days, the rest of the building was demolished for safety reasons.

This story is so interesting to us because there were ample warnings of the imminent collapse. There were multiple citations for various safety violations, and within a few days prior to the collapse, an engineering company refused to allow its workers into the building, fearing for its employees’ safety.

A building inspection by the city building inspector a few days prior stated that the building had “passed inspection” However, the day of the incident, the inspector was fired for attempting to change the entry to “failed.”

The lawsuits have just started to fly.

Who am I to be explaining all of this?

Well, in addition to being a licensed realtor, and having invested in a “historical property” myself, I’ve spent several decades in what is called “Quality Systems” for major manufacturers and service entities. In addition to that, I’ve worked as an ISO9001 auditor in several companies that do property management, including Section 8 Voucher Processing.

So, if there is a human screwup, it is part of my job to try to understand why it happened, and I have some real estate and property management experience.

Plus I went to Drake. Harvard, as we all know, is the Drake of the East Coast. That should be qualification enough.

(Link)

Disclaimer

Of course, what I am not is a lawyer, so anything below with the words “law” or “illegal” in it are unqualified opinions. Nor am I an engineer, nor have I been to the site and examined it. So, everything I am writing about is second hand, through the media and other sources, which I have cited below.

That being said, I have derived a revenue stream from people not doing their jobs, and have studied this sort of thing at great length.

One more thing: A lot of this information was gathered within a few days of the accident, and the links to some of these places may have been disconnected.

Historical Context

I have to say something about this, because it is important to the story. In the Midwest, and along the Ohio River, there is a collection of old hotels like this. The reason is that everywhere a railroad line crossed over a river, the passengers had to be accommodated. There are bridges, but at one point in history the trains had to wait their turn..

So a lot of times, if they had money, travelers would spend the night in one of these nice hotels. The status of a city was judged by the elegance of these hotels.

Side topic: If you didn’t have money, and still needed to get somewhere, there were “less nice” places. A lot of these river towns became a place for the all-American activity known as “hell raising.” This included gambling, various vices, and rough behavior. That’s a topic for another day.

Midwesterners love these old places, and a lot of them, including the Hotel Davenport, have been registered to the “National Registry of Historic Places.” There is historical reference to this in the two clips below from “The Music Man” by Meredith Willson, which should be required viewing for everybody that wants to understand Iowa.

Millennials especially love these old places. In most cities now, there is an effort to preserve them. They’re made into microbrews and coffee shops, and they become part of the “downtown bubble.” A lot of the historic hotels in Davenport have already been made into apartments. According to Apartments dot com, referenced below, the rents for these places are on the order of $1200 a month.

The average rent for the Hotel Davenport, however, was around $650 a month, according to the same source. Here’s an ironic photo from Apartments.com of this place prior to destruction.

The Property Owner

So who is responsible for this mess? The first finger to point is toward the property owner. You can look in the information links below to get his name.

The latest news is that he failed to show up in court the other day to pay his $300 fine for excessive garbage on the property.

Here is the question of the day. Did this fellow wake up one morning and decide to become a slumlord? Based on further research, he is a local fellow, graduated from one of the local high schools, and lives in the area. He’s also a millennial, to the extent that matters.

That is one option, however, and we shouldn’t take it off the table.

There is evidence in some of the social media, below, that there are complaints about some of his other properties with regard to physical condition of the place and responsiveness.

There is a story behind everything. Let’s put ourselves in his shoes, if we can, and try to figure out what he was thinking.

Alternate Theory

Here’s an alternate theory. In his belief about the future, he envisioned this place as an investment opportunity. Surely he knew at the time that the property was below market rent-wise. You could see, from his perspective, that if he could get the building, do rehab and refurb to the point where he could double the rent, he would be happy and do something for the community.

If he was one of the people that loves these old, elegant hotels, so much the better.

The fact that it was in the registry of historical places could have been a positive for him. I will tell you later why this is a negative and should have been a red flag.

He bought the place in 2021, after the Covid year, so his second theory was that business conditions would return to something approaching normal. Let’s say, hypothetically, that he also made the assumption that it would be easy to find engineers and contractors to work on the place.

Base Assumptions

Let’s make a few base assumptions.

The first one is that he didn’t have the $4.19 million dollars to pay cash for the place. Therefore he put some fraction down, and borrowed the rest from someone. The main evidence for this is in the Scott County reference below, where there is a paper trail on this place, including a transaction history.

Let’s also assume that he is paying an above-market interest rate for this. When I got my commercial property, I ended up paying a percent above the rate for home mortgages. Also, it is more typical to get a 15 year loan for a commercial property.

Mortgages at this time period were going for about 3% so let’s say he was paying 4%, and it’s a 15 year loan.

So his capitalization is as follows, assuming he put is 25% down. How he got $1M is the back story we don’t know about.

Capitalization
Selling Price	$4,193,000
Financed Amount	$3,144,750
Down payment	$1,048,250
Interest Rate	4%
Monthly Interest Rate	.33%
Period (years)	15
Period (Months)	180
Interest Payment	($10,482.50)
Principle Payment	($12,778.84)
Cash Flow/Month	($23,261.34)

Based on the modest assumptions above, our fellow starts out every month with a negative cash flow of $23K. Let’s make some more estimates and see how he was actually doing.

Further Fact-free Assumptions

Let’s make a couple of assumptions about his occupancy and average rent. According to one of the articles below, there were 53 residents, and there were 80 units total. That’s only a 66% occupancy rate, and his average rent was $650, as advertised in “Apartments dot Com.”

Therefore, we can compute his monthly income and cash flow statement as follows:

Cash Flow
Monthly Gross Rent	$34,320
Minus Capital Costs	($23,261.34)
Net Cash/Month	$11,058.66

Operating Expenses
Local Taxes (Per Month)	($7,250.00)
Utilities (Estimated at $2 per square foot per year)	($2,075.00)
Management (at $50K/year for one overworked manager)	($4,166.67)
Insurance per month ($1 per square foot annually)	($1,037.50)
“Maintenance” 1/27 of the selling price annually	($12,941.36)
Total Operating Expenses	($27,470.52)
Net Cash Flow (Negative)	($16,411.86)

We know what his taxes are, courtesy of Scott County.

We also know that he’s going to have to hire one or more overworked employees to operate the place. According to Indeed, the average property manager in this area makes $50K.

Also, there are utilities and insurance. We’ll talk about insurance a little later. Let’s say, hypothetically, that he’s getting the same insurance rate, per square foot, that I am for my place.

Utilities: That can also be estimated, based on the research below, we’re calling it $2 per square foot per year.

Maintenance: Let’s say, hypothetically, a responsible business owner would be paying 1/27 of the value of the place annually just in stuff like clogged pipes, and lightbulbs, and roof repair. That’s why the government gives you a depreciation allowance of 1/27 of the value of the property.

So if you work through all this the problem is obvious. He has negative cash flow of $16K/month.

This thing is a money pit, and he should have done this calculation before he bought the building. Or, the other way to look at is, he mis-estimated the amount of risk.

So what was he thinking?

Well, you can see a thought process. If he were to buy the place, rehab the rooms, and then raise the rent, he would be making money. Plus once that happened, he could raise the occupancy rate to closer to 90%. This would turn a terrible deal into a plausibly good one.

Here’s his hypothetical cash flow under those conditions:

Cash Flow
Monthly Gross Rent	$86,400
Minus Capital Costs	($23,261.34)
Net Cash/Month	$63,138.66

Operating Expenses
Local Taxes (Per Month)	($7,250.00)
Utilities (Estimated at $2 per square foot per year)	($2,075.00)
Management (at $50K/year for one overworked manager)	($4,166.67)
Insurance per month ($1 per square foot annually)	($1,037.50)
“Maintenance” 1/27 of the selling price annually	($12,941.36)
Total Operating Expenses	($27,470.52)
Net Cash Flow (Positive)	$35,668.14

So, this is looking much better. It’s a path to success, in fact.

But, that is based on a couple of friendly assumptions.

Firstly, it assumed that he could hire enough contractors to do the work. Secondly, it assumed that whoever registered this place to the historical registry would let him do the refurb. You’re known to have to jump through hoops to do anything in a “historical area.” Thirdly, I suppose there is an underlying assumption that he could do all of this before he ran out of cash.

There is evidence for this. In the county records, it lists all of the building permits he applied for in the 2021 and early 2022 time frame. There are a couple of dozen, including one for $140K for “Miscellaneous.” So he had the high level intention of doing a lot of work on the place.

Signs of Trouble

He bought the place in June of 2021. By early 2022 he was being assessed a “utility fee” and leaving an unpaid balance every month, on the order of $3300 per month.

It also looks like they were patient with him. It took almost a year, mid-2022 before they started to assess him for debris removal.

So you could write a narrative to the effect that he ran out of money. He was negative cash flow on the rental income, he couldn’t get the place fixed up, and stopped doing maintenance. According to the twitter site linked below, he also stopped doing maintenance on some of his other properties as well. So if we were investigating this, we’d say on the surface of it that it was a terrible deal from the start, and he got in over his head, and ran out of money.

Failure to Solve a Known Problem

So here’s the bottom line, except not really.

At some point, this became a known problem. There were engineering reports and ongoing complaints and maintenance issues.

There were flunked inspections. One of the engineering companies below literally was afraid to send their people in to the building to inspect it. People knew there was a problem, and no one did what they needed to do, which was get the people out of it until it could be stabilized.

It’s a classic case of missed alarms. There is a video on this topic.

Further Mysteries

There are a couple of things that are unexplained at the moment.

The first one is, how did he get insurance?

When I bought my 80-year old multi-unit project, the bank insisted that I have insurance, and the insurance company came out and did an inspection. This is a $220,000 project. Why did they not do the same thing with a $4 million project?

The second one is: How did he get financing? If I were the bank, I’d want to at least inspect the place. The bank I financed my project with insisted on a third party appraisal. He may have had some angel investors, and if that were the case, why did they not help him with his due diligence?

The third one is, how did the city or county not shut him down?

A couple of interesting plot lines could be developed from this, if we were writing fiction. The city inspector, per the article below, was accused of trying to alter inspection records. An inspection a few days before the incident was in the tracking system as “passed” and at some point, the engineer was fired for trying to alter it to “failed.”

But, what was going through the mind of the engineer in the six months prior to the disaster.

This was a big public project that is literally two blocks away from city hall. How did this place not get shut down prior to that?

The plot thickens.

The Residents

Nobody is talking about this, really, but it needs to be said. Who was living in this place, at half of the local prevailing rent? Who was putting up with the trash, flooded apartments and mayhem?

The answer is: people who couldn’t afford to move. This place was being used as a low income housing place.

We all know, don’t we, that there is a shortage of affordable housing in the country, and that includes Davenport. Also, as an aside, Iowa is one of the places in the country where it is hard to evict someone. It can take between 6 and 8 weeks to evict a tenant from someplace.

Now if you google “section 8 housing in Davenport” this place does not come up. If it had, this would be an even bigger mystery, because in order to qualify for Section 8 housing, you need to go through a series of inspections.

I actually work with a couple of companies that administer Section 8 for a living. It’s hard to qualify and remain qualified. This system is responsibly operated, based on my experience with auditing it.

But, that is a possible further motivation for the owner. If the place could have been brought up to Section 8 standards, there would be federally subsidized rent, and possibly lower turnover. Or if it could be brought up to “gentrified” standards, so much the better. We don’t know how many of our 53 residents was actually paying rent.

If you do a search for “Davenport Housing Assistance” you get a lot of organizations and housing places and they are all in that same area of town. So, there is a lot of that sort of clientele in that neighborhood.

How not to FIail, the Davenport Building Collapse, this is a "rough neighborhood"

Here’s a useful quote:

The neighbors in the Central Davenport East neighborhood in Davenport are low income, making it among the lowest income neighborhoods in America. NeighborhoodScout’s research shows that this neighborhood has an income lower than 93.3% of U.S. neighborhoods. With 58.2% of the children here below the federal poverty line, this neighborhood has a higher rate of childhood poverty than 96.3% of U.S. neighborhoods.

This is from “Neighborhood Scout.” They go on to say that it is much nicer in Bettendorf, where the property owner lives.

Motivation Revisited

So here is a plot line that can be developed. Keep in mind that all of this is fiction, but it is a theory of what happened.

In early 2021 our property owner gets the idea. He can turn this place into a showcase, walkable from downtown, that everybody loves. He has a meeting with “the city” whoever that is.

One of the references below suggests that he has some political connections.

“The City” would love for that place to be an attractive element in the community, rather than a low income place. It is much better for tourism, business, and the common good. It could be turned into a “downtown bubble of niceness.”

How Not to Fail, the Davenport Building Collapse, proposed beautiful Davenport

Davenport Development

The Davenport riverfront area, by the way, is very pleasant. There is a little baseball stadium, a riverwalk, and for the “common good” it could be made very desirable. There is an article below in “The Architect’s Newspaper” to the effect of a project to make this area more “Playful, Connected and Resilient” by 2030.

So this developer comes forward, and “the city” decides to work with him. There may even be some grant money to be had. The US Government and State of Iowa have programs for this kind of thing in a historic district.

They call the engineers out, the engineers are shocked.

So “the city” and our developer have a hell of a problem. They don’t want to/can’t throw all of these people out into the street, particularly in the wintertime. They will undoubtedly have to put up with political stuff quite possibly related to race.

The city inspector is in on all of this, and they have some sort of understanding not to shut the place down and give the developer more time to work.

So at one point, the risk blows up in their faces. People are killed, and the place hits the national headlines. Everybody knew about this. The engineering reports from the engineers who inspected the place are linked below.

Corruption

I thought about this plot line too. A politically influential investor, who has made campaign contributions to the city council and mayor. Political “looking the other way. “ Based on the available evidence, at least the disclosures that are required by the state, there is none of this. Most of the local politicians self-financed their own campaigns. In a couple of other cases, maybe not so much.

As I said above, there is a political connection between the developer’s lawyer and a couple of the local politicians, but if you are in a small-ish town like this, that’s not unusual on its face.

Lessons Learned

Well, the lawyer in the class action suit have one word for all of this, which is “incompetence.” This happened at multiple levels in the system, and over a period of time.

The first lesson of how not to fail is: the fundamental business plan was flawed in the first place. Who knew that as a real estate developer, you’re taking peoples’ lives into your hands?

The second lesson of this is that “the city” and the decision making process in this case missed several opportunities to shut the place down, and they may have had their reasons.

The third lesson, which is out there, is that if we’re living in a time when people are afraid to do the right thing because of the political ramifications, that’s very problematic. It’s the sign of lack of a solid decision making process.

Entrenched Mediocrity

I have a favorite phrase for this, which is “entrenched mediocrity.” There are four definitions for this:

An obvious beneficial change is resisted, often for non-technical reasons
An organization accepts mediocrity to avoid the cost of change
A widely known problem is allowed to continue, despite obvious risk
Overhead activities become more important than production

In a way I feel sorry for them, and by “them” I mean the developer and the city officials. They don’t want to throw the people out of the dangerous place, to avoid the political fallout. This fits definitions 1 and 3.

They would like to change the face of downtown, according to their openly stated plan, but face resistance. That fits definition 2. In fact, there may be a lot of hoops that they need to jump through because of the “historical register” aspect of the place, and that fits definition 2 even better.

All of this will be sorted out in court, in due time.

The alternate theory, which was that some or all of the participants are evil is also on the table. I guess we’ll find out.

How Not to Fail: The Davenport Building Collapse

Well, I guess you’d have to say that there are a lot of ways this could have been avoided.

It is likely that this problem could and should have been addressed years ago. Buildings don’t collapse overnight in the US.

If the investor didn’t do the business plan properly, or made uneducated assumptions, that’s a potential issue. The number one of these might be that he thought he could get the work done more quickly than he did.

The city officials should have been empowered to put a stop to it before it happened, but they didn’t do so.

Avoiding Entrenched Mediocrity? It may be part of the human condition because it is hard to find people in this era who aren’t mediocre.

The lawsuits are about to fly, as we said above.