Building on a Contaminated Site that is Stuck in a Time Warp

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I got an email from an Architect Colleague working on a infill project for a private developer across the street from the light rail station in a suburban city in the Northeast.  The City does not want to reduce the off-street parking requirement and does not think anyone would ever use ZipCar if the developer set up a couple spaces for ZipCars on the site.  My advice below comes from frustration with similar circumstances over the years.
Create two choices that are clear and straightforward.  Propose that by following the city’s current 20th Century parking requirements and building Design “A” you can build 20 units next to transit.  You could call this “pretending that massive transit investment does not exist.”  Design “A” produces $80,000 in annual property taxes for the city.
Design “B” delivers the amount of parking we think the market demands considering that the massive transit investment actual does exist and is a significant amenity for  the site.  You have further expanded the transportation choices by providing 2 zip car spaces based upon the projected usage by the folks at ZipCar.  Design “B” consists of two buildings and produces 40 units in a wider range of size and configuration and $160,000 in annual property taxes for the city.
The developer recognizes that the city may seek to delay its participation in the 21st Century for a few more years and if required to,  will limit construction to the over-parked 20th Century Design “A” and preserve a portion of the over-parked site for an additional building.  Eventually we expect that the city will want us to build the second building on the site and complete Design “B”.
Don’t fool around at the edges.  Present a clear choice.  If the  City picks the 20th Century Design you were never going to get much more than that, and I don’t think you should not waste your time trying to make inconsequential marginal improvements on the over-parked design, (apart from preserving a portion of the site for more building, keeping the utilities out of the future building pad.)
If the City is going to value parking over more market rate dwellings next to transit and greater tax revenues, there is little chance you will convince them to do otherwise.  Build half of the buildings and go down the road to do something else.  Give them the numbers and the clear choice.   If they pick more parking and less tax revenue on purpose, the best you can do is save a place for another building for when more thoughtful people are in charge.
If the developer is smart they have not closed on the  land yet.  They can offer the seller less money now that they have discovered that the site is contaminated with a bullshit parking requirement and is inconveniently stuck in a 20th century time warp.
Those things just make the land less valuable.  Sorry.
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How Do I Get Started as a Developer? –With a Four-Plex.

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Updated june 2, 2016  
NOTE:  The Limit on Nonresidential space in a 1-4 unit home financed with a FHA 203(b) mortgage was increase from 25% to 49% in September of 2015.
A question that I am hearing a lot from prospective developer/builders is “How do I get started?”.  One way to get started is with a Four Plex that you will also live in.
Over the last 10 months I have been digging into the details of the FHA four plex loan program and the FHA 203K Rehab and mortgage program which is available for 1-4 units as vehicles to help people get started.  I will be presenting this Dallas this week at CNU 23 in the session with Monte Anderson at 9am on Thursday morning How to Build & Finance Small-Scale Incremental Urbanism,  but here is the short version:
Goal = A rookie developer builds a 4 plex with a partner and buys it with an FHA 30 year mortgage.  They establish a modest but credible track record while working on a lean project at low risk.
Project costs for the sake of this exercise = $600,000.
  • Conventional 75% Loan To Cost (LTC) construction loan guaranteed by an investor who puts up $150,000 in equity (and has second position on the land and building after the bank’s typical lien position).
  • The rookie developer runs the project and earns a fee,( included in the $600K project cost) to support themselves  for 8-12 months while the project is under construction.
The Investor has a contract to sell the Four Plex to the rookie developer for $650,000 and the rookie developer has pre-qualified for an FHA insured 30 year mortgage (FHA 203-b) with the following underwriting requirements:
  • Borrower has 2 years of employment with stable or rising income.
  • 3.5% down payment (which can be gifted funds).
  • Reserves of 3 months PITI.
  • Credit Score minimum 580 (640 is more the real world score for local bank underwriting with the FHA insurance).
  • PITI cannot exceed 30% of borrower’s gross income which includes 75% of the gross rent on the other three residential units.
  • One of the four-plex units must be occupied by the borrower as their primary residence for at least 12 months.
  • A maximum of 49% of the building floor area can be non-residential use.  Appraiser will verify the non-residential use complies with local zoning.
Assuming a year for construction and lease up, the Investor/Guarantor would see a 35% IRR on an investment in a hard asset with minimal construction and leasing risk.  The 30 year FHA mortgage as the take out loan is really straight forward.  The rookie developer and the investor get to know each other in a low risk deal that takes 8-12 months.
The developer goes through the entire project arc and end up owning a building with some decent equity which they helped create.  The developer has demonstrated their ability to get a project financed, built and occupied.  They can live cheap while pursuing their next project (rent free) in a live/work that showcases what they can do.  PDF of the FHA Underwriting Manual:
The FHA 203K approach could be similar for an existing building.  You can use the FHA 203-k purchase/rehab loan to purchase an existing small apartment building of 5-6 small units that could be converted to a 4 plex as part of the renovation.   FHA 203-k loans are set up to include the cost of renovations.  Small apartment buildings are tough to finance with conventional commercial loans and tend to get rented to death, requiring a lot of work when they go up for sale.  Unfortunately the 203-k loan can take 6-8 months to get approved.
The intent with both of these approaches is a low risk entry into development and building with the rookie developer fully engaged and gaining experience in all aspects of a project in a compressed arc.
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Some stuff I learned from Dan Camp

Studio Cottage created from a one car garage in the Cotton District.
Studio Cottage created from a one car garage in the Cotton District.
Studio cottages build new, but modeled upon the early conversion of the pink one car garage.
Studio cottages built new, but modeled upon the early conversion of the pink one car garage.

 

The Cotton District in Starkville, Mississippi has put up a greatly improved website.  Definately worth a look.

http://www.cottondistrictms.com/

I have heard many of Dan Camp’s stories over the years (many of them several times). The advice he gives to young developers is to start small, never sell anything, don’t be afraid of debt, and don’t have any partners.  That last bit may be a bit of projection, as Dan is a larger than life character some days and I cannot imagine that he wants anyone telling him what to do.

Dan has built something amazing in a part of Starkville that nobody influential cared about.  That’s a good model.  If you want greater autonomy when you build, it’s a good idea to pick your neighbors and work in a way that makes their lives noticeably better.   Dan warns against quitting your day job before you have enough cash flow from your rental units.  He ended up building houses for other people for several years.  Something he did not enjoy.  He sorta spits the word “clients” when he says “I wasn’t much good with clients”.An alternative to Dan’s prescription would be taking on partners so that you can quit your day job and develop your projects full time.

He recommends against building and selling in a place you care about.  The Planter’s Row section of the Cotton District was a for sale section of the neighborhood that still bothers him.  People bought the great little sideyard houses and creole cottages to house their kids while they attended Mississippi State.  When the kids graduated, the parents became accidental  landlords in a college town and have not done very well by the neighborhood.

There are a lot of valuable lessons in the Cotton District.  A staggering range of small buildings, some very clever solutions to the crappy local soil conditions, small restaurants with common restrooms and big outdoor seating areas.  It is easy to spend a day looking at all the pieces and talking with Dan about how to make the pieces work together.  Small pieces assembled over time with real care and attention.  Make a mistake, it’s a small one and the fix can be pretty immediate.

Constraints Make You More Thoughtful

11146280_10205401293344815_239142571784274792_n2007.07 LW 3603rev10575382_10205407284494590_7983690658329097940_o10854443_10205407276214383_1227740487826718179_o  11027930_10205407263974077_5731793177096694527_o A tough site can force good work.  An infill site 600′ deep between a railroad and a state highway. From the rear of the site to the front: The red Live/work buildings designed by David Kim are at the rear of this constrained site.  They back onto the UPRR mainline track. The white freestanding live/work unit is a transition type between the attached live/works functioning as a second sound wall along the railroad tracks at the rear of the site. Initially used as a sales office, (hence the flags), the white building was purchased by a local CPA for her office. She rented the apartment upstairs to her employee. The blue cottage is pretty typical of the 1000-1600 SF detached houses along the interior streets garages and carriage houses on the alley to the rear of the lots. Some houses were built without garages, with surface parking off the alley. The yellow rowhouses  face the arterial road which is controlled by the State DOT.  We built a side drive along the state highway frontage after a lot of brain damage.

Letting Go of Lousy Buildings

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I have decided that I don’t want to waste anymore calories on spectacularly lousy buildings like this mess by Frank Gehry and Co. My time will probably be better spent on the mechanics of getting decent smaller scale buildings built.  There is plenty of work to be done taming overly wide streets ,repealing dopey off-street parking requirements, and helping small developer/builders get their enterprises off the ground.  Get the building in the right place.  Sort out where the front and the back is.  That’s gonna have to be enough, considering the amount of effort required to get such basic things accomplished in most places.

This is not to say that lousy buildings don’t bother me.  I’m just coming to terms with the reality that I’m not going to be able to do anything to slow their construction.  While the bold vandalism of Frank Gehry gets a lot of play, the problems of lousy buildings are all around us in a less flashy, but very annoying display.  For example, how much of this crappy faux lick ‘n stick stone do you see slathered all over buildings these days as if it were some sort of “upgrade” material?    I’ll try to limit my frustration with lousy buildings to finer grain stuff where there are straightforward household remedies for the symptoms.  I don’t have a cure for whatever is afflicting Mr. Gehry.

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We Need More Cutting Edge Boring Stuff

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There is some excellent work being done by architects working on modest scaled buildings.  This work has a lot of merit, but will not bring much glory or acclaim to the Architects producing it.  Firms like Union Studio and small shops like Rob Sharp, Tim Busse , Gary Justiss, and Eric Brown. The building above by Eric Brown is an example of a building that does a lot of small things well and the overall effect is worth your attention.

  • Heavier materials (stucco) on the bottom, lighter on the top.
  • Smaller openings in the stucco walls than the upper story.
  • Balconies that are supported by sturdy brackets, and do not require you to wonder about the cleverness of the structural engineer.
  • Deep roof overhangs at the eave and on the balconies.
  • Shutters that are sized correctly for their openings (-shutters that actually shut).

This is a well-behaved background building, delivering rental apartments in a dignified manner.  Some folks may think that this a boring building that lacks the pizazz and flash necessary to make Eric Brown a famous Architect.  I think it is rare enough to see the the elements listed above actually delivered competently in a boring apartment building, that the Architects who can do it are on the cutting edge of building and rebuilding places worth caring about.

We really do need more cutting edge boring stuff.

3 Things You Should Read Today Instead of This Blog

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I try to focus this blog on things that would be useful to someone starting out in development, and to folks on the policy and planning side of things who would like to understand the nuts and bolts of development better.  So here are three very valuable pieces for that audience.  All three of these papers are posted on the http://leanurbanism.org/ web site as part of the Project for Lean Urbanism.

http://leanurbanism.org/publications/from-landlord-to-leanlord/

http://leanurbanism.org/publications/lean-financing-alternatives-to-conventional-capital/

http://leanurbanism.org/publications/low-fat-vanilla-finance-a-simple-financial-model/