Stay in the Safe Zone until you are ready to ask for money

A great Food Cart Pod at 10th and Alder in Portland, OR
A great Food Cart Pod at 10th and Alder in Portland, OR (which has nothing to do with today’s topic)…

When I ask folks who want to develop small projects what they are worried about, it’s often that their lack of know how is going to create a problem that is so big that their project will blow up and they will lose all their investors’ money.  That is a legitimate fear.  The best way to address it is to stay in the safe zone and build your know how until you are ready to ask someone for money.

Safe Zone Stage One – Work it out on paper One of the core skills a developer needs is the ability to understand how a building makes more money than is required to build and operate it.  The best way to figure out if you understand your project thoroughly is to write stuff down.  Get your plans and ideas on paper so you can test them and communicate them to other people.  Do your market study so you understand what people are paying in rent for space that is comparable to what you want to provide.  Test your idea for what you want to build on several potential sites.  Build your pro forma from scratch, (even if you have access to someone else’s template) so that you understand how the rents, the hard construction costs, the land cost, the soft costs, the operating expenses all interact in a building that makes money.  Dig into the hard construction costs so that you understand what the most expensive parts of the building are and what you can do to spend your construction budget where it will have the greatest benefit.  If you see a project you like, try to reverse engineer it on paper. (-this is a little like learning how to draw by tracing over another drawing).

Safe Zone Stage Two – Take your paper to your mentors, peers, and colleagues Once you are confident you can describe your project costs, likely rents, likely operating expenses, and your preferred deal structure with your investors, and you have your project down on paper, you are ready to go get other people you trust to look at your work.  Better to learn that you have missed something from your mentor or your colleague than from a potential investor or construction lender.  Find people who will be tough with you because they want you to be successful in your enterprise.  Be sure you do the same for others when they ask. Sit down with your mentor or peer and lay out the project for them.  How does the project make money?  How much equity are you asking your investor for?  When do they get their principal back?  What is their return and when do they get it?What kind of debt financing are you trying to get? How is the cash flow after debt service going to be divided? What are the risks in the project?  How are you planning to address them?  What parts of the proposed project need to be described in more detail? Do you have a one page summary of the deal -or are you expecting an investor to read 23 pages of spreadsheets and site plans and figure it out for themselves?

Find someone who will play the role of your potential investor and practice your pitch on them.  Have someone else observe and critique your effort.  These should be people with enough experience in real estate that you know you are gaining real ability and confidence through the exercise.

Next Time : Leaving the Safe Zone in Stage Three – Taking your paper to your potential Investors and lenders

Tasks to Demonstrate a Town’s Resolve both Essential and Useful

shoup

In a presentation at Build Maine 2015 , I started off this list with these two bullets:

  • Lousy Streets and Lousy Public Spaces make it harder to sell or rent buildings. They drag down the local economy and make the town uncompetitive..
  • Contaminated Sites require a lot of extra work.

The first bit about lousy streets and lousy public spaces should be obvious, but it can be hard to really understand the numbers on this issue, and how you got the lousy streets you have now in some parts of town.  Those lousy streets were built to a very specific set of standards  The wrong stuff built with tremendous precision.  It is mind boggling to find out that lousy streets are built to a legal standard, while the best streets in your town may be illegal to build today.  Which brings us to the second bullet.  Contaminated sites require way more work to build upon.  I’m not referring to chemical contamination.  I’m talking about sites that are contaminated by bogus rules and ordinances that just don’t work any more, but nobody has been willing to clear them out.  Sites that are Administratively Contaminated need to be cleaned up.  If you wait for the individual property owners or developers to do that clean up, it could be a very long time before your town is competitive.  Towns that can show leadership in cleaning up Administrative Contamination will perform better than their neighbors.  So here is the list of stuff a town can step up and do to show their resolve in making their community better:

An added Note. Comments on Twitter described this post as hopping from the Essential to the Useful, So I have annotated each item as Essential or Useful

Dump Functional Classification —Replace with NACTO Replacing the grid or network of streets with the stem and branch system required under Functional Classification was a really bad idea.  It produced high levels of congestion with fairly low volumes of traffic by concentrating trips on a small number of really wide and fast roads.  Providing cyclists and pedestrians with a fighting chance with the stupid Functional Classification requirements still in place is blind and wasteful.  Dump the bad rules and adopt the Design Standards published by the National Association of City Transportation Officials (NACTO).(Essential)

AMEND the International Fire Code for local use–Repeal 20’ Clear and Appendix D  The International Fire Code is hazardous to the communities it is intended to serve, because it is the source of overly-wide streets which promote faster car movement and result in more serious vehicle injury accidents and more people getting hit by cars getting maimed or dead.  Appendix D in the Fire Code requires 26′ clear for streets fronted by a single building greater than 30 feet tall (even when that building has fire sprinklers. (Essential)

Stop Using the Wrong Damned Ambulance –Firefighters should not design streets.  If 80% of emergency responses in your town are medical and only 20% are vehicle and structure fires, why roll fire engines to medical calls (just in case the first responders have to continue on to a fire).  The second part got me into some trouble with local folks.  I am still pissed off that in the town I lived in for 15 years, (Chico, CA) The starting salary for a firefighter with a high school education and some time at the Community College Fire Academy is $90,000 plus pension and benefits.  This is going on in a place where the Area Median Income (AMI) for a household of four is $43,752.  The firefighters I know are operating building companies on the side in addition to their generous salary and benefits.  The last time a position opened up for an entry level firefighter, there were over 600 applications.  I should have checked on the local situation in Maine where firefighters in Auburn and Bangor start at about 70% of AMI.  So I upset some folks by being wrong on the local situation.  We can argue about the pay scale for firefighters  but it is more important to recognize they have done a lousy job designing streets in communities across the country.  Relieving them of that authority will help your town. (Useful.  Be mindful of where you invest your political capital.  Taking on the Fire Department will bring forward all sort of nostalgic and heartfelt -but irrational reactions from the general public.  Get some of the other stuff on this list done first and the problems presented by having the fire marshal control the design of your streets will come into sharper relief).

Overhaul your Off-Street Parking Requirements, Manage your Public Parking Properly,–Dump ITE Manual / Read Don Shoup  Municipalities are tremendously bad at guessing how much off-street parking should be required for a given building.  The closest thing to an object standard they can point to is a collection of tables with decimal points published by the Institute of Transportation Engineers.  Those tables were developed by surveying single use suburban parking lots and are being mistakenly applied to downtown settings which also have on-street parking.  Somebody asked me where spending $1200 would do the most good in Municipal government. It would be a book club formed from the City Council, Planning Commission and Senior staff assigned Donald Shoup’s book The High Cost of Free Parking.  At $30 a copy that’s 40 copies.

For an explanation of why the ITE parking numbers are quite bogus, check out Shoup’s paper Roughly Right or Precisely Wrong? (Essential)

Come to Terms with your Zoning Code. Is your zoning code a collection of amendments and post-it notes that tarted in 1958 with an off the shelf ordinance from some outfit  in Atlanta?  Do it prohibit the worst possible thing from happening and allow the next to the worst possible thing to be built as-of-right?  How many special exceptions and variances does it take to build stuff that you say you want in you Comprehensive Plan? (Useful -but only because as tangled as some zoning codes are changing the rules can be a needlessly drawn out process.  Essential that you get started, but less critical than changing the off-street parking requirements).

Provide an Alternative to your Current Process for Building Permits, Inspections, Plan Check –Self Certification When an Architect or Engineer stamps a set of building plans they are taking personal liability for any failure to meet the building code or established professional standards of practice.  When a municipal plan checker approves a set of plans for construction or if a building inspector approves the building for occupancy, the municipality has no liability.  If you are the architect stamping the drawings and a city staffer tells you to change something or the building permit won’t be approved, what do you do?  What if you know the requested change is outside the requirements of the building code?  Some communities have passed ordinances recognizing where liability for code compliance falls and have allowed Architects and Engineers to certify their work subject to some peer review. This would be a way to reduce the time, expense, and frustration in the building permit processes of many towns. (Useful -but hey come on, as long as you have the hood up do this thing too.)

Be Rigorous about Municipal Finance –Do the Math.  Many towns do their books without considering the cost of repairing and replacing infrastructure that will be wearing out.  They don’t have a good handle on what parts of town generate the most revenue per acre, or the most cost per acre.  Without those numbers, it is hard to see the reality of how the wrong pattern of development can be really expensive.  Take a look at the work that StrongTowns is doing in Lafayette, Louisiana.  See how your town measures up when you do the math.  (Essential)

Build Maine? Hell Yes.

The Build Main Audience in great space at the Bates Mill in Lewiston
The Build Main Audience in great space at the Bates Mill in Lewiston
Kara Wilbur Benson & Vanessa Farr principal wranglers of the Build Maine Event
Kara Wilbur Bensen & Vanessa Farr principal wranglers of the Build Maine Event
Continental Breakfast and Coffee Break Food you actually  wanted to eat.
Continental Breakfast and Coffee Break Food you actually wanted to eat.
The great folks from Forage Market who  fed us.
The great folks from Forage Market who fed us.
The List of Stuff I said I would re-post on the blog in greater detail....
The List of Stuff I said I would re-post on the blog in greater detail….

I just got back from the Build Maine event in Lewiston/Auburn, Maine.  I don’t know what went on behind the scenes to make this happen, but it came off as a very well-planned and well-executed event.  The space at the Bates Mill was soooo much better than the usual hotel venue.  The folks attending and exhibiting were from the full range of folks thinking about making their state a better place.  Chuck Marohn, Mike Lydon, and I were the keynoters from out of town.  I was up first, (I suspect this was make Mike and Chuck appear more grownup by comparison) Conference food is too often something to be tolerated, but breakfast and coffee break fare from Forage Market was great. The organizers put on a Pecha Kucha (multiple short presentations, each limited to 20 slides in 5 minutes) at the local brewery the previous evening.  That’s a great way to kick things off.  Adult beverages and rapid fire provocative ideas -what’s not to like?  If you are thinking about a regional event I would recommend talking to the folks that wrangled this one.  I promised to re-post my list of stuff a municipality can do to demonstrate they are not screwing around with this Place Making stuff.  (which included an item I had to apologize for later). I will get that up tomorrow.

What is Worrying the Rookie Developer?

despair-head-in-hands

Over the last couple weeks I have been getting some feedback on the things people are worried about as they consider taking on their first development project.  Worries about talking to bankers and asking investors for money are high on the list followed by concerns about how to find reliable trade contractors and property management firms.

The key seems to be helping folks understand how the big hunks of the project fit together sorting out the connections  between Likely Rent, Likely Project Costs, and Likely Operating Expenses.  It is important to sort his stuff out on paper using the pro forma to see how much you can afford to spend building the project, given the likely rents.  The short answer? If you can’t get enough rent, you can’t build the building.  There are lots of details to keep track of, but understanding the fundamentals of how a project makes money will help you see where those details fit in the overall picture.
Once they understand  the “back of the envelope” math, they can understand how the finer grain budgets for hard cost, soft costs, operating expenses, and trade offs typical to the various deal structures with investors.
Back to the investors and bankers thing.  If you have sorted out how your project makes money for someone willing to invest in your enterprise, the conversation becomes much more comfortable.  It is a business deal.  You have to provide a fair return for the risk the investor is taking on.  If you disagree on the particulars you can shake hands and move on.  If you have sorted out how the bank’s construction loan will be repaid, that conversation is straightforward as well. Banks have lots of rules they have to comply with and your loan application should make it easy for your banker to comply with the requirements on their side of the transaction.  Those rules and conventions are all knowable, so we should assemble primers on how to be a good bank customer.
Many thanks to the folks who participated in the recent series of group video calls.  Continued progress.  Please post questions on stuff you are looking for help on.  The Small Developer/Builder group is gathering some bright people that are offering to you sort through this stuff, notably bankers and appraisers.
So don’t worry.  Take things one step at a time.  Figure out your deal on paper and talk with smart people about it while it is just a project on paper.  Developers who have had a lot of practice may appear that they have some special gift of intuition.  They don’t.  They just have put in lots of hours sorting through the basics and asking smart experienced people to look at their deals.

Summer 2015 Small Developer/Builder Boot Camp in Dallas

Some of the very intense Rookie Developers at CNU23 in Dallas.
Some of the very intense Rookie Developers at CNU23 in Dallas.

Things are moving fast with the rapidly expanding Small Developer/Builders group.

I have heard from a number of folks via email and phone calls that they would be interested in a hands-on workshop on basic skills needed as a small developer builder. There is an effort percolating to hold a one day workshop for Small Builders in Atlanta the day before the National Town Builders Association (NTBA) Fall Roundtable in October 16-18.

But that’s all the way into late October and some are pressing for something much sooner.

I think we can put this together in the Dallas area rather inexpensively. If the folks attending cover their own travel, lodging and meals, we can find a venue at no cost. It could be a very Lean affair.  A meet-up with other folks consider or practicing as Small Developer/Builders. Connect with some mentors, roll up our sleeves and get some skills.

Here’s what we are thinking for content:

  • Building for-rent vs. building for sale projects.
  • How to do basic market research.
  • Pro forma basics, sorting out your deal on paper.
  • How to budget for hard and soft costs.
  • Operating expense budgets and the property management basics.
  • Site Selection – evaluating several sites to find the best one to start on.
  • How your financing request looks to your Banker.
  • Navigating the appraisal process.
  • How to pitch a deal to an Investors.
  • Deal Structures; aligning the interests of partners.
  • Pop-up Retail and Street Markets; cultivating tenants (when you have no money).
  • Understanding FHA Loan Programs 203(b) and 203(k) for 4 unit projects.
  • Dealing with construction if you don’t have a construction background (and even if you do).
  • Common Sense design strategies and working with Architects and Engineers.
  • Multiple on-ramps, scenarios for how to get started as a developer/builder.
  • A standard 4-plex deal; all residential or small mixed use building.
  • A standard Cottage Court deal.

What other content should we look at covering?

We are thinking folks would arrive in time for food and drink on Friday evening, leave after lunch on Sunday.
We are doing this on August 14-16,  Who’s in?

We are also looking at what topics should we tackle for a couple of webinars in the near term.  The intent on all of this is to find ways for Small Developer/Builders, (both rookies and more seasoned types) to reduce their learning curve, share lessons learned, pick up new skills, and find people to collaborate with.

What say you?  Post comments here or email me:  janderson@andersonkim.com

The Green Shoots of Common Sense Transportation Planning Popping up in Dallas

In a previous life, following a tour of duty with a large shopping mall developer, I did three years of hard time in the Minnesota DOT.  As you might imagine, I was not a particularly good fit with the organization.  I saw a lot of disconnects between the state agency and local communities, particularly over state roads that had become the local corridors of crap as they ran through towns and cities.  Sorting out transportation investments so that they actually contribute to good places is tough work.  Most DOT’s have a lot of momentum going in exactly the wrong direction to help make places worth caring about.

There may be a shift in that grim reality taking place in Dallas, Texas.

The following is from an email I received from Monte Anderson, my favorite Lean incremental developer on the South Side of the Dallas Region.

“John,  A few days ago I got this call from a guy asking me to come in and talk about Freeways and development around downtown Dallas.  He told me that folks from Texas Department of Transportation, HNTB Corporation, North Texas Council of Governments, EJES Corporation & Gateway Planning wanted to interview me about these issues.

Needless to say I was shocked because in my entire life no one has ever asked me what I thought about major transportation planning!  And what was more surprising what happened when I actually got in the room with these folks.  As a broker and developer I think I have a reliable BS detector.  I believe they were truly interested in my opinions about downsizing roads, removing freeways, how to build more complete streets, the need for small scale improvements, and for anticipating the impacts of incremental urbanism and entrepreneurial wealth building on the quality of life for people in our region.  The bottom line is, things in Dallas may be changing on a much larger scale that I had thought.  I am still wondering if I dreamed this.   (Attached is the flyer they sent me).”

Dallas CityMap OnePager_Final (1)-1

I think that getting all those players to fly in something resembling a close formation is a tough job.  Anyone who has more insight as to how this is working in Dallas, please post some comments.

How ’bout we build without the damned air conditioner?

hvac

I was on a video call with my able partner David Kim this morning.  When the conversation turned to the elaborate requirements of the California Energy Code, he had what I thought was a really great idea. “What if we could build without air conditioning?”

I think that’s genius.  There are lots and lots of Architects and Sustainable Design people running around these days.  If we can challenge that brain trust to design buildings that do not require air conditioning, I’m sure they could come up with all kinds of great stuff.