Sorting through the the Small Developer Basics; Land Cost, Total Project Cost, and Likely Rents

Typically the land price is not the driver you can pay $12-$16 per SF on the land and not upset the cost side of the equation too much, since the cost for the finished lot is a lower percentage of the overall project cost that the hard and soft construction costs are.  Here is an easier way to approach the basic go/no go analysis:
    •   Before thinking about cost per sf or rents per sf, think about total project cost per door(per unit) and typical rents per door (per unit).
    • Use “the rule of 100” a very workable rule of thumb that says the the total project cost per door should not exceed 100 X the monthly rent for a typical unit.
    • If the rent for a one bedroom unit is $900, you should not exceed $90,000 per door in total project costs (finished lot, hard and soft costs).
    • Here’s where good design can provide an advantage, if the typical one bedroom unit in the neighborhood is 850 SF for $900 per month that translates to $1.06 per SF.  The thing is, nobody thinks about what they are paying in rent in terms of per sf metrics.  They think about it as a check they write every month.  So, if you can build better units at 750 SF and rent them for $900 per month, that translates to $1.20 per sf, but you have to think in terms of specific unit design, and specific site plans so that you can see the arbitrage between what you want to build and the other guy’s product where he build a lot of off-street parking and a lot of landscaping, pool, clubhouse, etc.
    • The rough breakdown of project cost is typically something like this:  Hard cost: 65-70% Soft Costs 20-25%, Finished Lot 8-15%.
    • That project cost per unit cap of $90,000? divided by 750 SF = $120 per sf all in.
      • 70% of $120 = $84 per  in Hard Cost, 20% for Soft costs = $24 per sf and 10% for the Finished Lot = $12 per building sf (not lot area).
When you look at comparable rents, consider that you will be delivering newly constructed units which will typically command a 10%-25% rent premium over older units in the same area.  Also think about proximity to urban amenities, light rail stop, food and drink, trail system, parks etc.  You don’t want to talk yourself into an assumed rent that is way above what tenants will actually pay, but you don’t want to undervalue your units either.  It’s important to document your assumptions on rents, since they drive the whole thing.
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What If Our Town Fixes the Parking Rules and Zoning and Then Nobody Comes to Build?

Small Mixed Use Building in Geneva, NY.  Photo by Mike Puma
Small Mixed Use Building in Geneva, NY. Photo by Mike Puma (used under Mike’s “feel free to use whatever you want, whenever” license agreement).  Mike is a project manager at Preservation Studios in Buffalo.  If you are in Buffalo please buy Mike a beer.

That’s the question my friend Mark Nickita heard from a City Manager in a small town in Michigan.  Mark thinks that’s a very good question.  Mark and his partner Dorian Moore are Architect/Developer/Retail Entrepreneurs based in Detroit.  They understand urban design, architecture, and what it takes to make a building project pencil in a transitional or down market.  His advice for the city manager?  “If there are no developers coming to help fix your town you will need to grow some developers of your own.  Figure out how to help them build (or rebuild) in your town”.  It’s a tough situation that illustrates why a new cohort of Small Developer/Builders is needed in so many places.

Mark and I were talking today about how the typical 2 and 3 story main street mixed use building is perfect for a rookie developer to use the FHA 203K purchase rehab loan program to finance their first project.

HUD Guidelines for FHA 203(k)

The program is for 4 units plus some allowed non-residential space.  Here is the breakdown from the FHA Guidelines:

“A 203(k) mortgage may be originated on a “mixed use” residential property provided that the percentage floor area used for commercial purposes follows these standards:

– One story building 25%

– Two story building 49%

– Three story building 33%

The commercial use will not affect the health and safety of the occupants of the residential property.

The rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.”

So, since 4 units or more is the threshold for buildings covered by the Fair Housing Act requirement that all ground floor units must be accessible/adaptable, here’s what you do to rehab a small mixed use building using an FHA 203)k) loan:

  • Alternative 1: Keep the number of residential units to 3 or less and the SF of non-residential floor area within the percentages listed above.
  • Alternative 2: Carve out an accessible unit at the rear of the ground floor with three units on the upper stories.3story mixed use 203K diagram

This is not some exotic loan program.  It is a fixer-upper loan on a 1 to 4 unit dwelling.  If you pay attention to the particulars of the loan program, you can use it to fix a main street mixed use building and be in a position to live in one of the units rent free.  Four or five local folks doing this within a couple blocks of each other could change the main street.  Seriously worth pursuing for a lot of towns.

A number of colleagues whom I respect have made a point to telling me that the process of getting a 203(k) loan to actually close can be really tough.  There are enough specific underwriting requirements that are different enough from more typical loans which lenders process that closings get delayed, or the lender withdraws their commitment.  So finding a bank that actually has their stuff together on this program is important.  Wells Fargo has invested in training their people on this, so start with them.

The extra brain damage involved in the loan is why I think the 203k program is an excellent vehicle for the rookie developer looking to step up their game. It requires that the project scope be well thought out and well documented. It requires the rookie developer to understand the lender’s underwriting way more than the average mortgage borrower would. (-and possibly the more than the loan officer does..) It requires a long due diligence period from the seller. In short, the process is hard wired to require the rookie developer to have an excellent plan and seek help from their colleagues to launch their first significant solo project. It puts the rookie developer squarely in the position of adding value by creating order out of relative chaos. That ‘s the job.

Asking Nicely for Something that should be Really Obvious —(Again with the Parking Thing)

Providing convenient parallel parking at the curb should not be hard.
Providing convenient parallel parking at the curb should not be hard.

Parallel parking at the curb provides some important and useful things:

  • Slower traffic.
  • A formidable barrier between passing cars and people walking on the sidewalk, so walking feels safer.
  • Parking spaces located close to where people are actually going.
  • Parking spaces without any additional circulation lanes (and additional impervious surface).
  • Greater flexibility for building on private parcels.

So if you want to build in a place that does not allow parallel parking on a public street and requires way too many off-street parking spaces on the private parcel, it is usually worth the hassle to ask for a variance or exception to the rules that are on the books.  Sometimes this decision is made by a municipal staffer like a Zoning Examiner or Planning Director.  Sometimes special permission for something really obvious, (like a better parking arrangement) will require the approval of the Planning Commission or even the City Council.

If you are asking for on-street parking or a reduction in off-street parking It is important to make that ask in the context of a thoughtful project .  When you show the amount of on-street parking being provided, the reduction in the number of off-street spaces seems like housekeeping item and not a big deal exception or some completely exotic one-off variance.

Just to be clear , (since it is often all about how you ask), don’t just ask for a reduction in something that is on the books as a black and white requirement that everyone is supposed to follow. Show the reviewer, commission, or council the whole project and ask for the reduction as part of that larger conversation. When you demonstrate that you are doing more, doing better than a lot of what they are reviewing, relief from a number in the zoning code seems like a minor accommodation needed to get to a good outcome.

Parking Bloat Drives Down the Price of Land in Desirable Neighborhoods (which is really dumb).

Parking in Downtown Buffalo, NY.  A stark example of a city that has prioritized affordable places to house cars (--regardless of the cost or consequence).
Parking in Downtown Buffalo, NY. A stark example of a city that has prioritized affordable places to house cars (–regardless of the cost or consequence).

In an email exchange with my Architect friend (and aspiring developer) Sara Hines in Massachusetts, she asked “Okay, so I really want to build better places.  What towns in New England are going to let you build small scale walk-up buildings as-of-right, without requiring a lot of off-street parking?”

Good question.  More likely than not, you will have to satisfy some local version of a dumb minimum off-street parking requirement. This is particularly unfortunate and wasteful, since municipalities are genuinely terrible at guessing how much parking is actually needed.  Let’s just call it what it is.  Parking Bloat.

With off-street minimums, parking becomes the driver of what can be built and what a developer can afford to pay for land.  (also called the “land residual” in finance speak).  Simply put –you can only build what you can park according to the rules. That drives down the price you can afford to pay for the land.
There is some minor good news if you have an appetite for parking reform.  Since the requirement for off-street parking just reduces what can be paid for the land, you may have an opportunity for some arbitrage as a small developer. Think of excessive off-street parking as a land bank.  A piece of the parcel that needs to be set aside in the right configuration so that it might be built upon later, (after the rules change).   The strategy to deal with this is to provide the unessessary surface parking so that it is configured to be converted to building pads later.  To do this you need to keep the utilities out of the future pad and watch out for how the site drains.
Another strategy is to build actual garages to provide some of the required off-street parking.  You can rent out garages at the same rate per SF as local self-storage (or more).  Let’s face it.  They will end up being used as self storage anyway, but in the mean time they are a rent paying work around for Parking Bloat.
If a municipality is serious about the economic and cultural benefits of places worth caring about and they want to provide a greater range of options for where people can live and work, they will eliminate off-street parking requirements.  If they won’t take that step, I wouldn’t trust their well-intentioned planning efforts. It is clear that they are somehow just not equipped to do the most basic thing.   Parking Bloat is a telling metric for figuring out how a town works.  It could mean the elected officials and staff may not know what they are doing.  It could also mean that they know what needs to get done, but for some reason, cannot get it done.  Either way, the effect is the same.  The small developer/builder should watch out for surprises in dealing with the planning staff and elected officials. If the community is crippled by Parking Bloat, land will cost less and you will have to build less initially.  So don’t overpay for land and start working on getting rid of the regulations that require Parking Bloat.
Don Shoup’s book   The High Cost of Free Parking is out in paper back for $28.  Make sure your local public library has several copies.  Give copies to the leadership of your town’s various neighborhood associations and to the prime movers at the local chamber of commerce. With a little luck, the Town will do the right thing and you may create a couple of building sites down the line within the projects you built under the old bloated rules.

Grim Arterial Street or a Multi-way Boulevard ?

The Grim Arterial Street 150' ROW.
The Grim Arterial Street 150′ ROW.

The most challenging piece of the Amador Proximo charrette with Placemakers was figuring out how to deal with an unfortunate arterial street bordering the 60+ acre infill site on the West. This street could be anywhere in the US.  Chuck Marohn calls these unlovable high speed thoroughfares “Stroads”.  Neither a road between towns or a street in town.

Link to “Stroads” at StrongTowns.org

Our proposed solution was two  11′ through lanes in each direction with a center median with turn pockets and two low speed side drives providing access to the parcels along the boulevard with a median separating the through lanes from the side drives.  The side drives would allow businesses along the boulevard to stay in operation while the center lanes and medians were being constructed.

Illustration by Andrew von Maur.  Walking down the side drive of the proposed Multi-way Boulevard.
Illustration by Andrew von Maur. Walking down the side drive of the proposed Multi-way Boulevard.

We heard from serious local cyclists that a dedicated cycle track in the side drive median would be preferred over cyclists sharing the slower speed side drive, so we modified the section.

Proposed section redlined after meeting with local cyclists.
Proposed section redlined after meeting with local cyclists.

This approach has a shot at getting built, as the state DOT is in the process of negotiating an agreement with the city of Las Cruces to turn this section of the State Highway over to the city and the DOT has allocated funds to do some improvements to the current “stroad before turning it over.    A good deal for everyone.  The Boulevard will produce much higher economic value for the adjoining properties and the traffic capacity and safety of the arterial street will be significantly improved.

Plan view of the proposed Boulevard section, Existing Buildings in Black.
Plan view of the proposed Boulevard section, Existing Buildings in Black.

If you are interested in this approach to taming unfortunate streets, I recommend The Boulevard Book by Allen Jacobs and Elizabeth McDonald.

Link to the Boulevard Book on Amazon