What’s the Big Deal with Small Developers Anyway? —Capacity Building.

Modest Building with Big Potential.
A Modest Building with Big Potential.

Who is going to build the finer-grained Missing Middle housing, the small workspaces, the two and three story mixed use buildings that Municipalities and neighborhoods are looking for?  Will it be large development firms that see a 10,000 SF single story commercial building or 100 apartment units as a “small deal”?  Doubtful.  Very Doubtful, for the simple reason that large scale developers need large scale deals to support their operations.  They can’t execute small deals effectively and they see a lot of opportunity cost in small deals.  “Why would I take on a 4 unit project when I can build 40 units or maybe even 400 units with about the same amount of brain damage?”

Monte Anderson keeps hearing from folks who want him to move to their town and develop there.  To his credit, Monte is determined to focus on the communities in the Southern Dallas Metro that he knows and cares about.  His advice for the people that want him to come to their town is that they need to find someone who is committed to their town and help that person develop —or become a developer themselves.

This is actually very pragmatic advice, because the big outfits are not coming.  Monte Anderson is a great guy, but he’s not coming to your town either.  Who does that leave?  You (or someone a lot like you). Start small.  Learn the business.  Build a reliable team that cares about the place.  There is a growing network of support for small developers, some of them are just a few years ahead of you on the learning curve, but they will do whatever it takes to keep you from having to repeat their mistakes.

Consider what a small enterprise could accomplish in your town, not just he buildings you might renovate or build, but the local wealth you could create that stays in your neighborhood.  Think about the jobs that you could create in the trades, and in property management.  Think of the other folks in your neighborhood you could mentor, paying it forward once you have learned the business.  Real capacity for local and lasting economic development is hard to come by, but building the everyday buildings that people need, in a place that you care about will raise up more than walls and a roof.

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Parking Hysteria, Sloth, and Indifference

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There is a relationship between how woefully uninformed people are about parking and how epically they lose their shit over parking problems.  I am really tired of explaining the basics of modern parking management to people who seem incapable of using the Internet.  Here are the highpoints from Donald Shoup’s fine book The High Cost of Free Parking:

  • Recognize that all public parking is not equal.  Some spaces more convenient than others, so price them accordingly.  The spot at the curb in front of the coffee joint should not cost the same as the top floor of the seven level parking structure.
  • For retail areas, price the parking at the curb for a 15% clearance rate. Raise the prices for curb parking until you reach the point where when 15% of the spaces are available.  Reduce the price of parking in a rational gradient, the further away from high demand the cheaper the space.
  • Make it easy to pay with a credit or debit card or with a phone app.  Phone apps that message you to ask if you want to add another hours are particularly handy.
  • Folks that live in residential neighborhoods close to areas with high parking demand like universities, hospitals or retail areas get bent out of shape when the public parking spaces at the curb in front of their house gets a lot of spill-over parking.  This can be solved through the use of resident parking permits and the sale of parking permits in that area for daytime hours.  Proceeds from the sale of the permit can be used for public works and parks within the neighborhood by setting up a Parking Benefit District.

Folks that don’t care enough about solving their parking issues to use these proven tools need to get a real problem.  How much sympathy or patience fan you have for difficulties born from sloth and inattention?

So Why Won’t You Build Condos?

Big building. Complex Mechanical Systems. Lots of specialized details to make the exterior envelope keep the weather out. Condo Ownership. What could possibly go wrong?
Big building. Complex Mechanical Systems. Lots of specialized details to make the exterior envelope keep the weather out. Condo Ownership. What could possibly go wrong?

Disclosure;  Many of my Architect and Developer colleagues disagree with me on the subject of building condominium ownership.  They think the risk can be handled with the right insurance and the right attorneys.  My question for them; “As long as there are other non-condo projects to be built, why bother with this insurance/lawyer critical mess?

The Construction Defects Plaintiffs’ Bar is a very good reason to stay the hell away from for-sale condominium projects. The General Liability insurance policies for builders and developers are more expensive than for fee simple for-sale or for rent project. For Architects and Engineers Professional Errors and Omissions insurance coverage gets really expensive once you start doing any significant portion of your work on condo projects. The result is that Architects either do a _lot_ of condo work, or they do very little. There is a statute of limitations for construction defects, typically 10 years in most states. In year 9 the staffers of the big construction defect law firms start to send “trolling” letters to owners of the condominium units hoping to hook a couple people interested in suing. The addresses are easy to find, since they are required to be recorded with the State Board of Real Estate or the State Attorney General’s office. The letter tells the condo owner that the law firm is currently representing other owners in the condominium association in a lawsuit against the Developer, the builder, and the architect. The lawsuit is being handled on a contingency basis, so there will be no up front cost for the condo owner to join the lawsuit. The law firm gets 40% of any settlement or judgement if they win. The insurance companies for the developer, the builder and the architect, and maybe a few of the mechanical trades often just settle with the firm. Then they jack up the rates of their customers or just cancel their policies. So without any actual construction defects the tidy little extortion scam just ends up making the insurance needed to build condo’s more expensive. There are actual defects in some of these lawsuits, but the deals cut between the insurance companies to spread the paid of settlement around are sleazy at best. A hugely bad structure for managing risk. This is why we advise Small Developer/Builders to avoid condominium projects whenever possible and to keep the scale of your projects small and your project LLC separate to mitigate your risk of bullshit litigation.

Quick Notes following the Small Developers Boot Camp

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The first Boot Camp is behind us.  100+ people came to learn about how to develop scale projects.  Everyone I spoke with was already pretty accomplished in some line of work, but looking at what it would take to move into development.  This crew is going to be able to offer each other a lot of help and support.  After a pretty grueling 14 hour day of instruction and discussion, people still had enough energy to hang out at the Pop-Up Art Gallery put together by Donna Harris and her crew for another 3 hours.

I figured we would see maybe half the class at 8 AM the next day.  I was quite wrong.  85 of the 100 attendees were in their seats at 8AM on Sunday morning, several driving in from the other side of the Dallas Metro.

We have lots of notes on what we can do differently or better next time.  Jim Kumon shot lots of video so I hope that he can get some good stuff up quickly on the CNU.org web site.

It is going to take me a few days to recover, so in the meantime, I hope that members of the Duncanville cohort will post comments about their experience here and on the FaceBook Small Developer/Builders Group page.

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Homework for the Small Developers Boot Camp

progression

The Key Piece of Homework is to try and capture your project in a straightforward pro forma.

You can find the pro forma spreadsheets here in the Small Scale Developers Resources page on the CNU.org web site.

You will find two pro formas, the first is a simple four unit cottage court, the other a four-plex with potential expansion.  By changing the information in the pro forma spreadsheet that describes the individual apartments, the buildings, the size of the lot, the likely rents you can try out you project and see if it makes money.  If you don’t work with Excel very often you may get frustrated by mechanics of the spreadsheet, but even if you hit a dead end working on this on your own, spending an hour trying to fit your project into one of these pro formas will give you a head start when we start to walk through how to do this in the Boot Camp.

You can also download PDF’s of the site plans for the 4 unit cottage court and the Four-plex from the same Additional Resources page on the CNU.org’s Small Scale Developer page which may help you visualize what is going on in the pro fro forma spreadsheets.

If you want to present your project for a critique on Sunday morning, the pro forma is a good way to capture some of the basic information that will shape your project:

  • What are the likely rents?
  • What are the likely project costs -(hard and soft)?
  • How much cash will be needed and how much debt?
  • Does the project make money?
  • When does an investor get their principal back?  When do they get their return?
  • Can you draw fees while developing the project?

Things Worth Repeating

My good friend Phil Bess teaches very smart Architecture and Urban Design students at the University of Notre Dame.  He told me that the best students in his classes still need to hear information on important concepts and tools repeated 5 times to retain them and start to recognize how they might be applied.  If you would like a head start on that kind of repetition I recommend that you watch some of the following videos:

Arthur C. Nelson’s presentation of the core stuff in his book Reshaping Metropolitan America from CNU 21

Michael Lander’s talk at the University of Miami’s Masters of Real Estate Development + Urbanism; Design From the Marketplace.

A couple of my video presentations; Recruiting Small Scale Developers from CNU23  and The Dark Art of Developing Small Projects

Link to Small Developer Videos

For anyone not attending the Duncanville Boot Camp this weekend, I encourage you to check out the material above and take a stab at putting your project into the basic pro forma spreadsheet.  And as always, please post a comment or question here or on the Small Developer/Builders Group on FaceBook

Small Developer Boot Camp Schedule August 14-16, 2015

 Monte Anderson and me with Chuck Marohn at CNU23 in Dallas.
Monte Anderson and me with Chuck Marohn at CNU23 in Dallas.
Friday Evening
6:30 Registration
7:00 Barbecue Beer & Wine at the Venue
8:00 Boot Camp Kick Off ; Monte Anderson & John Anderson
Monte and John will lay out what to expect from the Boot Camp and how to get the most out of the Duncan Switch Street Market first thing Saturday Morning.
8:30 Pech Kucha; 5 minute presentations of Projects and Problems (20 slide limit)
Bring your PowerPoint and present your project (regardless of how far along you are in getting it figured out, funded, or built).
1 Required Slide:
  • What you have learned from your project so far?
  • What you need to figure out?
  • Where you need help?
Contact Jim Kumon jimkumon@gmail.com  get on the list of folks presenting at the Pecha Kucha.
Saturday
6:00 AM Breakfast available at the Venue.
6:30 Street Market 101 – Monte Anderson.
Monte Anderson will lead the tour as the Duncan Switch Street Market sets up on Main Street. Straggles can join the tour in progress, but are likely to miss some excellent content.
8:00 Small Developer Basics  – John Anderson.
The mechanics of Land Development, and building for sale and for rent -both the conventions followed by large operators and alternative strategies for Small Developer/Builders.
Small Developer Basics are broken down into Market Research, Proof of Concept and Site Selection, Programing and the Pro Forma, Financing, Design & Construction Delivery, Sales/Leasing & Property Management.
10:00 Practical Realities for the Small Developer – Monte Anderson.
Monte will address questions like how do I get started as a developer?  How do I transition to development from a related field?  How do I select an area as my “farm”? What is a good business model for the small developer?
11:00 Walking Tour of Downtown Duncanville.
 Duncanville may not be Paris or Uptown, but recent rehab and infill projects in downtown Duncanville are great examples of how to make a difference in a neighborhood or small town incrementally, so that the  parts can add up to a good and valuable place.
12:00 Lunch at the Venue.
12:30 Straightforward Design for Small Development Projects – David Kim
David will demonstrate the value of using stable building types and everyday building materials and practices.  He will demonstrate the wide range of buildings are available to the small developer below the threshold of larger scale buildings that require structured parking or elevators.
1:30 Cottage Courts – Bruce Tolar
Bruce will show models of for sale and rental cottage court residential and mixed use projects and demonstrate how cottage courts can be used to solve difficult site configurations.
2:00 Managing Construction – John Anderson & Bruce Tolar
A primer on the various systems of delivering site improvements and buildings; Using a General Contractor, Hard Bid vs. Negotiated Contracts, Design Build Variants, Construction Management Structures, Working directly with trade contractors, and the pros and cons of each for small developers with a range of skill sets.
3:30 The Glamour of Site Improvements and Utilities – John Anderson
How to sort through the details that your Civil Engineer or local utility company may have screwed up; Rule of thumb for placing transformers, meters, trash enclosures and other stuff that didn’t get much attention until it showed up in exactly the wrong place.
4:00 Break
4:20 Pro Formas, Budgets, and Deal Structures – John Anderson & Monte Anderson
How does the Pro Forma evolve through the arc of the project and how can a small developer assemble credible and reliable cost estimates?
6:30 Dinner
7:15 Asking for Money – John Anderson & Monte Anderson
Banks and Equity Investors have very different goals and perspectives when it comes to considering the small developer’s projects.  Monte and John will walk you through how lenders and investors look at a deal and how to prepare your pitch and the supporting materials.
8:15 Deal Pitch Simulation
Instructors will demonstrate how to pitch a project to a Lender and to a Capital Partner (investor or land owner).  Attendees are encouraged to pitch their projects to the “bankers” and the “investors”.  This simulation is intended to provide attendees with an opportunity to practice and refine their pitch in a supportive environment.
Sunday
8:00 Breakfast
8:30  Constraints, Opportunities and Competitive Advantage for Small Developers
Things municipalities can do to encourage small developments grouped into three categories: Essential, Important, and Useful.  9:30 Lab Work and Extended Q& A
Attendees can present their projects for detailed critique by the Instructors and the other attendees.  Bring your project in PowerPoint on a flash drive.  Spreadsheet pro forma files are also helpful.  Contact Jim Kumon to reserve a slot for your project’s critique and discussion.
A scanner/printer will be available in the venue throughout the boot camp to print 11 x 17 materials.  Attendees can post their projects in the classroom space.  Don’t be shy.
12:00 Lunch on your own.

How do you handle all the risky stuff that goes into development?

Courtyard between apartments in New Town St. Charles Tim Busse - Architect.
Courtyard between apartments in New Town St. Charles Tim Busse – Architect.
Ahead of the Small Developer Boot Camp this weekend in Duncanville, TX, I have been thinking a lot about how folks outside the field perceive what it takes to be a developer, and how that perception departs from the reality.
People that are not developers often talk about the developer’s amazing and unreasonable tolerance for risk as a defining characteristic.  This is not correct.  Seriously.  The key thing to understand is that Developers typically see the risk of a project parsed into hunks, not as one big scary ball of risk and adversity.
A developer’s job is to identify risks in the stages along the arc of the entire project and then manage or mitigate those risks with the appropriate know how, relationships, time & attention, and setting up the right deal structure to align the interests of the parties.
Market and Site Selection Risk is managed by doing lots of homework before committing to a specific site or sites.
Entitlement Risk is reduced or mitigated by building as-of-right projects or by not closing on the subject property until entitlements are secured, and by thoroughly understanding the technical steps in the process, the politics of the place and the culture of the staff and neighborhood.
Construction Risks (including cost overruns and delays in completion) can be reduced or mitigated by not taking on projects with building types outside of the developer’s experience.  Podium Buildings are a different animal than wood frame walk-ups, Mixed use building are different from one story commercial building or walk up apartment buildings.  If you are making a move to a more complex building type, get a partner who has been there before.
Leasing Risks are managed by doing your homework on market preferences and competing projects recently built or in the pipeline.
Financing Risk can be reduced or mitigated by cultivating multiple sources for equity or debt and not being tied to one investor or just one bank.  Rookie financing risk can be reduced by getting mentors and advisors to review and critique your deal on paper several times before you put it in front of an investor or construction lender.  Structuring multiple exits for investors and for the developer reduces financing risks following construction and lease up.
The mechanics of managing risk can start with assembling checklists and standardized deal structures and agreements with consultants and trades.  With practice comes more mature perspective and a more intuitive grasp of what activity and risks should demand the developer’s attention at a given time within the project arc.