Return On Brain Damage -the small developer’s key metric

There’s an old joke.  Where does wisdom come from?  Experience.  Where does experience come from?  Lack of wisdom.

Real Estate Finance has a lot of technical terms and acronyms.  Return on Investment (ROI).  Return on Equity (ROE).  Internal Rate of Return (IRR).  These are all worth understanding for a small developer working on incremental projects to make their neighborhood a better place to live.  They are ways to look at the numbers.  But how do you look at more intangible things like know-how, reputation,  and relationships?

More important to the small operator than any of these is the Return On Brain Damage (ROBD).  I am talking about figurative not actual “brain damage”.  Figurative Brain Damage for a small developer is the the accumulated effect of going through an a painfully confusing and ill-defined process to get your project approved and built.  You could call it painful learning gained in an informal ass-backward process.  This kind of learning is painful because while you are proceeding through the effort there is a voice in your head saying “This can’t be right…Are you sure you know what you are doing?  This makes no sense…”

For example, I was looking in a local zoning code to understand if it would be possible to build a four-plex on a 40′ x 125′ infill lot.  I sort through the setbacks, the hight limit, the maximum lot coverage, the minimum lot size, the minimum lot area required per unit, the minimum off-street parking required, and the minimum landscaping standard.  By my reckoning, a four-plex could be built on the lot as of right.  So I took my site plan to the front counter of the building department and met with a helpful staffer.  She showed me the Definitions section in the zoning code and pointed to the bit titled “Multifamily”.  Along with describing any building with three or more dwelling units as multifamily, the definition went on to explain how multifamily buildings were required to be at least 25′ away from any property line.  This would certainly be hard to do on a 40′ wide infill lot.  The fact that the city’s Comprehensive Plan specifically calls for more Missing Middle Housing in the neighborhood where the lots are typically 40′ wide never made it into a rewrite of the zoning code.

So I go through all that on the front end of a promising deal, only to learn that I should not buy the 40′ infill lot.  I had been invited to the town. Reading the Comprehensive Plan got my hopes up.  Reading all about the specific zoning classification applied to the infill lot was pretty encouraging.  I drew a site plan and had a 20 minute meeting with a seasoned staffer before I found out that there were 76 words buried in the Definitions Section of the zoning code that killed the potential four-plex (or anything bigger than a duplex.  So what was my return on brain damage?  What did I learn from that frustrating experience.  Always read the Definitions Sections of the Code.  -Something that I can use in any place I work or help others with their projects.  All in all a pretty good return on the frustrating experience of getting caught between the good intentions Comprehensive Plan and a black letter definition in the back of the zoning code.

If you are weighing one prospective project against 5 or 6 others in the same neighborhood, consider what your return on brain damage is likely to be for each of them.  If you learn the specifics of building on a particularly lousy local soil type, would that new know-how help you understand how to build other projects on that side of town?  If you can build trust with local activists and neighbors would that trust help with your next planning commission application?  If you can get through the communications issues you seem to be having with your architect or your framer, will that make things go more smoothly for the rest of the project?  Is it worth the frustration your historic tax credit consultant to draw a clear diagram of the process using small words (and no jargon).

If you facepalm and ask yourself “What am I getting myself into here?  The next question should be “What’s my likely return on what looks to be a fair amount of brain damage?”

My experience in 20+ years of trying to help large scale developers retool their operations to fit into urban places produced an extremely low return on the brain damage, given the effort required.  That’s why I figured it would be better to invest the effort needed to train a new cohort of developers committed to building incrementally at the neighborhood scale.  Over the last 3 years we have seen an excellent ROBD on that effort.

WalkScore meets Seaside. Hilarity Ensues

Planning and Urban Design folks will recognize this illustrative plan of Seaside, Florida.  Designed by Andres Duany and Elizabeth Plater-Zyberk and developed by Robert Davis.  A place built to demonstrate that narrow slow speed streets lined with straightforward buildings could be a built in modern times.  Seaside is a well known iconic project for the New Urbanism.  After a couple decades the project is still not completed and continues to evolve.

The brick streets are 18 feet wide, flanked by parallel parking on crushed oyster shells.  The streets deflect or terminate every 300-500 feet and people casually walk in the streets with vehicles creeping along occasionally outside of the town center which has generous sidewalks in front of the shops and restaurants.

There is a network of pedestrian pathways at the interior of the blocks.  When my kids were young they loved the place and knew every shortcut.

So what happens when you use WalkScore to check out this incredibly walkable place with a chapel, parks, bike rental, a school and soccer field, music venues, a postoffice, restaurants, a wine bar, an art supply store, bookstore, and lots of shops, galleries, cafes, and a small grocery?  You get a very comical result.  Because Seaside does not have formal sidewalks or bike lanes outside of County Road 30A and the Town Center, it has a low WalkScore (48 out of 100).  Walk score figures this is a Car Dependent neighborhood.  If you have ever strolled the long way back to your rented cottage wandering your way back from a swell meal at Bud and Alley’s down the middle of the brick streets you will probably find the WalkScore to be hilarious.

Seaside demonstrates that it is possible to calm traffic on local streets to the point where folks driving a vehicle are acutely aware that they are in a place where pedestrians and bikes are the order of the day and that vehicles must drive very slowly.  That level of careful design and pragmatic construction is on a completely different level from the metrics that feed into the WalkScore Algorithm.  Don’t get me wrong.  WalkScore is great for people who have a hard time recognizing a walkable place without the help of a real estate agent…. (-or you could go walk around and see the place for yourself).

 

Helping Your City Go Broke When You Know Better is Borderline Criminal

Do you know where your town comes up with the money needed to repave streets, expand the sewer plant, pay cops, firefighters, teachers, bus drivers?  Most municipalities rely upon a combination of sales tax, utility bills, impact fees on new development, and the big reliable source of money for the General Fund and Capital Projects; property taxes.  Property taxes are assessed according to the value of the buildings on a parcel  The more a building is worth, the more taxes the building owner pays.  Once a building is built, there is a good chance that it will be the basis of the property taxes that will be collected for a very long time.  It makes sense for a municipality to know how much taxable value per acre a given pattern of development yields, since there is only so much serviced developable land within its borders.  Joe Minicozzi of Urban3 does a good job of explaining this fairly obvious math in this video .

The straightforward little two bedroom cottage above is proposed on a 37.5′ X 135′ lot  in city with a minimum lot width of 50 feet.  There are lots of existing platted lots with water and sewer taps in an established and desirable neighborhood that are less that 50′ wide.  A vacant lot in the neighborhood pays about $70 a year in property taxes.  Removing the minimum lot dimension from the local zoning code would make it possible to build modest houses like the one shown above, but like many places, the city foolishly decided to downzone its established neighborhoods a couple decades ago.  That downzoning in favor of a more suburban model damaged their tax base.  There are roughly eight 37′ X 135′ lots in an acre.  If this little two bedroom cottage sold for $135,000 X 8 lots to the acre, the result is $1,080,000 in taxable value per acre.  Compared with the taxable value per acre of the biggest fanciest Super WalMart in the same zip code at $520,000 per acre.

When a developer builds a shopping center of residential subdivision these days, it is fairly typical for the developer to turn ownership the new streets, sewers and other utility infrastructure over to the municipality.  If the taxable value of the new development does not produce enough money to pay for the repaving of the street or the repair and replacement of the other infrastructure when it wears out, this turns out to be a lousy deal for the municipality.  The developer has essentially given the municipality a free great dane puppy.  Unless that dog gets a job, it will be a long term financial drain.

Getting senior staff and elected leadership to recognize the looming cost of replacing and repairing infrastructure in parts of the city that cannot pay their way is going to be difficult. Coming to terms with this structural and systemic failure cannot be done with short term impact fee patches. The problem is bigger and more expensive than what can be laid off on new buildings. The source of the problem comes from building a place with the wrong pattern of development over decades. If you build in a way that spreads civilization too thinly, (Auto-only Sprawl) what gets built cannot support the repaving of roads or the repair and replacement of other infrastructure, let alone paying for cops, fire fighters, schools, parks, libraries, and public health services. If towns and cities create big backlogs in infrastructure repair that they cannot pay for, the financial burden becomes so great that people elected to two or four year terms end up just ignoring the problem and resisting any effort to do the honest math that will force folks to face how much taxes are going to have to be increased to cover the repair and replacement costs that are coming down the line.  This is big money with big consequences.

If you cannot do the math to understand the taxable value per acre of serviced land, you should not be in local elected office or running a municipal department. I recognize that this is typically a problem of ignorance and not one of deliberate malice, but the effect is the same in either case. We have to build differently to provide folks with greater opportunity, but we also have to build differently because towns and cities cannot afford the financial fall out of the wrong development pattern. A town going broke while while elected officials and senior staff are ignorant is unfortunate, but kinda understandable. Going broke when you know better is borderline criminal.

So what pattern is your town going to build in?  Is anyone doing the math?

Three Story Urbanism? No Problem.

Hutchinson Green Apartments, Chico CA by Anderson|Kim 22 units. 3rd Floor units rent at a premium.

6-plex by Union Studios

6-plex by Union Studios

6-plex walk up by Brown Design Studios

 

I think it is important and valuable to build Accessible/Adaptable apartments as  currently required under HUD’s Fair Housing Design Manual .  Here’s how to do that in a straightforward three story walk-up building you could build with ordinary residential construction trades in your local market:

The requirement for apartment building or mixed use buildings containing four or more units, and built without an elevator is that all of the ground floor units must be Accessible/Adaptable.  If the 1st floor has no residential units on it, (say because the ground floor is occupied by commercial space or parking garages), then the next floor (the 2nd floor) becomes the “Ground Floor” for the purposes of compliance with the federal Fair Housing Act and you would have to install an elevator for access to that floor unless the building was adjacent to a steep enough grade to provide access to the 2nd floor without an elevator or lift.  As I explained in an earlier post that seems to be getting a fair amount of play, The International Building Code (IBC) allows you to build a three story TYPE V (wood frame) structure with fire sprinklers with a single exit stair, as long as the upper floors do not have more than 4 units on each of them and that the travel distance from the farthest location within each unit is less than 125 feet from the exit stair enclosure.  Follow the link for the specific IBC code citations:

Another Look at how to build a 3 story building without an elevator

The photos above show some capably designed 3 story buildings.  It is possible to do this.  If you have doubts and you need some help,  I suggest that you contact the good folks at Union Studio in Providence, RI They designed the two 6-plex buildings on the lower left or Eric Brown at Brown Design Studio in Savannah Eric designed the white 6-plex walk-up in the larger image on the right.  My able partner David T. Kim designed the 22 unit Hutchinson Green Apartments in the upper left as our first major project after the Great Recession.

So 3 Story Urbanism is no problem?  Okay, admittedly that title does cross the line into Click Bait, because while these hard working modest buildings are very useful in creating 3 story urbanism, your local zoning code with it’s needlessly deep building setbacks, or bloated off-street parking requirements may make it quite difficult to build good #3StoryUrbanism.  But as you can see, but the International Building Code should not be an issue for you.

Bloated parking requirements will mess up your site plan so that you cannot build the same way as the venerable 1920’s 3 story apartment building across the street.  Municipalities are famously bad at guessing how much parking you should be required to build on your private parcel.  Many cites will not even give you credit for the parking spaces at the curb in front of your potential building -as if they do not physically exist.  Unnecessary parking takes up space, creates additional impervious surface that you have to address for the storm water requirements, and those additional spaces cost money to build and maintain.  Bloated parking screws up perfectly good projects every day.  The development math for parking you don’t need never works in your favor.

 

A Noticeably Less Shitty Version of Darth Vader

The following is PG-13 version of a piece of an interview which was cleaned up a bit for this piece by Rob Studeville on Public Square. (thanks Rob).

Incremental Development does sound like you need a lot of capital and that there would be a lot of risk if you don’t know what it is. If you didn’t know what indoor plumbing is and how it works, that might also sound like a crazy risky idea. But Incremental Development is not that complicated nor that risky. The biggest barrier to entry is the initial step. What is the road map? What is the territory? It’s a black box in a lot of people’s minds.

Developers are held in very low-esteem.  I see that as more of a feature than a bug because if the bar is low, it’s pretty easy to under-promise and over-deliver. On the spectrum of all possible developers that might arrive in your neighborhood from Mahatma Gandhi to Darth Vader,  people expect a developer to resemble Darth Vader.

A small developer just needs to be a noticeably less shitty version of Darth Vader.”

Does Your Town Need an Authentic Asshole?

Atlanta Small Developer Boot Camp – October 2015

 

One of the themes I have seen following the recent election, is that many people are tired of being talked down to by people who seem to think they are better.  Call it a backlash against smugness, for lack of a more precise term.  Recently I proposed that for people trying to build better places, the alternative to smugness would be to become authentic assholes. I am serious on this point.  Authenticity appears to be the quality that lets you get a partial pass on being an asshole, as long as you don’t talk down to people..

I’m directing this approach to the Architects, Engineers, Planners, Policy Folks, and Academics who are members of the Congress for the New Urbanism or similar place making advocacy groups.  If being the fancy people who know stuff, (the people perceived as smug or condescending) is not working, then let’s not be those people.  Let’s be authentic assholes.

The fire marshal’s mandate is not a collection of sincere feelings that we should help the community process through group hugs. It’s bullshit that hurts the town. Some asshole needs to call the fire marshall out for being part of a calcified over-reach that makes no sense.

Off-Street Parking minimums? More bullshit that needs to be called out. Municipalities completely suck at guessing how much parking is going to be needed for all possible land uses, and the community was wrong to give them that job. The result was they picked numbers that produced fewer complaints and phone calls. Some asshole needs to call out that lazy bullshit in stark terms and poison the well. Make the position of advocating for such nonsense so awful that anyone who defends parking minimums (or maximums) is discredited for being a lazy bullshitter.

You want to make a difference at the local or regional level? Become a developer or a builder. Free yourself from the shackles of propriety and elaborate argument. Every community needs people who can build and rebuild the place. That’s where we can find our place in the moral, economic, and cultural fabric of a place. Architects, Engineers, Planners, Academics have a professional obligation to at least appear to be interested in making the city a better place with ideas. People who are fearful see a host of horrible outcomes, real or imagined, when ideas are advanced in clumsy ways disconnected from the base concerns of daily life. Developers and builders are not burdened with those expectations and when the dust clears there are buildings built or rebuilt, people find benefit in the buildings or they don’t. (–Keep in mind that the bar for a decent building or street is quite low many places). Nobody expects virtue from a developer. They may look to exact virtuous action from the developer under duress, but they really do not expect it as a natural expression of what is in the developer’s greasy soul. An exaction or tax is often given reluctantly, out of resignation.  An unexpected gift can be a sincere expression of our better nature.

This is a framing thing. When New Urbanists propose a better place that starts to sound like some kind of utopia and the built effort that follows only delivers 68% utopia, folks get disappointed and pissed off because their high expectations (however unreasonable) have not been met. If a developer commits to meet all local codes and regulations and to deliver something the market seems to want and the built result is 32% utopia, people are accepting and sometimes even happy, because their low expectations have been exceeded.

Be virtuous in your heart, but don’t wear it on your sleeve. Be cunning and deliberate. Have a plan for your neighborhood. Gather resources that others cannot access. If we can be the people who actually get stuff built during a recession (And that stuff doesn’t suck), if we can build well, despite the severe shortage of skilled construction labor, who is going to mess with us at the local level?

If you would like a glimpse of what an insurgency of Small and determined developers might look like, wander over to the Small Developer/Builders Group on Facebook and see what those folks are talking about. We worked to keep the group fairly politics-free. If you are not on Facebook, find somebody who is and they can guide you.  Come to a Small Developer Workshop where you will meet folks who are serious about making a difference in their neighborhoods (even if other people think they are assholes).

Nobody suspects virtue in a developer. You can pick the opportunity to surprise them. Under-promise and then over-deliver.

Let’s Line the Edges of Parking Lots with Small Shop Front Buildings.

 

 

I think there are lots of great precedents for small single story main street buildings that work well.  Above are some studies David Kim and Will Dowdy did on small, shallow storefront spaces that could be used as parking lot liners or in conjunction  with small apartment buildings and cottage courts located behind the small commercial/flex building to provide mixed use without requiring the use of commercial steel pipe fire sprinklers that can be required if the residential and non-residential Occupancy Types were combined into in one mixed use building.

The intent was provide a wide/shallow space that could be flexible.  We settled on a depth of 26′ as this leaves an 18′ dimension between the 8 x 8 accessible restroom and the storefront.  We were also looking to keep any columns or other intermediate structure out of the floor plan and 20′-32′ of depth is readily spanned without going nuts on the truss design.  You can get pre-engineered bar joists at 40′ long, but we wanted to keep the construction technique within the skills of residential trades.

Keeping the depth modest allows for daylighting of the space from a transom and light shelf over the storefront and awning.  Spaces this small are easily heated and cooled with a ductless mini-split heat pump/air conditioner.

Using a single pitch roof truss, sloping from the street side to the rear, with a parapet on the street side can provide lots of room for signage, while screening compressors or kitchen hood fans from the street view.

Buildings that are flexible enough to house small and inexpensive workspace for retail, services, food and drink, etc. should be in the Small Developer’s tool box.  You may know an under-utilized parking lot that could be lined with something like this.  Could be good way to follow up on testing the location with some food carts.

Steve Mouzon has some very interesting thoughts along these lines.  His blog has better production values than mine does, so I encourage you to click through and check it out.  Steve Mouzon’s Blog Original Green

You’re an Urbanist? Excellent. Why Aren’t You a Developer Yet?

A napkin sketch showing how to add an attached ADU and a detached ADU to a small existing house on a 50′ x 100′ lot in Portland, OR.

I continue to ask Urbanists “why aren’t you a developer yet?” That’s a sincere and serious question. I am serious about recruiting Architects, planners, engineers, activists who consider themselves to be urbanists (New or otherwise) into the ranks of the small developer cohort because I think it is the best way for an urbanist to have an impact in a place they care about. If you have devoted thousand of hours of study and practice to what makes a good place, why leave the construction and renovation of buildings to developers? This question becomes a bit more pointed when you recognize that many conventional developers are doing work in urban settings under duress or without much of a clue how to make their efforts fit a more urban context.  I think the typical generalist/urbanist will do a better job than whatever big development outfits are working in their city.

While Urbanists are working to heal the city or build better places, they should hang onto some of the buildings that get built/rebuilt along the way.  Having a modest portfolio of buildings that pay rent will help them weather the next recession.  (It is really hard to make a living doing fee for service or consulting work when nothing is getting built).

With those reasons in mind, we still need to have a sober and realistic grasp of what is involved for someone making a transition to become a developer, given the arena they are likely to operate in.  This stuff ain’t easy.

People tend to think that all real estate developers make a ton of money, because some developers have.  For every major league star in the real estate game there are scores of people hustling to make a living by making their neighborhood better.  Lots of people are fooled by the guy in the nice suit driving a  very nice leased vehicle.

I don’t know how people arrive at the amount of money they assume is made on a development project. The assumptions may be ridiculous, but until somebody actually goes through the process, it is not reasonable to expect them to know the math.

I also recognize that until you can demonstrate otherwise, a new developer is part of a disgraced enterprise. So folks considering taking up this work should not expect thanks or regard.  Start small. Hustle on a small project will help you acquire the know how and relationships that will make larger or more complex projects possible, but hustle will only take you so far and you don’t want to get into a project that will turn you into a former developer because it is too big or complicated.

The First Year of Small Developer Activity

Attendees; First Small Developer Boot Camp in Duncanville, TX August, 2015

 

I tend to let too many files accumulate on my computer desktop.  As I was clearing out files today I came across the photo above and the text below.  As you can see from the photo, we did manage to put on the first boot camp in Duncanville.  By the end of 2015 we had done six bootcamps and workshops and launched non-profit to coordinate the effort to cultivate Small Developers around the US, the Incremental Development Alliance (IDA).  Next Tuesday, June 7th in Hamtramck, Michigan we will running the 7th event of 2016 the day before the 24th gathering of the Congress of the New Urbanism starts up on June 8th.

In addition to running the one day and three day training events, IDA along with Midtown, Inc has been awarded a Knight Foundation grant to do a deeper diver into the Midtown neighborhoods of Columbus Georgia, providing 18 months of extended training and mentoring for local small developers.

None of this would have been possible without the hustle and hard work of local sponsors and volunteers in each of the cities that hosted us and the ongoing efforts of the IDA staff and board.  Strong Towns helped us get started, hosting the boot camp registration for the first couple events on their website.  Lynn Richards and the staff at CNU have been tremendously supportive as we continue to figure out how to scale up the Small/Incremental Development Effort.  The CNU’s Project for Lean Urbanism was the genesis of this entire effort.  The time we spent with the Lean Urbanism Working Group exploring what it would take to Make Small Possible made it very clear that we need a new business model for development, That shifting the scale of the development enterprise was going to be critical to building better places.   Thank you everyone.

 

June 5, 2015

Things are moving FAST with the rapidly expanding Small Developer/Builders Facebook group that we set up last April prior to CNU 23 in Dallas.

I have heard from a number of group members 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 October 16-18.

But that’s all the way into late October and folks 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, if we can find a venue at modest cost. It could be a very Lean affair.  A meet-up with other folks considering 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 – EVALUATE 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 INVESTOR.
• DEAL STRUCTURES; ALIGNING THE INTERESTS OF PARTNERS.
• POP-UP RETAIL AND STREET MARKETS; HOW TO CULTIVATE 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 cover?

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?

 

Building Houses or Condo’s for Sale? Bad Dog Ginger!

The wisdom of Gary Larson’s Far Side

This afternoon I got another phone call from someone convinced that they should develop condominiums and sell them. I am really struggling to find a better way to communicate on this really basic point. I feel like the guy in the Far Side cartoon above.

 

If you have the know how required to produce buildings that people live and/or work in, using that very valuable resource to produce houses or condos that you sell to people has a huge opportunity cost.  Opportunity cost is a big deal, as in lost opportunity and wasted opportunity.  What else could you have been doing instead of building and selling?

I cannot emphasize this enough. If you have the wherewithal to build something, Don’t sell it.  Hold onto it and rent out space in your building. The market for new or renovated rental buildings is hugely under-supplied in most markets, particularly in anything even remotely resembling walkable urbanism.  There are lots of places where a couple of decent buildings will have a wonderful effect upon the neighborhood.  The people who fill in the missing teeth in the neighborhood will do well, while doing good.

 

Our culture has created completely unrealistic expectations for what is supposed to happen when you buy a home. Avoid putting yourself in a place where you have to deliver on all the delusional nonsense that fills the heads of people who watch too much HGTV. Build to hold and rent. Build in places where the amenities are exotic stuff like proximity to transit, day care, $2 coffee and a genuine local bar.