The First Year of Small Developer Activity

duncanville boot camp
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:


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?


What the heck is a “Quadrant Foul?

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If a picture is worth a thousand words, then the right diagram is worth at least ten thousand.  I am very grateful  Jim Heid of Urban Green has boiled down the difference between Large and Master Planned Development and Small and Incremental Development into the series of excellent diagrams above.

I recently had a conversation with a bright guy in a Masters in Real Estate Development program at a serious university.  He was wondering if a Real Estate Investment Trust (REIT) would be a good vehicle for people in a local community to be able to invest in small projects in their neighborhood.  Just to set things straight, a REIT would not be a good vehicle for this as a REIT has to have a lot of property under management to justify their existence and overhead, so the structure would be way beyond the scale of small projects in a specific neighborhood.  Investors would own shares in an outfit that owns a large portfolio of a specific type of real estate.

-But the conversation reminded me of Jim Heid’s diagram.  The kind of  local in the neighborhood projects my grad student friend was describing belong in the lower left quadrant of Jim’s diagram, the Small and Incremental/Entrepreneurial and Bootstrapped territory.  Ownership of real estate by a REIT belongs up in the Corporate and Institutional/Large and Master Planned upper right quadrant.  We might want to bring established tried and true tools scaled for the upper right quadrant to bear on projects in the lower left, but often the scale is just…off.  I think we can call that a Quadrant Foul.

Rethinking the development business model for Small Developers will continues to uncover habits that may serve folks doing large project well that need to be substantially retooled to work in small projects, or they may just need to be set aside as because they are not fit to the purpose.


How do you know there is a demand for decent renovated or new apartments close to food, drink and day care?


The Blenheim Apartments in Denver.

In most places the demand is large and the supply is pretty damned small.  So just how large is the demand?  If we were able to wave a wand and redirect the entire US housing industry to deliver only new rental housing in walkable urban places tomorrow, we would not catch up with the demand until 2050

If you understand urban places and have the ability to produce modest buildings for a living, I encourage you to figure out how to build apartment buildings and mixed use buildings, rent them out and and hold onto them. You should look for opportunities to do this in walkable or even marginally walkable places.  Avoid completely car dependent locations so you don’t have to build swimming pools nobody uses.
If you are a contractor, I think this might work out better than building for other people.  If you are an Architect or urban designer I think this will work out better than performing fee for service design or consulting work.
If this seems like a crazy idea, please read Arthur C. Nelson’s book Reshaping Metropolitan America and give it a a little more consideration.
Here is a link to Dr. Nelson’s entire data set (in excel file format).
Go ahead and download it and poke around.  At a minimum, cruising through the spreadsheet will make you want to read the book , where Dr. Nelson very helpfully explains what all these data mean. I suspect that if you are half as geeky about this stuff as I am, you will hone in on the place where you live to see what the housing future holds for a place you care about.
 You can look up your Metropolitan Statistical Area (MSA) and find out the annual demand for new rental apartments is going to be in your place.  Then hop over to the US Census website to look at how many multifamily building permits were issued in your county in 2014 and 2015.
For example, I live in Albuquerque.  In the Albuquerque/Bernalillo County MSA, the annual demand for new rental units, according to Dr. Nelson is 4,000 units.  Imagine that a quarter of those units get delivered by the apartment fairy in the form of converted single family houses and the demand number comes down to 3,000 units.
In 2014 there were 400 units built in Bernalillo County, so the short fall of 2,600 would roll over into 2015.  add the conservative number of 3,000 units for 2015 and that comes to a demand for 5,600 new rental units.  I check in on the permit activity for the City of Albuquerque and the number for the city (admittedly not the entire MSA) for 2015 was 570.  So now the demand for 2016 is something over 8,000.    Vacancy for apartments in Albuquerque over the last couple years has been less than 2% (–about what you would see when apartments need to be repainted and re-carpeted between tenants)  Rents have gone up 5-10% a year in this market with the higher rents in the walkable parts of town.
Is your area any different?  Do you see an opportunity?

Answering some basic questions on forming an LLC and getting a construction loan for a small project


Today I got an email from someone who attended a Small Developer Boot Camp that asked the following questions:

  • How do I structure my project for an outside investor or for my own investment of capital?
  • How do the investors get paid for that investment?
  • How do I set up an LLC?
  • How do I get a construction loan?
  • How do I structure my finances and credit?
  • Should I use of my house and the land as collateral?

I figured posting the questions and my response here on the blog would be helpful to others.

Forming an LLC
You will need to find a local attorney familiar with real estate development and have them draft the Operating Agreement for your LLC.  If you are going to have another person or persons investing in your project you should hold off on actually filing your LLC paperwork at the State until you have sorted your deal with your investors.
The first step you need to take is to outline (on paper) what you want to do in your project and who will do what before you sit down with your lawyer.  The lawyer probably has a boilerplate LLC Operating Agreement that they will start with and they will modify it to suit your goals and requirements.  The Operating agreement is your opportunity to set up your the structure of your deal, answering questions like the following:
  • Who will manage the LLC?  This can be a designated manager or a managing member of the LLC.
  • Who will the other members of the LLC be?
  • Do you have more than one class of LLC member?
  • Are there milestones in the project or performance metrics that will require members to surrender their interest for a stipulated sum?
  • How are the proceeds of the project going to be distributed?
  • What happens if more capital is needed?
The reason why you hold off on filing your LLC documents until you have a deal with your investors, is to save the time and expense of modifying a recorded LLC to reflect the particulars of the deal you stuck with your investor after the LLC was formed.
Your negotiations with an investor should culminate in a (non-binding) Letter of Intent which is where you put down on paper who is going to do what.  Your lawyer will use the Letter of Intent as a guide to draft the LLC documents.
Links to general information about LLC:
(Legal Zoom is an online resource, but I strongly recommend that you find a flesh and blood local lawyer ).
Roles of the parties in a development project
In a basic deal the Operating Partner gets paid a fee to do the work of coordinating the design, entitlement, financing, construction and leasing of the project.  This can range from 5% to 15% depending upon the scale, complexity and duration of the project.  The Operating Partner is the active member of the development and typically serves as the Manager  or the Managing Member of the LLC.
The Investor or Capital Partner has a passive role.  They provide capital which they could lose if the project fails and they received a return in consideration for the risk they have taken in making that investment.  They also may be  guarantying the repayment of the construction loan.
If you are putting up cash you are a capital partner.  If you are running the project for a fee, or for a piece of the deal, you are the operating partner.  An operating partner can also be a capital partner if they are investing cash or contributing their land to the deal, but outside capital partners typically get their investment principal back ahead of an operating partner who has contributed cash or land.
Paying the Investor back their principal and a return
You construct your plan for how your project will make money in the form of a pro forma.  Based upon what the likely hard and soft construction costs and the cost of the land and the needed improvements to bring the land to the level of a finished lot or lots you look at what the likely revenue will be in rent after operating costs and debt service.  Cash flow after operating expenses and debt service is the money you use to pay back the investor their initial principal (the cash they invested) and the return you committed to provide them for taking the risk of investing in your project.  You can also refinance the project after it is built and fully leased up with demonstrated operating expenses.  This new loan will be used to pay off the construction loan and the cash left over can be used to pay the investor their remaining principal and the return you promised them.  For example if they invested $100,000 and you committed to pay them a 12% return, you pay them $112,000.  $100,000 in principal and $12,000 as their return.
Getting a Construction Loan
You get a construction loan by first talking with several banks to gauge their interest in the project and the likely terms of the loan.  Then you submit  a loan application or “bank package” to the lenders you think are the best fit for your project.  The bank will lend you a specific percentage of the total project cost, referred to as the Loan to Cost or LTC percentage or ratio.  If the total cost of your project is $1,000,000 and a bank commits to lending you 75% of the cost, you need to come up with $250,000  (25%) in equity  in essence, your down payment.  The deal with your lender is that if you default on the loan and they foreclose on the project, you lose your equity (or down payment).  If after they foreclose, they sell the project for less than the amount of the outstanding loan, they will look to recover the shortfall from the person who guaranteed the loan, either through a pledge of specific collateral or a personal guaranty.  If the property you have purchased is appraised at $350,000 and you bought it with cash, the land will be sufficient to cover the equity requirement.  If you bought the land for $350,000 with a loan and only put down $150,000 in cash, then the bank will want you and your investor to put in another $100,000 to meet the required 25% of the total project cost.
If you have good credit and enough equity, but you do not have enough assets to guaranty the loan in case of default, you will need to find a capital partner who can cover the guaranty.

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.

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.

August Small Developer Boot Camp Registration is Full

"Whadda mean we have 100 people aready??"
“Whadda mean we have 100 people already??”

The August Boot Camp is full and we are closing the Registration.  Monte Anderson has a great venue for us in the heart of Duncanville’s Main Street, but we are limited to 100 people.  Folks who have registered will be receiving advance materials via email (homework).  We will post that material on the CNU Incremental Development Resources webpage so others can get get a flavor of things as we head into the first of what looks like 6 Boot Camps this year.  Many thanks to the local crew of Wana Smith, Cindy Copeland, Donna Harris, Daniel Flores, and Monte Anderson for pulling the logistics of the Duncanville effort together, and to Chuck Marohn and Jim Kumon at Strong

Small Developer Boot Camp Registration is filling up fast. Better get on it.

Membership is open to people with and without hair.
Membership is open to people with and without hair.

The Small Developer/Builders Group on Facebook now has over 600 members. Small Developer/Builders Group

Some members are curious lurkers, some are practicing developers, and many are on the fence trying to figure out what it would take to make the move from their current day job into developing small scale, incremental projects. We have seen several clusters of folks connect through the group and decide to meet up in person.  It’s been quite marvelous to watch the group grow in number and see the discussion move past daily posts of whatever is on my mind that I think might be useful.  Click the link above and ask to be added to the group if this sounds like something you want to explore.

The August Small Developer Bootcamp in Duncanville has been capped at 75 participants.  There were 56 people registered as of lunch time Friday.  So just 19 spots are left.  If you were intending to join us in Duncanville, now is the time to go over to the registration page and sign up.  It looks like the event will fill up at the early bird registration price of $100.

Boot Camp Registration / Strong Towns

Chris Nelson Wrote a “Red Pill” Book that will not let you look at the world in the same way once you have read it.

Chris Nelson has written one of those "red pill" books.
Chris Nelson has written one of those “red pill” books.
You can read it, or you can go back to sleep....
You can read it, or you can go back to sleep….
A number of people have asked me recently why I am so focused on small developer/builders producing rental apartments , rental cottage courts, and mixed use rental buildings.  Yes, I did not enjoy the process of building for sale housing, but more important than my experience trying to manage the often unrealistic expectations of homebuyers, was reading the research of Arthur C. (Chris) Nelson.  It blew my mind.  If this guy is only half right, the world of real estate and community development is now a very different place.
The numbers on demand for rental on a national basis from Arthur C. Nelson  break down like this:
Rental apartments will be 48% of the growth of all new housing to be built between now and 2030.
Some of that demand will be delivered by the conversion of existing detached housing, which has been overbuilt.
National demand for all new housing units is about 1.3 million units a year until 2030.  Nelson puts 48% of that demand as rental.  Last year there were about 400,000 multi-family units built according to the census (combined rental and condo ownership)
48% of 1,300,000 new units in annual production is 624,000 rental units, so even if all 400,000 of the multifamily units produced last year were rental (and they were not) that is a production shortfall of a quarter million rental units units.
Nelson presents a summary of market preference from four separate surveys which say that about 1/3 of folks in the US would rather live in walkable urbanism.  If all of the nation’s the new housing production was delivered in walkable urbanism every year, we would not be able to meet the current demand (again just 1/3 of the market) until something like 2040.   If more good stuff gets built and people see it on the ground, and a greater number of  people decide that they want it, meeting that larger demand will, of course, take longer.  For example, if 1/2 the population decides that they prefer walkable urbanism and all the available production capacity goes into delivering walkable urbanism, it would take until 2060 to satisfy the market demand.
Chris Nelson’s presentation at CNU 21 in 2013 captures most of his book Reshaping Metropolitan America  here is a link to the video:  Arthur C. Nelson at CNU21
The data set from Nelson’s book is available for download as an excel file here: Reshaping Metropolitan America Data Set
It is broken down by metropolitan statistical area (MSA) so you can see what is going on in a given region vs. the national data Nelson uses to explain his findings in his book and CNU presentation.
You can find the US Census numbers on building permits here: Building Permit History
My reading of the data is that Albuquerque has demand for well over 2,000 new rental units a year between now and 2030.  Last year we produced 400.  Can you see why I think the opportunities for small developers are going to be in rental buildings?