Are Developers Just Trying to Maximize Profit?

 

22519798_10209688255341248_1187042747474828725_o
Podium Building -Photo by G.B Arrington

I commented on a friend’s Facebook thread in which he lamented the lame podium building getting built on his street. Somebody posted a comment that “It’s all about maximizing the developer’s profit” to explain why the building was not great.

I gotta say, that’s really over-simplifying what it takes to get a building constructed in Portland.  There is a pretty good chance that trying to build a building will result in the developer losing money if they are not on top of things. I guess Not Losing Money may be the same as Maximizing Profit, but there is a lot more to the work. If you lose money often enough you become a former developer.

Most developers are minimizing risks and maximizing returns within the current crop of constraints which include local, state, and federal regulations, local approval processes, skilled construction labor shortages, and a number of can only be described as short sighted bad habits. Over the life a a project it is too easy for design to end up as the superficial consideration -kinda like deciding how a cake will be frosted. All of the other things (that will blow up your project if you don’t pay attention) are about the cake. Attention to urban design and place making should be part of the cake because they can add a lot of value and solve some gnarly problems. The developers that get that employ urban design as a tool with great flexibility and utility. For the rest, well, that design stuff is just frosting.

While we can beat up developers for being unaware of the power of design to manage risk, let’s bear in mind that there is plenty of cluelessness to go around.  Some of the problem with how buildings are currently conceived and delivered be found in the unfortunate culture and habits of the design community. Most planners, urban designers, and architects are satisfied with remaining uninformed and unskilled when it comes to developer math and operations.  In the end they don’t have much of a common vocabulary to communicate with their clients (which is unfortunate.)

The bar for decent infill is pretty low these days -even in a place that likes to consider itself forward thinking and progressive like Portland.  It is very hard to build trust with local folks who have seen a lot of lousy buildings go up recently. If you do succeed in building something  something decent, you can start to carve out a place for yourself in the neighborhood. No matter how good your built work is, chances are good you will still be treated with contempt if your chosen line of work is to be a developer. Other people get paid at their job, but getting paid to make buildings happen is somehow something sleazy in the minds of some.  Development work is considered a vocation reserved for individuals of low character. Your buildings will have to speak for your character after you are dead. In the mean time, most folks will just think you are an asshole.  That does not mean that you can consider yourself some sort of community builder/martyr.  It’s an everyday thing.  Humans prejudge strangers based upon fear, myth, or by their direct experience of some recent bad building put up by somebody that you resemble.

Advertisements

Arrrgh! How do we start a productive conversation about Inclusionary Zoning? (Part I)

anguish

I live in Portland Oregon.  Moved here last December.

Last year Oregon’s legislature removed a prohibition on Inclusionary Zoning (IZ) which now allows cities to require a percentage of Affordable Housing units in new buildings of 20 units or more.  The Portland City Council unanimously voted to put an IZ ordinance in place.  Recently I have had a number of folks from around the country and from Portland ask me what I think about IZ.  I have had a hard time coming up with a response that does not shut down the conversation. I get really exorcised over this topic.  To be blunt, IZ makes me nuts and I tend to go off on the people who innocently ask me about it.  Clearly, I need to craft a more grownup response.

I respect the motivation behind wanting to see more affordable housing get delivered. I am appalled by the naive methods being employed toward that very positive goal.  I get frustrated with smart and sincere people who are serious about the delivery of housing if I think they have not made a serious effort to understand the basics of how housing gets delivered.  Maybe that information has not been available to them if they are not in the business.  It’s not reasonable to hold people accountable for information they don’t have, so let’s start by laying out the basics of how a building makes money and how people decide if they want to construct a building in a given location.

If you can’t get the rent, you shouldn’t build the building.  The rental income for a building needs to cover the Total Project Cost.  This includes cost of buying the site, , paying the impact fees, designing, bidding, financing, building and leasing the building.  The rental income also needs to allow for some of the units not paying rent from time to time because nobody is living in them (Vacancy).  Finally, the rental income needs to be able to cover the building’s Operating Expenses which include property taxes, insurance, property management, maintenance, water, sewer and trash, and replacements reserves of $300-$500 per unit set aside each year.

In addition to covering these costs, a building need to make a profit to justify why someone is going to put up 20% – 40% of the cash need to make the building happen.  Whoever puts that money up (and signs a guaranty to repay the construction loan that will provide the rest)  has other things they can do with that money and they can reasonably expect to get paid something for the risk they are taking in undertaking a construction project.  A construction project has more risk than a savings account, treasury bond or mutual fund, so money put into a real estate project has to pay a higher return than alternative investments with lower risk.  A workable rule of thumb is that $1 in monthly rent can typically support $100 in Total Project Costs and yield a reasonable return of 10-12% on the cash you put in the building.

What happens if 20% of the units in a building don’t pay their way because the rent you can charge has been limited by the IZ Ordinance?  The assumption is that you will have to convince the potential tenants for the other 80% of the market rate units to pay higher rent, or find a way to  reduce the Total Project Cost.  Reducing Total Project Costs will come down to convincing the person selling you the site that you need to pay less for it.

In Part II we can walk through the math on how this works on a example building.

 

 

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:

  • 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?

 

The Zoning Code makes the Comprehensive Plan Illegal? WTF?

 

 

 

despair-head-in-hands
I can’t build what the Comprehensive Plan requires, because the zoning won’t allow it? WTF???!

 

Warning! Planning Geek stuff ahead….

Most state have a law on the books that requires municipalities to adopt a Comprehensive Plan (called a General Plan in California) that will guide local investments in transportation, schools, parks, fire trucks, hospitals, and sewer plants.  Once the Comprehensive Plan (Comp. Plan) has been adopted, the municipality is supposed to revise their local zoning codes and development ordinances to bring them in line with the goals and policies of the Comp. Plan.  So the Comp. Plan is the big idea, the thoughtfully considered suite of policies that should guide the finer-grained rules and regulations that developers are required to follow if they want to build something.

Here’s a common problem.  After going through a long string of cathartic public meetings, charrettes, visioning sessions, etc. to prepare the Comp. Plan, Downtown Master Plan, Corridor Plan, etc., the mere mortals that staff the local planning department or sit on the planning commission and the city council are kinda burned out.  The unglamorous task of revising the zoning code tends to get delayed or forgotten.  Sometimes there is  just no money in the budget to get the zoning code revisions done.

If developer shows up proposing a project that is in line with the general policies of the new Comp. Plan but violates the specific rules of the old zoning code, the only path forward is some sort of Planned Development Permit (PD), Planned Unit Development (PUD), or some similar additional process designed to allow greater flexibility that is allowed under the letter of the zoning code.  PD’s and PUD’s require require additional applications, additional review by the planning commission, and typically a public hearing.  In the meantime, if someone wants to build some crappy project that violates the policies of the new General Plan, but is specifically allowed under the old zoning code, they could do that as an as-of-right project. That’s just bullshit.  Imagine how local residents who participated in all those visioning workshops for the Comp. Plan are going to feel when they see that crappy project get built.

I think that putting this statement on the front cover of every Comp Plan to save people a lot of time, money and frustration:

“WARNING! This is a feel good scam. We have no intention of actually changing the rules to allow you to build any of it without special permission and a number of public hearings with local residents who have not read this document.”

If your community wants to see the vision of their Comp. Plan actually get built, get serious about changing your zoning code.

Why is it so hard to build a decent building?

carpenter
What will it take to return scale and care to building?

In a recent Facebook post my friend and colleague Steve Mouzon, author of Original Green, posed an important question:

“Why is it that when there is an attempt to recover a lost tradition, that which is built is not the tradition but rather a cartoon of that tradition –have we lost the ability to see clearly?”

I think our habits of building are fractured and out of sync. We can’t seem to capture the rhythm of the mechanics of design and construction well enough to transcend a stilted mechanical approach. The people who built the traditional houses of the late 19th and early 20th centuries had habits of building that were reasonably intact. We try our best to be fluent in a language that, if not dead is at least seriously wounded. While some struggle to produce drawings that communicate well, others struggle to read them well and then launch ahead sure that they’ve “got it”. We trust our brains when we probably have little reason to. Everyday tradeoffs in building present themselves with reliable frequency. We are not wired to be obsessive or hyper-vigilant when performing carpentry or ordering lumber. At some point, you believe that you have a handle on the task at hand. Even hearing someone explain that “We do this because…” can feel abstract and a somehow disconnected. Skipping over the surface of a tradition feels pretty profound, so you don’t know that you are supposed to be diving deep. We are thrilled at building something that seems darned good compared to today’s usual habits of building, so we can’t see a more sublime experience just a few steps away.

Imagine that you are a housewright in 1889. You spent the winter producing window sashes, doors, moldings in your barn with the collection of hand planes and the Asher Benjamin handbook you inherited from your dad. In the spring you lay up a stone basement and start framing a house. When it comes time to install those windows, doors and trim your grasp of to how the pieces go together makes so much more sense than someone setting windows and coping trim today. Whether in the design studio or the field, it is rare for us to get Malcolm Gladwell 10,000 Hours in on the full arc of the work, on the habits of building. So, yes, Steve we have lost the ability to see clearly.  These days we see as if through a glass darkly. We need the discipline and structure of craft and habit to recover our sight. Today the flow that emerges from that discipline and structure is not available to most. On a good day some talented people provide us with some well-intended choreography of a dance few of us have ever seen performed by someone with real mastery.

Balconies? Nah.

Beacon_Hill_Bay_Window93039
Bay Window, Back Bay Boston
balcony
Balcony

 

One of these things adds serious value to an otherwise basic apartment making the unit much more pleasant.  The other is a balcony.

I am not a fan of balconies on apartment buildings and mixed use buildings.  They can present a raft of construction and liability issues.  They also tend to accumulate stuff.  Storage for tenants can be better delivered without the cost and hassle of hanging a balcony on the outside of the building.

I asked Fayetteville, Arkansas Architect Robert Sharp what he thought about all this.  Don’t tenants all want some sort of private outdoor space? Rob suggested that If you ask prospective tenants in a focus group “Would like some private outdoor space like a patio or balcony?”,   The answer would probably be yes -asking about private outdoor space in the abstract is kind of like asking if they would like a free pony.  Rob’s view is that people want access to quality outdoor space, that could be a courtyard, a well supervised trail system, or a public square.  A balcony is a pretty poor substitute for any of those things.

Rob would rather build some units with a good bay window, and then charge a little more for those units.  I think he’s right.

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

 

P1000505
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.  http://censtats.census.gov/bldg/bldgprmt.shtml
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?