If you have been reading this blog you know that I am always pushing for the creation of smaller development enterprises, building smaller and simpler buildings (without elevators for the most part), using off-the-shelf financing, and the delivering smaller units for the smaller households that make up a big portion today’s local markets.
I think we can do a much better job of connecting the housing unit to the list of consequential stuff people consider in their decisions to rent if we can deliver flexible unit configurations, competitive rent + transportation math, and locations close services, food and drink. Here is a list of stuff I shot off in an email to a colleague this morning:
It is important to shift the approach to development projects to a smaller, more incremental scale.
Re-imagine the development enterprise as a smaller outfit that can compete without economies of scale, recognizing the constraints in economies of means. If a municipality wants to revitalize a neighborhood, cultivate multiple small operators and roll out a Pink Zone. Don’t do a big lumpy Public Private Partnership.
A small outfit can aggregate several small projects into a portfolio within a decent neighborhood structure. This will provide a platform with significantly reduced downside risk and enhanced upside benefits.
It is time to take the Arthur C. Nelson’s work seriously. There is a significant lack of supply of housing in walkable urbanism and half of new housing needed between now and 2030 will need to be rental housing. (See Dr. Nelson’s Book and video).
With construction production at less than half of 2005’s peak, builders of single family homes, apartment complexes and commercial buildings are experiencing shortages of skilled trades all over the US, so small developers will need to cultivate a local base of small trade contractors to avoid the labor shortages.
Small developers are positioned to help local entrepreneurs create local wealth and local jobs among their trade base and their local tenants. Small, cheap workspace needs to be provided at modest scale within the context of a neighborhood.
The small developer business model needs to be accessible to younger people, immigrants, and folks who already have one or two of the skill sets needed (brokerage, leasing, property management, finance, entitlement, design, construction management, communications). We will need to develop training, tools and templates and a network of early adopters to reduce the learning curve of rookie developers. There is a lot of interest in training and tools from the leadership of Congress for the New Urbanism and the Incremental Development Alliance. I am active in both of these and recommend that anyone interested in this work do the same.
Many of the project management, construction management and property management advantages that were once only available to large outfits that could achieve economies of scale have been disrupted by technologies like BaseCamp, BlueBeam, AutoCAD360 for the iPad, QuickBooks, ClearNow.com, PayYourRent.com, YouTube, and the smartphone.
The market demand is large enough and the supply of anything remotely resembling walkable urbanism is small enough that all kinds of lousy half-baked projects are going to get built and get rented or sold in the next 15 years. This mismatch between very low supply and very high demand provides lots of room for dumb projects, but it also presents the opportunity to re-scale the development business.
You raise a lot of good points and express concerns which I have also heard from other folks looking to get started in incremental development. We should probably talk about this by phone or video chat when you have an opportunity. Some responses;
The most satisfying projects deliver on several levels
They post good financial returns that justify the risk of construction and leasing.
The process of getting the the building built or renovated builds relationships of trust among your team making it possible to take on another effort with greater confidence. I think that working with people you genuinely like and respect, seeing them grow and develop new capabilities is very rewarding.
A good project contributes to the social and economic flywheel of the neighborhood. The best projects have lots of synergy that benefits other people. A restaurant opening across the street from a coffee place strengthens both enterprises and makes that block a good place for someone to want to open their new office. Building projects that create local wealth and local jobs within a neighborhood protects the long term value of your own buildings in that setting.
I think it is critical to have a geographic focus for incremental development. Monte and I talk a lot about “farming”–identifying specific areas and getting to know them well. That investment of focused time and attention reduces your risk, because you can know the place well enough to understand where catalytic efforts will have the impact needed. Have you picked an area or neighborhood where you would want to concentrate your efforts?
New Construction vs. Renovation for a first project
I started out in the trades as a carpenter and later, an electrician. So, I tend to think it is always better for folks who want to understand the nuts and bolts of development and property management to start with a piece of new construction, rather than an ambitious renovation. That first construction project should also be of modest scale. Small scale helps you limit your risk and focus your learning. You are not looking for economies of scale on your first building experience, you are looking for an opportunity to learn the basics and connect the pieces so that you can communicate effectively with your team. Once you get a handle on the fundamentals and mechanics, you move to more subtle stuff like refining the design to make construction and maintenance easier, or to making the units more pleasant for your tenants. Renovation and new construction both have risks, and tradeoffs that you need to identify from the start and manage through the process. (I just think the risks and tradeoffs of new construction are more straightforward).
Affecting people’s lives
If we think about the resources we have; capital, skills, determination, and vision as things that we have stewardship over, understanding how we manage them in ways that affect the lives of people in the neighborhood should guide what we do and how we do it. Building a culture within the team that looks outward is really important in my view. Conventional development practices applied to existing neighborhoods tend to displace people who have limited choices and opportunities, so we need to have different strategies grounded in the principle of increasing choices and opportunities for local folks. I really appreciate the way that Monte Anderson finds the local entrepreneur tenants and puts them on a track to eventually buy their own building, so they are not displaced by Starbucks or some national tenant down the line. The local entrepreneur gets to build local wealth which stays in the community. That’s better for everybody. The current shortage of skilled construction labor presents a problem and an opportunity for an incremental developer working in an underprivileged neighborhood. A small developer can generate steady work for the trades. That steady work can become the platform for training local folks in the trades, with the goal of helping them sort out the logistics of having their own contracting enterprises and eventually owning their own buildings. There are more opportunities in these neighborhoods than there is capacity to meet them, so the wise strategy would be to build a local trade base to add to that capacity.
Acquiring and sharpening tools
I understand that you have capital you want to put to work soon. Rather than look for deals right now, I encourage you to sharpen your tools and build your skill set for a while. Maybe set a target of getting into a project by the end of 2016. One potential way for you to get up to speed on the tools and techniques that will help you as you look at opportunities for incremental development is to come to a boot camp. The concentrated format of two and a half days gives you a lot of information in a short period of time and getting to know other folks at various stages of doing this kind of work will help you build a network of people you can reach out to for counsel when things get tough. You will find the the network of small developers has a culture where nobody wants to see their colleagues repeat their learning curve. There is a lot of lateral support among the crew. They are generally looking for a chance to pay it forward. We are scheduling at least one event a month through most of 2016. Keep an eye on the Incremental Development Alliance website for new dates as events get confirmed.
Over the last couple weeks I have been getting some feedback on the things people are worried about as they consider taking on their first development project. Worries about talking to bankers and asking investors for money are high on the list followed by concerns about how to find reliable trade contractors and property management firms.
The key seems to be helping folks understand how the big hunks of the project fit together sorting out the connections between Likely Rent, Likely Project Costs, and Likely Operating Expenses. It is important to sort his stuff out on paper using the pro forma to see how much you can afford to spend building the project, given the likely rents. The short answer? If you can’t get enough rent, you can’t build the building. There are lots of details to keep track of, but understanding the fundamentals of how a project makes money will help you see where those details fit in the overall picture.
Once they understand the “back of the envelope” math, they can understand how the finer grain budgets for hard cost, soft costs, operating expenses, and trade offs typical to the various deal structures with investors.
Back to the investors and bankers thing. If you have sorted out how your project makes money for someone willing to invest in your enterprise, the conversation becomes much more comfortable. It is a business deal. You have to provide a fair return for the risk the investor is taking on. If you disagree on the particulars you can shake hands and move on. If you have sorted out how the bank’s construction loan will be repaid, that conversation is straightforward as well. Banks have lots of rules they have to comply with and your loan application should make it easy for your banker to comply with the requirements on their side of the transaction. Those rules and conventions are all knowable, so we should assemble primers on how to be a good bank customer.
Many thanks to the folks who participated in the recent series of group video calls. Continued progress. Please post questions on stuff you are looking for help on. The Small Developer/Builder group is gathering some bright people that are offering to you sort through this stuff, notably bankers and appraisers.
So don’t worry. Take things one step at a time. Figure out your deal on paper and talk with smart people about it while it is just a project on paper. Developers who have had a lot of practice may appear that they have some special gift of intuition. They don’t. They just have put in lots of hours sorting through the basics and asking smart experienced people to look at their deals.
Things are moving fast with the rapidly expanding Small Developer/Builders group.
I have heard from a number of folks 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 in October 16-18.
But that’s all the way into late October and some 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, we can find a venue at no cost. It could be a very Lean affair. A meet-up with other folks consider 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 – evaluating 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 Investors.
Deal Structures; aligning the interests of partners.
Pop-up Retail and Street Markets; cultivating 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 look at covering?
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?
We are also looking at what topics should we tackle for a couple of webinars in the near term. The intent on all of this is to find ways for Small Developer/Builders, (both rookies and more seasoned types) to reduce their learning curve, share lessons learned, pick up new skills, and find people to collaborate with.
What say you? Post comments here or email me: firstname.lastname@example.org
Since putting up the To Do List yesterday, I have had a number of folks ask me “What’s this shark tank thing?”
The Shark Tank is a platform for recruiting and accelerating the skills of small developer/builders and laying the groundwork for incremental development in a neighborhood or municipality. It works like this:
Recruit likely new developers from the local area with help from local trade suppliers, the Lumberyards, Truss companies, Drywall Supplier, Plumbing, HVAC and Electrical Supply House. Who among their customers look promising for stepping up their enterprise so they can build infill/retrofit projects at a small and incremental scale. Make the rounds with the local Chambers of Commerce, the NAIOP, ULI, churches, banks & credit unions and the entrepreneurship programs at the Community Colleges and Universities.
Candidates get homework and guidance on how to prepare development proposals for several local sites based upon the Charter and within a prescribed area to “flood the zone” with as many small operators as possible for maximum impact. They are now on a clock and must focus on completing the homework on deadline.
The municipality has made plans for capital projects that make the prescribed area for the projects viable, traffic calming, bike and transit investments, an overlay of code reform and removal of minimum off-street parking requirements. Establishing a Pink Zone (See www.LeanUrbanism.org) as preparation for the Shark Tank event would reinforce the importance of adopting the right code platform.
Candidates bring their proposals to a 4 day intense workshop with solid coaches and specialists who help them understand the fundamentals and strengthen their pitches.
On the fourth day they pitch their deals to qualified investors and construction lenders who are there because they are aligned in interest with the goals of the effort and have signed on to the criteria that all the deals much meet in order to be pitched to them.
Coaches follow up with the developer/builders whose deals are funded and sort out a gameplan for refining and improving the pitches of deals that are not funded with the initial round.
While competing for investment the developer/builders form a cohort that can provide continued support. Coaches will reinforce the realities of the market and the need to build capacity and the right code and public infrastructure to sustain infill and retrofit. Their competition for resources is the conventional development at the edge of town. There are more than enough sites to occupy all the candidates and the market for infill and retrofit cannot be satisfied in the next 20 years.
Here is the To Do List I accumulated at CNU 23 in Dallas
Figure out ways to reinforce the connections between the rapidly growing ranks of the Rookie Developers to reduce everyone’s learning curve.
Set Up FaceBook Groups for Small Developer/Builders with a sub-set the “CNU Lady Developers”. (and no, I did not name the group…)
Develop a TurboTax-like Wizard for developing basic development pro formas with Keith Hopkins of Stage Capital Group.
Webinar with Mike Hathorne on using Google Earth to organize site selection materials for small projects.
Get a working group going with bankers and appraisers to vet the patches, hacks and workarounds needed for small projects in walkable urbanism.
Line up one Small Developer/Builder “Shark Tank” and get it funded.
Submit comments to HUD on expanding the amount of non-residential space in mixed use building financed with the HUD 221(d)(4) Loan program. (Proposed changes in the HUD MAP Manual are still in the public comment phase which closes May 14th).
Get materials into shape for the Lean Urbanism “Developer in a Box” Tool by October.
Coordinate the framework for the Lean Building Types Tool with Bill Dennis and David Kim so that it dovetails with the Curated Sketch-Up building types tool kit Bill is shepherding.
Figure out the communications strategy for recruiting and mentoring small developers builders with Ben Brown and Scott Doyon.
Figure out a structure for rookie developers to do their first project next to seasoned operators, (sort of like a medical residency).
There is clearly a lot to do. In addition to all this mentoring and advocacy, David Kim and I have our own projects to deliver between now and CNU 24 in Detroit June 8-11, 2016. A number of people have volunteered to help with this stuff, but don’t be surprised if I am calling you to enlist you in the effort. Contact me on Facebook if you want to be added to the Small Developer/Builders group. Email me if you want to help with something on this list. email@example.com
Post a comment here on the blog or email me if I told you that I would put something on this list and have forgotten it. It has been a big week and I am pretty sure that something important has slipping my mind by now….