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.

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?

Developer in Residence? Exploring three infill scenarios with grad students

The cool building by Leon Krier
The cool building by Leon Krier
The slightly less cool building that houses the MRED+U program...
The slightly less cool building that houses the MRED+U program…

It might be a strain to imagine me in an academic setting, but here I am at the University of Miami’s Masters program in Real Estate Development + Urbanism (MRED+U).  Dr. Charles Bohl runs the program and has something called the Developer in Residence.  They invite a developer to give a couple lectures and work with the MRED+U students. This year Chuck invited me.

This evening I am scheduled to explain the one page static pro forma we use in the Small Developer Boot Camp to folks taking a graduate level real estate finance class in a building designed by one of my heros; Leon Krier.  I am finding that part of the gig quite wonderful (and a bit intimidating).

Earlier today I was working with small teams of students who are charged with putting together theoretical infill projects on parcels they have been assigned in several Miami neighborhoods.  They all had questions similar to what we hear from Boot Camp participants.  Where do you start? -the buildings? the parking? the zoning?  How can we estimate what construction is going to cost? Should we build the maximum we can under the zoning?  Should we build structured parking?

My advice was to set up three scenarios, the first should be an as-is reality check to use as a baseline.

  1. Figure out what the rents would need to be to support the purchase of the existing building and parking lot at the price Dr. Bohl has assigned to the property.
  2. Add some buildings to the parking lot and spending some money to improve the existing building.
  3. Scrape the site. Demolish the existing buildings and build something close to the maximum the zoning would allow.

Sorting out the first scenario helps you understand how the existing building with existing or similar tenants makes money.  The second is an incremental approach to adding value without creating a really expensive site that needs to be maximized to justify tearing down a building (regardless of how crappy it might appear.  The third shows you what the maximum you could build under the local rules could be.  It also leads you to consider if the market would support that much building program and that much hard and soft construction cost.  Lay out quick site plans for each of the three scenarios.  Annotate them with your assumptions on square footage, residential unit configurations and unit count, and then use your quick and dirty site studies to build three parallel static pro formas.

This promises to be a very interesting week.  I will do my best to capture some of it here.

7 Things a Town can do to Encourage Incremental Development

A demonstration project showing how great a buffered bike lane can be. Photo by Mike Lydon
A demonstration project showing how great a buffered bike lane can be.                   Photo by Mike Lydon

If you present information on the nuts and bolts of what it take to develop smaller-scale, incremental projects and the audience includes elected officials, municipal staffers, and local activists, they will ask you “What can our town do to encourage building differently?”  It is not so much what a municipality can do, but what the individual leaders in a town are willing to do.  Here is my list for those leaders.

1. Stop trying to guess how much parking is needed. Eliminate off-street parking minimums from your regulations.

2. Manage the supply of public parking with rational pricing. Convenient on-street parking should cost more than a space on the top floor of a parking deck two blocks away.

3. Get serious about streets as public spaces. Narrow lanes to 10 feet. Convert dumb Stroads to boulevards. Put on-street parking everywhere. Install better bike infrastructure like buffered bike lanes. Replace unwarranted traffic signals with stop signs.  Don’t wait for your Public Works Director to lead this effort.  (Believe me, he’s had plenty of time).

4. Stop letting your fire marshal design the town. Direct the Fire Department to figure out how to provide good emergency services on a network of connected low speed streets.

5. Overhaul your zoning. Get rid of minimum lot area and minimum lot width. Dump the silly maximum lot coverage percentage. The best incentives for incremental development support a clear vision and a reasonable process.  Your Comprehensive Plan may contain something resembling a clear vision, but do your zoning reg’s and development standards screw up your chances for getting it delivered?

6. Think Small and Think Local. Encourage the small operators you have in your town and don’t worry about convincing large developers to come from out of the area to fix your town.  They are probably not coming.  If they do, agree to come and build in your town, the results are rarely what you had in mind.

7. Dig deep. Cowboy up. Find some allies.  Making any of these thing a reality in your town will stir up some shit.  Ask yourself if how much political risk or career risk you are willing to take to make a difference.  Figure out what your Plan B is in case you lose the election, get demoted, or get fired.  Once you have your downside covered, find some serious people to work with and make some changes.

Mapping the Small Development Project/Process

Development Process Overview
IDA’s map of the Development Process. Three types of skills needed over 5 phases.

When I hear the question “How Do I get Started as a Developer?”  it is usually followed by a string of questions which amount to “Can you draw me a map that will guide me through every detailed step to becoming a developer?”

People who are interested in this line of work come from a wide range of starting points.  A lot of them already have a fair amount of skill in one aspect or another of the built environment.  They may be very accomplished in one or more specialized areas as a contractor, broker, planner, activist, architect, or property manager.  They know enough about how things work to recognize that they have a lot to learn outside of the field that originally led them to development.

So let’s group the skills a developer needs into 7 groups:

  1. Urban Design, Site Selection, Site Planning and Civil Engineering.
  2. Building Design.
  3. Deal Architecture, Pro Formas and Finance.
  4. Entitlements.
  5. Construction and Construction Management.
  6. Marketing, Sales, Leasing and Property Management.
  7. Communication and Follow Through.

Very few people master all of those skills.  If you start with small projects, you can gain an overview, and understanding when they are needed at the various stages of a project.  You get a sense of the basics for each skill set.  If you don’t have the skill which the project requires, you can’t go without.  So you should borrow or rent the needed skill.  Look for people who are genuinely interested in your project and who are actually happy to teach you about their specialty.  I figure a developer does not have to know everything, but they should have a good idea who to call before it is too late.

 

After a number of Small Developer Boot Camp (calendar here) Jim Kumon and Gracen Johnson have put together the graphic above which has three types of skills and activities allocated over 5 phases of a development project.  I think it is a substantial improvement over the list of 7 skills because it give the reader a sense of when they need to know what, or when they have to find help as they move their first project from idea into an actual building.  This is a work in process, so comments and critiques are welcome and needed.  What do you think?

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

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

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

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

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

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

So Why Won’t You Build Condos?

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

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

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

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.

What If Our Town Fixes the Parking Rules and Zoning and Then Nobody Comes to Build?

Small Mixed Use Building in Geneva, NY.  Photo by Mike Puma
Small Mixed Use Building in Geneva, NY. Photo by Mike Puma (used under Mike’s “feel free to use whatever you want, whenever” license agreement).  Mike is a project manager at Preservation Studios in Buffalo.  If you are in Buffalo please buy Mike a beer.

That’s the question my friend Mark Nickita heard from a City Manager in a small town in Michigan.  Mark thinks that’s a very good question.  Mark and his partner Dorian Moore are Architect/Developer/Retail Entrepreneurs based in Detroit.  They understand urban design, architecture, and what it takes to make a building project pencil in a transitional or down market.  His advice for the city manager?  “If there are no developers coming to help fix your town you will need to grow some developers of your own.  Figure out how to help them build (or rebuild) in your town”.  It’s a tough situation that illustrates why a new cohort of Small Developer/Builders is needed in so many places.

Mark and I were talking today about how the typical 2 and 3 story main street mixed use building is perfect for a rookie developer to use the FHA 203K purchase rehab loan program to finance their first project.

HUD Guidelines for FHA 203(k)

The program is for 4 units plus some allowed non-residential space.  Here is the breakdown from the FHA Guidelines:

“A 203(k) mortgage may be originated on a “mixed use” residential property provided that the percentage floor area used for commercial purposes follows these standards:

– One story building 25%

– Two story building 49%

– Three story building 33%

The commercial use will not affect the health and safety of the occupants of the residential property.

The rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.”

So, since 4 units or more is the threshold for buildings covered by the Fair Housing Act requirement that all ground floor units must be accessible/adaptable, here’s what you do to rehab a small mixed use building using an FHA 203)k) loan:

  • Alternative 1: Keep the number of residential units to 3 or less and the SF of non-residential floor area within the percentages listed above.
  • Alternative 2: Carve out an accessible unit at the rear of the ground floor with three units on the upper stories.3story mixed use 203K diagram

This is not some exotic loan program.  It is a fixer-upper loan on a 1 to 4 unit dwelling.  If you pay attention to the particulars of the loan program, you can use it to fix a main street mixed use building and be in a position to live in one of the units rent free.  Four or five local folks doing this within a couple blocks of each other could change the main street.  Seriously worth pursuing for a lot of towns.

A number of colleagues whom I respect have made a point to telling me that the process of getting a 203(k) loan to actually close can be really tough.  There are enough specific underwriting requirements that are different enough from more typical loans which lenders process that closings get delayed, or the lender withdraws their commitment.  So finding a bank that actually has their stuff together on this program is important.  Wells Fargo has invested in training their people on this, so start with them.

The extra brain damage involved in the loan is why I think the 203k program is an excellent vehicle for the rookie developer looking to step up their game. It requires that the project scope be well thought out and well documented. It requires the rookie developer to understand the lender’s underwriting way more than the average mortgage borrower would. (-and possibly the more than the loan officer does..) It requires a long due diligence period from the seller. In short, the process is hard wired to require the rookie developer to have an excellent plan and seek help from their colleagues to launch their first significant solo project. It puts the rookie developer squarely in the position of adding value by creating order out of relative chaos. That ‘s the job.