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

anguish

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

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

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

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

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

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

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

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

WalkScore meets Seaside. Hilarity Ensues

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

plan-5-illustration2-960

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

seaside 3driehaus_07

There is a network of pedestrian pathways at the interior of the blocks.  When my kids were young they loved the place and knew every shortcut.seaside 2

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

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

 

53 Seaside Avenueseaside walkscore is 48

Biblical Precedent for Traffic Calming and restoring sanity to street design

 

crosstown us 17
The Crosstown – US 17 in Charleston SC
Charleston-Churches street
Church Street Charleston SC

I have purposefully cherry picked two street in Charleston to compare.  The Crosstown/US17 which most folks hate and Church Street which is one of the most beloved streets in the nation.  Why design and build awful streets that end up killing and maiming people in car crashes made more severe with higher speeds?  We can find much better streets if we invest some time and attention and seek the best guidance possible.

Over the years we have heard some folks cherry pick bible verses to suit all manner of questionable activity.  Enslaving people, going off to war, and recently, removing children from their parents’ arms at the US border.  Since it looks like we’re headed into a couple of news cycles with lots of people quoting scripture to reinforce their arguments, I figured this would be a good time to share one of the best pieces of biblical scholarship applied to building better places that I have encountered.

I heard Charleston developer and all around thoughtful guy, Vince Graham used a passage from the Gospel of Matthew in a presentation in Minneapolis in 1997.

“Enter through the narrow gate. For wide is the gate and broad is the road that leads to destruction, and many enter through it.  But small is the gate and narrow the road that leads to life, and only a few find it.”        Matthew 7″: 13-14  NIVf

So we have it on go authority that narrow streets are best and that the road to Hell is really wide and there is a lot of traffic.  People seem to be in quite a hurry to go there.

Think about this the next time you find yourself in a discussion with a stubborn closed minded traffic engineer.  Maybe use the quote from the book of Matthew and see if you can’t lead them away from what could be the Road to Perdition.

 

Video: Introduction to Incremental Development

prarire st

The Infill Group’s Prairie Street Mixed Use Building, Fayetteville AR

 

Matthew Petty is an impressive and capable guy.  The three story mixed use building above is his first project as a small developer.  (Full disclosure; my able partner David Kim designed this building).

Follow this Link and check out a video of Matthew explaining how Incremental Development works in an introduction lecture in Conway, Arkansas.  I think this is the best video of an IncDev intro presentation to date.

Nobody is coming to fix your town…

waiting-for-godot-bw-920Waiting for Godot…or some unicorn developer…

How many times have you seen local elected officials recruiting a large scale developer from out of town to come and build some sort of catalytic project to help spur redevelopment?  These kinds of recruiting efforts typically involve some free or deeply discounted land, a Tax Increment Financing (TIF) deal, construction of off-site infrastructure, structured parking, and maybe some direct investment in the developer’s project.  Does this ever work?  By necessity, the scale of these projects and the  expectations that come with them are really large.  Think about it.  The Unicorn Developer From Out of Town will probably have to travel past 4 or 5 perfectly good opportunities in markets they already understand to get to your town (where they don’t know a single plumber, banker, or building inspector).

Are you pinning the hopes of your community’s future upon somebody that is not coming?  If they do show up, consider the scale of their likely project.  It will need to be big enough to justify the risk of building in a new place.  Consider what happens after the project is completed?  Will it spur other investment?  Will that investment need similar levels of subsidy?  I think this kind of enterprise is a naive long shot at best.

The faculty of the Incremental Development Alliance (incDev) has grown from 5 people to 12 since we started training folks in August of 2015.  The purpose of the non-profit is to cultivate 1,000 new small scale developers and the communities that support them.

At one time or another, everyone on the faculty has been asked to pick up stakes and come develop in someone else’s town.  Seeing case studies of incremental projects that fit into the surrounding neighborhood, it is reasonable that they would ask for the same in their town.  But that’s not how it should work.  Small scale, incremental development is an intensely local line of work.  It take time to acquire the local know how and relationships needed to do it well.  You should not count on somebody coming to fix your neighborhood or your town.

It is time for towns to grow and support their own small developers. If you find yourself looking at a vacant lot or distressed building in your neighborhood, saying “Somebody aught to…”  That somebody might be you.  You could become the small developer your town needs.  You care about your place.  That’s the first requirement for a small developer.  All the rest is learnable.  Come and join us.  Add new know how and relationships to your hustle and make something happen in a place that needs you.

Chances are, nobody else is coming.

 

 

Deciding to become a developer can be attractive for some folks in public service

angry mob
Angry Planning Mob at a Planning Commission Meeting

 

At every One Day Workshops I do with IncDev,  there are always a few folks attending from the planning staffs of communities in the region.   We also see elected officials and planning commissioners taking these classes.  Often these folks are there looking for insight and techniques on how to craft policies and zoning ordinances that will encourage incremental development (or at least level the playing field for small operators).

Talking with them one on one, I found that some plan on starting small projects of their own as a side hustle while they keep their current day jobs.  I am curious to see how these project go and what they learn in the process.  While they have a lot of insight into what can be accomplished with variances and all manner of discretionary approvals, they also know how uncertain doing anything that is not a straightforward as-of-right project can be.  That understanding leads most of them to look at simple as-of-right deals, especially if they are looking to build something in the municipality they serve.

I think that recovering elected officials, planning commissioners and municipal planners would make good small developers. They have already spent years being insulted and condemned by the wide range of poorly-informed citizens and colleagues pictured above.  So they may already have a thick skin, a good thing in a small developer. They also have developed the ability to suspend disbelief and critical thinking so that they can operate effectively within some rather arcane and contradictory rules. They know all too well that planning policy and implementation are never about objective facts and municipal math, but instead are always awash in the feelings of people fearful of change and contemptuous of potential neighbors.  That knowledge will protect them from being overly idealistic of hopeful about the planning and development process.

Elected officials and public planning staffers have been stagehands and bit players in the rather elaborate Kabuki theatre production of Planning and Development in the US. When they leave public service or a staff gig they are ready for more substantial and meaningful roles.

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

18 x 60 shot gun cottage for Columbus

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

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

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

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

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

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