- Who is in charge of this thing?
- Do they know what they are doing?
- How do decisions get made?
- How does the project make money?
- When do we get our initial investment back?
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.
Last weekend I was working on a charrette crew that included my colleague and partner, Bruce B. Tolar. Searching through my hard drive today I came across my (improvised) remarks from when the New Urban Guild gave the 2015 Barranco Award to Bruce, the Developer/Builder of Cottage Square in Ocean Springs Mississippi.
“For those of us who knew Michael Barranco and were there for the Katrina charrettes, this is a person who really made a mark on our lives, not just because we showed up and did work together, but because his character was such that it was like playing in a pro-am: You really upped your game when playing around Michael. Very genuine. No artifice. No phoniness. He was genuinely concerned about every person he ever met, and wanted everyone’s life to be better. He decided that architecture was his way to do that.
With his passing, there is a hole in the CNU, but the New Urban Guild offers the Barranco Award to practitioners who are that kind of stand-up guy. It’s about the character with which you comport yourself. It’s about how hungry you are to learn. It’s about how much you care about your community. It’s about how much you love and encourage your fellow-citizens. With that said, I’d like to introduce you to this year’s award-winner, Bruce Tolar, through some of his work. <begin slides of Bruce’s projects>
The original Katrina Cottage which by itself was great, but Bruce took it out of the total chaos and mayhem and bad financial circumstances that were pretty much an everyday deal in Ocean Springs at that time, and all along the coast. And from nothing, he created the peaceful excellence of Cottage Square, where he put the pieces together into something amazing which that community cherishes. It has even become a tourist destination. Imagine that: an interim housing solution after a hurricane has become a tourist destination!
So Bruce pulled together all the Katrina Cottages that were built as prototypes for demonstration purposes and brought them to Cottage Square. And he made something out of the pieces, just as we all try to do, which is to aggregate a great place from small incremental parts. It is a modest place, with gravel sidewalks; a place where you can operate a tiny business out of those tiny buildings. And the community that has formed there has become a real anchor to Ocean Springs. From there, Bruce launched an expansion, which was an incredibly ambitious project in a place governed by FEMA… <cough> <laughs and applause> … a terrible environment to work under, but he is doing amazing, excellent work with modest little pieces.
He reached out to nonprofits in the area; he connects with so many people; he’s been in that town forever, serving on many boards; and the idea that there was something to be done after a hurricane, and fixing civilization in general, was a natural thing for Bruce. The people love this neighborhood. The nonprofits he’s been working with have been tremendously empowered by seeing one guy’s ability to put people together and make things work. Bruce is the best design caulking gun you can imagine, pulling everything together on modest means and making things happen. So with that, I’d like to present this year’s Barranco Award to Bruce Tolar.”
If you are traveling along the Gulf of Mexico between New Orleans and Mobile you should give yourself a treat and stop to walk around Cottage Square. It is a special place built in tough circumstances by a remarkable guy.
One of the themes I have seen following the recent election, is that many people are tired of being talked down to by people who seem to think they are better. Call it a backlash against smugness, for lack of a more precise term. Recently I proposed that for people trying to build better places, the alternative to smugness would be to become authentic assholes. I am serious on this point. Authenticity appears to be the quality that lets you get a partial pass on being an asshole, as long as you don’t talk down to people..
I’m directing this approach to the Architects, Engineers, Planners, Policy Folks, and Academics who are members of the Congress for the New Urbanism or similar place making advocacy groups. If being the fancy people who know stuff, (the people perceived as smug or condescending) is not working, then let’s not be those people. Let’s be authentic assholes.
The fire marshal’s mandate is not a collection of sincere feelings that we should help the community process through group hugs. It’s bullshit that hurts the town. Some asshole needs to call the fire marshall out for being part of a calcified over-reach that makes no sense.
Off-Street Parking minimums? More bullshit that needs to be called out. Municipalities completely suck at guessing how much parking is going to be needed for all possible land uses, and the community was wrong to give them that job. The result was they picked numbers that produced fewer complaints and phone calls. Some asshole needs to call out that lazy bullshit in stark terms and poison the well. Make the position of advocating for such nonsense so awful that anyone who defends parking minimums (or maximums) is discredited for being a lazy bullshitter.
You want to make a difference at the local or regional level? Become a developer or a builder. Free yourself from the shackles of propriety and elaborate argument. Every community needs people who can build and rebuild the place. That’s where we can find our place in the moral, economic, and cultural fabric of a place. Architects, Engineers, Planners, Academics have a professional obligation to at least appear to be interested in making the city a better place with ideas. People who are fearful see a host of horrible outcomes, real or imagined, when ideas are advanced in clumsy ways disconnected from the base concerns of daily life. Developers and builders are not burdened with those expectations and when the dust clears there are buildings built or rebuilt, people find benefit in the buildings or they don’t. (–Keep in mind that the bar for a decent building or street is quite low many places). Nobody expects virtue from a developer. They may look to exact virtuous action from the developer under duress, but they really do not expect it as a natural expression of what is in the developer’s greasy soul. An exaction or tax is often given reluctantly, out of resignation. An unexpected gift can be a sincere expression of our better nature.
This is a framing thing. When New Urbanists propose a better place that starts to sound like some kind of utopia and the built effort that follows only delivers 68% utopia, folks get disappointed and pissed off because their high expectations (however unreasonable) have not been met. If a developer commits to meet all local codes and regulations and to deliver something the market seems to want and the built result is 32% utopia, people are accepting and sometimes even happy, because their low expectations have been exceeded.
Be virtuous in your heart, but don’t wear it on your sleeve. Be cunning and deliberate. Have a plan for your neighborhood. Gather resources that others cannot access. If we can be the people who actually get stuff built during a recession (And that stuff doesn’t suck), if we can build well, despite the severe shortage of skilled construction labor, who is going to mess with us at the local level?
If you would like a glimpse of what an insurgency of Small and determined developers might look like, wander over to the Small Developer/Builders Group on Facebook and see what those folks are talking about. We worked to keep the group fairly politics-free. If you are not on Facebook, find somebody who is and they can guide you. Come to a Small Developer Workshop where you will meet folks who are serious about making a difference in their neighborhoods (even if other people think they are assholes).
Nobody suspects virtue in a developer. You can pick the opportunity to surprise them. Under-promise and then over-deliver.
Buildings that are flexible enough to house small and inexpensive workspace for retail, services, food and drink, etc. should be in the Small Developer’s tool box. You may know an under-utilized parking lot that could be lined with something like this. Could be good way to follow up on testing the location with some food carts.
Writing is hard. Sarah makes it look easy. Take a look at how she describes the mechanics of a team exercise from the Incremental Development Alliance’s Small Developer Boot Camp. She lays out that rather technical set of tasks and rolls right into the real world limitations of the moldering zoning codes you find in most cities these days.
My favorite quote from Sarah:
“Everyone has sexy dreams, but as a developer it’s important to maintain a long-term, monogamous relationship with math.”