We (David Kim, Bruce Tolar, Will Burgin and I) are currently working on a wide range of tools for delivering walkable neighborhoods and incremental development. After Hurricane Katrina, Bruce and a host of others put in thousands of volunteer hours producing an alternative to the awful FEMA travel trailer that came to be called the Katrina Cottages. The State of Mississippi’s Emergency Management Agency (MEMA) commissioned several thousand MEMA cottages of various sizes that were used as part of the hurricane recovery effort and eventually were sold for permanent housing.
Bruce Tolar has continued to advocate, design and build cottage housing and cottage neighborhoods over the 12 years since the hurricane. He lives in Cottage Square neighborhood in Ocean Springs, MS. He built a place contains a number of the early prototype cottages designed by colleagues in addition to his own excellent work. As our development company started building a project in Thomasville, Georgia we started looking for manufacturers to produce cottage designs in addition to their usual mobile homes and modular houses. We continue to find a lot of confusion that comes from not having a workable common vocabulary to talk about the range of housing that is partially or entirely built off-site in a factory.
For example; capital “M” Manufactured Homes (mobile homes) are produced to meet HUD certification that allows for their use anywhere in the US. You can easily find yourself in a conversation where industry insiders are using “Manufactured Homes” as a term of art referring to mobile homes and lay people are using lower case “m” manufactured homes to describe anything that comes out of a factory regardless of the code or certification it complies with. In a spoken conversation you cannot hear the capitalization of the word and this leads to needless confusion.
Site building can be quite economical and flexible if you have a good team of local trades and you are well organized. But that level of delivery does not come with a one-off project. You can also build economically if you are competent enough to self-build.
Things get complicated when skilled construction labor is in short supply as it will be for the next 10 years. Short supplies of skilled construction labor get compounded by the needs of disaster response and recovery within a region. For example, a lot of drywall outfits from Atlanta are now down in the Houston area after Hurricane Harvey, so finding someone to install drywall in Atlanta is a problem.
We need to train folks in the trades for all forms of building across the board.
In additions to training people for site built construction and incremental development, we need to be able to use all manner of systems built housing, depending upon what the right tool for job might be:
ANSI spec Tiny Houses.
ANSI Spec Park Models.
HUD spec mobile homes. (also know as capital “M” Manufactured Homes)
IRC spec modular buildings in single box and multiple box configurations.
IRC spec wet core modules with site built additions.
IRC Spec Panelized Construction.
IRC Spec SIPS construction.
The MEMA Cottages produced after Katrina were dual certified as IRC off-frame modular Homes and on frame HUD Spec Mobile Homes. They could be placed temporarily as HUD spec mobile homes. Once you removed them from their trailer chassis they could be placed upon permenant foundations as IRC spec Modular homes that comply with the standard local building code, while being inspected by third party engineering outfits at the factory.
Below is a 12′ wide MEMA Cottage w/ 8′ ceilings (one bedroom). This cottage had its porch tuned up a bit and got repainted when it was taken off the trailer frame and set on a permanent foundation in Ocean Springs.
These are all structures for owning real estate that have alternative methods for governance and distribution of profits that are alternatives to the more typical tools for owning income producing real estate, the partnership or Limited Liability Company (LLC) . Before you get fancy with alternative ownership structures, focus upon the basics by standing up an enterprise that will be doing the work of the developer; finding the site, testing various designs and financing approaches, building . leasing and operating the building or buildings. The Operating Company can be the operating partner, operating co-op member, managing LLC or L3C member, or Benefit Corp. manager. All of these various ownership structures are set up to do the job of describing how capital will be raised for the project and how profits will be distributed. It is the role of the Operating Partner to raise the capital, build/rebuild and operate the buildings profitability so that there is cash flow to distribute among the owners regardless of what ownership model is used, or the mission of the enterprise.
Before you get fancy with alternative ownership structures build a straightforward simple project with straightforward and simple ownership structure, an operating partner and a capital partner under a typical LLC that is limited to just one project as the owner. (a Project-Specific LLC). You build this structure with an ordinary LLC Operating Agreement. Under the Operating Agreement, the Operating Partner and the Capital Partner both know who is supposed to do the work (the Operating Partner), who is supposed to put in the capital needed (the Capital Partner), how important decisions will be made, how and when the capital partner will get their original investment back, and how revenue beyond the repayment of principal will be distributed between the capital partner and the operating partner.
The basic deal structure is a good starting point for folks that want to eventually set up other more elaborate alternative forms of ownership. It will help the small developer to become good at doing the work of the operating partner -an essential role that is required in every one of the alternative ownership structures mentioned above.
In any of these structures people putting up the money in large or small amounts are going to ask a very legitimate series of questions:
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?
The horse that goes before the cart is knowing how to do the work of the operating partner. Do that on a small project. It’s like learning how to drive in an empty parking lot before you attempt to drive on local streets or on a freeway. Once you have some of those basic operating skills, then you can look at alternative ownership structures consistent with your mission. The operating partner is the crucial resource, not the money.
Raising money from a couple of individuals and operating under a straightforward project-specific LLC is easier and less complicated than Crowd Funding, REIT formation, starting a co-op, L3C, or Benefit Corporation. Walk before you try to run (attempt to fly).
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.
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.
Incremental Development does sound like you need a lot of capital and that there would be a lot of risk if you don’t know what it is. If you didn’t know what indoor plumbing is and how it works, that might also sound like a crazy risky idea. But Incremental Development is not that complicated nor that risky. The biggest barrier to entry is the initial step. What is the road map? What is the territory? It’s a black box in a lot of people’s minds.
Developers are held in very low-esteem. I see that as more of a feature than a bug because if the bar is low, it’s pretty easy to under-promise and over-deliver. On the spectrum of all possible developers that might arrive in your neighborhood from Mahatma Gandhi to Darth Vader, people expect a developer to resemble Darth Vader.
A small developer just needs to be a noticeably less shitty version of Darth Vader.”
(You may love Brooklyn, but Brooklyn doesn’t need your ass. Go somewhere that does.)”
Ryan Terry‘s statement has two parts and you might stop at the evocative opening; “Find a place you love…” The second half is just as critical “–that needs you”. Places that need you will need a lot of work. That is why they need someone like you that is willing to do a lot of frustrating and unappreciated work (because you care about the place and the people in the place. Swell places with high barriers to entry don’t need you.
If rents are low, you may need to limit yourself to picking up trash and doing careful serviceable rehabs like the cottage shown above. Don’t forget that the project is the neighborhood not just the building. That little garage has been rented since Dan Camp renovated it 30 years ago as part of his effort to transform a part of town nobody cared about.
Be disciplined in what you are willing to spend in total project costs. If rents are low or high, you still need to limit your project costs to what can be supported with the likely rents.
Do not expect to be welcomed or appreciated. Keep your head down. Under-promise and over-deliver. If you are a developer it will be hard to build trust in a place where people doubt or casually mischaracterize your motivation and methods. Do the work anyway. Any recognition or support you see from your neighbors along the way is a bonus. Take the long view and outlast critics who don’t have anything resembling a genius plan of their own. Be smart. Run the numbers on multiple projects before you launch. Start small. Find and support local champions and colleagues. Few resources are as important as Stubborn Hustle in a person hungry to learn their craft.
If you are passing through Bryan, Texas, look up Ryan Terry and have him show you his project on the edge of the downtown. He is walking the talk.