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

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?

Three Story Urbanism? No Problem.

 

I think it is important and valuable to build Accessible/Adaptable apartments as  currently required under HUD’s Fair Housing Design Manual .  Here’s how to do that in a straightforward three story walk-up building you could build with ordinary residential construction trades in your local market:

The requirement for apartment building or mixed use buildings containing four or more units, and built without an elevator is that all of the ground floor units must be Accessible/Adaptable.  If the 1st floor has no residential units on it, (say because the ground floor is occupied by commercial space or parking garages), then the next floor (the 2nd floor) becomes the “Ground Floor” for the purposes of compliance with the federal Fair Housing Act and you would have to install an elevator for access to that floor unless the building was adjacent to a steep enough grade to provide access to the 2nd floor without an elevator or lift.  As I explained in an earlier post that seems to be getting a fair amount of play, The International Building Code (IBC) allows you to build a three story TYPE V (wood frame) structure with fire sprinklers with a single exit stair, as long as the upper floors do not have more than 4 units on each of them and that the travel distance from the farthest location within each unit is less than 125 feet from the exit stair enclosure.  Follow the link for the specific IBC code citations:

Another Look at how to build a 3 story building without an elevator

The photos above show some capably designed 3 story buildings.  It is possible to do this.  If you have doubts and you need some help,  I suggest that you contact the good folks at Union Studio in Providence, RI They designed the two 6-plex buildings on the lower left or Eric Brown at Brown Design Studio in Savannah Eric designed the white 6-plex walk-up in the larger image on the right.  My able partner David T. Kim designed the 22 unit Hutchinson Green Apartments in the upper left as our first major project after the Great Recession.

So 3 Story Urbanism is no problem?  Okay, admittedly that title does cross the line into Click Bait, because while these hard working modest buildings are very useful in creating 3 story urbanism, your local zoning code with it’s needlessly deep building setbacks, or bloated off-street parking requirements may make it quite difficult to build good #3StoryUrbanism.  But as you can see, but the International Building Code should not be an issue for you.

Bloated parking requirements will mess up your site plan so that you cannot build the same way as the venerable 1920’s 3 story apartment building across the street.  Municipalities are famously bad at guessing how much parking you should be required to build on your private parcel.  Many cites will not even give you credit for the parking spaces at the curb in front of your potential building -as if they do not physically exist.  Unnecessary parking takes up space, creates additional impervious surface that you have to address for the storm water requirements, and those additional spaces cost money to build and maintain.  Bloated parking screws up perfectly good projects every day.  The development math for parking you don’t need never works in your favor.

 

Sharing a Cottage Court Pro Forma (A Live Excel File)

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Repurposed MEMA Cottage, Ocean Springs, MS

 

Here is a link to a live Excel File you can download for a modest rental cottage court:

 

Cottage Court Excel File

You may recognize the Static Pro Forma tab as the template used in the IncDev Small Developer Workshops.

Please post comments and critiques here or email me with questions.  The sooner folks understand the small developer business model the sooner building/rebuilding will get better.

Beyond the Tiny House

374 sf MEMA Cottage
374 SF MEMA Cottage 11′ x 34′ plus a 6′ porch.

I guess the phenomenon of the “Tiny House” is now part of our culture, since there are now HGTV shows about Tiny Houses.  I love a well designed small house.  I am not a fan of Tiny Houses on wheels for a couple of reasons.  It can be hard to find a place to park a tiny trailer and actually hook it up to a sewer line unless you go to a trailer park or RV park.  Tiny Houses on wheels are not built under typical local building codes but under a  the ANSI standard A119.5 for Park Recreational Vehicles, (specifically RV’s without motors, gasoline tanks or diesel tanks).  If you would like to put your tiny house on wheels on a permanent foundation, you will need to convince the local building official that the trailer meets the local building code.  It is possible to get your tiny trailer certified to comply with the International Residential Code (IRC) by a third party inspector who watches the trailer being built by the fabricator, but this is not a typical practice by many of the folks building Tiny Homes/Trailers.

For the next couple of months my wife and I are living in the little pink cottage shown above in the Cottage Square neighborhood in Ocean Springs, MS.  This little one bedroom cottage was used as temporary housing during Mississippi’s recovery from Hurricane Katrina and was later removed from its transport frame and placed on a foundation at Cottage Square.  It was dual certified by the manufacturer as a HUD Manufactured Home (mobile home) while it was attached to the transport frame and as a IRC compliant modular cottage when removed from the frame and set on a permanent foundation.

We are finding the cottage to be quite comfortable.  We have an actual bedroom compared to the sleeping lofts often provided in Tiny Houses/trailers.  The kitchen and bathrooms are pretty straight forward, built from standard cabinets and fixtures.  There is plenty of natural light and a porch we can sit out on when the weather allows.

Video from the Recruiting Lecture for Emerging Developers – Memphis/May 2017

 

I love Memphis.  More specifically, I love the people I have met in Memphis.  Lots of heart and lots of hustle.

The video above is from an introduction lecture we gave as part of an effort to cultivate a cohort of Emerging Developers working in a number of Memphis neighborhoods.  Following the lecture Incremental Development Alliance (IncDev) held two One Day Workshops and a Two Day Boot Camp.  The folks who attended continue to get together and support each other.

I think it is vital for small developers to “find their people”.  The work is challenging enough and doing alone with out friends and colleagues makes it even harder.  What we have seen in the Memphis cohort of Emerging Developers is a willingness to help each other that is inspiring.  Nobody wants to see someone else repeat the learning curve they went through.  The Emerging Developer effort has been supported by a number of local sponsors and is worth exploring if your community is thinking about how to cultivate local entrepreneurs doing small scale real estate projects.