I got these questions from a fellow looking hard at some infill sites, trying to make sense of the pro forma I sent him with the single stair Walk-up buildings:

John, I'm finding more time to dig in to some of the pro formas you've sent. Particularly the 72x32 and the 80x40. I have about a thousand questions but ill save some for the developer boot camp.

First though, do these only work when land can be had at $8 per ft? Or similarly, at the rent of 1.02/ft I'm seeing here? Do these scale proportionally? Is there a magic ratio of predictable rent based on comps vs land costs that give a go/no go signal?

My reply:

Typically the land price is not the driver you can pay $12-$16 per SF on the land and not upset the cost side of the equation too much, since the cost for the finished lot is a lower percentage of the overall project cost that the hard and soft construction costs are.  Here is an easier way to approach the basic go/no go analysis:

•   Before thinking about cost per sf or rents per sf, think about total project cost per door(per unit) and typical rents per door (per unit).

• Use "the rule of 100" a very workable rule of thumb that says the the total project cost per door should not exceed 100 X the monthly rent for a typical unit.

• If the rent for a one bedroom unit is $900, you should not exceed $90,000 per door in total project costs (finished lot, hard and soft costs).

• Here's where good design can provide an advantage, if the typical one bedroom unit in the neighborhood is 850 SF for $900 per month that translates to $1.06 per SF.  The thing is, nobody thinks about what they are paying in rent in terms of per sf metrics.  They think about it as a check they write every month.  So, if you can build better units at 750 SF and rent them for $900 per month, that translates to $1.20 per sf, but you have to think in terms of specific unit design, and specific site plans so that you can see the arbitrage between what you want to build and the other guy's product where he build a lot of off-street parking and a lot of landscaping, pool, clubhouse, etc.

• The rough breakdown of project cost is typically something like this:  Hard cost: 65-70% Soft Costs 20-25%, Finished Lot 8-15%.

• That project cost per unit cap of $90,000? divided by 750 SF = $120 per sf all in.
  • 70% of $120 = $84 per  in Hard Cost, 20% for Soft costs = $24 per sf and 10% for the Finished Lot = $12 per building sf (not lot area).

When you look at comparable rents, consider that you will be delivering newly constructed units which will typically command a 10%-25% rent premium over older units in the same area.  Also think about proximity to urban amenities, light rail stop, food and drink, trail system, parks etc.  You don't want to talk yourself into an assumed rent that is way above what tenants will actually pay, but you don't want to undervalue your units either.  It's important to document your assumptions on rents, since they drive the whole thing.

New Videos from CNU23 Presentation on Lean Urbanism along with previous Lean video content.

A lot of what I have been posting lately is contained within this 17 minute video.

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.

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.