Among the key planning concepts with which a developer should be familiar are conservation development, cluster development, new urbanism, and PUDs.
“Conservation development” is an approach to exurban community development that proposes that sensitive landscapes and development can coexist. Conservation communities can range in size from a few acres to thousands, but they generally have several items in common. They usually include legal protections for some areas of the plan, such as a conservation easement. They also typically control housing design to a greater degree than comparably located subdivisions.
Clustering is the most common zoning-approved method of conservation development. In cluster development, higher densities in certain areas permit protected open space elsewhere on the site. Following traditional zoning, overall, gross density usually remains the same for cluster developments as for traditional tract housing where housing is spread more uniformly over the entire tract. Each cluster may contain homes of a similar style, and styles may vary among clusters, imparting an individual village character to each. Cluster planning requires more design skill than conventional subdivision planning; unskilled planning or exploitation of the cluster concept can easily generate an unattractive bunching of dwellings.
“New urbanism” offers another alternative to conventional subdivision design, emphasizing traditional neighborhood planning based on grid street patterns. Featuring narrower streets with sidewalks, small public squares and parks, narrower lots with rear garages to manage car traffic, and walkable town centers, this approach proposes land use patterns similar to those of traditional cities and towns. Seaside in Walton County, Florida, is among the earliest examples of the new urbanist approach, and its success has spawned hundreds of development plans that refine the core concepts. New urbanism typically relies on typological coding, rather than zoning, as its primary regulatory tool. Coding, which is more design-oriented than zoning, specifies building, street, and open space “types” for each lot in the development without dictating uses. The results are a mixed-use, mixed-housing-type community, flexible enough to accommodate many uses, but conforming more or less to a formal design for the streetscape.
Beginning developers aspiring to these characteristics should be advised: it is not as simple as it sounds. First, the more comprehensive design vision of a community like Seaside requires substantially more attention and expense in the design phase, which can be tough for a small firm to sustain. Second, the consistent vision of a master-planned community requires legal structure, governance documents and boards, and operational funding for common area maintenance, as well as ongoing design review and builder oversight. This “software” is just as complex as the actual construction. Third, many developers have encountered trouble when shaping community plans to a formal ideal without adequate research to prove a deep market for the resulting mix of home typologies. That said, demographics clearly support more of this type of development, particularly the aging of the U.S. population and the increasing diversity of household types that are poorly served by conventional suburban houses. The Congress for New Urbanism and other professional advocacy groups offer an array of symposiums and training opportunities for individuals to learn about these ideas.
Whereas conservation and new urbanist development are design and governance concepts, PUD is a legal concept. PUDs are zoning classifications typical in many jurisdictions, under several common names, such as planned residential development or planned residential unit, but the purpose remains the same. In PUDs, traditional zoning classifications are discarded in favor of a more flexible approach that considers the project in its entirety instead of in zoning overlays. The PUD is approved as an entity and is essentially a customized rezoning for a desirable project. It may combine commercial and residential uses, include several types of residential products, and provide open space and common areas with recreational and community facilities.
In a PUD, residential areas may be outlined and a certain number of units designated, but no detail regarding the specific site plan is required for approval. Most jurisdictions require later public review of the specific site plan; some treat this review as cursory, if the plan is being followed. Developers have the right to build a certain number of units or a certain number of square feet of commercial or office space as long as they conform to the stipulations of the PUD ordinance.
PUDs usually involve negotiations between the developer, the reviewing agencies, and the public. The negotiations give the community an opportunity to tailor development proposals to meet community objectives. Often, the developer will be required to place more land in open space or to commit more land or cash to community facilities than originally planned. In return, the developer may receive permission to build more units than the regular zoning would allow.
Planning and development trends have been leaning toward greater mixing of land uses. Planners, developers, and the public have discovered that a considered mix of uses can create a more functional and pleasing environment, with benefits to local ecology, infrastructural efficiency, and public health.
After the site investigation has been completed and base maps prepared, the land planner should present the developer with a site plan that describes a number of different approaches toward developing the site. The site plan, which combines information regarding the target market with the base map, must consider many different items:
• topography;
• geology and drainage;
• natural vegetation;
• vistas and sight lines;
• private and public open spaces;
• neighboring uses;
• easements and restrictions;
• roads;
• utilities;
• patterns of pedestrian and bicycle and other vehicular circulation—ingress and egress, sidewalks, and alleys;
• market information;
• sales office location, visitor parking, and other temporary operational concerns;
• buffers for noise and privacy; and
• building types.
The design process involves considerable trial and error, and it can quickly spiral out of control without a dedicated project manager. Developers must consider future users and their relationship to every aspect of the site. The site planner first produces a diagram showing constraints and opportunities with all the site’s relevant features—undevelopable slopes and wetlands, neighboring uses, view corridors, arterial roads, access points, streams, forests, and special vegetation. Next, using the developer’s land use budget from the market analysis, the site planner prepares alternative layouts showing roads, lots, circulation patterns, open space, amenities, and recreation areas.
Throughout the schematic planning phase, developers must ensure that the plan will meet their marketing and financial objectives. They should mentally drive down every street, examining traffic patterns, and consider such aspects as attractive vistas, landscaping, and homeowners’ privacy. They should also envision the entrance to the subdivision, playgrounds, and street crossings. Sequence and the sense of arrival are key elements that the developer should always keep in mind.
A team approach usually works best, and the contractor, civil engineer, political consultant (if needed), and especially sales and marketing staff should be involved as early as possible. Rough drawings of alternative schemes should be reviewed at regular intervals. Another way to develop a plan is by holding a charrette in which the land planners work with the public, community leaders, and other representatives to incorporate their concerns and ideas. This model of public participation, if handled correctly, allows stakeholders to feel they had a say in shaping the proposal. If handled poorly, it is a recipe for disappointment and expense. Charettes are work sessions with the public, but decisions should never be announced in this environment. The project design team is ultimately responsible for fulfilling the development’s objectives, and the desires of any other stakeholder must be considered but only adopted if they add value to the proposal.
When the developer is satisfied with the schematic plan, the planner produces the final version. The final plan also goes through several iterations. Because it will ultimately be submitted to the city for plat approval, the final plan must show the boundary lines, dimensions, and curvatures of every lot and street. Jurisdictions typically offer detailed guidelines for these submittals, but it has become common for these guidelines to include a troubling line: “… and anything else that may be requested for departmental review.” Developers must meet with reviewers early on and obtain a clear list of what documentation, including engineering calculations, will be required for review and approvals.
Design guidelines provide an important tool for land developers in setting the tone and overall appearance for a subdivision. In master-planned communities, detailed urban design guidelines can cover all aspects of design, from the streetscape and landscaping to individual house sites, materials, setbacks, and architecture. Although guidelines that are too severe can create monotonous subdivisions where everything looks alike, well-crafted guidelines can help establish an attractive subdivision. Creating design guidelines is a skill that may not be within the capability of the project planner. There are firms specializing in coding and guidelines, but developers should coordinate such documents closely with the attorney drafting the governance documents for property owners’ associations, understanding that the association, or its agent, will need the legal authority, design support, and operational budget to follow through for many years. Developers should also be sure to retain the right to modify guidelines if buyers react negatively to the initial approach. Architectural guidance should be framed positively: “How porches can create an active streetscape” rather than “all porches must be eight feet deep and painted white.”
The design process begins with a base map that delineates the parcel’s relevant physical and legal features. All subsequent design schemes are drawn on the base map. Zoning and other resource mapping and aerial photos are often available for download from planning departments or from private companies. Aerial photos are invaluable for understanding the property, as well as for marketing the project later. City halls, local libraries, utility agencies, state highway departments, and local engineering firms are sources for topographic maps, soil surveys, soil borings, percolation tests, and previous environmental assessments. Title companies and the development attorney are the sources for existing easements, rights-of-way, and subdivision restriction information.
TOPOGRAPHIC SURVEY. Site planning begins with the topographic map that shows the contours of the property, rock outcroppings, springs, marshes, wetlands, soil types, and vegetation. Although topographic maps are available for many counties, a custom-drawn topographic survey is invaluable for sites with significant grading. In tight subdivisions, or on sites with substantial vegetation, on-site surveys are often needed to obtain more accurate information in specific areas. The topographic map should show
• contours with intervals of one foot (0.3 m) where slopes average 3 percent or less, two feet (0.6 m) where slopes are between 3 and 10 percent, and five feet (1.5 m) where slopes exceed 10 percent, with the caveat that the reviewing engineer or zoning may require a specific interval for final approval;
• existing building corners, walls, fence lines, culverts and swales, bridges, and roadways;
• location and spot elevation of rock outcroppings, high points, watercourses, depressions, ponds, marsh areas, and previous flood elevations;
• location and spot elevations of any on-site utility fixtures or emergency equipment;
• floodplain boundaries (determine in advance which boundary the jurisdiction will require);
• outline of wooded areas, including location, size, variety, and caliper of all specimen trees;
• boundary lines of the property; and
• location of test pits or borings, such as for bridge locations, to determine subsoil conditions.
SITE MAP. Developers should prepare a vicinity map at a small scale that shows the surrounding neighborhood and the major roads leading to the site. The map can be later adapted for marketing, loan applications, and government approvals. In addition to location information, the map should show
• major land uses around the project;
• transportation routes and transit stops;
• comprehensive plan designations;
• existing easements;
• existing zoning of surrounding areas;
• location of airport noise zones;
• jurisdictional boundaries for cities and special districts, such as schools, police, fire, and sanitation; and
• lot sizes and dimensions of surrounding property.
BOUNDARY SURVEY. The boundary survey shows bearings, distances, curves, and angles for all outside boundaries. In addition to boundary measurements, it should show the location of all streets and utilities and any encroachments, easements, and official county benchmarks from which boundary surveys are measured or triangulation locations near the property. It is important to know which elements the lender will require—typically the American Land Title Association standard—and also to think ahead to requirements of the final plat and engineering review.
The boundary survey should include a precise calculation of the total area of the site as well as flood areas, easements, and subparcels. Calculations of area are used to
• determine the number of allowable units based on zoning information;
• determine net developable area (the size of this area serves as the basis for both site planning and economic analysis of the project);
• determine sale prices—often, sale price is calculated per square foot or per square meter (for instance, $2 per net developable or gross square foot [$21.50/m2]) rather than as a fixed total price; and
• provide a legal description of the site.
UTILITIES MAP. The utilities map is prepared at the same scale as the boundary survey. It shows the location of
• all utility easements and rights-of-way;
• existing underground and overhead utility lines for telephone, electricity, and street lighting, including pole locations;
• existing sanitary sewers, storm drains, manholes, open drainage channels, and catch basins, and the size of each;
• rail lines and rail rights-of-way;
• existing water, gas, electric, and steam mains, underground conduits, and the size of each; and
• police and fire alarm call boxes.
CONCEPT DEVELOPMENT. Once base maps have been prepared and gross and net developable acreage calculated, the true design process begins. Before the planner begins drawing, the developer should define the target market, the end product (including lot sizes), and the approximate number of units needed to make the project economically feasible.
The 7,000-acre (2,800 ha) Lake Nona property in Orlando, Florida, includes 2,000 acres (800 ha) of lakes and open space. Development includes office and retail space, medical and educational facilities, and nearly 2,000 residences.
LAKE NONA PROPERTY HOLDINGS, LLC
Base maps outline developable areas as well as features such as lakes, stands of mature trees, and hills on the site. The developer determines which features should become focal points for the design based on the site’s physical condition and specific market. For example, although a creek and its floodplain are often excluded from the developable area because of potential flooding problems, it may be the site’s best feature when used as a focal point for public open space or as a private amenity for certain lots. Most likely, it also performs a vital drainage function that may be expensive and destructive to alter.
The goal of site planning is to maximize the value of the property subject to market absorption and zoning constraints. Lots with views, or that adjoin open space or water, sell at a premium. Developers may achieve high returns by placing higher-density products such as townhouses, multifamily housing, or zero-lot-line homes next to valued features. Lots that do not front on these features will sell for more if the plan provides them physical and legal access. The best plans create value by using a desirable feature as a generator of lot premiums—for example, a town square with houses fronting it. The public has access to the square and its surrounding streets, while the houses that front on it have special views. A lake, golf course, or other active or passive recreational amenity could similarly enhance value.
If the development’s use is perceived as incompatible with adjacent uses, the project may be contested by local residents. For example, if single-family houses face a developer’s property, any non-single-family use is likely to draw objections from the neighbors. Although different uses on adjoining properties are appropriate in many situations, the burden falls on the developer to demonstrate the reason for not maintaining consistency in use or density.
Many residential tracts border major streets. Because such commercially suitable frontage usually sells for three to five times the value of single-family land, the developer may wish to consider placing retail, office, or multifamily uses with ground-floor commercial space at these locations. The risk of reserving a large amount of commercial or multifamily frontage at the edge of the development is that, in the event of a slow market, the vacant lot serves as an unattractive front entrance to the project. If frontage is retained for future development, the entrance into the residential portion of the tract should be carefully designed and landscaped. A parkway entrance with an entrance feature and landscaping has become a common element of many subdivisions, but more urban-style options that play down the entrance and connect seamlessly to adjacent developments are gaining favor. The key is to communicate arrival, and quality, in other ways, such as with a consistent design aesthetic, material palette, street furniture, lighting, and signage.
In the design of street systems for a new development, a street’s contribution to the neighborhood environment is as important as its role as a transportation link. The street system should be legible to visitors so that the intended function of a particular street segment is readily apparent.
Although debate over the appropriate functions and definitions of street types persists, the concept of a hierarchy of streets remains practical. The commonly used functional classification of streets includes, in ascending order, local streets, collectors (sometimes called “boulevards” or “avenues”), and arterials (including freeways).
• Arterial Streets—Arterial streets are seldom created as parts of new subdivisions. The primary purpose of arterial streets is mobility—movement of as much traffic as possible as fast as is reasonable—and the mobility function of arterials therefore overshadows their function of providing access to fronting properties, such as residences or commercial uses.
• Collector Streets—Collector streets serve as the link between arterial streets and local streets. Typically, they make up about 5 to 10 percent of total street mileage in new developments. Increasingly, new collector streets are fronted by active properties, such as neighborhood commercial centers, institutions, and multifamily residences.
• Local Streets—Local streets usually account for around 90 percent of the street mileage in new communities and are intended to provide access to the residential properties fronting them. As the preponderant class of streets in terms of mileage, they contribute much to the signature of their neighborhoods. They also constitute the backbone of neighborhood pedestrian and bicycle networks.
When designing streets for a new development, designers should begin with the minimum width that will reasonably satisfy traffic needs. On most local streets, a 24- to 26-foot-wide (7.3–7.9 m) pavement is appropriate. This width provides two parking lanes and a traffic lane or one parking lane and two moving lanes. For lower-volume streets with limited parking, a 22- to 24-foot-wide (6.7–7.3 m) pavement is adequate. For low-volume streets where no parking is expected, an 18-foot-wide (5.5 m) pavement is adequate. It has been found that widening access streets a few more feet does not increase capacity, but it does encourage higher driving speed. A wide access street also lacks the intimate scale that makes an attractive setting. Designers should consider the viability of bicycle traffic to evaluate whether any widening might be better used for bike lanes, which can expand the nonmotorized domain on the street.
A residential collector street should be designed for higher speed than local or access streets, permitting unrestricted automobile movements. Residential collector streets 36 feet (11 m) wide provide for traffic movement and two curb parking lanes. When parking is not needed, two moving lanes of traffic are adequate, with shoulders graded for emergency parking.35 Designers should keep in mind that a street section, once chosen, need not remain constant for the length of the street. In fact, special moments in street design, such as expanding sidewalk area periodically to allow outdoor dining or allowing nose-in diagonal parking to alternate with traffic-calming landscape elements, are powerful signals that something of value is happening in these locations.
Residential streets should provide safe, efficient circulation for vehicles and pedestrians and should create positive aesthetic qualities. The character of a residential street is influenced to a great extent by its paving width, its horizontal and vertical alignments, and the landscape treatment of its edges. Residential streets are community spaces that should project a suitable image and scale. For example, much of the character of older neighborhoods is derived from the mature street trees that form a canopy over entire streets, whereas a neighborhood with wide streets devoid of trees conveys an entirely different image. Vertical elements, including not only trees but light posts, shading structures, bollards, and signs, can be more important than the surface of the street in communicating pedestrian safety and insulating lower-floor building programs from the effects of traffic.36
Straight streets with rectangular lots give a more urban ambience, whereas curvilinear streets tend to create irregularly shaped lots and provide a more pastoral feel. A minor problem for the developer is that irregular lots may have to be resurveyed when the builder is ready to start construction because the iron pins that mark lot corners tend to get moved or lost during construction of other houses.
Adequate grading and the optimal provision of utility services are important elements of site design, and the cost of providing them is critical to a project’s bottom line. Developers should never leave the decision about these elements to the civil engineers; the lowest-cost site engineering is rarely the most profitable subdivision design. The developer’s objective is to maximize the sale value of the lots subject to efficient site engineering, but this value may also derive from a harmonious relation between built and natural landforms.
GRADING. The grading plan must contain precise details and take into consideration such factors as the amount of dirt that will be excavated, the finished heights of lots, steep areas that may require retaining walls, and graded areas that may be subject to future erosion (developers are liable for erosion even after they have sold all the lots on a site). Grading is used as an engineering tool to correct unfavorable subsoil conditions and to create
• drainage swales;
• berms and noise barriers;
• roads and driveways, plazas, and recreational spaces;
• topsoil at a proper depth for planting;
• circulation routes for roads and paths; and
• suitable subsoil conditions and ingress for facilities.
Grading is also used for aesthetic purposes to provide privacy, create sight lines, emphasize site topography or provide interest to a flat site, and connect structures to the streetscape and planting areas.
Homebuilders usually do their own fine grading of lots in addition to that done by the land developer, but they expect—and may be contractually entitled to—a buildable site with no grading required other than topsoil clearing. When the final foundation location is unknown at the time of sale, developers should be extremely careful about such promises. When homebuilders feel a site requires fill, the developer may receive a request for a rebate of fill and trucking costs, if expectations are not set appropriately at the time of sale or option.
STORM DRAINAGE AND FLOODPLAINS. Storm drainage systems carry away stormwater runoff. In low-density developments with one-acre (0.4 ha) lots or larger, natural drainage may suffice, and generally natural approaches are more cost-effective. In denser developments, however, some form of storm drainage system is always needed, and the best design may be a hybrid of conventional and low-impact techniques.
Gently rolling sites are the easiest and cheapest to drain; flat sites and steep sites are more difficult and expensive. As with other environmental issues, drainage problems can come back to haunt a developer long after the lots have been sold, and these issues can be difficult to predict.
If a property contains any hint of wetlands, a floodplain study is among the first studies a developer should commission before buying a site. Developers should understand where the property lies in relation to floodplains. They can start by obtaining the Federal Emergency Management Agency’s flood hazard boundary maps (see www.fema.gov), or flood hazard GIS data from the municipality. Land that is within the 100-year floodplain—that is, the area that is expected to flood once every 100 years—is usually not developable except for uses such as golf courses, parks, or storage of nontoxic materials. Even if uses are permissible, developers should consider whether they make sense, and whether the resulting structures will be insurable.
In some localities, land within the 100-year floodplain is developable, albeit with restrictions, and structures can be mortgaged by federally insured institutions only if the structure carries flood insurance. To alter floodplain areas, developers must apply for a permit from the EPA, U.S. Army Corps of Engineers, or other body, such as state environmental or natural resources agencies, with authority over the local wetlands or creek system. The Army Corps of Engineers designates floodways as well as 100-year floodplains. A floodway is that portion of a channel and floodplain of a stream designated to provide passage of the 100-year flood, as defined by the corps, without increasing elevation of the flood by more than one foot (0.3 m). Developers may not build within floodways. Floodways must retain the same or better rate of water flow after development as before it; otherwise, floodplain elevation is likely to rise upstream from the development, causing increased flooding in those areas. Developers can alter the floodway, but any changes must be engineered properly to preserve water flow and must be permitted by the appropriate authorities, including the Corps of Engineers.
Sterling Collwood is a 260-unit student rental community in San Diego, California. More than half the site is set aside as green space, restored with native plants.
HUMPHREYS & PARTNERS ARCHITECTS, L.P.
DON RUSSELL, PRODIGITAL REAL ESTATE PHOTOGRAPHY
Irrespective of the frequency with which they flood, areas within a property may be defined as wetlands and thus come under the jurisdiction of the EPA as well as other federal, state, and local agencies, such as the corps and the U.S. Fish and Wildlife Service, or more commonly, the state department of environmental quality. Often, all agencies must be satisfied before the Corps of Engineers will issue a permit to disturb a wetland.
Wetlands come in many forms, including ephemerally wet swales, intermittent streams, hardpan vernal pools, and volcanic mud flow vernal pools. Regulatory streamlining has encouraged coordinating agencies to adopt standard definitions of these features, but delineation is, ultimately, done by an individual field biologist or hydrologist on site, and jurisdictional determination is subjective.
In evaluating a site that contains potential wetlands, developers should hire a qualified biologist to conduct a preliminary wetlands evaluation report, to map potential wetland sites on the property, and to suggest mitigation measures and alternative approaches to the design of the property.37 Developers should be aware that some features, such as vernal pools, may be only seasonally visible, meaning that a project that is ready to go in September may be delayed by six months for a complete wetland delineation.
LOW-IMPACT DEVELOPMENT. Several aspects of land development can adversely affect site hydrology in multiple ways. Expansion of impervious surfaces and changes in vegetation can concentrate and accelerate surface stormwater flow. The introduction of vehicles, new uses, and landscape maintenance regimens can increase pollutant discharge, and the combination of increased water use and reduced permeability can impair the recharge of aquifers on which the development and surrounding uses depend. Low-impact development (LID) water quality management strategies can make up an integrated approach to improve water quality.
Integrated LID methods can result in better environmental performance while reducing development costs when compared with traditional conventional stormwater management approaches.38 LID techniques are a simple yet effective approach to stormwater management that integrates green space, native landscaping, natural hydrologic functions, and other techniques to generate less runoff from developed land. These processes can also remove pollutants, such as nutrients, pathogens, and metals from stormwater.39 In short, LID is used to maintain—as closely as possible—the benefits of natural site hydrology and to mitigate the adverse effects of stormwater runoff and nonpoint source pollution associated with some conventional stormwater management methods.
Common LID practices include the following:
• Conservation Design and Impervious Surface Reduction—Following conservation design methods, such as clustered housing, shared driveways, and narrower roadways, as well as rainwater collection systems on buildings, can reduce the overall impervious surface and decrease stormwater management costs.
• Bioretention (Rain Gardens)—A bioretention cell is an engineered natural treatment system consisting of a recessed landscaped area constructed with a specialized soil mixture and site-appropriate vegetation. Slightly recessed, the cell intercepts runoff, allowing the soil and plants to filter and store runoff; remove petroleum pollutants, nutrients, and sediments; and promote groundwater recharge through infiltration. These “rain gardens” can be relatively inexpensive to build and can become site amenities.
• Temporary Erosion Control—More ecologically sensitive approaches are not limited to permanent installations. Up to a quarter of stormwater management costs can be expended on temporary measures of erosion control during construction and landscape establishment. Filter-fabric and compost constructions have increasingly been deployed in lieu of silt fences and check dams in these applications. Typically costing more to install, these measures can be deployed so that they remain in place permanently, making the life-cycle cost comparable with conventional measures.
• Vegetated Swales, Buffers, and Strips—Constructed downstream of a runoff source, a vegetated or grassed swale is an area that slows and filters the first flush of runoff from an impervious surface. From both a budget and an environmental perspective, swales are nearly always preferable to culverts.
• Permeable Pavement—This type of pavement allows stormwater to infiltrate the soil. Materials and maintenance costs are substantially more expensive than conventional pavements, but their use can radically reduce impervious surface, a metric that is increasingly evaluated by approval authorities.
• Low-Impact Landscaping—Increasingly, native plants may be specified for site landscaping. These varieties are often more expensive, but they reduce operational cost and impact and require less water and maintenance.
• Green Roofs and Rainwater Collection—Capturing rainwater for reuse and slow discharge reduces concentrated runoff. Green roofs capture rainwater while improving buildings’ thermal performance in several ways. As designers and contractors become more skilled, the typically large cost differential is falling rapidly, and historical concerns about maintenance have been addressed. Still, these are complex systems, and experienced designers and installers are the key to successful implementation.
Demonstrated by multiple EPA case studies, the use of LID practices can be both fiscally and environmentally beneficial to developers and communities. These systems can often substitute for more expensive elements like curbs and gutters, and sometimes they can reduce requirements for intensive site engineering, such as flood-control structures.40 In case studies, capital cost savings have ranged from 15 to 80 percent when LID techniques were used.41 Engineering departments increasingly recognize low-impact best management practices as functionally superior, or at least equivalent, to conventional stormwater measures. It is likely that virtually all developers will soon use a mix of conventional and LID techniques, and communities in very sensitive areas, or projects seeking sustainability certification, will benefit from a comprehensive LID system. The best examples of LID use functional features as landscape amenities, in ways that increase value, and studies have shown that attractive implementations of these systems can result in developments that appreciate at a higher rate than conventionally designed subdivisions.42 Whether they are used comprehensively or à la carte, familiarity with these systems is now an absolute necessity for planners, landscape architects, and site contractors, and only an experienced team can advise a developer on the suitability of these types of techniques for a particular site.
SANITARY SEWERS. The layout of the sanitary system is determined by the topography of the site and the location of the outfall point—that is, the point of connection to the sewer main. Sewers are primarily gravity driven, so if the sewer main that connects the subdivision to the treatment plant is not located at the low point of the site, the developer may have to provide a pumping station, which brings both construction and operational expense.
Beginning developers should avoid tracts of land for which nearby sewage and water services are not available because the cost of bringing these services in from off-site locations can be prohibitive. When major off-site utility improvements are necessary, developers usually require a minimum of 200 homes to recoup their investment and risk. Creating a utility district to provide service or building a plant where none exists typically takes two or more years, as well as significant front-end investment, and can entail substantial operational and legal entanglements.
One option available to developers whose sites do not have sanitary service is to buy or lease a package treatment plant, a small self-contained sewage treatment facility, to serve the subdivision and to design the system to tie eventually into the community’s system. This option can work in rural areas and in communities that are accustomed to working with package treatment technology.
Septic tank systems are usually feasible only in rural areas. Their use depends on soil conditions and, in most areas, they are allowed only on lots of at least one-half acre (0.2 ha). A minimum of one acre (0.4 ha) is typical. If a well is included on the same site as a septic tank, even larger lots are sometimes necessary to prevent contamination of the well water, and health department approvals will be contingent on an adequate physical separation of the two, usually both by distance and by extending the well casing’s grouted seal.
In planning a sewer system, the developer should investigate
• sewage capacity requirements, which may vary, but 100 gallons per day (379 L/day) per person is common;
• available capacity of the treatment plant and connector lines;
• number of hookups contracted but not yet installed;
• the municipality’s method of charging for sewer installation; and
• the people responsible for issuing permits and establishing requirements for discharging treated sewage into natural watercourses.
Sanitary sewer lines are normally located within street rights-of-way but not under road pavement. House connections to sewers should be at least six inches (15 cm) in diameter to avoid clogging; all lateral sewers should be at least eight inches (20 cm) in diameter. Sanitary lines and waterlines should be laid in different trenches where possible, although some cities allow a double-shelf trench that contains the sanitary sewer on the bottom and the waterline on the top shelf. Except in very high-density communities, these “wet” infrastructure elements should not be colocated with power and voice and data communications services.
WATER SYSTEM. A central water system is standard in urban communities. Like the requirements for sewage capacity, those for water supply vary, but 100 gallons per day (379 L/day) per person is common. Requirements can vary greatly in their calculation of occupant load: jurisdictions may count bedrooms, bathrooms, or habitable square footage.
Water mains should be located in street rights-of-way or in utility easements. Residential mains average six to eight inches (15–20 cm) in diameter, depending on the water pressure. Branch lines to houses are three-quarter-inch or one-inch (2 or 2.5 cm) pipe connected to a five-eighths- or three-quarter-inch (1.5 or 2 cm) water meter, respectively. Because waterlines are under pressure, their location is of less concern than that for sewer lines, which rely on gravity flow.
Developers should consult the fire department about requirements for water pressure and the placement of fire hydrants. The fire department is likely to restrict the depth and slopes of culs-de-sac and the maximum distance between fire hydrants and structures. Fire department requirements, like road requirements for emergency services, are increasingly used as “backdoor” development restrictions, and developers should be aware very early of these requirements.
Water, sewer, and drainage lines should be installed before streets are paved. If installation before paving is not possible, developers should install underground crossing sleeves where the lines will cross the streets so that the utility contractor can pull the lines through later; otherwise, streets will have to be torn up to install and maintain lines.
UTILITY SYSTEMS. Electricity, gas, telephone, and data cable services are typically installed and operated by private companies, although in the case of underground electrical service, it is not uncommon for the site contractor to act as the utility’s agent. Designating the location of utility easements is an essential step in the process of land planning. If the land planner does not specify a location, the utility company may do so with little regard for aesthetic considerations. Usually, easements run with the street right-of-way, and along the back or side lot lines, within five or ten feet (1.5 or 3 m) of each lot. Most planners prefer to place all electrical power transformers underground or in semiexposed secure cabinets, but local custom and ordinances may dictate whether lines are above- or belowground. Local power companies often communicate their preference with prohibitively high costs for the less preferable option. The installation of transformers underground can be done at a reasonable cost and can prevent vandalism and the need for frequent maintenance. Transformers located aboveground can be hidden and protected from vandals by wooden lattices or painted metal cabinets with thorny shrubs or similar landscaping devices. Landscaping for these areas should closely follow the utility’s operational guidelines, as it is almost certain that major work will occur here as homes are built in the development.
FIGURE 3-9 | Typical Designs for Bioretention Basins
Although electricity, gas, telephone, and cable tend to play a smaller role in site design than do public utilities, such as water, sewer, and drainage, they still determine where structures can be built on each lot. Because the rapid development of data infrastructure has reshaped so many aspects of domestic and work life, many developers have made major investments in fiber-optic network installation for their communities. The value of these networks to retail lots or homebuyers over time is not known. Developers of communities must think beyond the year or two of the development period and consider not just the function of the utility service but the durability of the “deal” they have made for their customers, by committing to providers. Developers have, in some cases, saddled their communities’ residents with long-term contracts in order to get affordable and high-quality service, only to find that falling costs make their packages unattractive in just a few years. The safest approach is to attempt to “future-proof” development projects by installing additional empty conduit and equipment space during development, when unit costs are low. In this way, a disruptive technology can, as long as it fits in the pipe, be accommodated at modest cost later.
The developer should talk to each utility provider as early as possible. Utilities are by nature uncompetitive, and within their concession area, providers may have little incentive to move quickly or improve service. Delays in obtaining services are common and can easily throw off the developer’s schedule and hold up final sales.
Lot size and layout should reflect the nature of the surrounding community. It is especially important in an infill site to match the character of the new development with its surroundings. A developer should not try to suburbanize an urban community with deep setbacks, wide lots, and side garages. Alternatively, a compact development in a rural setting may not be appropriate or marketable.
Two determinants of a community’s layout are lot width and garage placement. Many postwar suburban subdivisions were designed with wide lots—some up to 100 feet (30.5 m) to accommodate a house and a two-car garage and driveway. More recently, 25- to 40-foot (7.6–12.2 m) widths have become more common. The new urbanist approach embraces the concept of narrower lots, smaller frontyards, and garages at the rear of lots, typically accessed by an alley. This layout creates a better streetscape because the view is not dominated by garage doors. For developers, this approach can be desirable because it allows the placement of more houses on the same length of street, saving per-unit infrastructure costs.
In the past, attached townhouses tended to be sited in rows surrounded by parking lots. Today’s townhouses often include individual garages that are tucked under the living space at the front or rear or in separate, dedicated buildings at the rear. Garage townhouses can be very cost-effective for builders and developers because they use less land and cost little more to construct.
Sidewalks, curbing, planting strips, and catchment basins must all be adjusted to the density and price point of the development. A single-family subdivision of 20,000-square-foot (1,860 m2) lots on minor streets need not be developed with the same street improvements required for a higher-density subdivision on 2,500- to 4,000-square-foot (230–370 m2) lots.
If the development adjoins a busy street, that edge must be handled with great care. Ideally, the community should not turn its back on the street but should take advantage of the traffic and activity and turn it into an asset. If the project is a mixed-use development, this location could be ideal for intensive uses, such as a retail district. Or it could be the site of neighborhood facilities, particularly if they are shared with the greater community, such as schools, libraries, or parks. If houses must be sited along a busy street, visual and sound buffering may be needed, which could take the form of service streets, landscaping, or site walls, or potentially upgrades to the building envelope. If sound isolation is required, developers are advised to retain acoustic consultants, as landscape effects on noise can be highly unpredictable.
Because lots facing busy streets may yield lower prices than interior lots, the developer should consider ways to boost their appeal or possibly use them for lower-priced units. Experienced developers, like good architects, understand which items can create value. But even experienced developers should spend time in the field investigating why people react more favorably to one design element than to another. The need for market research cannot be overemphasized. Successful developers always review the competition, use focus groups, and collect exit data from potential buyers who stop at sales offices or visit community websites or events.
Buyers react differently in different markets to both location and cost. For example, in western states, many buyers prefer single-level houses, whereas in the Northeast they are usually considered less desirable. In urban areas, buyers may like three-level townhouses, while farther from large cities, only a single-family house will do. Buyers may like certain features, such as deeper frontyards, but may not be able to afford the additional land cost. Good market research can reveal buyers’ preferences in the target market.
Throughout the country, land cost as a percentage of house value has risen steadily since the 1960s, from 15 to 25 percent on average. In certain areas of major cities, land costs may exceed 50 percent of the house’s value.
In response, traditional housing types are being rescaled and redesigned for modern use. Bungalows and cottages on small lots are particularly suited to move-down empty nesters, single parents, and others who make up today’s smaller households. Townhouses are a popular housing type in both urban and suburban areas, offering an alternative to those who do not want the maintenance of a single-family house. Townhouses are not always lower-priced options and can be as upscale as any other housing.
Large estate houses in exclusive communities remain an American icon that appeals to certain market segments. In many areas, estate-style houses are now being rescaled to fit on quarter-acre (0.1 ha) lots. These houses (called small-lot villas or, pejoratively, McMansions) typically have highly articulated two-story facades that face the street, giving an impression of height, volume, and high quality.
ZERO-LOT-LINE OR PATIO HOMES. Traditionally, local zoning codes have established minimum side yard setbacks ranging from three feet (0.9 m) to 10 percent of the lot width. Three- or five-foot (0.9 or 1.5 m) side yards result in unusable spaces. Windows from one house often look into windows of the next house, only six feet (1.8 m) away. To make side yards more usable, zero-lot-line lots, which allow densities up to nine units per acre (3.6/ha), were created. Today, most major cities and high-growth counties have modified their zoning codes to allow them.
A zero lot line means that the house is left or right justified; that is, one side of the house is built on the lot line so that the opposite side yard can occupy the total width available (10 feet [3 m] is considered the minimum width for usable space). The side of the house on the lot line is usually a windowless, but not shared, wall. Each lot must take care of its own drainage. If builders design a roof that drains water onto the next property, they must obtain a drainage easement from the owner of that property. In addition, a maintenance agreement, which can be made before construction while the builder or developer owns all the lots, must be recorded if using the neighbor’s lot is necessary to maintain the wall on the lot-line side of the house. Creative architects have mastered the challenge of designing zero-lot-line homes (also called patio homes) by making good use of the outdoor space and developing floor plans and elevations that maximize light and space (see figure 3-10 for various zero-lot-line configurations and associated densities). Small-lot, high-density housing must be carefully coordinated with scattered-lot or multiple-builder land sale programs. The land plan, in fact, should be drawn up concurrently with the house plan. The lot layout should seek to achieve a variety of goals:
• a site that does not require excessive grading or unusually deep foundation footings;
• the presence of sufficient usable area for outdoor activity (one or two larger areas are preferable to four small areas);
• adequate surface drainage away from the house, with slopes running toward the front or rear of the house; land developers should grade the lots so that they all drain toward the storm drainage system;
• minimum on-lot grading and maximum retention of specimen trees; and
• a minimum number of adjoining lots—preferably no more than three (one on each side and one along the back).
OTHER SMALL-LOT VARIATIONS. Variations of the zero-lot-line concept include Z-lots, wide-shallow lots, and zipper lots. Z-lots are shaped like a Z, with the house placed on the diagonal between its frontyard and backyard. The concept yields seven or eight units per acre (17 or 20/ha).
In wide-shallow developments, lots are 55 to 70 feet (17–21 m) wide but half as deep as conventional lots, allowing the developer to achieve densities upward of seven units per acre (17/ha). Wider lots add proportionately to street and utility costs but may yield greater curb appeal. Wide-shallow lots usually necessitate two-story houses. If the lots are less than 65 feet (20 m) deep, the back-to-back rear yards may be too small for privacy. Depths of at least 70 feet (21 m) are recommended.
Zipper lots are like wide-shallow lots except that space is borrowed from adjacent lots to avoid the problem of narrow, rectangular rear yards. Easements are used to make the rear yards of back-to-back houses abut on an angled, rather than parallel, property line. The main disadvantages of zipper lots are the complexity of the plot plan, loss of privacy from second-story windows that overlook the neighbor’s backyard, and possible resistance from buyers and government jurisdictions. Nevertheless, they offer a creative solution to high-density housing in selected markets.
With careful design, densities of seven to eight units per acre (17–20/ha) can be achieved in a single-family detached setting, and densities of 10 to 12 units per acre (25–30/ha) are possible for small senior housing units or projects without garages. Even higher densities have been achieved in traditional neighborhood developments.
Creative site planning and unit design make it possible to achieve greater densities without sacrificing privacy and livability. Increased densities are one tool to be used in solving the crisis of affordable housing in areas with high land costs. Community acceptance of higher densities is more likely if developers are careful to design attractive, livable communities that enhance their surroundings.
The major difference between the development of land and the development of income property is that land is usually subdivided and sold rapidly, whereas income property is usually held and operated over a period of years. The holding period is the key to deciding the appropriate type of financing. Land development is financed by a short-term development or construction loan, which is paid down as sales occur. Income property development is financed by both a construction loan and a permanent mortgage, the latter of which is known as a takeout loan. For income property development, the construction lender depends on the permanent lender to replace (take out) the construction loan with the permanent mortgage. For land development, the construction lender relies on the developer’s ability to sell the finished lots within the agreed-on time frame and at the projected price.
FIGURE 3-10 | Lot Yield Analysis for Different Zero-Lot-Line Configurations
Success in land development—and the developer’s ability to repay the development loan—thus depends on the successful marketing of the lots. Because no takeout exists for construction lenders, they must be satisfied that the developer will be able to sell enough lots fast enough to pay off the loan. Often, construction lenders require other collateral, such as letters of credit, in addition to a mortgage on the property. The amount of the loan is usually limited to 30 to 50 percent of the projected sale proceeds to provide a cushion in the event that sales occur more slowly than projected. Slower sales translate into greater interest costs because the balance of the development loan is reduced more slowly than the developer initially projected.
The most difficult task for beginning developers is obtaining financing. Most developers will need to convince lenders to provide them with financing. In most situations, developers must contribute equity and sign loans personally. A developer’s equity can be furnished in cash or in land. Suppose, for instance, that a developer purchased land for a project for $100,000 and the market value of that land after entitlement and planning rose to $400,000. If the total cost of the developer’s proposed project is $1 million ($600,000 for development costs plus the market value of the land), the developer could probably find lenders willing to lend 70 percent of that amount. In other words, the lenders require $300,000 equity. Because the market value of the land is $300,000 greater than the original land cost, the developer should be able to use the land equity to satisfy the lender’s requirement for $300,000. In fact, the loan would cover the developer’s original $100,000 land cost because the $700,000 commitment exceeds the development cost of $600,000 by $100,000.
PURCHASE MONEY NOTES. The terms of the purchase money note can play a vital role in financing the project. PMNs automatically have first lien position and must be paid off before the developer can get a development loan because the development lender must hold a first lien position on the land. If the developer can get the seller to subordinate the PMN to the development loan, however, it is possible to reduce or eliminate the need to raise outside equity—the hardest money for any beginning developer to obtain.
It is difficult, but not impossible, to find a seller who will subordinate the PMN. Beginning developers should look for sellers who do not need cash immediately and who are willing to accept the risk of subordination in return for more money. The developer should expect to pay a higher land price, higher interest rate on the PMN, or both in exchange for subordination. Because a subordinated PMN can be crucial for covering a beginning developer’s equity requirements, it may even be worth giving the seller a percentage of the profits as added incentive to subordinate. This arrangement merely recognizes what is already a reality: the seller is, by virtue of his loan, a secured partner in the deal.
Even with subordination, the developer will have to negotiate with the development lender to treat the subordinated PMN as equity. Subordinated or not, the PMN’s release provisions are among the most important business points for negotiation with the seller. The release provisions provide for removing designated subparcels of land as collateral from the PMN so the developer can give the development lender a first lien (where the PMN is unsubordinated) or a buyer can get construction financing to build a home.
The release provisions designate which subparcels of land are to be released from the first lien of the PMN. They have two main parts: (1) initial land release concurrent with the downpayment and (2) land released by future principal payments on the PMN. On larger tracts, the downpayment on the land provides for the release of the first subparcel the developer plans to develop. The land that is to be released first must be designated specifically in the purchase contract and the PMN mortgage to avoid any conflict or confusion. The unencumbered parcel provides the initial collateral for the development loan, although the developer may have to provide additional collateral, such as a personal guarantee, letter of credit, or other assets, including real estate. The development loan can be extended to cover other subparcels as they are released from the PMN, thereby providing construction money for development.
The land development contractor will be able to build improvements on only those parcels for which the development lender has a first lien. If the contractor begins work on any part of the land before the lender has perfected the lien (recorded it), the lender may halt construction until possible lien conflicts are cleared. Clearing lien conflicts can take several months because all suppliers who have delivered material to the property and all subcontractors who have worked on the property must sign lien waivers indicating that they have received full payment. If anyone is unhappy for any reason (a common occurrence in building), he may use the developer’s need for a signature on the lien waiver as leverage to get more money.
BUILDERS’ PRECOMMITMENTS. As part of the market feasibility stage, the developer obtains from area builders indications of interest in purchasing the lots. Next, the developer must secure commitment letters from builders, which are part of the documentation the developer will have to submit to the lender to obtain a loan commitment. The commitment letter specifies the number of lots each builder will buy in the project.
Ideally, the developer will have commitments for most of the lots on a site before approaching potential lenders. Although commitments help reduce the market risk, they do not guarantee that the lots will be sold unless they are backed by letters of credit (LCs). LCs provide guarantees to the developer that the builder’s unpaid balance on the lots will be paid off by the bank that issues the LC. If the developer intends to build on all the lots himself rather than selling to other builders, the financing may be more complicated. The lender would look at equity and financing needs for the entire project, including the buildings.
Builders, who are often underfinanced, are reluctant to guarantee that they will purchase the lots. The developer must convince his lender that builders’ commitments are solid or must provide proof with the LCs. The developer should know the type of documentation that lenders will require before talking to builders. If the lender requires firm commitments backed by LCs, then the developer must address that requirement as part of the deal with the builders.
BUILDERS’ PURCHASE TERMS. The purchase terms that builders require for lots vary according to local market conditions. Downpayments range from $100 earnest money to 10 percent—or even 20 percent—of the purchase price. Builders pay the earnest money when they reserve the lots. The balance is covered by a note that typically sets the interest rate beginning the day the developer delivers finished lots. The contract for purchasing lots usually defines lot delivery as the date on which the city accepts public street dedications or the engineer certifies that the project is substantially complete. The contract may actually stipulate a list of conditions that must be satisfied to convey the “finished” lot.
In slow markets and in workout situations (when the developer has defaulted on the loan), builders hold a stronger position than the developer. To generate interest from builders, developers sometimes subordinate to the construction lender some portion of the land note on builders’ model houses, allowing builders to reduce upfront costs, or they may provide seller financing to builders. Another approach that developers use to generate interest from builders in slow markets or workout situations is to discount the initial lots. For example, if the lots normally sell for $20,000, developers may sell the first two lots to builders for $10,000 and the next two for $15,000. Any of these concessions should be cleared well in advance with lenders and investors, and preferably presented as a marketing cost in the business plan. Unexpected sales concessions could cause the lender to review release provisions on the project, effectively revaluing the collateral value of the developed lots.
Developers of Ten Fifty B used public and private financing for an affordable high-rise community in downtown San Diego.
AFFIRMED HOUSING GROUP
TIPS FOR DEALING WITH LENDERS. Although each deal with a land development lender is unique, several guidelines usually apply:
• The developer should borrow enough money at the beginning of the project; the developer should not think that a loan can be renegotiated later or that lots can be sold faster.
• The developer should allow enough time on the loan to complete the project or to provide for automatic rollover provisions, even though the lender will charge for the rollover option.
• If working with a lender on multiple projects, the developer should consider that terms on one project may become open to renegotiation if progress on a second project is not to the plan.
• Typical points for the land development loan are two points up front and one point per year, starting in the third year. Points are calculated on the total loan request, not on the amount drawn to date. For example, two points on a $1.5 million loan request amount to $30,000.
• The loan can be structured as a two-year construction loan with three automatic renewals.
Development loans are a form of construction loan. The amounts by which the developer pays down the loan cannot be borrowed again later. If possible, developers should structure the development loan as a revolving line of credit that allows borrowing up to the maximum limit of the credit line, regardless of repayments already made. Doing so will likely require the provision of additional collateral as the lots are sold.
The development lender holds a first mortgage on the entire property and must release its lien on individual lots so that the purchaser (the builder or end user) can obtain construction financing. The release price is thus a major item for negotiation between the developer and the lender. The lender wants to ensure that the loan is paid off faster than the land is released from the mortgage, which protects his security in the event that the developer defaults on the loan. The developer, on the other hand, prefers that the release price simply be a prorated share of the development loan. For example, if the development loan is $1 million for 100 lots, the sale of one lot would retire the loan by $10,000 (1 ÷ 100 × $1 million). Most lenders set the release price at 1.2 to 1.5 times the prorated share (called the multiple). For a multiple of 1.2, the release price is 1.2 times $10,000, or $12,000 per lot. Thus, every time a lot is sold, the developer pays down the loan by $12,000. The lender often wants a high multiple, 1.3 or greater, for releasing lots. The developer wants a multiple as low as possible, 1.2 or lower, because he needs cash flow. In return for a low multiple, the lender may require some form of credit enhancement, such as an LC or second lien on other property. Particularly in developments with widely divergent lot prices, the lender may simply set release prices as a percentage of an agreed-on lot price list, but the same acceleration of loan repayment (a higher percentage) will be the lender’s goal.
In the cash flow analyses shown earlier in this chapter, the developer was assumed to own 100 percent of the deal, investing 100 percent of the equity and receiving 100 percent of the cash flow. The developer would also have 100 percent of the downside risk and liability. All or any part of a land development project, however, may be packaged as a variety of joint ventures.
The various legal forms of joint ventures are described in chapter 2. In this chapter, the business side of joint ventures is the focus. Most joint ventures involve three major points of negotiation for distributing cash flow from the venture:
1. preferred returns on equity;
2. priorities of payback of equity, fees to the developer, and cash flows from the venture; and
3. split of the profits.
In addition to dividing the spoils of the venture, the joint venture specifies how risk is shared between the parties—the timing and amount of equity contributions, fees to the developer and other parties, personal guarantees on notes, and management control of the development entity and other operating entities and associations (see chapter 6).
DEVELOPER AND LANDOWNER. One of the most common forms of joint ventures is that between a developer and a landowner. The land is put into the deal at a negotiated price; it is common that land value covers in full the equity that the developer may need to obtain development financing, although partners may demand some additional cash as “skin in the game.” The landowner may hold a purchase money mortgage subordinated to the development loan or a first priority for receipt of positive cash flow. The order in which cash flows are distributed (the order of cash distribution priorities) might be as follows if land value equals total equity:
• Priority 1—The landowner is returned the equity land value allowed by the lender.
• Priority 2—The landowner receives a preferred return (cumulative or noncumulative) on the equity (see chapter 4).
• Priority 3—The developer receives a development fee, some of which may be paid during the construction and leasing periods.
• Priority 4—The developer and the landowner split the remaining profits; priorities and fees are subject to negotiation.
When required equity is less than land value, the landowner gets some value out of the first loan draw. If equity is greater than land value, a two-tiered partnership provides for additional equity investment.
If the landowner has a subordinated PMN on the land, that loan agreement provides for releases similar to those in the development loan agreement. Both liens must be released before homebuilders or other buyers of the lots can obtain free and clear title, which they need to obtain construction financing. For example, suppose a subdivision has both bank financing and a subordinated PMN from the seller. Suppose also that the PMN calls for repayment of $10,000 to release a lot from the note and that the development loan calls for $20,000 repayment. If the developer sells ten lots that net $35,000 each, the cash flow would be
Most joint venture agreements provide for the venture to retain cash available for distribution as working capital until the development loan is retired. The cash provides a safety net to cover future equity needs in the event that sales slow or costs increase. Alternatively, such cash could be given to the landowner until the land equity has been fully recovered, or it could be considered profit and divided among the joint venture parties. The landowner would prefer, of course, to receive first priority on all cash flows until recovering the value of the land equity.
Sometimes, the revenue from land sales does not cover the required loan release payments for a given parcel or series of lots. In that case, the joint venture partners would be required by the partnership’s operating agreement to invest new equity to cover the deficit. The development loan agreement may require the lender’s approval for sales below a certain price, although the developer would prefer to have full control over pricing decisions. Such pricing approval, while common, can be a recipe for disaster if the lender withholds approval of lower prices to match current market conditions. A common middle ground is for the developer and lenders to agree on a base price, and an allowable maximum discount, which are preapproved and can be executed quickly by the sales team.
One benefit for landowners of putting their land into a joint venture is to save on taxes, especially when they have owned the land for a long time and their basis is well below the current market value. If they sell it outright, they must pay taxes immediately on the full capital gain. If they put it into a joint venture, they can defer paying taxes until the property is sold by the joint venture and capital is returned to them. A tax accountant should be brought into the negotiations early with the landowner to understand IRS requirements for “installment sales.” Taxes on the gain are paid as principal payments on the PMN are made. In a joint venture with a subordinated PMN, the principal payments are usually timed to occur when lots are sold to homebuilders or according to a prenegotiated schedule (typically three to ten years), whichever comes first. For example, suppose land originally purchased for $100,000 is put into a joint venture at the current market value of $1 million, with a PMN for $750,000. One-quarter of the $900,000 gain is taxed initially because the downpayment is one-quarter of the sale price—$250,000 of $1 million. The rest of the gain is paid as the PMN is retired. Note that this structure works with any PMN, even if no joint venture is created with the land seller. Taxes are deferred longer, however, if the PMN is subordinated. If it is unsubordinated, it must be paid off as soon as the developer obtains a development loan.
DEVELOPER AND INVESTOR. Joint ventures between the developer and third-party investors are far more common than joint ventures with the landowner. The third-party investors (third party because they are not involved in the original transaction) furnish the cash equity needed to complete the deal. For example, in the deal shown above between developer and landowner, the developer purchases the land outright from the land seller. The investors put up the cash needed to purchase the land, which was the landowner’s equity in the first deal. The developer’s arrangement with the investors might closely resemble the deal with the landowner with respect to priorities for cash distribution:
• Priority 1—All cash available goes to investors until they have received their total cash investment (return of equity).
• Priority 2—The next cash available also goes to the investors until they have received, say, an 8 percent cumulative (or noncumulative) return on their investment (return on equity).
• Priority 3—The next cash available goes to the developer until the agreed fee is reached.
• Priority 4—All remaining cash available is divided between the developer and the investors based on the agreed-on terms and conditions. (With institutional investors, multitiered “waterfall” provisions are more common.)
Every term of the deal is negotiable, including the order of priorities and the amount of personal liability on the development loan. A straightforward 50/50 split between the developer and the investors, without any priorities, used to be typical and some large developers still use this format, but beginners typically must give a larger share to investors to attract their interest. In the case of a 50/50 split with no priorities, developers are able to take out profit as each acre is sold. The risk to investors is that developers may sell off the prime tracts, take the profit, and then fail to sell off the balance of the project, leaving the investors with a loss. Most investors, therefore, insist on receiving all their equity before developers participate in any profit. Until this milestone is achieved, compensation for developers may be structured as a percentage of net proceeds, and reimbursement of professional fees for work performed on the project.
DEVELOPER AND LENDER. Some lenders provide more favorable debt financing for a deal—a higher loan-to-value ratio, for example, or lower initial interest rate—in exchange for some percentage of the profits in the form of a participating loan. In this structure, all the deal financing might be structured as debt, but the loan is convertible at various points to a predetermined amount of equity: the “equity kicker.” For the developer, this arrangement is the easiest form of joint venture because it involves only one other party. The lender can structure involvement in a variety of ways. The financing can be considered a 100 percent loan, or some portion can be considered equity. The difference between a 100 percent loan and, say, an 80 percent loan with 20 percent equity is that the equity portion usually receives a “preferred return” rather than “interest.” The preferred return is paid when cash is available, whereas interest must be paid immediately. Some development loans have accrual provisions that allow interest to be accrued in a fashion similar to that for preferred returns. They allow the project to accrue unpaid interest into future periods until cash is available to pay it. The split with inexperienced developers could be 65/35 or 75/25, with the lender receiving the larger share. Joint ventures with lenders usually allow developers to receive a fee for administrative expenses. Developers may request fees of 5 to 10 percent of construction costs, but 3 to 5 percent is more common.
The construction phase of land development consists primarily of grading the land and installing drainage systems, streets, and utilities. Land development involves fewer subcontractors than building construction, but the process can be just as complicated, not least because of the role played by the public sector. The facilities built by land developers are usually dedicated to the locality to become part of its urban infrastructure. The locality maintains the streets, and the utility company, which may also be a city agency, maintains water and sewer lines. Consequently, all facilities must be built in strict accordance with utility company standards; city, state, and federal codes; and management practices.
If possible, the contractor should be part of the development team from the beginning. Even if developers select a contractor after plans and specifications are completed, they should go over preliminary plans with a construction manager who can offer money-saving advice for various aspects of the design layout. The following tips are useful in dealing with general contractors:
• Negotiated-price contracts are usually better than competitively bid contracts. On smaller jobs, developers should negotiate with two or three qualified contractors simultaneously and take the best deal.
• A fixed fee for the contractor of, say, $5,000 to $10,000 for a $100,000 to $200,000 job (costs based on actual dollars spent, verifiable by audit) is recommended. For change orders, developers should pay the contractor the additional cost but no additional fee or markup. Equipment should be charged based on direct time in operation.
• Developers should hire a member of an engineering company for which business currently is slow to be on site to check that everything is installed properly. Developers should not rely solely on the engineer’s certification and should ensure that the engineer will spend enough time on site. The engineer of record (responsible for the original drawings) should certify the work (check progress at least twice per week), but the on-site engineer should check that everything is installed properly and should be present for deliveries and for any event that requires quantity surveying to price, such as remedial fill for inadequate subgrade. An engineer should also be present for any visits by inspectors, who should arrange their visits with the engineer.
• The standard 10 percent retention of payment for subcontractors is recommended. Subcontractors should sign lien releases and bills-paid affidavits with every request for a draw. The general contractor must obtain these affidavits and releases from the subcontractors and suppliers before paying them.
• If the contractor is not performing satisfactorily, developers should notify the contractor in writing (by registered mail), citing the specific paragraphs of the contract that are being violated and stating the possible consequences if performance does not improve by a certain date.
• When hiring a general contractor to construct forsale housing, developers should include a clause stating that any deceptive trade practice suits that are not warranty items belong to the general contractor, not the developer.
Key Points on Contracting
Contracts are necessary for controlling costs, scheduling, and performance of those involved in a project. It is important to get everything in writing. Contracts are a commitment. Once signed, it is difficult to backtrack.
THE CONTRACTING PROCESS
• Bidding
• Assembly of bid package contents
• Prebid meetings
• Bid review and award
• Review of bidding issues and ethics
• Review of other issues
CONTRACT CONTENTS
• Details of commitments
• Behaviors agreed to that benefit and bind future managers
• Firm commitments versus general understandings (represents a meeting of the minds; words on paper must reflect intention of parties and needs involvement of principals)
• Fee structure: fixed fee, GMAX (guaranteed maximum price, with contractor sharing any savings), time and materials, or hybrid
BID PACKAGE CONTENTS
• Complete drawings
• Bid submission package terms with instructions
• Payment conditions and terms
• Schedule commitments
• Inspection and progress payments
• Incentives
• Change order provisions
• Retention provisions
• Dispute resolution language
• Basic contract terms
• Right not to award
• Right not to select low bidder
PREBID MEETINGS
• Meeting on site
• Including all personnel who will be involved (owner’s rep, contractor’s rep, engineers, architects)
• Achieving a meeting of the minds: all know expectations, where to get answers
• Defining who can make decisions for each party
• Conveying full understanding of site conditions
• Getting a sense of who everyone is and how they will work together
Source: H. Pike Oliver, Cornell University, Ithaca, New York.
A developer may choose to be its own general contractor, hiring various subcontractors to do the work—for example, an excavation subcontractor to move dirt, a utility subcontractor to install water, storm, and sanitary sewer drains, and so on. One deterrent to subcontracting in this manner is the difficulty in coordinating the work of the separate subcontractors and controlling the condition of the site during the transition from one subcontractor to the next. For example, the paving contractor may complain that the utility contractor left the manholes too high or that more dirt is needed. The developer/general contractor must then choose between paying a late charge to the paving contractor, who must wait until the utility contractor comes back to correct the problem, or paying the paving contractor exorbitant change fees to fix it. If the project is coordinated correctly, the utility contractor is still on site when the paving contractor arrives, allowing any apparent problems to be solved immediately. The general contractor is encouraged to withhold 10 percent of the contract price until the city accepts the utilities, or at least until the reviewing engineer has issued final approval of the installation.
A problem that developers encounter is deliberate bidding mistakes. Most contracts are bid on price per unit (not as a fixed price) calculated from the engineer’s estimate of quantities. If subcontractors see an area in which the quantity of an item was underestimated, they may bid lower on other items so that they get the job. They deliberately bid high on the item for which the quantity was underestimated so that the developer ends up paying more on the total contract after the correct quantity has been determined. Engineers should not be allowed to bid and to supervise the site; otherwise, developers will never know whether money was lost. It is better to negotiate a price-per-unit contract and then convert the bid to a fixed-price contract as soon as quantities can be better determined, perhaps after vegetation and topsoil are cleared, making subgrade visible. The developer may pay a little more to allow for a margin of error in the quantity takeoff, but major overcharges are less likely.
During construction, it is important to remember to do the following:
• Supervise subcontractors closely. A subcontractor who needs a piece of equipment for another job is likely to remove it unless the developer is watching closely.
• Plan drainage correctly for each lot. The usual five to ten feet (1.5–3 m) of fall from one side of the property to the other is a sufficient slope. Storm sewers are normally located in the streets, so lots should slope toward the street where possible. As many lots as possible should be higher than curb height. Excavating shallow streets may save money at the front end but may cost money in the long run.
• Work closely with the electric utility contractor to determine the location and price of transformers and other required gear. Carefully review designs to know what existing conditions the design requires: common omissions are a concrete pad or a level-graded gravel base. These conditions should be noted “NIC” or “not in contract,” and the manager should know who is providing them, at what cost.
• Design and execute grading carefully. Grading is cheaper than constructing retaining walls, but a poorly executed grading job can lead to costly repairs, maintenance headaches, back-charges by builders, and even lawsuits from homeowners. Developers should employ an engineer familiar with the rapidly evolving technologies of slope retention. Compost, engineered fabrics, and various techniques may eliminate the need for retaining walls under some conditions.
If FHA financing is planned for homes in the subdivision, the developer should pay especially close attention to grading to ensure that it meets FHA’s strict requirements. Although FHA and Department of Veterans Affairs (VA) financing for homebuyers can greatly aid the sales pace of a subdivision, especially for lower-priced homes, developers must understand not only standards but also the institutional process of inspection and approval.
If possible, all rights for off-site road, drainage, utility, and other easements should be obtained before buying the property. The seller should assist the developer in this effort, according to specific terms that should be negotiated in the earnest money contract. The price for obtaining off-site easements can increase dramatically after closing if the neighboring landowner knows that the easement is required for development.
Generally, developers are not directly involved in retail sales to the general public, unless they also build homes or are engaged in condominium or recreational developments. Subdivision marketing begins before the developer closes on the land and continues until the last lot is sold. Various aspects of marketing, including public relations, advertising, staffing, and merchandising, are described in detail in chapter 4. Certain items, however, are unique to land development.
For the land developer, the primary marketing objective is selling lots to builders, but the sale of houses to consumers drives lot sales. Except for large-volume builders, who purchase large blocks of lots, most builders take down a few lots at a time. In most subdivisions, builders handle the sale of their houses themselves or use outside brokers. The developer is not involved directly with house sales but may undertake advertising and public relations for the subdivision as a whole, and it is increasingly common for the developer to market affiliated builders as an extension of the development team.
Virtually the entire development process can be viewed as a marketing exercise. Even before selecting a site, the developer should have identified the target market, and every step of the process, from lot design to selection of builders, should be consistent with the demands of that market.
The market determines
• price range for the houses;
• product type or mix of product types;
• appropriate builders for a subdivision;
• design of the lots;
• types of permanent financing for builders;
• variety and quality of amenities;
• type of public relations and advertising campaign to be conducted; and
• means by which homebuilders will market their houses to buyers.
Focus groups can provide useful feedback for understanding the preferences of prospective buyers. Larger homebuilders use them extensively to inform decisions on floor plans, styling, features, and amenities. Focus groups are also useful to land developers at the beginning of a project, providing important input on lot size, siting, pricing, amenities, and other critical market information for serving a particular clientele. A consultant with experienced focus group leaders on staff is usually assigned the task of assembling, leading, and reporting the results of focus groups.
Marketing budgets are based on the estimated cost of marketing, promotions, and sales strategies. A typical marketing budget is 5 to 7 percent of gross sales for nonrecreational projects and 10 to 12 percent for recreational projects. The budget includes 1 to 2 percent for advertising and the balance for commissions for the sales staff and cooperating brokers.
Large developers generally use their own in-house sales staff to handle direct marketing. Even if they use an outside brokerage firm, however, developers need an in-house marketing director and sufficient staff to represent their interests in day-to-day negotiations. Fee and listing negotiations with outside brokers should specify in detail exactly which responsibilities will fall to the developer and should define any deliverables by the agent. These agreements commonly specify size, frequency, and publication of choice for advertisements; they may even specify a particular agent, and his or her hours on site. Small development firms should consider using one or more local brokerage firms as sales staff or as a source of sales referrals. In larger markets, some brokerage firms specialize in new homes and have established marketing programs for builders and developers. The great majority of real estate agents have never sold a new home and are not experienced in community marketing. Experience in staffing a development sales center, touring, merchandising, and design guidance should not be assumed of even very successful local agents.
The sooner a marketing director is hired, the better. Before construction begins, the marketing director can help by getting to know the market area. The marketing director should be skilled at sales techniques and at motivating sales personnel and should have firsthand experience with the types of products being sold. If sales are handled in house, a minimum of two salespeople should be hired, with one or two more available to help during peak periods.
Some developers argue that salespeople should be paid on commission; others advocate a combination of salary and commission. A few rely on straight-salaried staff, although salaries may need to be quite high to attract top-notch brokers. Prizes, bonuses, and competitions are proven good practices. Higher commission rates may be paid for selling certain “problem” lots or homes, and bonuses should be awarded if sales personnel exceed monthly or yearly quotas.
Marketing low-priced production homes requires a different approach from that for high-priced custom houses. If sales are routine, the best method of compensation may be salary. For higher-priced housing, however, sales are seldom routine; the agent may need to deal with special financing and a wide variety of home customizations. Further, because a buyer with a substantial amount of money usually has a greater selection of houses from which to choose, salesmanship is at a premium. A cooperative broker arrangement also is more important for higher-priced houses. An effective sales program requires thorough training and constant motivation, investment in online communications and contact management, and process tracking. Salespeople need productivity support as well as incentives. Good sales programs usually include
• well-paid, well-trained, and motivated sales staff;
• a public relations strategy tuned to sales needs;
• regular sales meetings to discuss prospects and policies;
• a system for communicating with, and following up on, prospective buyers;
• a system for obtaining and apportioning leads and referrals;
• a structure for fairly and transparently splitting commissions and bonuses among responsible agents;
• a reporting system to inform management of buyers’ objections, preferences, and attitudes;
• a design guidance system for handling the selection of options and upgrades; and
• a customer support protocol for closing details, move-in procedures, and postsales warranty and service issues.
Many different methods can be used to market a subdivision. Apartment, retail, or office sites are marketed directly to building developers. Lots in custom home subdivisions may be sold directly to homebuyers, who then hire their own custom builder or select from a list of builders approved by the developer. In some cases, a custom builder is also the developer. In most cases, however, the developer sells lots to builders who, in turn, sell to homebuyers. Developers usually operate at a distance from the customers who drive demand for their product. A close, supportive marketing relationship with builders is therefore essential.
Builders typically market their product in one of three ways:
1. Builders may offer a range of basic plans with varying degrees of options in facades, interior finishes, and lot location and type. They may build model homes from which homebuyers select their preferences or establish a design center to facilitate this process. The model home approach is used primarily by production builders for whom economies of scale can be realized by standardizing the basic units. Moreover, the costs of model homes can be amortized over a large number of lots. Depending on the market, production homebuilders typically build 25 to 100 or more houses per year in a given subdivision. Production builders may be active in many subdivisions in a region, or regions, or even nationwide. This method of building and marketing new homes is the most common and includes homes in all price ranges. It is not always essential for all these functions to occur at the development site. Particularly in the case of resorts or projects targeting a relocation market, some sales functions may be located close to buyers.
2. Builders may build houses on spec (speculation) to be sold during or after construction. The buyer contracts for the house during construction, or, in a slow market, the house may be completed before a buyer is found. Both large and small builders, in all price ranges, use this approach. The builder selects the design, which may be customized to varying degrees for the buyer, who selects interior finishes, appliances, cabinetry, and so on. Spec building is most common in strong housing markets because builders cannot afford the risk of a long sale period.
3. A custom builder may purchase lots from the developer, then sell a house to the buyer. The builder may sell a completed house or a partially completed house, giving the buyer the chance to customize it, or may contract with a buyer to build a custom home on a particular lot. Custom homebuilders typically build one to ten houses per year in a given subdivision. Most—but not all—custom builders tend to market higher-end products.
Cascade Village, a 242-unit mixed-income rental community in Akron, Ohio, offers a variety of recreational amenities and on-site resident services. It is close to public transit and employment centers.
TYSON WIRTZFELD
Market studies should indicate the types of builders for developers to target in marketing the development. Builders with a strong reputation in the market will have an edge in attracting homebuyers. Interviewed for the first edition of this book, Don Mackie of Texas-based Mill Creek Properties gave advice still useful today. Developers should not let first-tier builders control their subdivisions. “They will want ten to 15 lots at the beginning and a rolling option on the rest. They will build four models and construct six to ten specs at a time. You need to give them enough lots for models and specs, with a rolling option as they sell the specs.
“In pioneering areas, you convince builders by telling them how much you will spend on promotion: ‘Here’s what we will spend. If we don’t do what we promise, we will take the lots back.’ You get better absorption if you can keep traffic moving around in the subdivision. On small, 200-lot subdivisions, you must choose between selling all the lots to one major builder or working with small builders who take one or two lots each. Developers need 300 to 500 lots to run a cost-effective on-site marketing program. In a 300-lot subdivision, they would sell half the lots to the ‘market maker’ and the rest to three other builders. The market maker will attract many potential buyers. Smaller builders will use one of their spec houses as a model and an office.”43
To obtain commitments from builders, developers should begin contacting potential builders as soon as the land is tied up. Savvy local builders are often experts on the area, and developers should solicit their advice on the target market and its preferred products.
To broaden their markets, larger subdivisions (200 houses or more) may include two to ten homebuilders that build two or three different product types in different price ranges. A 300-house subdivision may, for example, be divided into two sections, with one production builder taking down 200 lots and two or three custom builders taking down the other 100, with the mix depending on the market. The developer should retain some flexibility for allocating more lots to one builder or another as sales progress. A rolling option that allows builders to take down blocks of five, ten, or 20 lots at a time helps the developer avoid the problem of losing lot sales if one product type is not moving as quickly as another.
Developers should meet with and examine the completed projects of homebuilders who build the type and price of product market studies recommend. Beginning developers should be able to compete effectively against well-established developers by offering builders a continuing lot inventory, minimum cash up front, and seller financing. Ideally, builders should be required to put up a 10 percent downpayment, but beginning developers may have to settle for any amount that is sufficient to hold builders’ interest.
After preliminary contact with prospective builders and as soon as a preliminary plat is available, the developer should prepare a marketing package. This package should include information about the site and the neighborhood (shopping, schools, daycare facilities, churches, and recreation), and data about the site, including the subdivision plan, restrictive covenants, amenities, and the marketing program.
Terms for buying lots vary depending on the market. In softer markets, builders may put down a token amount of, say, $1,000 cash per lot. When the commitments are made before site development, builders are not obligated to take down or close on the stipulated number of lots until the engineer has certified that the lots are ready for building. Before then, builders have the option only to buy the lots at the specified price. The option (or purchase contract) is not a specific performance contract. In other words, if builders fail to close, they lose only their earnest money.
Once the lots are ready for building, builders are usually liable for interest on the lots that are committed but not yet closed. If a rolling option exists, builders are committed to taking down a certain number of lots at a time. Builders may pay cash for the lots, with funds provided by the builder’s construction lender, or the developer may finance the lots for builders during the period between closing and start of construction. For example, builders may commit to take down two lots immediately for model houses and have an option to purchase 30 lots every six months, beginning, say, January 1. If the builders exercise the option, the interest meter starts running on January 1 for the portion of the 30 lots not closed on that date. Six months later, if the builder does not exercise the option on the next 30 lots, they are released for sale to other builders.
If the developer wants to use the builder’s credit to help secure the development loan, rolling options on lots are not sufficient. If possible, beginning developers should have a firm contract of sale for the lots covered by the development loan, either to a creditworthy builder or to a smaller builder with a letter of credit for the unpaid balance of the sale price.
In addition to single-family or townhouse lots, a larger parcel may also include nonresidential sites for commercial, apartment, office, or other use. Reaching potential buyers for these sites requires an approach similar to that for marketing office park and business park sites (see chapters 5 and 6).
Two main sources of business are outside brokers and drive-by traffic. Experienced outside brokers require the payment of a generous commission, but many developers believe they are well worth the investment. Although advertising is not an especially effective technique, newsletters and broker parties do help generate and maintain brokers’ interest. On-site representation—at least a place provided for brokers to come in and talk to prospects—is desirable.
Typically, the buyer of a $1 million site puts up $25,000 to $50,000 of earnest money, in cash or by way of a letter of credit. Standard closing times range from 60 to 120 days, depending on the market. Buyers almost always want the option to buy or the right of first refusal on adjoining sites. Developers should try to avoid giving these options, which can complicate a future sale, but they may be granted as part of a larger deal. Declining to give options is especially important during the initial project stages when the developer is trying to encourage absorption.
Whereas advertising is intended to reach a wide audience and to persuade people to visit a development, merchandising is designed to stimulate the desire of potential buyers once they come to the site. Developments of 500 houses or more can support a visitor center in which all builders in the subdivision can merchandise their homes. Given the reach of Internet communications, it is increasingly common for developers to market the builders in their community, often funded by a builder marketing fee or flat membership dues in the builders’ guild or association. A visitor center should be equipped so that prospective purchasers can get an initial impression of all products available in the subdivision and should offer meeting spaces to allow semiprivate interviews and coordination meetings. Smaller subdivisions can generally support only a very modest visitor center, such as a trailer furnished as a sales center or an existing home furnished for temporary use.
The developer should encourage all the builders to place their models in the same area. In this way, the builders benefit from the traffic generated. Each builder builds two to four models in separate but interconnected areas. The model home “park” should be large enough to illustrate the effect of the land plan, including common spaces, street furniture, landscape standards, and pedestrian paths. The developer is responsible for the landscaping and common area maintenance of these facilities. Dirty streets and unkempt construction areas deter potential buyers. It is also important to consider how the model home area will work as a neighborhood, since the houses will ultimately need to be sold.
The design of the sales office and arrangement of model units are central to the merchandising plan. Signage that is coordinated with other marketing materials should lead visitors directly to the sales office, the model houses, and the major amenities.
In recreational and larger land development properties, the developer may want to market to out-of-state residents. Jo Anne Stubblefield cautions that interstate marketing of land is a legal minefield, and that even the establishment of a promotional webpage can trigger (sometimes costly) legal responsibilities for developers. “By and large, we’ve found that marketing consultants are clueless regarding the legal issues that surround the marketing of land. Tending toward zealous promotion, they are in a hurry to get to the grand opening and push the process of establishing a website, mailings, and other promotions.” Establishing a website to market land is considered the legal equivalent of advertising in a publication with national subscribers. Like a mass mailing, it is interstate marketing. Stubblefield adds that about half the states require registration of a sale, full disclosure, or both. “Many states claim to have ‘uniform acts’ that are interchangeable with other states’ regulations. They are almost never uniform. Each state has its own requirements for the documents to be submitted and a different schedule of fees, ranging from $250 to $500 to New York’s requirement, which is calculated as a percentage of the total value of common areas of the development. To market the project in multiple states, developers should not rely on marketing consultants to negotiate this terrain, but should consult a lawyer with a national practice before even starting the marketing of the project.”44 These laws are poorly understood by most developers, but compliant practices are actually well defined for most states, if the sales and management teams are educated on the requirements.
Among the developer’s most important tasks is the creation of a proper set of mechanisms to handle long-term maintenance after the project is complete. Such mechanisms protect not only the developer’s investment but also the investment and living environment of the future residents of the subdivision.
A developer’s stewardship of the land may take many forms. First, a developer may make express guarantees or warranties concerning the care of streets, landscaping, and amenities when selling lots to builders. Second, a developer normally creates and records a set of deed restrictions and protective covenants. The covenants enable residents to enforce maintenance and building standards when other residents violate the restrictions. Third, a developer normally creates a homeowners association that sets and modifies rules of community governance, bears the financial and management responsibility for long-term maintenance, has the power to collect and spend money on common areas, and helps to build a sense of community. Fourth, unless streets are to be made private, a developer dedicates streets, and sometimes amenities, to the city or county. The city or county then takes responsibility for various public services, such as street cleaning and repair, parkway mowing, and trash removal. Because the types of public services available differ from city to city, a developer must make sure that all public services are provided. Trash and recycling collection, for example, is a municipal service in some jurisdictions but is handled by private contractors in others.
Protective covenants, which embody the agreements between the seller and purchaser covering the use of land, are private party contracts between the land subdivider and the lot or unit purchasers. Covenants are intended to create and ensure a specific living environment in the subdivision. Purchasers of lots and houses in the subdivision should perceive the covenants as assurance that the developer will proceed to develop the property as planned and that other purchasers will maintain the property as planned. Strict enforcement of suitable covenants gives each lot owner the assurance that no other lot owners can use their property in a way that will alter the character of the neighborhood or create a nuisance. Lenders and government agencies, such as the FHA and VA, often require covenants as a means of protecting the quality of the neighborhood and the condition of the houses.
Deed restrictions and covenants can augment zoning and other public land use controls by applying additional restrictions to size of lots, building massing, location of structures, setbacks, yard requirements, architectural design, and permitted uses. Affirmative covenants can be used to ensure that certain land remains as open space and that the developer will preserve certain natural features in that space. They may also create a mechanism for assessing homeowners on the maintenance of common facilities, ranging from roads to fiber-optic networks.
If both public and private restrictions apply, the more restrictive condition is operative. Covenants should take the form of blanket provisions that apply to the whole subdivision, and they should be specifically referenced in each deed. These covenants, together with the recorded plat, legally establish a general scheme for the development. They should be made superior to any mortgage liens that may be on record before recording the covenant to ensure that everyone is bound by the restrictions, even someone buying a house through foreclosure.
Although covenants are automatically superior to any future lien, many covenants and restrictions also provide for an automatic lien for payment of homeowners association fees and assessments. The documents must provide that the lien for assessments be automatically subordinated to purchase money liens. Not all covenants are legally enforceable, however. Covenants that seek to exclude any buyer on the basis of race, religion, or ethnic background are both unconstitutional and unenforceable.
Usually, developers do not want to be the enforcers of covenants in established neighborhoods, unless a long-term building project requires them to keep control over an area. Subdividers may retain control over enforcement as long as they are active in the subdivision. Thereafter, however, the covenants should grant enforcement powers to the homeowners association and to individual owners. Some cities also require a provision that lets the city take over enforcement under certain circumstances.
The covenants should not be recorded until developers have received preliminary subdivision approvals. Covenants frequently do not have to be recorded until issuance of the first deed. Stubblefield advises, “Don’t write yourself into any covenants until you have to.”
Further, if developers intend to use FHA, VA, or other sources of federal financing (such as the Government National Mortgage Association [Ginnie Mae] or the Federal National Mortgage Association [Fannie Mae]), they should ensure that the proposed covenants meet with the approval of those agencies. The FHA and VA have jointly developed acceptable model legal documents.
Rock Row, Los Angeles: Compact Sustainable Living on an Infill Site
Rock Row is a successful small subdivision in the Eagle Rock neighborhood of Los Angeles. Conceived and developed by a two-person firm, with only a few small projects under its belt, this project illustrates the kind of innovative and sustainable land development that can be done by small but ambitious developers. The concept’s positive reception and rapid sellout in the face of adverse market conditions and substantial regulatory delays offer several lessons to the beginning developer.
THE DEVELOPER
The Heyday partnership was founded in 2002 by the Wronske brothers: Hardy, an engineer and construction manager, and Kevin, an architect. Beginning with a four-unit apartment building, they have built an integrated design-develop-build business model to address infill opportunities in transitional neighborhoods in Los Angeles. The two principals are now supplemented by an administrative staff of two and three construction employees in the field. Like most small development firms, Heyday keeps overhead low, but even with a lean headcount, it serves as its own general contractor and designer.
THE OPPORTUNITY
The Rock Row project is a response to several simultaneous opportunities the firm identified and acted quickly to pursue. With the passage of a Small Lot Ordinance in 2006, the city of Los Angeles essentially legalized the townhome dwelling type within large sections of a market that was, and remains, dominated by single-family detached homes on conventional urban lots, and by low- and mid-rise condominium and apartment structures. A nimble developer could quickly deploy a concept that would be largely unique in the marketplace. The proposed development could offer price advantages of multifamily housing, without the legal liability and operational concerns of the condominium structure. Meanwhile, Eagle Rock, the partnership’s home and target neighborhood, was rapidly gentrifying, with a relatively old stock of single-family homes rapidly appreciating in price. Located between Pasadena and Glendale, with an easy commute to downtown Los Angeles, this neighborhood of 36,000 had benefited from a recent influx of young creative professionals who, the partners reasoned, would be open to a more contemporary and sustainable lifestyle, if such an alternative were available. Preliminary analysis showed that, with the right land price, the firm could offer a single-family product at prices roughly competitive with existing inventory, but with new construction, higher-quality finishes, and more contemporary and functional plans.
REGINA O’BRIEN
THE CONCEPT AND THE SITE
The regulatory and market opportunities came together on Yosemite Drive in Eagle Rock. The 24,700-square-foot (2,300 m2) site was surrounded by city-owned senior housing and at the time included a single-family home, five apartments, and an incidental commercial use. Most important, the property lay within a small strip of land zoned “RD1.5” within a context of almost uniform single-family homes, some with accessory apartments. The zoning’s maximum density of one dwelling unit per 1,500 square feet (139 m2) of land implied 16 potential units, although preliminary study of vehicular, service, and emergency access requirements indicated that 15 might be more realistic.
Tying up the parcel, Heyday quickly defined a concept that would split the site into two distinct phases (eight and seven units) along a double-loaded two-way access drive. Competing on price was necessary, but not sufficient, and the firm began to explore ways to differentiate its concept from available inventory. Simply by virtue of its compact site plan and location, the development would meet basic definitions of smart growth, and the partners had long been seriously interested in sustainable construction. The partners decided to take the sustainability of the project to the maximum, within the constraints of their projected pricing. They pursued certification under the relatively new criteria of Leadership in Energy and Environmental Design (LEED) for residential development, and made a modern, sustainable urban lifestyle the overarching concept that would inform all aspects of the design and construction. Their one-line description of the project became the “Lean Green Living Machine.”
ACQUISITION AND SITE PREPARATION
Amid a still-frothy real estate market, the land seller had little incentive to allow an extended free-look period. The land was purchased in early 2007 for $1.2 million. Following a $100,000 downpayment, an additional $10,000 per month was applied to the purchase price during the extended due diligence period, with another $10,000 per month to replace the seller’s lease income. Tenant evictions were required, and cost about $70,000. During the 18-month period before recording of the tract map, entitlements were processed, the design was completed, and construction lending was finalized. Including miscellaneous fees, the land cost at closing was just under $1.4 million ($57 per square foot [$614/m2] of land), or approximately $94,000 per unit. Considering a potential average unit price of approximately $500,000, the outlay seemed cheap as a portion—under 20 percent—of finished lot–home package cost, but with structures on the site, and utilities to pull, expenditures toward finished lots were far from over.
The entitlement process was, as expected, a bumpy ride. Rock Row was among the first development projects to proceed under the new ordinance, and both staff and applicant were at various points uncertain of the next step in the process. Heyday’s small size allowed the principals total focus on dialogue with city reviewers, and ultimately the application was approved without losing additional units, or incurring uneconomical fees or off-site requirements. Since the ordinance has come into effect, Rock Row and other pioneering projects have sparked interest in this type of development; as of this writing, over 150 small subdivision applications have been made.
Immediately upon entitlement, Heyday was prepared to proceed with structure demolition and other site preparation, including rough grading, soil compaction, walls, and other improvements to the edge of the site. Including engineering, survey, and off-site work, the project’s total to move from acquisition to finished site was approximately $450,000, or $30,000 per proposed unit.
DESIGN
The project includes 15 urban-style, two- and three-story houses with two-car garages. The image of the project is thoroughly distinct from surrounding and competitive buildings: a kind of warm palette modern minimalism, with extensive use of daylighting and unusual access to outdoor spaces. Five floor plans range from 1,310 to 1,605 square feet (121–149 m2); all have two or three bedrooms with two or three baths. The plans are open and feature ten-foot-high (3 m) ceilings, virtually unknown in comparably priced condominium projects.
Comparable condominium units in neighboring communities varied widely, but $350–$450 per square foot ($3,800–4,800/m2) seemed a common range, which would imply a $525,000–$675,000 price range on average 1,500-square-foot (140 m2) units. Other details not often found at this price point include high-quality contemporary finishes and materials, custom millwork, solid-core doors and superior hardware, and numerous low-maintenance composite roof decks, balconies, and patios, as well as the project-wide emphasis on energy efficiency and indoor air quality of the finished construction.
Most significant, perhaps, is the fundamental characteristic of the new type: each home is structurally independent, separated by five inches (13 cm) of airspace, and sits on its own property, offering occupants the acoustic privacy and other benefits of single-family living at the condominium price point.
SUSTAINABILITY AND COMMUNITY OPERATION
The project is the largest LEED-rated subdivision in Los Angeles to date and the least expensive LEED-rated homes in Los Angeles. Eleven of the 15 homes are LEED Platinum and the other four are LEED Gold. Surprisingly, virtually all the “green” features of the construction were offered with the base package, rather than as options. Although including those features was necessary to achieve LEED rating, the developers also felt that sustainability would be the most important differentiator of this project, and to leave these decisions to a semicustom buildout would undermine the story of the project.
Standard elements of the construction included recycled content or renewable materials in flooring, countertops, decking, and even engineered framing materials. Operational efficiency was achieved with tankless water heaters, dual-flush toilets, and a highly efficient envelope, including a “cool roof” radiant barrier, low-E argon-filled windows, green roofs on some units, and optional solar photovoltaic (PV) installations. To maintain indoor air quality, special attention was paid to passive cooling, and mechanical heating, ventilating, and air-conditioning systems, laid out efficiently and run by SEER 14–rated air handlers, were supplemented by a whole-house fan approach and separately ventilated, sealed garages.
Because the Rock Row development was conceived as a single-family alternative to the many potential pitfalls of condominium structures, the developers were cautious about burdening their buyers with legal entanglements. The developers did not charter an actual homeowners association, but instead created a deed obligation to fund third-party common area maintenance, trash removal, and other common costs. The service package was priced at sale at around $40 per month, comparing favorably with condo fees. The properties are subject to minimal covenants and restrictions, intended to preserve the design integrity of the houses, which appear to a casual passerby to be one building.
FINANCING AND DEVELOPMENT
Just as the market was beginning to turn, Heyday obtained a construction loan commitment to fund 90 percent of its roughly $6 million project cost, likely one of the last available, at 275 basis points over a LIBOR index rate, which at the time was slightly over 5 percent. This annual interest cost of just over $300,000 was reasonable, but it certainly focused the partners’ attention on quickly getting the project to sales.
Construction began in June 2008 with two model homes in the first phase, completed in nine months. The rest of this phase of eight homes was completed in September 2009, and a second phase of seven homes was begun in February 2010. The project was completed in 2011. The development period coincided with the worst sustained housing downturn since the Great Depression, and California represented, with other Sunbelt states, one of the most challenging markets in the country.
SALES
The most popular unit at Rock Row was the smaller, lower-cost version of the three-bedroom house plan. These units’ beginning sale price of $467,000 allowed buyers to secure conventional financing (the 2007 limit was $417,000) with 10 percent down. The maximum selling price, for larger units, was $599,000. All marketing material was designed in house with a budget of $40,000, and a publicist was used to promote the project. Neighborhood connections and the project’s interesting story gave the developers an opportunity to get the message out with minimal paid advertisements, and an emphasis on free editorial content and word-of-mouth communications. A large kickoff party of about 400 people generated buzz and attracted the local news station, and numerous articles, particularly in the local alternative press, featured the new type of development and the team behind it. Despite deteriorating market conditions, all 15 homes sold within five weeks of the opening party. After three weeks, prices were increased 4 percent. No concessions were offered on the sale price.
Though very few options were offered at initial sale, the team did propose one interesting incentive: for buyers who closed without a buyer’s agent, the developers would throw in a custom solar PV installation. The brokers’ fee was a wash, with the installation cost, and the developers correctly assumed their buyers would rather have the hardware than the representation. The offer clearly communicated the developers’ serious commitment both to sustainability and to their value proposition, and 11 of 15 buyers took the deal.
LESSONS LEARNED
The developers attribute the rapid sales pace to a hole in the market. Kevin Wronske explains that “at least in Los Angeles, there is a huge potential market of people who know what they want, who have an image in their mind, but they can’t find it.” The macroscale market’s ample supply of homes, even distressed homes, can influence these buyers only so far because properties conforming to their idea of a suitable home are incredibly rare. This rarity was created over decades of regulatory constraint, where the only way to satisfy these buyers was with condominium products—most of the Rock Row buyers cite the single-family lot as a driver of their decision—or a conventional home at a much higher price.
At least half of the buyers were interested in the sustainable aspects of the development, and the comparables available in the market study during underwriting included no similarly conceived projects. Many developers are uncomfortable pioneering, but when obvious momentum has built behind a trend, as was clearly the case with sustainability in 2006, an innovative project may be the only one to reach a potential market. Finally, and most important, the developers credit their success at Rock Row to an excruciating attention to detail. Partially because of the firm’s size and relative inexperience, and partly because of the ample time allowed during an extended entitlement, every element of the development, from architectural design and systems engineering to marketing brochures, was—if not executed entirely in house—directed and managed closely by a principal of the development firm.
DESIGN CONTROLS. Provisions for design control should reflect the tastes and attitudes of the target market. The types of design controls and degrees of constraint differ, depending on whether the target market is production builders or custom builders. For the developer who is selling finished sites, the best basic mechanism for design control is to include an “approval of plans” clause in the purchase agreements for building sites.
Even though individual designs may be attractive, incongruous styles may detract from the overall appearance of a subdivision. A design review committee should therefore be established to approve proposed designs. Such a committee also shields the developer from accusations of arbitrariness.
Encouraging good design is easier than discouraging bad design. The developer’s primary tool is to specify dimensional limitations, such as yard setbacks, building heights, bulk, and signs. But size covenants may backfire. For example, the city of Highland Park, a wealthy Dallas suburb, passed severe lot coverage limitations. Builders of houses that averaged 6,000 to 7,000 square feet (560–650 m2) responded by building two-story boxes that completely filled the allowable building envelope. Similar boxes have appeared on small lots in other communities where soaring lot prices virtually guarantee that buyers will build houses as large as possible on their lots.
Covenants that are too restrictive may lead to boring uniformity and eventual rebellion among residents, leading many developers to minimize restriction by covenant. Communities have faced lawsuits over paint colors, swing sets, pickup truck bans, and other elements that were too rigidly controlled by covenants. One of the most difficult areas to control is future alterations and additions. Materials are difficult to match or become obsolete. Costs change over time. New fire codes may prohibit the use of certain materials, such as the once-popular cedar shake roofing. New technologies are developed, such as small-scale satellite dishes, and lifestyles change, as in the proliferation of home-based work. Covenants should therefore provide for a procedure to accommodate changes over time—a variance. The design review committee must consider not just the project under review, but the potential precedent when it approves variances from the specified restrictions.
OTHER COVENANTS. Some covenants attempt to preserve the property values of the community directly by limiting construction in several ways. Cost covenants are universally unsuccessful. A $60,000 minimum cost requirement, for example, may have built a mansion in the 1950s, but a garage in today’s market. One common method for establishing quality is to set minimum square-footage standards for living areas, exclusive of garages, basements, and accessory buildings. These too can become obsolete as housing needs change. Since 2007, a leveling off of the 60-year rise in average home size has occurred, implying a possible change in the market for large homes.
In cluster home, duplex, and townhouse subdivisions where houses are attached, the long-term value of a development requires a covenant that protects other owners when one house is damaged or destroyed by fire or other causes. Such a covenant should make owners of damaged property responsible for rebuilding or restoring the property promptly. The restoration should be substantially in accordance with the architecture and engineering plans and with the specifications for the original buildings.
If a subdivision includes common open space, a covenant should be included that provides for the use, preservation, and limitation on future development of the space. Open-space easements may be used to ensure long-term protection of common open space. In some cases, the granting of open-space easements to the community may be a basis for obtaining planning approval for the development.
Boats, mobile homes, campers, and trucks all require special storage areas. The developer may include a covenant that prohibits on-site parking of these vehicles or requires visual screening. Alternatively, the covenant may limit parking to specified areas. Other restrictive covenants may prohibit keeping certain types or numbers of pets or livestock on site, cutting trees of a certain caliper, repairing automobiles, and parking inoperable vehicles.
Developers walk a fine line between introducing too little and too much restriction. Developers want to maintain the value of the subdivision without overly limiting their market. A potential homebuyer who cannot keep the family boat or camper on the property may look elsewhere for a house.
EFFECTIVE TERM AND REVISION. Although some covenants may include a definite termination date, covenants should generally be designed to renew themselves automatically and run with the land indefinitely. Property owners also should be able to revise the covenants with the approval of a stipulated percentage of other property owners. The developer may decide to allow some covenants to be revisable with a simple majority vote, whereas other covenants may require approval by 75 percent or even 90 percent of property owners. The developer may also want to allow homeowners to revise some covenants, such as changes in fencing, after three to five years, whereas others, such as “single-family use only,” may be revised only after 25 to 40 years, or with near unanimous approval. Proposed revisions in covenants should be submitted sufficiently ahead of time to allow property owners to review them—three years for major covenants and one year for minor covenants.
Residential developers disagree about whether or not the developer should retain the power to make minor amendments to covenants. Some feel that the flexibility to adjust building lines and make modifications in design character from one phase to another is essential for the developer. Others feel that such modifications should be handled through the design review committee. Developers who frequently amend covenants risk hurting their credibility with property owners, who may doubt the developer’s intentions to fulfill promises and carry out future development plans. Given the history of unintended consequences from covenants, beginning developers are advised to maintain some flexibility in “founders’ rights” to change elements of governance while they still own a substantial portion of the community’s lots.
ENFORCEMENT. Legally, anyone who is bound by covenants may enforce them against anyone else who is bound by them. Because doing so may set neighbor against neighbor, providing a homeowners association with the power of enforcement is the best solution. Failure to enforce a covenant in a timely fashion may render the covenant void. For example, in a Dallas subdivision, the homeowners did not enforce a covenant that restricted fencing of an open-space easement running along the back of the owners’ lots. Several years later, the homeowners association attempted to enforce the covenant against several homeowners who had fenced the open space. The homeowners who had fenced in the open space successfully challenged the association on the grounds that the covenant was void for lack of previous enforcement.
The developer must create the association and file the articles of incorporation and bylaws before selling any lots to homebuilders or individual buyers. Any sales that predate the establishment of the association are exempted from the association. Therefore, forming the community association is a critical part of the developer’s initial activities.
TYPES. Four main types of homeowners associations exist: community association with automatic membership, condominium association, funded community trust, and nonautomatic association.
Community Association with Automatic Membership. In most subdivisions in which fee simple interest in the lots is conveyed to buyers, membership in a community association occurs automatically when a buyer purchases a dwelling or improved lot. The association may hold title to real property such as open space and recreational facilities in the subdivision. It is responsible for preserving and maintaining the property. Members have perpetual access to the common property. They must pay assessments to finance the association’s activities and must uphold the covenants.
Condominium Association. This approach resembles the community association, except for the form of ownership. When someone purchases a condominium, the title applies only to the interior space of the particular unit. The structure, lobbies, elevators, and surrounding land belong to all the owners as tenants in common. Owners are automatically members of the condominium association and have voting privileges and responsibilities for operating and maintaining the common facilities.
Funded Community Trust. This approach is an alternative to the automatic membership association. The funded community trust holds and maintains the common areas in a development. The funded trust differs from a community association in that a fiduciary organization, such as a bank, is the trustee responsible for the costs of overseeing maintenance of the property.
The funded community trust limits the ability of owners to act directly on their own behalf. The advantage of the trust is that it eliminates much of the day-to-day governance and participatory requirements of members. This form has not been used widely primarily because banks and other institutions have been reluctant to become trustees.
Nonautomatic Association. This form of association provides for the voluntary support of homeowners. It does not work, however, if the development owns common properties because if owners are not automatically members, assessments cannot be mandated. A nonautomatic association cannot participate in the enforcement of covenants and, therefore, can serve only as a focus of interest and social pressure for conformance.
LEGAL FRAMEWORK. An automatic community association includes five major legal elements: a subdivision plat, an enabling declaration, articles of incorporation, bylaws, and individual deeds for each parcel. The subdivision plat is the recorded map showing individual lots, legal descriptions, common spaces, and easements. The plat should indicate areas that will be dedicated to the association as well as those that will not be dedicated for use by the general public (often called reserve parcels). It should also reference and be recorded with the enabling declaration, which sets forth the management and ownership of common areas, the lien rights of the association against all lots, the amendment procedures, the enforcement procedures, and the rights of voting members.
The articles of incorporation and bylaws are the formal documents for creating a corporation with the state. The articles of incorporation set forth the initial board of directors, procedures for appointing new directors, membership and voting rights, amendment procedures, dissolution procedures, and the severability of provisions. The bylaws of the association describe the rules by which the association will conduct business. They set forth the composition and duties of the board and the indemnification of officers of the association and describe the role and composition of subordinate boards, such as the design review board.
Each individual deed conveyed by the developer should reference the declaration of the association. The developer should summarize the formation, responsibilities, and activities of the association in a brochure that homebuilders in the subdivision can give to their buyers.
THE DEVELOPER’S ROLE. Homeowners associations, protective covenants, and the common facilities managed by homeowners associations are as important to the overall success of a subdivision as the subdivision’s engineering and design. If handled properly, they can serve as a major component of the developer’s marketing strategy.
The developer usually donates commonly owned land and facilities to the homeowners association. The costs are covered by lot sales to builders. For the purpose of property taxes, permanently dedicated open space has no real market value and is either not assessed or taxed at all or assessed at a nominal value, with the taxes paid by the homeowners association.
During the course of development, the developer usually maintains the open space and common facilities. These responsibilities are turned over to the association when the development is completed. Control of the association passes from the developer to the residents when the residents elect the officers of the association. The developer should design the accounts and record keeping so that the transition to the association is smooth.
The developer establishes initial assessments for homeowners that must realistically reflect the number of residents of the community at any one time. Because buyers evaluate monthly association assessments the same way they do monthly mortgage payments, the assessments cannot be too high. Although developers would like to place as much of the burden as possible on the association, they should keep the assessment competitive with that of other subdivisions.
Residents appear to be somewhat more tolerant of association dues than they are of general taxes because the results of dues are more directly apparent. The upper limit to place on dues depends on local conditions. In Orange County, California, for example, before Proposition 13 limited property taxes to 1 percent of the house purchase price, homeowners tolerated a combined tax bill (property taxes plus special district assessments) of up to 2 percent of the house value. Homeowners may tolerate as much as an additional half percentage point per year in association dues in areas where the association owns and operates substantial common open space and recreation facilities.
In the past, homeowners associations gave boards the feeling that they must be extremely restrictive toward members; today, however, the emphasis is much more on empowerment than enforcement. Wayne Hyatt of Atlanta-based Hyatt and Stubblefield notes that developers are using covenants to improve quality of life, meaning that rather than simply restricting nuisances and design choices, the homeowners association can be used to establish community goals—activities, charities, voluntarism, and other enhancements of the way the community lives.
According to Hyatt, “There’s been a sea change in the sophistication of the law and of many private developers with regard to covenant development. The emphasis today is much more on empowerment of the owner-members than on enforcement. The law has become much more precisely defined, and as the fear of uncertainty [with regard to fiduciary duties and conflict of interest] wanes, the focus of litigation has changed dramatically. Where ten years ago disputes were typically developer versus board, now they are primarily owner versus members versus board. But the reputation for disputes among members is really a reflection of society, magnified through these private governmental bodies.”45
Beginning developers will find many opportunities in land development. Particularly for individuals with expertise in legal, urban design, and entitlement issues, the higher risk of land development can be mitigated by thorough knowledge and good management. Although land development may be combined with building development, in general, it should be considered a separate business to be evaluated on its own merits.
Land development is one of the riskier forms of development because it is so dependent on the public sector for approvals and infrastructure support, involves a long investment period with no positive cash flow, and, especially in large projects, requires the ability to change direction to meet changing markets and economic situations. Beginning developers should concentrate on smaller, less complex deals. Problem sites, such as those containing environmentally sensitive areas, can offer attractive opportunities, but developers should be wary of getting bogged down for several years in litigation and entitlement disputes.
Beginning land developers will find that obtaining financing without significant cash equity and strong financial statements is a difficult process. Nevertheless, land development offers the opportunity to use commitments from builders as collateral for securing financing. Those starting out will find that seller financing and joint ventures with landowners and financial institutions can enable them to build a track record and successfully launch a development career.
Although opportunities are always present, so are pitfalls. Cities are holding land developers responsible for an ever-higher share of the cost of providing public facilities and solving environmental problems. In many cases, developers are becoming the de facto agents of cities in building arterial streets, libraries, fire stations, and sewer and drainage facilities and in cleaning up toxic waste and restoring environmentally sensitive land. The liability of developers for construction standards, especially streets, utilities, and drainage, extends for many years after developers have sold out of the subdivision.
Dos and Don’ts for Homeowners Associations
GENERAL ADVICE
• The senior person on the development team responsible for the project should not serve on the board. Many developers ignore this advice, but understand that doing so opens the developer and the association to conflict of interest claims.
• The developer should not try to do everything alone. The developer should document whatever it or the association does, and should never underestimate the role of the association manager. The developer should budget for these tasks, even if they’ll be done by development staff for the foreseeable future.
DO:
• Observe the required corporate formalities, such as holding regular meetings, keeping a corporate minutes book, and properly authorizing and documenting all board actions.
• Purchase or renew adequate insurance.
• Collect assessments and increase assessments as necessary.
• Enforce architectural control.
• Review the association’s budget and produce quarterly and annual reports.
• Always remember to protect members’ interests.
• Use due care in hiring personnel, including compliance with nondiscrimination laws.
• File tax returns and other required IRS forms.
• Require the developer to complete and convey the common areas in a timely manner.
• Order an impartial inspection of the common areas by the association.
• Maintain common areas adequately.
DON’T:
• Enter into long-term contracts, such as maintenance, against the bylaws of the association. If it turns out not to be in the best interest of the association, you could be liable.
• Enter a dwelling unit without authorization.
• File a lawsuit after the statute of limitations expires.
Source: Wayne Hyatt, Protecting Your Assets: Strategies for Successful Business Operation in a Litigious Society (Washington, D.C.: ULI-the Urban Land Institute, 1997).
Cities and land developers have always formed a kind of partnership because land development has been the primary vehicle by which cities grow. As the burdens of responsibility shift more toward developers, developers must come to understand not only how to build financially successful subdivisions but also how to ensure the fiscal health of their cities.
NOTES
1. Sometimes called “super pads.” The buyer is responsible for installing local streets and utilities. Lots are often subject to design guidelines imposed by the master developer.
2. H. James Brown, R.S. Phillips, and N.A. Roberts, “Land Markets at the Urban Fringe,” Journal of the American Planning Association (April 1981): 131–144.
3. Smart growth is defined in different ways, but at its core, it is about accommodating growth in ways that are economically sound, that are environmentally responsible, and that enhance the quality of life.
4. Most communities require public hearings for subdivision approval but not for building plans, which are approved by the building department only. Public hearings are political by definition and involve much more risk—of disapproval, reduction in density, or increase in exaction cost. Building department approvals are essentially administrative: as long as one satisfies the regulations, approval is automatic.
5. For further discussion, see Charles Long, Finance for Real Estate Development (Washington, D.C.: ULI–the Urban Land Institute, 2011), chapter 3.
6. The lender’s release price from the loan may be higher than $16,000; thus, the developers would have to make up the difference.
7. Interview with Harlan Doliner, partner, Nixon Peabody, LLP, Boston, Massachusetts, 2000.
8. Ibid.
9. Interview with Jack Willome, former CEO, Rayco, Ltd., San Antonio, Texas, 1987.
10. Interview with Don Mackie, partner, Mill Creek Properties, Salado, Texas, 1987.
11. Title insurance companies do not survey property and therefore do not insure against encroachments and boundary disputes that would be disclosed by a proper survey. A correct survey, however, corresponds to the description in the deed, and if the description in the deed is wrong, the title insurance company is liable. The company insures the accuracy of the documents.
12. Interview with Dan Kassel, president, Granite Homes, Irvine, California, 2002.
13. This paragraph and the next two are from an interview with Steve MacMillan, chief operating officer, Campbell Estate, Kapolei, Hawaii, 2002.
14. See Mike Davidson and Fay Dolnick, “A Glossary of Zoning, Development, and Planning Terms,” Planning Advisory Service Report, no. 491/492 (Chicago: American Planning Association, 1999).
15. Interview with Jo Anne Stubblefield, president, Hyatt and Stubblefield, Atlanta, Georgia, 2000.
16. Interview with Scott Smith, La Plata Investments, Colorado Springs, Colorado, 2000.
17. Interview with Al Neely, executive vice president and chief investment officer, Charles E. Smith Co., Arlington, Virginia, 2000.
18. Interview with Tim Edmond, president, St. Joe/Arvida, Tallahassee, Florida, 2000.
19. Interview with Roger Galatas, president, Roger Galatas Interests, the Woodlands, Texas, 2001.
20. Golden v. Planning Board of the Town of Ramapo, 285 N.E.2d 291 (N.Y. Ct. App., 1972). This case upheld regulations for timing, phasing, and quotas in development, making development permits contingent on the availability of adequate public facilities.
21. Construction Industry Association v. City of Petaluma, 522 F.2d 897 (9th Cir. 1975). The U.S. Supreme Court let Petaluma’s residential control system stand after lengthy court battles initiated when the city was sued by homebuilders.
22. Kevin Lynch and Gary Hack, Site Planning, 3rd ed. (Cambridge, Mass.: MIT Press, 1985), p. 124.
23. Interview with Roger Galatas, 2001.
24. “Brownfield Redevelopment: One Highly Successful Approach,” Leavitt Communications: An International Public Relations Agency, Leavitt Communications, 2006; and June 29, 2011, www.leavcom.com/mactec_1006.htm.
25. Interview with Roger Galatas, 2001.
26. Interview. Matthew Kiefer, attorney, Gouston and Storrs, Boston, Massachusetts, 2010.
27. The city might require the developer to pay for, say, the first one or two lanes of paving, with the city paying the rest. Alternatively, it might require the developer to pay for or install the entire arterial, with subsequent reimbursement by other developers whose subdivisions front the arterial.
28. Although the terms gross acres and net acres are commonly used and understood, net usable acres is far less popular.
29. Richard B. Peiser, “Optimizing Profits from Land Use Planning,” Urban Land, September 1982, pp. 6–10; and Ehud Mouchly and Richard Peiser, “Optimizing Land Use in Multiuse Projects,” Real Estate Review, Summer 1993, pp. 79–85.
30. The compound return is (1 + 0.3)1/3 – 1 = 0.09139, or 9.139 percent. The general formula is (1 + r)1/n – 1, where r equals the total rate of return and n equals the holding period.
31. All return figures presented here are IRRs. They give the annual return on equity per year that should be made on an alternative investment (with annual compounding) to accumulate the same total amount of money by the end of the life of the project.
32. The rate of return on equity is the same as the discount rate used for determining the present value of a stream of future cash flows. It is also the same as the target IRR that an investor would use as the hurdle rate for making an investment.
33. Radburn was established by the City Housing Corporation, led by Henry Wright and Clarence Stein. See Eugenie Ladner Birch, “Radburn and the American Planning Movement,” Journal of the American Planning Association (October 1980): 424–439.
34. Interview with Dan Kassel, 2002.
35. See Walter Kulash, Residential Streets, 3rd ed. (Washington, D.C.: ULI–the Urban Land Institute, 2001).
36. Ibid.
37. See Jeanne Christie, “Wetlands Protection after the SWANCC Decision,” Planning Advisory Service Memo (Chicago: American Planning Association, 2002), pp. 1–4.
38. Reducing Stormwater Costs through Low Impact Development (LID) Strategies and Practices (Washington, D.C.: U.S. Environmental Protection Agency, Nonpoint Source Control Branch, 2007).
39. Ibid.
40. Ibid., p. 9.
41. Ibid., p. 34.
42. Economic Benefits of Runoff Controls (Washington, D.C.: U.S. Environmental Protection Agency, Office of Water, 1995).
43. Interview with Donald Mackie, 1987.
44. Interview with Jo Anne Stubblefield, 2000.
45. Interview with Wayne Hyatt, principal, Hyatt and Stubblefield, Atlanta, Georgia, 2001.