3-2-1: A Creative Approach To Building Community Wealth, 501 Main Zoning Approval, Before And After Logging, & More
Week #15
Happy Thursday —
Here are 3 things from others, 2 things from me, and 1 picture related to incremental real estate development.
Oh, and big news this week for one of my projects (keep reading).
Enjoy!
3 THINGS FROM OTHERS
I.
The real estate industry is usually pretty slow on the innovation front. From technology adoption, to deal structures, to interwoven mixed uses—there’s not usually a whole lot of creativity that goes into the average development.
But a real estate cooperative in Traverse City, Michigan called Commongrounds is turning that stereotype on its head.
Commongrounds is owned by hundreds of community members and six businesses, all united by the desire to address community needs and increase quality of life in the region. Fundamentally, the co-op is driven by the notion of the triple bottom line—people, planet, and profit.
Easier said than done, for sure. But the team is seeing success on the execution of their vision, bringing a refreshing and transformational perspective of real estate development to the table.
Their first project is a 25,000 SF building that establishes an ecosystem of diverse, yet complementary, uses. This includes a food hall with an incubator for food entrepreneurs; an early childhood education and training facility; an arts and community event center; co-working space; and affordable housing. Independently, each of these is a phenomenal addition to the community—together, they’re transformational.
Perhaps one of the more creative aspects is how the capital stack is structured. The team raised over $18M from a wide variety of non-traditional sources:
535 community members paid $50 to buy into the ownership of the co-op
Several early supporters lent $550,000 with a marginal interest rate to allow the co-op to purchase the property
An $8M, 30-year mortgage backed by a personal guarantee from the USDA
$1.2M of cash equity provided by the six commercial tenant-owners that includes a coffee roaster, co-working space, and a child care facility
$1.37M in debt from 132 community investors with a median investment of $2,000
$210,000 from a city brownfield remediation grant
$1.2M in tax-increment financing to help pay for the construction of underground parking at the site
$1.8M from the Michigan Economic Development Corporation
$1.5M loan from IFF, a Chicago-based community development financial institution
$1.8M in property-assessed clean energy (PACE) financing
My favorite part is the crowdfunding piece. Most people either don’t invest their money at all, or else channel it through a 401k or mutual fund managed by Wall Street. By giving community members the option to invest and own a piece of the development, profits generated from the project can go towards increasing the wealth of the community.
However, soliciting community investment is a notoriously Herculean effort that involves following expensive protocols to ensure compliance with SEC securities regulations. $18M is pretty sizable, and so the project can absorb those costs. But it is often prohibitively burdensome for smaller projects. I would love to see this world start to open up for incremental developments in the $1M range or less.
II.
Here’s Ivy Zelman with a hot take that the real estate market is at serious risk of collapse. Definitely not your typical headline with all the bulls charging around these days and pumping up the market.
Zelman is well known for signaling the top of the market in 2005. Back then, there were several other people in her corner—today, she’s a party of one.
In studying nationwide trends and sources of capital, she’s come to the conclusion that, instead of a housing shortage, we actually have an oversupply of investment capital flooding into major markets. And, as a result, homeowners are finding themselves bidding against iBuyers (RIP Zillow Offers), institutional money, and build-to-rent developers. Note: this is all related to single-family homes—not multi-family which have traditionally been investment grade from the start.
If Zelman is right, than the shortage of nearly 6M homes that the National Association of Realtors currently estimates is drastically inflated. The caveat here is that she’s analyzing major metro areas with a lot of recent development activity (think Pheonix and Boise). According to her, those markets pose the biggest risk.
I love a little anecdotal evidence so here’s your dose for the day. Based on what I’ve experienced through monitoring the rental market and speaking with agents in my area, the opposite seems true up here in more rural markets—single-family homes are predominately being purchased by homeowners, not investors. Fortunately, iBuyers and single-family landlords seem to have been kept at bay (for the most part). Housing is still extremely expensive, but at least folks bidding on homes will typically live there without the price being inflated by outside investors.
III.
The House passed the Biden Administration’s $1T infrastructure bill last week and now it is ……… zzzzzzz ………… Wait, wake up! You’ll like the link at the end.
This legislation combines previously approved funds with $550 billion in new spending that the Senate approved as part of a bipartisan deal in July.
Here’s some of what we can expect from it:
$110B: Roads, bridges and major projects
$105B: Public transit/passenger and freight rail
$73B: Power infrastructure
$65B: High-speed internet
$55B: Clean drinking water
$50B: Resilience and western water infrastructure
Say what you will about the $110B for transportation-related costs—if you haven’t yet read Chuck Marohn’s Confessions of a Recovering Engineer, you absolutely should. The predicament we’ve built ourselves into with respect to transportation infrastructure maintenance is fairly alarming and worth understanding.
By and large, though, the bill seems well positioned to positively impact smaller communities. Lack of high speed internet is one of the more often cited pain points that small towns have trouble addressing.
But, I won’t belabor infrastructure and all its riveting attributes. Instead, here’s John Oliver reinforcing the need for that $73B in power infrastructure in all his comedic glory:
2 THINGS FROM ME
I.
WE DID IT.
After three meetings, six weeks, and a healthy amount of hair pulled, we received site plan approval from Fairlee’s Development Review Board (DRB) for 501 Main (see post from October 30th for details on the previous hearing). Conditional, of course, on a few items:
Read the full conditional approval letter from the DRB.
Getting here wasn’t all roses and smiles though.
Daniel Herriges at Strong Towns recently wrote a fantastic 5-part series called Where Did All the Small Developers Go? One of the reasons Herriges cites for this disappearance is regulatory barriers and red tape in the zoning process.
I experienced a bit of solace reading through this series, which happened to be released mid-zoning process for 501 Main. Not only was there an element of commiseration with other small-scale developers in similar predicaments, but Herriges’ recounting the success stories of towns overcoming these obstacles provided a much needed light at the end of the tunnel.
The process of getting this conditional approval from the DRB was more arduous than I expected. And, frankly, more so than I believe was warranted—especially given that this project is directly in line with the approved town plan, has the support of the Selectboard, and would be one of the first major developments in the Village Center in decades.
I fully appreciate the need for due diligence that ensures the right kind of development is being pushed forward. That’s a fundamental responsibility of the DRB. The friction here was not necessarily due to the rules themselves being restrictive, but because the subjective interpretation and application of those rules was.
I will absolutely acknowledge the fact that sitting on the DRB is a thankless job (any public servant position in these small towns is for that matter). These men and women are all volunteers that choose to spend numerous unpaid hours of their week making critical decisions that shape the future of the town. And I applaud them for taking on that role.
That said, in reflecting on the process, I saw three red flags that concern me:
Restrictive interpretation of bylaws. The bylaws—whether intentional or not—lack specificity in some instances. For example, a setback is defined as the “distance between a structure and a lot line” in the Fairlee bylaws. It is unclear whether the measurement starts from the base of the structure or the termination of the drip edge. We had proposed an 18” drip edge to enable integration of solar panels into the parapet design but were informed by the DRB that the drip edge could not extend beyond what exists today due to its extension into the setback area. Because that would increase the degree of non-conformity, it was implied that this was out of the question. The DRB could have chosen to interpret the setback definition so as to exclude a reasonable drip edge. Instead, we were forced to reduce the depth of our drip edge, rethink our parapet design, and consequently remove the rooftop solar component.
Inconsistent application of bylaws. Trash receptacles should be screened from the view of abutting properties and public roads. That’s a fair ask. In our site plan, we positioned the refuse area in a way that was tucked in a corner behind the adjacent commercial building and a stand of hemlock trees. This would have sufficiently screened it from the road and neighbors. However, the DRB chose to require a three-sided stockade fence be constructed around the perimeter of the trash area. That’s added cost for no tangible benefit as the area is already naturally screened. More alarming, though, is that the 7-11 next door has two 6 cu. ft. dumpsters directly outside the station in plain view of the road and town. And a small commercial development that was approved last year has done the same thing—no screening yet in plain sight from the road. Why the inconsistency?
Absence of collaboration. Perhaps the most shocking part of the process was the first five minutes of this week’s DRB hearing dedicated to the chair of the board admonishing me for soliciting inappropriate zoning guidance from him outside of a formal hearing setting. This struck me as particularly strange and insular. If I receive feedback from the board on part of my application via email, I’m naturally going to follow up with clarifying questions. My main goal is to stay aligned with the board and to make sure we are unified in our pursuit of a great development—especially when the town’s zoning code lends itself to ambiguity and interpretation. Perhaps naively, I had hoped this would have been a collaborative process.
There’s an adage called Hanlon’s razor that goes: “Never attribute to malice that which is adequately explained by ignorance.” (Shoutout to Tim Ferriss for the reference).
I don’t believe my project was singled out due to spite or that I was targeted in any way. I think the issue is more philosophical as to what it really means to be a member of a Development Review Board. Is the goal to resist change because the status quo is comforting or to promote smart growth that aligns with the town vision and provides real value to the community at large? Two different mindsets, two different outcomes.
And that’s just it—after this whole charade, I’m just not convinced everyone on the board truly understands the vision that has been developed both by the town and for the town. That’s a real problem. For, if true, then future projects brought forward by other small-scale developers will be met with the same resistance that I faced.
Every small development matters in towns such as Fairlee. And any artificial obstacles inserted within the process only go to further jeopardize the chances of bringing new projects to light—incremental projects that would, collectively over time, have the power to transform our town.
Perhaps it’s time for a bit of change.
II.
Tree fellin’ came to a close this weekend at 501 Main. After hitting pause for a few weeks, the loggers were able to finish up clearing the two acres behind the property (see my post from October 24th for more context).
I happened to stop by as they were doing the final push, jumped at the opportunity to take the drone out, and then quickly managed to crash it into the one of the few trees that we decided to leave standing. Just trying to get that perfect shot that I’m obviously undeserving of.
Thankfully, DJI makes a resilient product that doesn’t balk at falling 15’ out of the air as well as propellors that easily snap on and off. Four new propellors to the tune of $25 and I’m back in business.
Here’s an Instagram video of one of the last big trees coming down. Timber!
And here are some before and after photos of what the property looks like. It’s like watching one of those skin care infomercials except without all the Photoshop.
The green overlay above represents the boundary lines of 501 Main. Parking will be tucked behind the gas station (site plan here for reference).
One of the next steps will be to remove all the smaller brush and tree stumps that were left in the wake of the loggers. And then to do some site grading. All sorts of strange craters, contours, and debris have built up back there over the decades that need to be cleaned up and leveled out before any further work can be done.
1 PICTURE
I.
A 325 SF “spite” house (blue building) built in 1830 to keep horse-drawn wagons and loiterers out of the alley. Great building, but perhaps the wrong intentions.
📍 Old Town Alexandria, Virginia
From: Moira Neal
That’s it for today. Thanks for reading. If you haven’t yet, go ahead and subscribe here:
About me: I’m Jonah Richard, a small-scale real estate developer in Vermont. With my company, Village Ventures, I’m currently getting my hands dirty redeveloping mixed-use buildings along Main Street while trying to pick apart and replicate what makes other communities thrive.
Looking for more things related to my projects and incremental real estate development? Connect with me on LinkedIn, Instagram, or Twitter.
In small towns, like Fairlee, it’s important that all the business of town committees be down exclusively at the meeting. This way there is a record of what transpired in the meeting minutes. There is also a strong suspicion by part of the public that things are being done behind closed doors, in secret, and there’s always corruption going on. In almost all cases, these suspicions are completely unfounded. It’s important that committee members not feed these suspicions in any way. The best way is to make sure all business is conducted exclusively in public meetings.