3-2-1: How To Found A New Town, Naturally Occurring Affordable Housing, 501 Main Budget Breakdown, & More
Issue #24
Happy Friday —
Here are 3 things from others, 2 things from me, and 1 picture related to incremental real estate development and my projects at Village Ventures.
Enjoy!
THREE THINGS FROM OTHERS
I. Founding A New Town 101
Have you ever thought about founding your own town?
Well, Casey and Laura Roloff did it in 2004.
Welcome to Seabrook, WA—“Washington’s Beach Town.”
Almost twenty years ago, the couple purchased 350 acres for $3.5M and started developing a walkable town rooted in New Urbanist principles.
Today, the town contains 450 homes, a town center with 50+ businesses, a school, an amphitheater, and more. All within a 10-minute walk of the town center.
If you’re not familiar with New Urbanism, let’s fix that. As its ability to inform the creation of great places is highly relevant for development practices and patterns.
New Urbanism is a direct response to unfettered suburban sprawl. And it establishes a set of principles for urban planning and development that focus on creating vibrant, walkable places with a variety of uses.
These principles embody:
Steering cities and towns away from sprawling development
Building more beautiful and sustainable places
Preserving historic assets and traditions, and
Providing a range of housing and transportation choices
A defining concept of New Urbanism is the rural-to-urban transect (above). It helps delineate the scale of development as you move further out from a city or town center. Note that suburban areas are a critical piece of the puzzle, just not at the sprawling levels witnessed today.
Seaside, FL was the first recognized New Urbanist town built in the 1980s. For Jim Carrey fans, it is also the setting of psychological comedy-drama The Truman Show. In fact, the Roloffs even recruited some of the original planners for Seaside to help design Seabrook.
Similar to Seaside, many of Seabook’s properties are sold as vacation homes. This helped fuel initial growth and fund development of additional property.
The Roloffs then established a short-term rental management business to assist homeowners with leasing activities. As a testament to the success of Seabrook, that business has sustained 20% growth year-over-year for almost two decades. In addition, 1% of all home sales are donated to local charities.
One of the critiques of Seaside, FL is its ratio of residents to tourists. It’s difficult to foster a great place with a vibrant community without a high proportion of long-term residents. Too many tourists and a place starts to lose its charm. Another example is the French Quarter in New Orleans.
The Roloffs seem to have done a good job managing that ratio in Seabrook. And I’m sure this is a pitfall they are well aware of and actively avoid.
For more, here’s an article about the Roloff’s Seabrook project.
II. Naturally Occurring Affordable Housing
I always assumed “naturally occurring affordable housing” was an oxymoron.
I thought: There must be some sort of subsidy—whether federal, state, local, or private—that offsets development costs to make it affordable.
Some inspiring folks in Atlanta are proving me wrong. And without cutting corners.
Urban Oasis Development—a Missing Middle Housing developer focused on creating inclusive and flourishing neighborhoods
Backyard ATL—a turnkey ADU development concept by design firm EightVillage
Fortas Homes—a high quality, affordable single-family home developer
Instead of relying on subsidies, all three developers partner with the Reinvestment Fund, a community development financial institution (CDFI).
CDFIs are private financial institutions dedicated to delivering responsible, affordable lending to help low-income, low-wealth, and other disadvantaged people. They are mission-driven and provide favorable financing for projects providing social impact.
Specifically, the Reinvestment Fund provides debt financing for housing development. Their loan fund is supported by 800+ social impact investors.
Often, social impact investment is synonymous with lower financial returns. But that’s not necessarily the case here. By investing in Reinvestment Fund, investors get access to federal New Markets Tax Credits—a mechanism to incentivize private investment in underserved communities.
The credit totals 39% of the original investment amount and is claimed over a period of seven years. In turn, the CDFI is able to offer financing to projects at lower rates as investors are able to secure additional financial return with the New Markets Tax Credits.
The Reinvestment Fund funds a variety of projects—the common thread is that the projects are all located in severely distressed census tracts and provide essential services to their communities including health care, education, and access to healthy food.
Fascinating model. And one that seems to be making big strides in driving the equitable revitalization of entire neighborhoods.
Wondering if there are any CDFIs in Vermont? There are six!
III. Where Do People Like To Live?
COVID-19 prompted a wave of new residents moving to rural areas—so called Zoom Towns.
The long-term impact of these moves is unclear (is it a fleeting fad?). But Pew Research sheds some light.
Granted, the report is from July 2021 and is a bit dated. But the trends are relevant and interesting nonetheless.
Below is a chart on how preferences for dense vs spread-out communities changed from Sept ‘19 to July ‘21. Funny that even this topic seems to introduce a partisan divide where Democrats prefer proximity and Republicans prefer distance.
Across the board, there’s one consistency—COVID-19 has had measurable impacts on shifting housing preferences away from dense village center and downtown cores.
TWO THINGS FROM ME
I. Expediting Demo at 501 Main
We’re on Week 4 at 501 Main.
Demo is fully underway.
Initially, the framing crew was booked until mid-May. This meant I had the luxury of slow-rolling the demolition and site work before they joined the project.
With a few months to kill, I figured I could deconstruct the building by hand and salvage the majority of the lumber.
But… I got a call last week. Turns out the framers can start sooner. As in, next-week-sooner.
That’s an opportunity we don’t want to pass up. The sooner we can start, the sooner we can finish and avoid holding costs. Two issues though:
We don’t have permits in hand
The building is still standing
There’s not much I can do about #1. We submitted for state permits on 2/7 and were told three to four weeks. We had already reviewed the plans twice with the inspector before submission so hopefully we come in at the lower end of that range.
Regardless, for #2, we need to expedite demolition as I no longer have months to deconstruct stick-by-stick.
So I called my site contractor and arranged to have him come out next week with his excavator to tear the building down.
But, before that can happen, there were a few items to close out:
Salvage as many materials as possible, including windows, doors, boiler, and cabinets. I sold or donated about half within the past week. And then moved the other half offsite while they stay listed on Craigslist
Scrap the metal—electrical wire, HVAC ductwork, copper pipe, etc. Construction dumpsters are priced by the ton so the more weight you dispose of, the more you pay. By scrapping metal, we avoid that cost and get paid a little bit for the material
And, most importantly, power and phone lines need to be disconnected. And water shut off at the town main
This week, we focused on getting those things wrapped up in preparation for the final demolition.
Here are some pics.
From left to right:
Progress made on deconstructing the building by hand before changing demolition strategy. I was even able to donate all the 1x4 pine trim to the local trade school for use in their construction projects
Front of building with the windows removed. These were nice wooden double hung windows that I ended up selling
A 15-yard dumpster full of scrap metal. TBD on weight but safe to assume a ton or two. Between not paying for disposal and then receiving payment for scrap, we’re looking at a $500 savings. Not getting rich here but every penny counts!
From left to right:
Utility company disconnecting power and phone lines. We’ll set up temporary power for construction from the same pole once the building is demolished
The shutoff for the town water main was covered under a few feet of snow and ice. After two hours of metal detector probing and heavy shoveling with the town water commissioner, we found it
The little metal cap protecting the water main shutoff valve. A needle in the haystack!
All ready for next week’s fun with the excavator.
We’re getting hit with a big snow storm today so final demolition may be delayed depending on conditions next week.
II. Budget Breakdown For 501 Main
Let’s open up the books on the construction budget for 501 Main.
Hopefully it’s informative for folks considering their own small-scale development project.
I crafted the original budget in July 2021 as I structured the project, explored viability, and later pursued financing.
As we got further into the planning processes and new scope surfaced, I kept the budget up-to-date. Importantly, any changes were tied back to the proforma, ensuring the development continued to make sense financially.
Before we broke ground a few weeks ago, I conducted a final round of pricing including building materials.
As you might have guessed, we’re running high. In fact, 25% higher than the original budget, or $230,000.
There are two options to deal with an increased budget, both of which likely lead to higher rents:
Take on more debt. This requires ensuring projected rent revenue can cover the increase in monthly debt service
Raise more equity. This dilutes member equity and reduces returns. For this to succeed, you need to articulate the impact to investor returns and secure additional capital commitment from one or more partners
Here’s a snapshot of the working budget. And the full breakdown in case you’re interested.
The big questions then are—what’s driving this increase, how will the funding gap be filled, and what impact does this have on rents?
Let’s start with why we’re looking at such a large increase in budget.
Some of it can be attributed to scope change—addition of one apartment, increased building footprint, expansion of rear balcony to cover ADA ramp, change in roofline to accommodate parapet, and change of siding from cement-fiber shiplap to metal board and batten.
But much of it boils down to components that just weren’t anticipated. Not necessarily because of some massive oversight, though. Details have been naturally hashed out during the creation of the construction documents that were not known back in July. Here are a few examples:
Structural fasteners that were not specified until completion of structural engineering plans add up to $20,000. Take this Simpson ECCLLQ column cap for example—$350 each and we need 12
Double layers of Type X drywall and resilient channel for fire protection and sound proofing added $10,000
Fire-rated windows on the west wall required by the fire marshal added $10,000
The cost of a 10-meter rack (9 units + 1 house meter) is nearly $25,000 due to the need for a custom build. This was a cost not initially anticipated as a part of the electrical budget
Commercial storefront window systems are extremely expensive. I had originally budgeted the cost of residential windows for the retail space. Tack on another $10,000
So, how do we close this funding gap?
This is the stressful part. If you can’t fill the gap, you can’t complete the project.
After some financial engineering, here’s my solution:
$95,000 private note (additional debt)
$40,000 anticipated discount from building supplier by setting up a GC account
$40,000 additional investment capital from partners
$30,000 of my GC/developer fee rolled into equity
$25,000 incentive package from Efficiency Vermont for hitting their high performance building targets
All in, we’re now looking at $292/SF in total project cost (acquisition + holding + construction costs).
How does this cost increase affect rental rates?
Affordable housing for the average 1-person household is $1,100/mo in Orange County ($44,000 in income). $1,250/mo for the average 2-person household ($50,000 in income).
Unless we’re able to find some cost savings during construction (I’m not optimistic), we’re looking at rental rates around $1,200/mo at 501 Main. Utilities would be another $100-$150/mo. Perhaps lower. There will be significant cost savings on utilities when compared to the typical rental property due small floor plans, high performance building practices, and efficient mechanical systems at 501 Main.
$1,200/mo in rent is a bit higher than we’d like to see. Ideally, we could establish rents that are affordable to residents making 100% of area median income (AMI). But, with the way building costs are trending, the units will likely be affordable for households earning $54,000 per year—or 2-person households making 110% AMI and 1-person households making 120% AMI.
Keep in mind, we’ll be providing washers, dryers, and AC in each unit. Along with dedicated 75 SF balconies. So the amenities and location on Main St are more desirable than other rental apartments in the area.
ONE PICTURE
Fortas Homes specializes in developing permanently affordable homes. And they do so without sacrificing design. Here’s an example of a small-scale project they built.
📍 Atlanta, GA
Source: Fortas Homes
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 developing Missing Middle Housing while trying to pick apart and replicate what makes other communities thrive.
Connect with me on LinkedIn and follow my projects on TikTok.