Speaker 1I wish more people, particularly elected officials and neighbors and staff, would understand the math, you know, that you're at the planning commission and you wanted to do an eight-unit project and for some reason you leave with five. Again, for no apparent reason. Somehow more neighbors is worse, you know, less neighbors is good. And I think that understanding that you still have all the utilities to build, you still got a lot, everything to do, but by making it go from eight to five, it's now a project that's not going to happen because it doesn't pencil.
Speaker 2Hey, what's going on, everybody? Welcome back to the Land Development Podcast. I am your host, Ryan Glick. I'm excited today to be joined by. John Anderson. John is the principal at our John Anderson Consulting. John, thanks for joining me. I'm glad to be here. Well, I'm excited to get into some of the topics we're going to get into today because there are things that we haven't really gone into in much depth on the show in the past. And so, you know, that's the topic of ADUs and then also getting into the concept of pocket neighborhoods. But before we get into those topics, I first want to get into your background. And so a couple of questions for you here to get us started would be, how did you first. get into land development? And then I'm also curious to find out at what point or how you decided to kind of transition your approach to land development over your career.
Speaker 1Well, the die was kind of cast. My second attempt at being a high school sophomore, I was pulled into the vice principal's office, oddly for not having a fight this time, and I met my guidance counselor for the first time. And it was explained to me that I could no longer take any more shop classes until I brought my academics above F or incomplete. And then next day was Christmas vacation, and I didn't have like a big, you know, I'm out of here. I just never went back. So I was out on my own, fairly young, 15, worked constructions on the weekends, worked in kitchens. And a buddy of mine, I'm from northern Minnesota, from Duluth. And. In the early 70s, there was a strike on the docks, and the steel mill closed, and 20,000 people out of the 90,000 we had, it was a diaspora. And I. So my friend could get me in the electrical union in New York City. So I went out and I did that. Went through the apprenticeship program, came in journeyman, was Ron Cruz, and fell off a scaffold and shattered my shoulder. And ended up, rehab put me in an architect's office, a drafting, before CAD. It was all pencil-on-mylar stuff. And I was there for a couple years, but it was pretty clear I wasn't, like, going to go to college and be an architect. So there was, you know, an argument to be had with an Italian contractor in Queens. It was like, well, send John. Those are his people. And so I ended up working for contractors, property owners, and the like. And the earliest land development I did was, it actually was in an equestrian arena in Horseball. It was a barn and then house lots on the hillside around it. And it was all on septic systems and stuff out in the farthest reaches of Orange County, New York. So the idea that there were actually rules for doing this, and the people of the city and the county took the rules really seriously, even when they were, well, orderly but dumb. It's like, but this is the rule. It's like, and you can get an exception to the rule, but there's a process to get an exception to the rule. And if you make the argument that the rule is orderly but dumb, I don't like your chances. So, you know, like that. So I ended up bouncing around, always kind of a bigger project, a bigger project, never like settling down in one company, just project, project. Always. And to the point where I got recruited from the minor leagues to be one of the project managers, one of seven at the Mall of America for four years, which was, would have been a really good education for two years. So I was living in like one of the streetcar expansions of St. Paul in my little Sears and Roebuck house, and I would get my car and drive through every successive generation of American development until I came to where we were building the largest mall in the country, the intersection of two freeways by the airport. And at the end of the day, reverse the process. And just the feeling of. You know, why is, why is America so damn ugly? You know, my neighborhood is really cool and nice and interesting. And then it just gets worse and worse and worse and worse until I get to work. And so after I was done at the mall, we hung out a shingle and was doing kind of contract project management work for various folks. And I had a client who was doing in town and infill townhouses. And he was. This early involved in the organization called the Congress for the New Urbanism, which was made up like four years into it at that point. A lot of folks on the design and the policy side looking at how could we do this better? You know, what are the things that we can learn from how it was done well in the past? Can it be done that way again? And so a lot of the things that were coming forward is like parallels, like, okay, this is a conventional way to do this. You have single family houses and larger single family houses and then shopping centers. And all these things are separated. And then you glue them together with the trip on the only road, which has a lot of traffic and nobody addresses onto it except for McDonald's and the like. So to see that that really, that kind of zoning is like the DNA that's being followed, you know, all over the place and to, to fall in with people who had such profound authority. It's like, yes, these are the orderly but dumb rules, but, uh, we took a little time. We wrote some other rules. We would like you to adopt these so we could build something like the best part of your town. Oh my God. That would be the apocalypse. So, and so, uh, I bounced around a lot, helping people on small projects. I did serve three years, a hard time at the Minnesota DOT wasn't, wasn't a fit. My job was explaining why it was. It was a bad idea to take away the parking spaces in front of the stores in the downtown, you know, that just to make customers get out of there faster, that people needed those parking spaces. Right, right. Yeah. But an institution like a DOT is really driven by its culture and the, and it's a rules-based kind of hierarchy. Uh, so they're often kind of in the way orderly, but incredibly dumb. So, uh, and. So we ended up 99 moved out to California, had some clients there and we started developing first little 20 acre kind of neighborhood fragment with an eye toward 200 acre master plan across the road that was land owned by the hospital that they were going to relocate to and economically healthcare changed. So we built out the 20 acres with, uh, an exotic approach to, uh, houses and buildings. So we built out the 20 acres with, uh, an exotic approach to, uh, an exotic approach to, uh, a building. So we built out the 20 acres with, uh, an exotic approach to, uh, a building. but and we built a building company initially our thought was we just need to have enough of a building company to build cool stuff and then later it became clear we're closing 50 or 60 houses a year we need to have an excellent company that happens to build cool stuff and that was that had was not on my bingo card that's like the lot of understanding people's feelings and being patient while they don't do what i say there was a fairly long period where i was pretty much a jerk who had to win every argument i like to think that i've evolved since but my primary network continues to be the congress new urbanism we get together once a year kind of a gathering of the tribe the 200 acre master plan that we were in the middle of of uh doing first phase site development on you O'Neill in 2008 the bank called their debt on it they weighed about 30 percent of the project and local bank debt by that time the regulators were telling the banks you know just 200 acres uh figure of bulk sale and a 90-day close that's the value did you lend them more than that well yeah oh then you got to call the loan so i got diluted out and almost lost the house kind of thing so between 2009 and and uh 2019 we gypsied around albuquerque portland a year before covid we moved here to atlanta but we started looking at this in terms of the places that we really like and i think are really valuable you know financially called actually, are usually built out of smaller pieces rather than in big chunks. But a business model for development is big chunks. Particularly working in California, if someone's thinking about 400 acres, might as well do 4,000 because the environmental litigation will cost the same. And you can dedicate 800 acres and maybe be done in five years instead of seven, you know, with the entitlements. So coming from that environment to the South, whatever level of regulation or, you know, stormwater or whatever, it's like, this is the rules? It's like, these are adorable, you know? I felt like I'd been training at altitude and is now, you know, competing in track on sea level. These days, oh, 2015, we started a nonprofit called the Incremental Development Alliance, which is a nonprofit. Which trains people about how to do small projects in their neighborhood with a business model that makes sense at that level. A big outfit can't get excited about a 100-foot lot, you know, next to downtown. The juice is just not worth the squeeze for them. They're set up on economy of scale. And a big production home builder has got maybe two product lines they're going to be bringing out, and they need at least 50 closes for five years to justify a superintendent in the sales operation. So they're stuck in a conventional model that, is going to be producing something that's either kind of a commodity or a commodity with a little zhuzh on it, you know, some licking six stone and a few more gables. But, you know, people know that product. The appraisers know the product. The financing knows the product. And nobody's expecting it to be Paris anytime soon. My view is we, developing in the States, we don't have to be Paris, but we should be a noticeably less shitty version at Houston. So, you know, we're going to be producing something that's either kind of a commodity or a commodity with a little zhuzh on it. You know, and that takes real work. Incremental Development Alliance has trained over 10,000 people the last 11 years, half of them women and people of color. And they're doing amazing work. It was like the proudest, I couldn't be prouder of that group of folks. So they do workshops, they do training, they help cities understand how to clear the underbrush to make it possible for small operators to survive. And so most of my work these days is on our own development projects, largely infill and, you know, some development advisory for smaller outfits or people that want to build in smaller increments. And we do a lot of pocket neighborhoods and cottage courts.
Speaker 2So I think where I would like to start is digging into the ADUs. So I think most of the people listening in probably would say they have somewhat of an understanding of what they are. But I'd like to hear from you what, for people listening in, you know, what are ADUs and how do people, sometimes, misunderstand ADUs and what they are?
Speaker 1Well, they're meant to be an accessory to something else. So you've got a larger house and a little cottage in the back or a unit over the garage, a granny flat, you know. But you'll also sometimes see an accessory dwelling unit actually attached to the main house. But the idea is that to be, it's a dwelling unit, like under the building code, so it's got bathroom, kitchen. Cooking in actual range and stuff. But they're typically going to be smaller. And a lot of municipalities will regulate them relative to the size of the house. Like where I live, you can have one as big as 800 square feet or half the size of your house, whichever is smaller. My house is 700 square feet. I could have a 350-foot ADU, so. Now, the reasons why people want them is typically issues of greater flexibility. Maybe you want a home office that the next time your sister-in-law gets divorced again, you'd rather she not be in, like, the second bedroom in the house. You know, it's like, she'll stay longer, you'll get along better. Boomerang kids. We used to lease ours to kind of a rookie elementary school teacher. And it would throw $500 a month toward our, our mortgage. So it would make our, our house payment more affordable for us, so we didn't have to have two jobs to support the house. So, and I think that these days, with so many people working from home and having side hustles and everything else, to just be able to arrange your buildings with a little more flexibility is a great, a great thing to do. There's always room for people to get the wrong idea and get really upset about something they haven't done. And I actually read, you know, and go on cable TV and wave their fingers and stuff. And so, so when, when a city is maybe considering an ordinance to allow accessory dwelling units or backyard cottages or laneway houses, you hear all these different words, it can be pretty controversial. And I think a lot of it comes down to, you hear people talking about, well, you know, we just don't want renters. You know, renters. And when, when I hear people talk about, in my town, it's like 48% of households are renters. It's like, renters, when you talk about half the people in town, it's kind of, that's, that's really, these are your neighbors. Relax. I think one of the reasons why folks get upset about the prospect of renters is they may be remembering when they rented and the sort of behavior they had. They engaged in, maybe it's that, but I think more realistically, I think that we put so much emphasis on home ownership that it's, you're graduating into being a real grownup, right? So somehow if you have signed three quarters of an inch of mortgage paperwork without reading it, you're somehow a better person. And at that point with, you know, 5% down, you're basically renting with bank debt. You know, it's like. You're not that special, you know, or that somehow if someone is renting over someone else's garage, we'll see the collapse of civilization and your property values will dive. And, you know, uh, so it's uncertainty. People are worried about change. The, uh, what about parking? What about all of the traffic that will be generated by nurses having to go to the hospital? You know, it's like, so it isn't, it isn't right. The opposition of this is almost never. Rational. It's always kind of emotional. And, uh, my wife explained to me that humans are incredibly social and are capable of tremendous emotional investment and are also capable of rational thought if they feel like it. And, and that's not what's going on in a lot of these when it's more controversial. And so once somebody actually builds a few and people see that. It's fine, then things smooth out. You'll often see a city council adopt a requirement that, well, you can have an ADU, you can build a cottage in your backyard, but either the cottage or the house has to be occupied by the, by the owner. Otherwise it's the end of the world, you know, and those things almost never get enforced, but they're kind of put in as a, as a, some sort of feel good measure. I mean, realistically, if you have to move away to take care of your mom in the next town and you could rent out your house, but the cottage in the backyard has to be vacant, it's just dumb. So the, so the, the, I think the, the big challenge is to kind of get things calmed down, build some good examples. People see it on the ground. It's fine. You know, and I think that being able to have a lot more flexibility in the. The way that you, as builders, the idea that we could build two bedroom, two bath houses that had the third bedroom over the garage and people's mortgage was less because they were renting out over the garage. It was like, it was a product line nobody else had. And, you know, we had a waiting list out the door. I think it's a, it's a good way to, it's a good way to, um, serve a lot of latent demand people that want it, but can't find it anywhere else. And if you're looking at just the conventional kind of single family subdivision, townhouses, garden apartments, and the like, a lot of folks end up kind of settling for their least worst option. And it's a huge amount of money involved. There's a lot of pressure. And I think to, if you can have a little bit more room in how your buildings building or buildings work together, I think that's all to the good. So a big fans of ADUs. We built a lot of them. We did do some backyard cottages, but for the most part, we did units over the garage. So, uh, which is almost a no brainer. So our standard garage was like 26 by 24 deep and the, and the, and so you put a standard two car garage door and then to one side, you'd have a hunk of wall big enough to put your utility meters on. And then along the side was a door and a stair bay take you upstairs. little one bedroom studio and you can park right next to your garage. it's not like we were inventing cold fusion or anything. People have been building this stuff for years. They just kind of got out of practice. So I think that what's happening in my neighborhood since they're little 700 and 800 square foot houses is people are adding on to the house to make it like a three-bedroom, two-bath. They have a master suite. And then they'll have a door that locks that goes to the master suite. Master suite has like an eight-by-nine bathroom big enough for a stack washer, and a little galley kitchen, which is not a kitchen. It's a heck of a wet bar. And a little porch to the outside. And they'll rent that out separately or they'll move into it. And now they've got enough square footage to get to a larger ADU. So you end up with what's essentially kind of a stealth triplex. And for, you're able to, today's mortgages, you can, Fannie Mae, Freddie Mac, VA, FHA. If you have two or more units, like on the one property, the standard mortgage that all those entities write will allow you to claim 75% of the gross rent toward your income to qualify. So instead of white knuckling it with two people that absolutely have to have a job, otherwise they lose the house, you could have one person with a job and your real estate, you know, helping you qualify. And you could end up with, you know, your share of the mortgage payment could be a couple hundred a month. Takes a lot of pressure off, makes room for exotic things like daycare and medical insurance. So again, not rocket science, but I think a really stable, straight ahead kind of way to do things. You'll often see them more popular in existing older neighborhoods with small houses rather than new subdivisions. Particularly if the new subdivision has the garage sticking out the front, you know, it's an awkward arrangement to add a little building in the back. But if you've got, if you're building your new subdivisions with alleys, it's a breeze. So, and we would typically build on like 36 or 40 by 90 or 100 lot with an alley in the back.
Speaker 2So one thing as I'm, I wrote a few things down here as you were talking, because it feels like these can serve multiple different purposes. I mean, you've got, you know, I mean, you've got the concept of people looking to rent at something that they can afford. You can provide that housing to those individuals. You also have maybe some of these, well, whether they're existing homeowners or maybe for even first time home buyers who can have some rental income to help them be able to afford the house or like you said, not necessarily have to have both of the people living in the household or everybody in the household actually having to hold down a steady position or a steady job. And so that all makes sense to me. I'm curious if there's any, are there any reasons or situations where ADUs don't necessarily make sense or maybe there's better options other than ADUs?
Speaker 1There are situations where the prospect of even considering an ADU will get you several crazy hostile people on the city council for several years. If people are upset about this, it's almost glandular. You know, it's the one issue they're running on. They're ruining our neighborhood with renters. And it's like, they're not. You know, so it's a, it's a hypey thing. And I think people would be well advised to understand the audience. And, you know, if you're in a situation where you think it's a really swell idea, but you're going to be kicking a hornet's nest, you should, you know, you should reconsider. In terms of places where they don't make sense, that may be more an issue of infrastructure where you're on minimal lots that have septic. And if you try to put another building in, you don't have room to expand the septic field or something. So, you know, there could be some kind of hide bound situation where it doesn't work. In Portland, Oregon, where we lived for a couple of years, there's an outfit that would jack up houses and, you know, off of a crawl space and make a full basement. Then they would finish the basement and set up an egress well, and now it's a duplex. Or, you know, or an ADU underneath the principal house. So there are a lot of different ways to do it. I think the, where things get complicated is if you decide that, well, we could have a bazillion people living here. So if you're going to build an ADU, you need to have three parking spaces off street. Or, you know, wouldn't be a big deal to tap the sewer from your ADU into your service for the house. You know, just running around the outside and bring it in. But there are municipalities who say, oh, they have to have their own dedicated utilities. You know, so it doesn't take much to load up enough extra cost onto a little cottage that, the juice isn't worth the squeeze. And so, and that's really a function of kind of the, you see a lot of people that really do need to have a kind of a one-size-fits-all way to approach regulating things. And that always ends up with something that, no, it, one-size-does-not-in-fact-fit-all. Places that will allow you to count the parking spaces on, at the curb toward whatever number that you're supposed to have make it a lot easier. And if there is no alley, then a corner lot makes it a lot easier to, to do this. If you're on like 36 or 40 foot lots with like a bypass driveway, older, older houses, it can still work. But, you know, it's a, it takes a little more tailoring. I, I don't think it's like the universal cure. I think it's one of a number of solutions we should be trying as often as we can. The thing is that if your municipality is not ready to take that kind of baby step, probably want to find another town to work in. Because if you're trying to do, if you're trying to do something more substantial or more different, and they can't get their arms around an ADU, they need to see you build somewhere else and invite you back. Uh, rather than you don't want people to sort of begrudgingly accept this under duress. Nobody's going to do their best work, you know, and it doesn't take much to gossip it up into some horrible end of the world scenario. So it's emotional. People are, are then told that protecting their property values is something that I think you, people figure they have a license to be a real jerk if they're talking about protecting their property values. And I, and I think that communication suffers when, when we take on those kinds of positions.
Speaker 2One thing I want to, I have one more thought here on this same topic, and then I'd like to get into the pocket neighborhoods, but on the ADUs, one thing I was thinking about coming into the conversation was we see a lot of new communities being built and a lot of single family residential communities that are built and they're, they're somewhat spread out, right? These big master plan communities and everything. I always wondered what those would look like or could look like. If something like ADUs were built into the concept and are people, do any developers do that?
Speaker 1Oh yeah. No, there's, there's a whole subspecies of developers that are doing traditional neighborhood development, TNDs, or new urbanism, walkable communities. And they're a standard part of the toolkit, you know, along with duplexes and row houses and mixed use buildings and stuff. So, and the, we put the plans that we built up, you know, we put the plans that we built up, on a stock plan site called Liberty House Plans. And it's a very well curated site. A lot of stock plan sites are like thousands of terrible houses and a couple of good ones. These are all really good. And so, that we've seen some municipalities put together like a collection of plans that are pre-reviewed, you know? So if you want to do an ADU, here's five. Some places will even give you the plan, the plans for free. Or it's already been through, the whole plan check process. And all you need is a site plan to pull a building permit. Creating ways that not just make the barriers not too terrible, but creating ways that actually encourage this. We're seeing a lot of that, both for infill and for new greenfield projects where, you know, that's the ADUs and the other building types, the other kit of parts are in common use. And they appeal to, you know, I live in Fulton County, Georgia, where Atlanta is. And 32% of households in Fulton County have one person in them. And those people are living in three bedroom, two bath houses, because they can't find a one bedroom or an ADU. So I think that there are big segments of the market that are not well served smaller households, one person, one person, plus one kid, two adults. This market is maybe 25% mom, dad, and kids, and 75%, a whole lot of something else. And I think that people's commitment to a house, to a neighborhood is significant enough that they ought to have real choices and ADUs can help flesh out that range of choice. If you make everybody drive an F-150 and nobody can buy a Mini Cooper and people have to settle for an F-150. If you're buying an F-150, you should really want an F-150 and not a Mini Cooper. You know, of course, Mini Cooper a little more expensive, per the pound, so, I mean, with an ADU, So the ratio of like expensive space you're building, kitchens and bathrooms to other is higher. So they're going to cost a little more than the house would to build. But on a rental basis, they're almost always a home run. Or if you need to split your house into a place where you work and a place where you live, rather than you have a corner of the living room you're working in, an ADU is a great solution.
Speaker 2Well, let's dig into pocket neighborhoods now. So this is something where it feels like you get a lot of older communities, I feel like, are set up in a way where you have the road going, you have the road in between, you know, some houses, but then you have the alleys where you generally would find a garage or you'd park and you'd actually enter the home from the, either through the garage on the backside of the home. And is that essentially what these pocket neighborhoods are? Or is there a different way you'd define them?
Speaker 1Well, the term pocket neighborhood came up when somebody was touring one of Ross Chapin's projects in the, in the Seattle area. It was like a little neighborhood I could put in my pocket. And it really refers to kind of the scale and the idea that if it's houses facing a street with maybe an alley in the back or driveways, the scale of the street is modest and people drive slow. And, and now the street actually becomes like a public space. That's the. It's like an outdoor room formed by the buildings. So you'll see pocket neighborhoods that might have two or three cottage courtyards incorporated into them and some places where buildings meet the street and behave differently. But Ross's book on pocket neighborhoods has, has great materials and great examples from projects built by a lot of people all over the country. Now a cottage court or a bungalow court is the thing that comes to us from built in the. 1910s where you'd have houses arranged around a common courtyard forming that outdoor room. So you have a little detached houses or maybe duplexes. In some ways it's like a deconstructed apartment building with a bunch of little cottages. So you, you, now you don't have a common wall or ceiling and floor with somebody else. You probably have a little private side yard, a little patio fenced off that you can let your dog out at three in the morning to pee. Plus your front. And the porch faces this courtyard, which is landscaped on purpose. Parking is convenient. Fire trucks can get through and we like to, we built almost 90 units in, in cottage courts of eight to, to 10 in California and Chico and writing before 2008. Since then, I've only been involved in cottage court projects for rent, because in many places you end up having a, like a condo. Or elaborate homeowner association. And it's, it's a lot of, a lot of brain damage. Also, we found that the, when we built them for sale, they were very popular with single professional women aged 40 to 60. And they had very high expectations. I got the definite impression that they were hoping that their little cottage, two bedroom, two bath, just them, that their little cottage would be like a Bavarian automobile and everything. It would be just right because they'd seen Ross's project and find home building and stuff. And we're building in the central Valley of California, building these things out of wood with a crew of dyslexic parolees. So they were not going to be BMWs. You know, we were going to have warranty issues and stuff. And so the residents of the cottage court would form the bonds of community really quickly. And if somebody's water heater made a funny noise, suddenly nine people. His water heater was making a funny noise and we needed to get on top of it, take good care of people. So in the end, if someone resold in four or five years, they would make three or four times what we made. And we took all the risk. Plus, you know, we had to spend a lot of time in windowless conference rooms, explaining to appraisers what this new product was. When it came time after 2008 to build cottage courts for rent. I mean, we have a project in ocean Springs. Mississippi called cottage square, which got started as a recovery housing after Katrina. And the zoning for that was highway commercial, which also allows multifamily professional office, drive-in banks, whatever. So there's a barbershop in a cottage. There's a hair salon in a cottage. There's a marriage and family counselor, a cottage architect's office in a cottage. And then the other 28 cottages are people living there, one and two bedrooms. And what we found. Was that, you know, the nearest kind of direct competition where you could get a one bedroom. There was almost 800 square feet, kind of back to back in a garden apartment, eight foot ceiling, popcorn ceiling. Uh, they had taken the steps of upgrading with grayish vinyl, luxury vinyl plank and replaced the, the, uh, cabinets and put in granite counters. But otherwise it's kind of a commodity apartment boat. Those are 900 bucks a month. We were renting for nine 50 for 400 square feet, one bedroom with a little porch out the front. What we were building was very appealing to the market. It was affordable to local workforce and it was a big hit. And then when people would renew every year, and if we wanted to change the landscaping in the courtyard or replace some trees or put down some more crushed limestone somewhere, we just do it. We're the landlords, you know, we don't have to do a committee thing. And I think the, uh, uh, cottage court like that, again, eight to 10 units in some ways is like the gateway drug for someone getting started in development. It's not like you're building a, an eight plex where the whole building has to get a CFO before you can lease anything. You get one cottage built, get a CFO, you can rent it out. They're typically not requiring outside of California. They're not requiring fire sprinklers. You know, once you get to three units or more, you're moving into the commercial, the international business. You know, you don't have to pay a lot of money to rent a house, but you're not going to be paying a lot of money to rent a house because you're building code rather than residential. So things get expensive, but you're providing actually a superior product to an apartment building and your tenants, uh, appreciate the difference. They pay a premium rent, they renew, and they feel more connected to each other. It's not someone you say hello to in a long hallway. You're, you're out in kind of a, a little more elevated space. It also is a beautiful kind of a postcard shot. And the same people that might want to ride you out. A town on a rail. Cause you wanted to build apartments for renters. I don't like to use the term like tiny house. Cause that, and the building code that includes like houses on wheels, but a cottage just, I mean, you think about it, it's like a cottage is intentionally like cute and cozy on purpose. Yeah, it is smaller, but it's cute and cozy and it's not for everybody, but for some people it's just the, it's the. It's the house they've always wanted. And these days, um, it's not that hard to, you know, get a construction loan for five or more units and to get a permanent mortgage for it from Fannie or Freddie or, you know, a debt service coverage ratio loan. We're looking at them in places where just outside of a Metro area where the U S department of agricultural will, uh, for a fee, sell you a 90% loan guarantee for multifamily. And then they're, they're thinking that. They need the income, the rents to be affordable to somebody at a hundred percent of area median income, but they will use the area median income from the larger Metro. So one of the projects we're looking at one bedroom cottage, you know, 500 square feet rents for 1800 bucks. It would be okay to rent that for $2,300 and still be underneath the cap that the department of agriculture has. What market rate is going to be 18? So you're basically, you're getting a. Federal guarantee on a project that's building market rate housing just happens to be like in the small town, you know, five miles out of the big town. So we're looking at that in a number of locations around the country with local people doing it. I'm just shipping them the proforma and helping them with the site plan and stuff. The key to all this is always going to be foreign follows finance parking and fire access, and then the building should look good, but if you don't get those other ones in place, you don't. So you're going to have to get a chance to have good looking buildings.
Speaker 2What about the density of these? So obviously if you're in apartments, then everything's attached together. And so it's all, it's all touching anyway. So when it comes to like privacy and density and stuff like that, I'm curious how in these cottage court or these pocket neighborhoods, do you run into any issues with people concerned from a privacy standpoint or anything like that when they're really packed together?
Speaker 1Well, they're not really packed together. You want room in between. Okay. And also. If you do it right. What we do is with each one of. Our. Our, our floor plans, we have what's called an active side, which is full, you know, as many windows as you want and a passive side where if there are windows there, the cell is set at six feet above the floor. So the one with the, with the windows facing the other one gets to use all the way up to the wall of the building, like a zero lot line, except they're separated enough that you don't have to have rated walls. So you got a 10 or 12 foot side patio and it's fenced in the front and it's private. So you have. You have the courtyard, you have your front porch, which is kind of semi-public, you know, you're available. for conversation if you don't like that guy you can go inside or you can go inside and go out the kitchen door and be on your private patio so you have a lot of options and but density has always bothered me that people give it so much weight it's like i mean technically i have the same density as brad pitt not quite six feet tall you know male white guy somehow the way the pattern that brad pitt has arranged in is apparently more financially rewarding than me but zoning like white guy one each you know i mean the the obsession with like counting dwelling units per acre as if it means something and arguing about oh 12 is too much and eight is maybe okay but goldilocks would be not it's like do we really need to engage in that level of abstraction about building places that are worth caring about i don't think we do we can deliver cottage courts at a range of 12 to 24 units to the acre without them touching so it's basically townhouse to garden apartment yields but a if there is a uh a density limit then maybe you build on half the site and wait for the you know for the zoning to change so you can build on the other half because you've demonstrated that no one died and i think that when projects come through and it's all about arguing about the number of units per acre mostly people have forgotten what the buildings look like and so it's a little bit like having a tax code conversation with someone who actually actually read the tax code i hear a lot of people who say well i don't know i don't know i don't know i don't know i'll have to pay taxes it's like well yeah but it's in this chapter here i don't want to read that i think that the cute and cozy little houses forming uh an outdoor room what you see happen when people kind of walk into that courtyard is they like they lower their voice because they're aware that they're kind of on someone else's turf and there's a level of uh like i say eight to ten units is nice for a courtyard you get closer to 12 and people become a little more uh standoffish a little more anonymous so if you're going to do multiple ones you might string them together with like a passage or paseo but they're each kind of distinct plus also it makes it really easy to phase in a lot of the planning textbooks and stuff you'll see cottage courts is like a really tidy rectangle and what we find is that it works better if you have some random amoeba shaped lot with a couple of mature trees and some topo and stuff because you're working with small footprint buildings and doing cool stuff you know compared to mass creating for garden apartments and losing all the trees and all that and we're also able to you know you could find sometimes a piece of land that's zoned multi-family or townhouse or something where you could do this where if you build it people could walk to exotic stuff like daycare and two dollar coffee which to my mind that's like a real amenity versus the apartment complex with this kind of a janky swimming pool nobody uses but you still got to pay to build it operate it insure it and it's just there as a tiebreaker kind of well i'm not going to use it but my grandkids might so i'm going to rent there because that is a pool and that one doesn't and i think that a lot of you know the big apartment complexes that are big enough to have on-site management it's you know it becomes kind of a commodity form of housing you know no one really has an address nobody's unit is unique the hallway in between nobody rents in that apartment because they love the hallway and i think also cottage courts are typically one one and a half story buildings sometimes two for somebody that wants to live on one level have a little garden have a dog have neighbors they pay a little bit more per square foot in rent but they do it gladly so we're happy to
Speaker 2help them with that are there any other things that you think a developer out there who might be listening that may be considering doing their first cottage court project is there anything else that they need to be thinking about or anything like that before they take on a project like this
Speaker 1i think when you branch out into new product you need to keep your kind of the scale of your project kind of modest and you want to keep the level of complexity kind of tapped down because there's a lot of learning to go through particularly if it's if you're the first person doing it in your area so if somebody was used to doing small lot subdivisions or townhouses or even garden apartments if they were used to doing it that way i think they should be really rigorous and you know run in parallel like here's my townhouse project if i did the same land and i did with this cottage court what do the numbers look like what's the utility installation and this one i would do townhouses i would sell them i do cottage court i would hold on to it how the taxes work with that so i think rather than just i like the look of this i'm a capable builder i want to try it i think sort out the business case if you're a townhouse builder and you used to sell in townhouses cottage court's probably not going to be a good deal because your cottage court buyers are going to be much more demanding than your townhouse buyers were and also your trades and everything you're talking about introducing new product so i would look at it as the opportunity to expand and add to your toolkit because there are going to be some places that just townhouses are not going to work but a cottage court physically it might make more sense also when you think about like the spectrum of all possible developers right between like gandhi and darth vader and people talking about oh yeah there's a developer going to come talk to the city council everyone's expecting someone from the vicinity of darth vader like a villain a guy in a nice suit with a leased car and a briefcase from out of town right and oh you know those people and so if you're the local small townhouse builder you're going to have to think about what's going to happen and you're going to be a small operator and you're doing things like cottage courts and infill and the like your job is to have enough daylight between you and that guy so that people actually support your projects and are happy when you build them so your job's not actually to be like you know gandhi the perfect human developer your job is to be like a noticeably less shitty version of darth vader you know where local folks like well if it's going to get developed i'd really like for janine and jenny to be able to do that and i think that's going to have to do it because you know they that cottage court where my mother-in-law lives that they did it right so it's a product that it can be part of your identity as a builder it can happen on smaller lots than would be necessary for say townhouses or garden apartments it'll get good social media and also the the sort of folks that move in there tend to recruit their neighbors you know so someone works at the hospital they can live three blocks away in a cottage court before you know it it's full of nurses and they're happy to be there and happy to renew the or the traveling nurses come through it like and if you're going to be doing you know short-term rentals having one or two that you do short-term and the rest of them you do as a regular rental project you know it's not hard to imagine that but folks that are used to building and selling and paying ordinary income tax on their profit from building the idea that you could have a small portfolio of rental properties that have a small portfolio of rental properties that have a small portfolio of rental properties that have a legal no no when you refinance it it's like getting your uh home equity loan you don't pay taxes on your home equity loan you know when you refi and for the most part you'll see that the cash flow that comes after paying your expenses and your debt service that that money is going to be sheltered by your depreciation anyway so you're making 50 grand a year off your cottage court it's going to be tax-free and also you still own the asset right so you're not going to have to so if your project is like the whole neighborhood and things are getting better all the time each project has the pencil but there's kind of a flywheel effect and and rousing values you end up with equity in the property that you could borrow against if you want to start another project like i say gateway drug for small small developers
Speaker 2well i think at this point just based on where we're at time wise i'd like to shift into the last segment so to keep this episode consistent with all the other ones i've got five questions for you and they're all going to be pretty much on topic of what we've been talking about just uh get your thoughts on a few things here so first one for you do you prefer front porches or backyards i
Speaker 1prefer both you do it right you know the i mean the purpose of a front porch is to have people know that's how you get in the house but also to get the sun off of your living room windows you and also the porch ought to be big enough to furnish so you could you know you don't have to entertain but you could if you wanted to if there's too small and all it is is like cover to like fumble for your keys in the rain or i see people all the time they'll cut eight foot material to put a four foot porch on and they have all the labor and all the material there already they may as well do a proper porch now a backyard or a side yard should be set up so that you have more privacy than you would in the front so it really is a question of working with a pattern that can give you both more privacy in the backyard a good public space and also when you think about I mean, we've all seen neighborhoods that was like two car garage door, barely a man door and kind of a window and some lick and stick stone. And there isn't even a walkway that goes to the man door, kind of jogs off of the parking pad. And so, you know, you could, and cheap people just, you know, everyone's parking in the front yard. There's a transformer in the front yard. The street isn't really, doesn't feel like a safe or public space. And it should be a machine that sells real estate. You know, if you flank the street with, you know, houses with porches and you have five foot sidewalks and you have a planter strip with trees that provide shade and a place to park, that's a machine to sell real estate. And if it's just a bunch of roll curb and parking spaces. And transformers, that's like, you know, the loading dot. Let's go to number two here. So do you prefer alleys or no alleys? Alleys. Alleys all the time. But I don't like a single loaded alley, like on the edge of a property. What we'll do there is we'll do a little stub alley, two of them, and then three lots in each side facing a common court. Rather than front loading garages, we'll use the stub alley scheme on the edge of the thing. And we typically. You'll do a 12 foot paved section inside of a 20 foot right away and have the utility easements left 30 feet between the buildings back there so that people can make the turns. I mean, you can store a lot more muscle cars under renovation off an alley than you can in your front yard. And and also it sets it up so that a lot of municipalities won't collect trash in the alley anymore because they're using a robot truck. So everybody says roll their trash to the front. But it used to be you could also run the trash cans and be in the alley, too.
Speaker 2All right. Third one. If you could change one zoning rule, what would that be?
Speaker 1I would remove. The responsibility for city staff to guess how many parking spaces every possible use of this building would need until the end of time. Because they're really bad at guessing. And they make you build more parking than you need. And. And. And it's just dumb because and they'll they'll overestimate because they don't want to get phone calls. Right. So now you're adding cost to the build. For something that isn't necessary. So regulate where it goes on the private lot. But however many or few you want to build as a builder. I don't have them telling me how many toilets or closets I'm going to build, but somehow they're going to tell me how many parking spaces I need. It's nonsense. And you have people that get really, really, really militant about parking for no apparent reason. We get lots of problems to solve. Parking is not one of them.
Speaker 2All right. Fourth one. You've worked with a lot of developers over the years. What's something that developers tend to overthink?
Speaker 1They tend to overemphasize the for sale element, even though they're going to be doing some multifamily or some mixed use. Because they see that as the early cash flow. They have some prime lots they can sell. They can get things going. I think they also once you've decided that your capital source is going to be more or less institutional. Then you start making mistakes about how big you start tailoring your project to the financing. You start amplifying the potential risks. So I think that a lot of developers feel like they're comfortable with their product, but they're not good at analyzing risk. And they're not good at understanding how much additional risk comes when you use large amounts of money.
Speaker 2All right. Last one. What do you wish more people would understand about land development?
Speaker 1I wish more people particularly. Elected officials and neighbors and staff would understand the math, you know, that you're at the planning commission and you wanted to do an eight unit project. And for some reason you leave with five again for no apparent reason, you know, somehow more neighbors is worse, you know, less neighbors is good. And I think that understanding that you still have all the utilities to build, you still got a lot, everything to do, but by making it go from eight to five. It's now a project that's not going to happen because it doesn't pencil. So I wish people understood the basic math and also understood the hoops you have to jump through as opposed to we need more hoops for people to jump through because we can't be having people coming from out of town change in our town. Let's give them some more hoops. Of course, my daughter can't afford to live here. She's going to have to move, you know, because it's really expensive to build a town here.
Speaker 2Well, John, I think that brings us to an end here. I really appreciate you hopping on here. And, uh, sharing some of your knowledge and experiences over the years and everything. What's the best way for people listening in to connect with you?
Speaker 1Probably on LinkedIn. It's initial R space, John Anderson. That's the easiest way to find me. I'm also on Facebook too, you know, for older folk.
Speaker 2There you go. Well, I'll throw the links, uh, on the show notes page. So if you guys listening in, look down in the description for this episode, you'll see a link there to the show notes page and on the show notes page, I'll put a link to the LinkedIn page. I'll put a link to the LinkedIn profile as well as your Facebook page.
Speaker 1You got another one. Oh, I think also the, I mean, the way that we work and we've taken it for granted for a long time is that if you're doing an early like site plan, you should be doing an early proforma at the same time. You shouldn't get it all drawn and then give it to some finance guy. You can't read drawings who says it doesn't work. And you go back to your architect and say, uh, numbers guy says it doesn't work. Can you guess again? You know, for the same fee. Uh, that's not really fair. And I think that bring the design and the money and the numbers up at the same time so that they can inform each other. And, and you're not left with a bunch of bad compromises just because it's fantastic project, but it, you know, we can't afford it.
Speaker 2All right. Well, anything else you want to add before we wrap up here? No, I'm good. Cat wants to be fed. So there we go. All right, guys, that is all for this episode. If you're not already subscribed, please click that button. We'd love to have you back for the next one. Otherwise, we will talk to you. All right. We'll see you all next week. Bye.
PodcastTranscript AI