For residential developers and home builders, the economy and real estate market may have reached rock bottom and the long, slow climb out has begun. However, most of us know that any progress that has been made needs to be proven to be not only substantial but sustainable before any large scale investment into new, stalled or shelved projects can be made. Until that time when developers and home builders are comfortable making major financial commitments, however, there is a great deal that can be done today that will truly pay dividends in the future.
While there has arguably been no worse time to be in residential real estate development, there is now no better time to try to renegotiate, i.e. correct, some of the zealous decisions that were made during the last peak. These decisions and agreements made during the fast and furious boom cycle of 2001-2006 are the impediments that now burden most of the inventory and projects available for development today.
Below are some strategies by Todd Hill (a property developer) to bring today's economic reality to the forefront and to "reset the clock" for some of these projects through renegotiating onerous stipulations and restrictive development terms and conditions.
Adjust the Timing and Payment of Impact Fees - Many jurisdictions are amenable to adjusting the timing of impact fee payments today and it is a small consolation that can obviously assist a builder with cash flow management. Payment of impact fees on a speculative home prior to sale increases the cash outlay that a builder has to put at risk and ultimately carry until it sells. As has been well documented, impact fees are a significant expense that can be as much as 10% or more of the cost to construct a home today. However, if a home is speculative and unoccupied, in definition it should not be impacting a municipality's utility and life safety infrastructure for which the fees are designed to offset. By delaying payment of these fees until close of escrow on a home, a builder will be able to delay a significant cash outlay and reduce risk. Additionally, if a builder is using borrowed funds to pay all of the associated fees and construction costs up front, delaying payment can actually reduce interest carry on each home and enhance price affordability.
Adjust or Defer Permitting and Review Fees - Many municipalities have not escaped the economic downturn and are in need of new construction and development to generate tax revenue. New projects also keep planning and engineering staffs busy. While review and permitting fees are traditionally paid at time of submittal, many municipalities are open to restructuring payment schedules to resuscitate their general fund and to keep departments staffed. While their latitude may be limited in reducing or adjusting fees, deferring payment of thousands of dollars of fees would reduce initial expense and risk associated with a speculative new project.
Expedited Reviews, Approvals and Permits - The current economy has substantially reduced the volume of new projects being submitted to planning, engineering and building departments everywhere to the point where there is substantial over-capacity. In order to prevent reductions in staff many municipalities are willing to provide expedited review times, permitting and inspections to foster further development and construction. Any municipal concession that can reduce a project's time to market has the potential to reduce overhead and give a builder a competitive advantage.
Adjust the Timing for Installation and Completion of Infrastructure Improvements - Likely the most significant cost of residential development today is the high cost of designing, permitting and constructing the necessary water, wastewater and transportation infrastructure that serves the communities and projects we build. In order to protect their interests and to guarantee completion, most municipalities and governmental authorities have required the construction of costly project infrastructure that may be local or regional in nature at the time of development which is often prior to when additional demand requires. Simply delaying this responsibility would reduce the initial capital expense for a project and ultimately increase its rate of return which may allow a stalled project to move forward.
Reduce the Requirement for Project Assurances - Performance bonds and irrevocable standby letters of credit have been the norm for many years by most municipalities. These assurances often come at a premium for developers and builders alike. However, as we are seeing today, these assurances have simply not acted as intended. These improvements are not being completed, they sit uninitiated or incomplete and consequently the development which relies upon its completion remains stalled. The best method to get infrastructure built is to allow developer's back in and to incentivize them to complete infrastructure through putting limits on home closings through what is known as a Certificate of Occupancy Agreement. These agreements restrict the issuance of Certificates of Occupancy until such time as the corresponding infrastructure is completed. They therefore can provide more flexibility and significantly reduce a developer's cash exposure.
Allow Temporary or Alternative Solutions to Infrastructure Improvements - During the residential upswing, it became commonplace for a municipality or government authority to require the over-sizing of infrastructure improvements or to require optimal systems components, i.e. "gold plated "infrastructure. While these requirements would meet the demands generated by growth for many years to come, they also have increased the cost of development exponentially. This was particularly true of water and wastewater improvements. The technological solutions available today are much more efficient and can provide a temporary or alternative solution at a fraction of the cost of some of the older and more "accepted "technologies.
Allow Smaller Project Phases - Many master-planned projects designed and engineered over the last ten years were designed with project phasing that doesn't meet current absorption rates or builder needs. The additional expense required constructing a phase of 200 lots or more can handicap a project where absorption rates of old will today dictate a multi-year sell out. Current rates dictate no more than a 10-12 month supply. Allowing a developer to reduce the size of an engineered phase will reduce the initial capital outlay and increase bottom line performance.
Adjust Lot Size Mix to Meet Current Market Demands - The radical economic shift of the last two years has inevitably adjusted a consumer profile which has ultimately affected consumer demand. In many markets and sub-markets affordability has become the primary objective which could dictate a more efficient product and lot size. In other markets demand for new or underserved product types such as multi-family town homes, lofts or even custom home-sites may now be the primary objective. The ability to adjust the lot sizes in a platted and engineered or semi-finished community will allow more flexibility and product offerings that could lead to better absorption and result in better project returns.
Adjust Project Density to Contain Infrastructure Costs - Along with the current economic conditions have come inevitably lower margins on housing products and projects overall. As discussed, as sales prices and margins declined over the last several years, infrastructure costs have become an over-proportionate share of the total cost to complete a home.
Allowing an increase in project density to spread these costs over more homes could make profit margins acceptable and jumpstart a stalled project. However, it is likely that in return a builder or developer will have to provide concessions to the governing authority which may include; additional open space; commercial land; land for public facilities such as police and fire stations, libraries and schools and; additional project or community amenities.
Today's economy has provided an unprecedented cooperative environment for developers and builders to work together with municipalities in bringing projects to fruition. Both builder and developer alike should take advantage of this open forum today as it is likely to disappear once conditions improve. Additionally, by taking some of these relatively simple steps and asking the right questions, one can turn a marginal project into a very profitable one.
As one of the premier home builders in Los Gatos CA, Todd Hill Homes provides new homeowners with quick move-in homes that combine build quality, comfort and enticing pricing incentives. As a company recognized as one of the top builders in America, Todd Hill Homes offers top-quality services that let homeowners see their dream house become a reality.
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