Issue #1: The Weight of Trying New Things

Gravity pulls us back to what is safe

Nov 10, 2020

Welcome to The Inaugural, The Series Premier, The First Edition…of the Good Neighbors Newsletter, where we’ll explore the ways in which real estate development and entrepreneurship can combine as a force for good in our neighborhoods.

Below you’ll find 3 sections, with which I may experiment in future issues: (1) An essay, (2) Things Worth Sharing, and (3) Parting Thoughts & Updates.

The Weight of Trying New Things

Have you ever wondered why so many new buildings look the same?

I often wonder whether the new developments I pass on the street are going to be apartments, a school, or maybe a prison. Guess which of the three the photo below represents:

I know, I guessed prison too. It’s actually my high school - though I went to the previous version where the classrooms only felt like jail cells.

Let’s take a quick look at a few recent mixed-use multifamily developments within a few miles of my house. Tell me if these look familiar to you:

These even have a name, often referred to as “3-over-1” buildings. This refers to ~3 stories of residential over ground-level retail/commercial. Here’s why they are so common:

They maximize density within most multifamily zoning requirements, e.g., height limits or parking requirements
Unlike many larger urban developments, they don’t require expensive underground parking and built-in amenities like fitness centers and lobbies
Cheaper materials like wood framing can be used rather than the more expensive steel needed for taller buildings

Let me be clear: none of this is inherently bad. I want these projects to continue because we need multiple paths to more housing.

The problem lies in a system that requires you to either do a version of what you see above or build something unique for the luxury market. There is very little in between.

The Headwinds

There are some who are attempting to do things differently, to challenge the status quo. I’ve worked with developers across the country who want to spark opportunity for those that have been forced out of the conversation. People bringing true innovation to the construction or design process with viable plans and strong support. And with a few exceptions, I have seen them fail. I’m currently in the midst of these challenges with Chapel, a 40,000 ft2 mixed-use warehouse renovation in a downtown Greenville, SC low-income neighborhood.

The headwinds are strong. The roots of “what has worked” and backwards regulations are deep indeed. Financial institutions won’t lend to interesting projects, or even good projects. They only want safe projects, with safe developers.

It doesn’t take a big leap to realize the impact of this mindset: the projects and the people building them are safe because they’re familiar.

They are a extension of the 3-over-1 mindset, built predominantly by rich old white guys who can either guarantee the debt themselves or (more likely) get non-recourse loans from the same banker they’ve been working with for years.

Let’s get a bit more specific, and talk about what can be done to affect change.

Problem 1: Pre-development
This refers the 1-2 years it takes to rezone...and work with architects and civil engineers and landscape engineers and four layers of consultants for MEP/traffic study/commercial kitchen design and file for permits and hire expediters to get the staff at the city to provide their multiple rounds of comments on your permit application in a “timely” manner...and I’m out of breath.

And this part is expensive. We call these “soft” costs, probably referring to the way they can suffocate a project like a soft pillow being held over your face.

As an independent developer, I have to figure out how to weather 1-2 years without pay - not counting the time it took to identify, evaluate, and purchase the property in the first place. Unless I raise pre-development money, the highest-risk and therefore hardest money to raise, the deal will dissolve and get picked up by one of the big developers looking to do another 3-over-1.
Solution: Ok, maybe this is more of an idea. Anyone want to raise a startup-studio-style fund strictly for pre-development costs of interesting projects from overlooked developers with me?
Problem 2: Loan Guarantees
Impactful real estate projects cost millions of dollars. Investors will choose, every single time, to invest actual cash rather than guarantee a loan. Most have a strong negative reaction to providing a personal guarantee on someone else’s loan. And non-recourse loans, which don’t require a personal guarantee, are reserved for the safe bets (rich old white dudes).

See the circular problem here? It's an exclusive club that can only be infiltrated by the scrappiest.
Solution: Organizations like the Kresge Foundation have started to address this by creating “Guarantee Pools,” but this is an area desperately in need of public attention and innovation. We need more of this and it must be scalable.
Problem 3: Valuation / Business Models
Commercial real estate assets are typically valued, like businesses, as a multiple of the net income they produce. Financial institutions and appraisers then analyze the relative risk of that income, usually by the length of leases in place and how “creditworthy” the tenants are.
And here we are with another circular problem.
The only creditworthy tenants looking to sign long-term leases in neglected neighborhoods are payday lenders and Family Dollar. The other projects never get funded, and these neighborhoods stay the way they are until rapid, less thoughtful change begins. In other words, gentrification instead of equitable growth.
Solution: This will have to change. More and more people are working remotely, and there is real long-term value in flexible leases. Revenue-sharing and short-term leases with tenants will become more and more common. Creative, entrepreneurial thinking will drive future success. And all of this must factor into how we value a project.

Why it Matters

It is a steep hill to climb, but the view will be worth it. With more variety in both the types of projects and the people who develop them, we’ll see more vibrant, diverse neighborhoods bustling with pedestrians and shops owned by local entrepreneurs. More and more people will be able to walk or bike to the grocery store and pick up their kids from school in the same outing. They’ll have access to a park, basketball courts, a bank, and a well-designed home they can afford.

Good Neighbors will be shining a light on this journey. Here’s to seeing more of this:

A Few Things Worth Sharing

Newsletter: Dense Discovery: My current favorite. So well done.
Productivity: Roam Research: More than a note-taking app. It’s a second brain. Takes a bit of effort upfront, but very much worth it in my opinion. I am betting this “personal knowledge database” will be my most valuable asset in a few years. Here’s a great overview of why it’s a game-changer.
Going dad-mode for just a sec to share this photo of my kids. I love it, partly because you’d never know that if you sprinkle water on them they turn into gremlins.

Parting Thoughts & Updates

65% Funded! Actually, I just checked and its 66% :)

We’ve made some major progress on the Chapel crowdfunding campaign. The goal from the start has been to live out our belief that opportunities should be accessible to more than those who already have resources. We want to create awareness of a new way of financing and running real estate projects.

We’re happy to announce that, in perfect storytelling fashion, one or our neighbors has agreed to match the next $50,000 of investment into the project.

If you own stock, have been looking for ways to diversify, or just want to have a say in what is built in your city, we hope you'll consider joining us on this journey.

Become an Owner

Until next time, please share this if you enjoyed! See you on the flip side.

Matt

Good Neighbors