Published January 2002

Balanced discussion needed on development rules

You and some associates have formed a partnership and assembled enough cash to invest in an income property. After discussing it, the partners decide to buy some unimproved land and build a 10-unit apartment complex somewhere in the Puget Sound region. It’ll take about half an acre.

You want to be in a neighborhood setting and near schools, bus lines and a grocery store. The site you ultimately settle on is zoned R2, which means you’ll have to petition the city it’s located within to “up zone” to R4 in order to fit 10 units on the site.

You engage an architect at this point, and plans are submitted to the city. Things seem to be rolling along just fine with your zoning change request. It turns out you’re inside the “Urban Growth Boundary,” which is a definition within the Growth Management Act that identifies urban or rural areas for development purposes. You think you’re home free.

But because you’re asking for a zoning variance, you have to conduct neighborhood meetings for public comment. This is when it starts getting interesting.

No one shows up to support your plans. No one. In fact, it seems the entire surrounding neighborhood thinks you and your partners have devil horns on and are inviting crime into their neighborhood. You just wanted to build a nice little apartment complex for some retirement income, not start a neighborhood feud, you think.

Ultimately, a public review board approves your variance request, but only after you’ve spent another four months and doubled your architect and legal fees to get through the process. You’ve only just begun.

Through the permit process, you’re told you need a “buffer zone” around an area in the corner of the property because of a stream down below. A Level One environmental report is required to determine whether there are contaminants in the soils. Another five months and several thousand dollars later, you are cleared to build.

But because of the buffer zone requirement, you’ll only be able to put six units on the property. After reworking your projections, it seems you’ll now need about $1.20 per square foot of rent on the finished building, or about $1,100-a-month rent on an average-size two-bedroom/one-bath unit just to break even the first year — assuming you have little or no vacancy loss. Average rents in the city where you are building are $0.82 per square foot. That’s about a $350-per-month difference in asking rent.

The bank now requires more cash in the project from the partners because the appraisal won’t support your rents. Half of your partners now want to cut their losses and walk at this point. Ahead are changes in interest rates, construction costs, mitigation fees and other challenges before obtaining an occupancy permit and actually hanging a “For Rent” sign.

Sadly, this is a scenario that is repeated often by local developers. The business of developing real estate is so specialized and carries so much risk that developers are simply unable to make sense out of building new residential properties. More projects are scratched than are ever built.

Restrictions on supply of developable land result in increased cost and risk — so much so that many developers are either out of the game or forced to push rents up considerably in order to just break even. Couple this with sometimes negative public sentiment toward growth, and the development game is hard to play unless you have the horsepower to handle it.

Of course, the real impact of development challenges is felt at the consumer level — as it almost always is in any free market. All of these costs and obstacles mean higher rents.

Development needs to be sensible, though. Look to Houston and its no-zoning restriction policies of the ’70s and ’80s and we see an oversupply problem that created boom-and-bust housing cycles. Or Atlanta, where they’ll deliver approximately 16,000 new apartment units to the market this year with many projects not meeting projections due to oversupply. That’s almost three times what the entire Puget Sound region will produce this year.

There has to be a balance. Restrictions to sensible development that push prices up artificially only serve to ultimately erode both demand and limit supply. They weaken the economy.

Likewise, unrestricted development rules push too much supply into the market in too short a period of time and can have the same effect.

No-growth attitudes don’t have any please in the dialogue. They, of course, feel good to advocates but have the result of making housing more expensive. Plain and simple.

Finding the happy medium is the goal. Balancing the discussion by making creation of affordable housing important to all is the first step.

Tom Hoban is CEO of Everett-based Coast Real Estate Services, a property management and real estate advisory company. He can be contacted by phone at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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