So, this is our last day of class. Instead of touring around Fort Worth, we are stuck in a room reading and editing. Actually, since we have class in Fort Worth on a regular basis and have toured most of the newer developments already, Professor/Dr. Forgey thought it might be a good idea for us to work on our blogs…for 6 straight hours.
This whole journey has been one highlight after another. It started out with a huge success, the City of Austin officials and the Austonian, and ended the same way, aLoft Hotel and Craig Ranch. I may have been a late addition to roll call, but I am extremely glad I was. I learned a lot, as you can see from the novel I wrote for each project/site visit.
I want to take a moment to thank all of the city officials, developers, investors, architects, administrative assistants, and brokers who opened their doors to us. We greatly appreciate the knowledge you eagerly bestowed to us. Also I want to thank my classmates for setting up the tours and for them making the trip that much more enjoyable. Finally, I want to thank Professor, Dr. Fred Forgey for dealing with us day in and day out. Without him this class would never have happened. Thank you all, it was awesome!
{bell rings Dr. Forgey says} “You are dismissed.” {the sound of children screaming as they rush the exits}
City Hall of Dallas is surprisingly an extremely accessible place; one can park and get to where they need to with great ease. Our first meeting was with Mr. Paul Dyer, Director of Dallas’ Park and Recreation Department. It is difficult to convince city officials that downtown parks are important; they want to help only their precincts. But $32 million has been allocated for three downtown parks, Main Street Garden, Woodall Rogers Deck Park, and Belo Garden Park. Golf courses are the only non-governmental source of income for the parks department, where a third party runs the courses and makes their profit on the amenities of the course. Amenities on park grounds like restaurants are on 20 year land leases.
A third party has been hired to purchase properties for city for future parks. Dallas was the third party’s first customer to have them purchase urban land. Another way The Park and Recreation Department procures land for its parks system is through the use of eminent domain, or at least the threat of it. It is one of their tools and helps to keep the acquisition cost down. Though, when word gets out that the city is assembling land, prices go up. A lot of parks are in the flood plains because this is usually all the parks department can afford.
It has been proven that proximity to a park can increase property values. For instance, once news broke that the Deck Park was going to happen a planned 24 story tower became a 42 story tower. The Deck Park is a 5 acre project that bridges over Woodall Rogers Freeway, connecting uptown Dallas to downtown. It will use $20 million from bonds, $16.7 million from the Federal Stimulus, among other means to fund the $106 million project.
With the help of a master plan, the Park and Recreation Department came up with a three tiered program. Tier 1 addresses the current need to update and repair existing park conditions. Tier 2 would add “infill” needs, like soccer fields and recreational centers to areas that need them. The final tier is a wish list. The city liked aspects from all three tiers and has started to implement them. Future initiatives are trying to tie Fair Park back to downtown or at least to Deep Ellum and widen the overpasses 0ver I-30 for the addition of public plazas connecting to Old City Park.
Mr. Mayor
Mayor Tom Leppert was kind enough to take time out of his busy schedule to talk with us about the city’s approach to real estate and development. He emphasized the need for a more balanced tax base, stating that more was needed from the commercial side, that the city is too dependent on the residential for tax revenues. The city has sustainable initiatives that include a green fleet of 2,000 vehicles and using renewable energy (wind). All new city buildings are to meet LEED or other sustainable standards. The Trinity River project will be a boon to Southwest Dallas.
South Dallas seems to be the new frontier, where North Dallas is pretty much built out, the south has a lack of development and copious amounts of available land. However TIF Districts typically haven’t worked in South Dallas, because it hasn’t been able to generate tax revenue. So, one an irregular TIF was created by combining a North and a South Dallas neighborhood and since TIF Districts must be contiguous, they were connected along the DART light rail line. The city is anticipating that this new district will generate $10 million over the next 15 years.
These are just a few of the topics the Mayor was able to discuss in such a short time. We were able to get a couple of photos with him before he headed off to his next meeting.
Sustainable Development and Construction
Ms. Theresa O’Donnell from the Sustainable Development and Construction department joined us after the mayor. Her first comments were on how development has been a huge economic driver for all of North Texas since the late 1960’s. But the current market has seen declines of around 80%, specifically the housing industry. Publicly financed projects are the only projects in construction at this time.
Since Dallas is a land locked city, meaning it can’t expand its borders, it is starting to emphasize redevelopment and trying to increase density in the core (CBD & surrounding areas). Redevelopment doesn’t have a master developer, so the city is stepping in, especially with regards to transit and infrastructure. They will use bond money to purchase existing “bad” properties to have redeveloped. Other than the parks department, the city views eminent domain as poor public policy. So, it pays market value for properties.
Issues of displacement because of gentrification are also addressed. TIF Districts have a provision that any new housing development must provide 10% of the units for the newly displaced residents and provide services that help the other families find comparable housing in the immediate area.
Dallas offers many incentives for development; TIF Districts, Tax Abatements, MMDs, and bond programs to name a few.
City Design Studio & Economic Development
Mr. David Whitley of the City Design Studio joined us prior to Ms. O’Donnell’s departure. The City Design Studio is the Dallas’ office urban design that advocates good public design, internally and externally. It is part of the Trinity River project
Much discussion was on the area just across the Trinity River, where the new Calatrava Bridge will terminate. The community wants to be a destination, a reason for crossing the bridge, a place to go to. With the help of the City Design Studio, a general master plan has been formed and potential industries are being discussed for the area.
Two other major issues are also being addressed, though implementation of remedies may be decades away. The first is how to maintain the existing community and addressing the destination problem at the same time. The second and more difficult to remedy, is the lack of public transportation to the community. The latter may not have an answer for quite some time.
Mr. Karl Zaritkovsky, Director of Economic Development, spoke briefly on the subject before moving into other areas of his expertise. He stated that the City of Dallas has put together four (4) types of financing for private development. Brownfield programs have halted and even the position in charge of brownfield development was terminated.
The bulk of the conversation was about the CDRC’s (City of Dallas Regional Center) initiative with the U.S. Citizenship and Immigration Services, to bring foreign capital to U.S. markets, specifically Dallas in this case. The premise is to give green cards to foreign investors, their spouses, and their dependants under 21 years of age, when the invest $500,000 in regional projects that create 10 new jobs within 2 years. This idea initially started in the real estate industry to finance projects when the markets collapsed two years ago. A fund manager oversees the financials. Korea, China, and Mexico are the biggest players in this initiative.
aLoft
The aLoft Hotel, Owned by Mr. Suhas Naik and Mr. Ted Hamilton, is housed in an 8 story, 158,000 sf historic warehouse/manufacturing building directly above the old Santa Fe Railroad. aLoft is under the W Hotel umbrella, which is owned by Starwood. The project was helped financed by a grant from the TIF district for $4.2 million and historic tax credits, sold to Chevron for $5 million. Half of the equity came from the tax credits. The total project cost was $42 million, which included the purchase of land behind the hotel and an added floor (making it 9 stories total). Approximately $50,000 went into remediating the lead paint and asbestos, minimal compared to the total cost.
Prior to the current TIF regulations, TIF money could only be used toward public right-of-ways. These included, streetscape features, such as sidewalks, benches and street lamps, elevation work on a building, and any remediation to the project (viewed as a benefit to the public. The new regulation allows almost any use for TIF money, because the money is viewed as going toward a project that will increase tax revenue and thereby benefitting the public.
To remain competitive, the hotel must change its rates daily. OTAs, Online Travel Agents like Travelocity & Expedia, have created a whole new way for hotels do business and stay competitive. About 30% of their business comes from the OTAs, but this rate would be higher, say around 60%, if the hotel was located in a more suburban, highway adjacent market.
Besides speaking with Mr. Naik and Mr. Hamilton, we had the pleasure of discussing the project with the architect, Mr. Gary Murphree, the hotel manager, Mike, and the sales manager, Mr. Andy Osborne. Mr. Osborne gave us a personal tour, showing us the rooms and amenities aLoft offered. They are falling short on the desired room rates. However, the hotel has an occupancy rate higher than the rest of downtown hotels, approximately 65% per night, despite only being open for 8 months. Also, the hotel is looking at being LEED silver and possibly gold. The paperwork is still being processed.
Craig Ranch
The Craig Ranch, developed by Mr. David Craig and a “quiet giant” for a partner, Mr. Cecil Van Tuyl, is a 2,200 acre all inclusive, self sustaining, new urban master planned community. A Tournament Players Club, the PGA’s pension fund, golf course creates the spine of the development, running along Rowlett Creek. Mr. Craig built quality of life venues, such as ball fields, ice skating facilities, and fitness trails first to entice would be residents and companies. He wanted to create a Regional Employment Center, where medical facilities and corporate headquarters make up a large percentage of the areas employment opportunities. Despite the economic downturn, Mr. Craig is still able to sell his dream. Currently over 7,000 residential lots and homes have been sold.
The entire project is within the City of McKinney and within the Allen and Frisco school districts. Two Ch. 380 agreements were reached with the city, where Mr. Craig would build all the roads and necessary infrastructure, and the McKinney would waive all the impact development fees. Millions of dollars in ad valorem tax has been paid to the city, and this trend does not show signs of stopping, as areas of Craig Ranch are developed. Mr. Jason Kessel, Executive Director of Development Services, joined us and discussed the project from the city’s point of view. He expressed that the city shared Mr. Craig’s objectives (dream) for the project and how this is an example of a great public/private partnership.
In all honesty, the development was overwhelming. I of course mean this in the most flattering way. It is a Texas sized dream for a Texas size tract of land. But if anyone can make it happen, I am sure Mr. Craig can.
New Hope is “Houston’s first single room occupancy (SRO) provider” and offers dignified living accommodations for those of “limited income.” Mrs. Joy Horak-Brown, Executive Director, and Ms. Nicole (Nicki) Cassier, Director of Fund Development, were ever so kind as to show us around 2 of their properties and disclose details regarding each one’s conception, construction, and completion.
New Hope currently has 5 properties up and running with 2 more to be completed by fall of 2010. Their next project after the last 2 open won’t be completed until 2012. New Hope has its own onsite management at each of their properties, where the day to day operations are closely monitored. New Hope’s board of directors is made up of attorneys, accountants, and members of the real estate community.
There are vans at each property that provide residents with weekly trips to the grocery store and doctor’s appointments for their everyday needs. They are also located near public transit, for those tenants without vehicles. Community meeting spaces, weekly movie nights, a computer lab, a library, and an assortment of programs geared to help residents better their situation are just some of the amenities offered at each of New Hope’s properties.
New Hope’s funding is provided from a variety of different sources. Governmental programs provide 41%, tax credits 29% (which is a very complex process), foundations 24%, corporations 4%, and individual donors/churches provide 1% of their funding, for a total of $40.5 million for all of New Hope’s projects thus far. In order to gain and sell off those tax credits, New Hope, a not-for-profit, has to have a for-profit financial structure, taking a developer fee and placing some of the tax credits into a reserve. Every one of New Hope’s projects are all equity projects, meaning they have no debt on any property.
Brays Crossing
Brays Crossing, an existing series of buildings that cost $15 million to rehab, is where we met Mrs. Horak-Brown and Ms. Cassier. The 149 unit project was dedicated May 20, 2010 and is already 50% occupied. Tenants must make $22,350 or less per year to qualify for housing at Brays Crossing. The average stay in New Hope’s housing is 27 months, where leases are initially signed for 6 months and are month to month after. Potential tenants must go through a criminal background check. This check is not to discriminate, but for the protection of the other residents, as well as the property. For instance, sex offenders, arsonists, and people who have committed violent crimes are not permitted to reside in New Hope’s communities.
Brays Crossing was once a nuisance property to the City of Houston, riddled with crime and drug infestation. Police had to have armed interventions at the property multiple times a week. Mrs. Horak-Brown always made sure she had an escort with her when she visited the site prior to its current suggestion. Even after all the previous tenants and riff raff were removed, there was still need for an escort. Prior to becoming a nuisance to the city, it once was temporary extended stay residences for NASA engineers.
Mr. Joe Martinez, Community Manager for the property, opened up 2 of the units for us to see. They are idealized dorm style, single occupancy apartments with mostly built-in furnishings. The smaller unit rents for $415 a month, and resembles most dorm rooms, only with a kitchenette. The larger unit is about twice the size of the smaller, renting for $475 a month. The lower level apartments are ADA accessible. Some units even have roll-in showers. The rents include all utilities and cable tv.
Perforated steel murals along the interstate face of the property act as security barriers and break the sights and sounds of Interstate 45. They provide a more attractive alternative than just a blank wall. It also gives the tenants a sense of place, an attachment to the location they will be calling home, even if it is a temporary home.
Canal Street Apartments & Noon-time Sustenance
Dedicated on November 17th, 2005 Canal Street Apartments is a 41,000 sf affordable housing complex. It has 133 units that are 100% occupied and has a waiting list that is max’ed out at the limited 15 people. The apartments are similar to Brays Crossing, with 2 different idealized dorm style units. The building is a “P” shape where many of the units face a Zen-like courtyard. We also met Ms. Tamara Foster, the Community Manager, who complimented Mrs. Horak-Brown’s dialogue with detailed information of her own.
On a special note: Canal Street Apartments received the 2009 Urban Land Institute-Houston Development of Distinction Award.
The total all inclusive cost was $6.0 million, which includes the furniture. Speaking of furniture, Mrs. Horak-Brown noted that the criteria for the furnishings are that they be inexpensive, sturdy and stylish. Canal Street Apartments is a Home Funds project, which uses state and local money to fund projects to house “people at or below 80 percent (80%) of Average Median Family Income ("AMFI") for an area.” This however is not a low-income tax incentive deal.New Hope is expecting a sizeable net return from Canal Street Apartments this year. Not bad for a non-profit.
I have to say that I agree with what one of my fellow student’s said about the project. Amy De Vernon posted on her blog the following: “What makes these projects stand out from other low-income projects is their emphasis on bringing stabilization to each person coming in through beauty, cleanliness, art, architecture, landscaping, and a whole host of personal improvement classes.” I could not have said it better myself.
Much to my surprise, Joy and Nicki treated us all to lunch at Mama Ninfa’s, where I had an amazing meal, probably the best on the tour (Sorry Lori & J.D.). It was so good, I finished off the entire plate of (3) beef enchiladas, something I rarely do. But what made the meal even better was the conversation. I was able to sit next to Joy and across from the De Vernons, where we discussed a host of different topics. I want to send a personal thank you to Mrs. Joy Horak-Brown and Ms. Nicole Cassier for such gracious hospitality, both for lunch and for showing us your two wonderful properties.
CityCentre
Mr. Brandon Houston (yes, he is a distant relative to Sam Houston), Director, Development with Midway Companies, briefed us on CityCentre. Midway’s name comes from the street in Dallas, where the company was founded and is a full service development company, with in house leasing, management, & development services. They also build to hold.
They bought an existing mall located in one of the wealthiest neighborhoods in all of Texas, with a $900,000 median home price, for $30 million and were able to close in 60 days. Everything but the three garages was leveled. By keeping the garages, money was saved as the price per garage parking space at the time was somewhere between $10,000-12,000 and 3,500 spaces were needed. The site is a total of 38 acres, 28 of which was developed by Midway. The land is parceled out so that each building has its own ownership entity.
The property also is within a TIRZ district, but no public money was used for the projects infrastructure. The main reason was that Midway wanted to maintain control of the streets and keep them private. They plan on using some of the TIRZ funds to create a more pedestrian friendly path from the adjacent neighborhood.
The price tag for the project was $500 million. CityCentre’s primary investor is Michigan State Teacher’s Fund, who provided 60% of the equity. Typically Midway’s investors are high net worth individuals. Mr. Houston told us that Midway’s strategy is to eventually buy out all their investors and own the projects outright.
The debt service coverage ratio (DSCR) was 1.15 when the project started and will become 1.4 when the loan/s are renewed. Midway took developer fees as well as leasing and management fees despite each parcel being under a different entity. Construction didn’t start until each building was preleased to meet its debt service (loan payments).
For branding purposes, Midway approached Lifetime Fitness with a proposal for them to change their name. Lifetime already wanted to cater to a more upscale market and ended up creating a new brand called Lifetime Athletic.
Rents are above the market rates by $1 to $2 and Mr. Houston does not foresee this changing for the second generation of leases. He believes that the leases will remain above the market and even get higher. The 425,000 sf of retail space is 60% leased at $35 per square foot. The 450,000 sf of office space, between two buildings, is 100% and 75% leased at $22 per square foot, but offers 5 to 6 months free rent as a concession. Midway is working their way to bringing the effective rent up to $22 per square foot with concessions and tenant improvements. The 525 apartments are 72% leased at $1.45-1.50 per square foot per month. The 244 key (room) hotel has rates averaging between $180-200 per night. There are also 22 condominiums on the premises.
Mr. Houston gave us some wisdom that he has garnered along the way. Always be creative and open minded. Have a plan, but be willing to allow that plan to change. For instance, a restaurant tenant wanted $50 per sf in T.I., but Midway wasn’t willing to pay that much. So an idea bounced around where Midway become a 20% owner in the business and would pay the $50 per sf as an investor/owner. That’s being creative, because there is a give and take in real estate. Also, don’t take “no” for an answer until they file a restraining order against you.
Appreciating no regulation & Homeward Bound
I have to say that I have gained a new appreciation for Houston. Though not having zoning in such a large city is a little unorthodox, it does however, seem to be working for them.
I had a fairly painless drive home, with some congestion and traffic leaving Houston. I was pleasantly surprised that it only took 4 hours from CityCentre to my house. I even ended with a decent skyline shot of Dallas. Tomorrow, I return the car…I will miss the gas mileage. Thursday, we are at Dallas City Hall and Friday, in Fort Worth. ‘Til then.
City of Houston’s Planning and Development Department
Marlene Gafrick, Director
Richmond Coward, Planner, a Katrina transplant who looks at plats and whether they meet Ch. 42 requirements
Brian Crimmins, aMichigan transplant who works on variances
Ryan Albright, deals with platting issues and hotel development
* All of the above have backgrounds in more traditional development regulation.
Houston is a developer driven city. So much so, that many companies will test new product types in Houston, seeing if their product will actually work. Houston doesn’t regulate land use through zoning, but rather through local ordinances. There are no height restrictions other than the FAA’s requirements. The turnaround time of the approval process of meeting Ch. 42 (see below) is 2 to 4 weeks, and once approved a developer can immediately start pulling construction permits. You can pretty much build anything, especially with the city and county’s backing.
There are three chapters in the city’s legislation that the Planning and Development Department has in their tool box, they are Ch. 26 (parking), Ch. 33 (landscape & historical), and the main one, Ch. 42 (land use). Ch. 42 is a one size fits all land use legislation. Houston also has what is called Extra Territorial Jurisdiction (ETJ), where Ch. 42 extends beyond the city limits to other municipalities and open land within a defined zone. The ETJ is basically the boundaries of future annexation of the City of Houston. Tax Increment Reinvestment Zones (TIRZ) are also used to incentivize development and may include zoning regulations in specific areas. But the enforcement of deed restrictions is the biggest way the city controls development.
To prevent sprawl the City of Houston gives incentivizes to refocus on dense development, as well as the transit corridor ordinance (METRO). Developers have to pay for roads and other infrastructure costs, like water treatment plants, or other impact fees like for sewer and water infrastructure. Dedicated parkland, public or private, is required or the developer can pay a fee based on the number of units.
Changing deed restrictions is extremely complicated and near impossible, outside of having the person who put the deed restriction in place make the change. The State of Texas has a way to make this change. Sometimes the deed itself has a provision written in it stating how it can be changed, i.e. 51% of the development has to agree to the change.
Here is some advice they gave us:
Always get the title report and all deed restrictions
Assume the worst, especially with regard to deed restrictions/zoning issues
Pull all documents regarding the property
Do your due diligence
Green Building Resource Center
Mr. Richmond Coward guided us through downtown on the light rail to the Green Building Resource Center, where we met Mr. Steve Stelzer, Program Director. From the outside you could see a rain water cistern and solar panels. The interior was well designed montage of many different Green building materials donated by companies for this project (a good way to advertise). The building itself received a LEED Gold for commercial interiors. The city uses this building as a resource for Green materials research and the staff offers plan reviews. Mr. Stelzer discussed with us that new city projects over 10,000 sf will have to be LEED certified and that there are increasingly more green/LEED buildings in the development pipeline. He emphasized owners, developers, builders, etc. need to “get over” the added upfront costs and realize the savings are in the life cycle and lower utility costs.
We had the pleasure of Mr. Richmond Coward joining us for our express lunch. Despite the limited time we had to eat (we were slightly behind schedule), I was able to find out more about what he does for the Planning and Development Department. One of the major things he does is to review the plat drawings that developers, owners, builders, etc. submit online, making sure that the projects adhere to Ch. 42 guidelines. He was also able to clarify some questions that I had from the earlier meeting with the Planning and Development Department, like what building lines were, basically setbacks.
West Ave
Just up the street from where we had lunch was our next site visit, a high end mixed use, retail/residential project, named West Ave, a Gables development. Mr. Ben Peaceglock and Mr. Josh Landry gave us a tour of the property and a Powerpoint presentation in the resident amenity media room. Glass skywalks attach the three buildings to one another. The project sits on 2 ground leases and a couple of smaller parcels that Gables owns outright.
The average rent per month is approximately $2,138 with an average unit size of 1,080 sf for total of about $1.98 per square foot per month. The storage units are also about $1.98 per square foot per month. There are 397 units, of which 89% are leased. One concession is two months free rent. The buildings are viewed as being completely commercial by the city, and can therefore have a second bedroom within the units that do not have exterior facing windows (for light/air and possible fire egress).
There is 195,000 sf and two levels retail space, which at the moment is 41% leased. A lot of risk was taken in building the second floor retail. In order to convince their investors and managing partners that two levels of retail could work in the Houston market, a 6 tiered plan was put into place. Tiers 1 through 4 designate different types of retail that Gables will target. Tiers 2 through 6 are simply put, back up plans. Tier 5 changes the vacant spaces into office space and tier 6 into residential, the latter is irreversible.
Time did not permit us to visit 2727 Kirby, a condo/residential tower, just across the street from West Ave.
The Core with Michael Morgan
We met with Mr. Michael Morgan at his company’s project, The CORE. His Regional Manager, Clark and Property Manager, Christy also joined us. The CORE sits on 4.5 acres, shared between two lots that are separated by a street and are connected by a skywalk. It opened in April of 2008 and has 326 rental apartment units, of which 98.8% are leased. They predominantly serve 25-28 year olds who make between $65,000 and $100,000 a year. The effective rent rate is about $1.40/sf and the market rate is about $1.62/sf. But the actual property is really only a back drop for this visit. As the visit became more about how Mr. Morgan and his company approach and finance development.
Here are a few of the approaches to development and some words of wisdom from Mr. Morgan:
There is “no substitute for hard work and common sense.”
“Not stepping on a land mine”, basically means do your due diligence, to make sure that the land, building and rents are at the right price for the market and your returns.
Morgan gets three prices on all materials and labor, choosing the cheapest best quality.
“Timing is everything.” Morgan will typically develop when there is not much competition and little in the development pipeline.
Protect the downside (knowing the worst case scenario) and let the upside take care of itself. He makes sure that he knows what the company has to lose if a deal goes bad or does work the way it was intended.
Save the funds from fees until you are “out of the woods.” Once out, you can then distribute this money to your partners or add it to the company’s working capital.
When able, standardize the development process. For instance, using similar layouts and designs, which will help cut soft costs. It also limits the architects, giving little leeway [I disagree, but understand the principle].
Morgan typically will buy where home prices are more than the rental units.
Morgan also wants street frontage and high volume of drive-bys.
Another thing that was discussed was how Texas compared to other states. Despite Texas having higher property taxes, other states, and the cities within them, have higher development, permit, etc. fees. In the long term, it is actually cheaper to develop in Texas because of the lower fees and no income tax.
Mr. Morgan was kind enough to disclose the proforma and deal structure of The CORE. The project came $2.4 million under budget, $42.9 million versus $45.3 million. Morgan took a developer’s fee and a construction management fee that amounted to more than $3 million. Morgan’s equity partner was Archstone Smith [yes, the very Archstone Smith that I worked for on 125th East Harlem]. Archstone provided $10,293,832 of the equity and Morgan provided $170,540. They have done many deals with Archstone and built a reputation that had allowed them to continually put less and less money into deals. JP Morgan holds the note of $32.5 million that comes due in 2012.
If, I repeat IF, the deal goes south, the lender’s only recourse is for $1.8 million. I note this for two reasons. First, Morgan is a very conservative in their developments and tries to limit their potential loss. Which brings me to point number 2, as stated earlier, Morgan puts the funds earned from fees aside into an escrow account. So, they can take the construction management fee, approximately $1.8 million, to pay the lender and Morgan does not lose any money on the deal.
