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, a Michigan 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.
No comments:
Post a Comment