cart-before-horse-cartoon

I do a lot of teaching and coaching of small developers through the Incremental Development Alliance (IncDev). In the course of that effort I meet folks who are really interested in Alternative community based models for owning buildings.  These include Benefit Corporations, Co-operatives (Co-ops), Low-profit Limited Liability Companies (L3C's), or Cohousing

.  I think I understand and appreciate the reasons why these arrangements are attractive to people looking to build community, but I want to offer some advice on the mechanics of using these structures in a development project.

These are all structures for owning real estate that have alternative methods for governance and distribution of profits that are alternatives to the more typical tools for owning income producing real estate, the partnership or 

Limited Liability Company (LLC)

 .  Before you get fancy with alternative ownership structures, focus upon the basics by standing up an enterprise that will be doing the work of the developer; finding the site, testing various designs and financing approaches, building . leasing and operating the building or buildings.  The Operating Company can be the operating partner, operating co-op member, managing LLC or L3C member, or Benefit Corp. manager. All of these various ownership structures are set up to do the job of describing how capital will be raised for the project and how profits will be distributed. It is the role of the Operating Partner to raise the capital, build/rebuild and operate the buildings profitability so that there is cash flow to distribute among the owners regardless of what ownership model is used, or the mission of the enterprise.

Before you get fancy with alternative ownership structures build a straightforward simple project with straightforward and simple ownership structure, an operating partner and a capital partner under a typical LLC that is limited to just one project as the owner. (a Project-Specific LLC).  You build this structure with an ordinary LLC Operating Agreement.  Under the Operating Agreement, the Operating Partner and the Capital Partner both know who is supposed to do the work (the Operating Partner), who is supposed to put in the capital needed (the Capital Partner), how important decisions will be made, how and when the capital partner will get their original investment back, and how revenue beyond the repayment of principal will be distributed between the capital partner and the operating partner.

The basic deal structure is a good starting point for folks that want to eventually set up other more elaborate alternative forms of ownership. It will help the small developer to  become good at doing the work of the operating partner -an essential role that is required in every one of the alternative ownership structures mentioned above.

In any of these structures people putting up the money in large or small amounts are going to ask a very legitimate series of questions:

• Who is in charge of this thing?
• Do they know what they are doing?
• How do decisions get made?
• How does the project make money?
• When do we get our initial investment back?

The horse that goes before the cart is knowing how to do the work of the operating partner. Do that on a small project. It’s like learning how to drive in an empty parking lot before you attempt to drive on local streets or on a freeway. Once you have some of those basic operating skills, then you can look at alternative ownership structures consistent with your mission. The operating partner is the crucial resource,

not the money

.

Raising money from a couple of individuals and operating under a straightforward project-specific LLC is easier and less complicated than Crowd Funding, REIT formation, starting a co-op, L3C, or Benefit Corporation. Walk before you try to run (attempt to fly).

We (David Kim, Bruce Tolar, Will Burgin and I) are currently working on a wide range of tools for delivering walkable neighborhoods and incremental development.  After Hurricane Katrina, Bruce and a host of others put in thousands of volunteer hours producing an alternative to the awful FEMA travel trailer that came to be called the Katrina Cottages.  The State of Mississippi's Emergency Management Agency (MEMA) commissioned several thousand MEMA cottages of various sizes that were used as part of the hurricane recovery effort and eventually were sold for permanent housing.

Bruce Tolar has continued to advocate, design and build cottage housing and cottage neighborhoods over the 12 years since the hurricane.  He lives in Cottage Square neighborhood in Ocean Springs, MS. He built a place contains a number of the early prototype cottages designed by colleagues in addition to his own excellent work. As our development company started building a project in Thomasville, Georgia we started looking for manufacturers to produce cottage designs in addition to their usual mobile homes and modular houses.  We continue to find a lot of confusion that comes from not having a workable common vocabulary to talk about the range of housing that is partially or entirely built off-site in a factory.

For example; capital "M" Manufactured Homes (mobile homes) are produced to meet HUD certification that allows for their use anywhere in the US.  You can easily find yourself in a conversation where industry insiders are using "Manufactured Homes" as a term of art referring to mobile homes and lay people are using lower case "m" manufactured homes to describe anything that comes out of a factory regardless of the code or certification it complies with.  In a spoken conversation you cannot hear the capitalization of the word and this leads to needless confusion.

Site building can be quite economical and flexible if you have a good team of local trades and you are well organized. But that level of delivery does not come with a one-off project. You can also build economically if you are competent enough to self-build.

Things get complicated when skilled construction labor is in short supply as it will be for the next 10 years.  Short supplies of skilled construction labor get compounded by the needs of disaster response and recovery within a region. For example, a lot of drywall outfits from Atlanta are now down in the Houston area after Hurricane Harvey, so finding someone to install drywall in Atlanta is a problem.

We need to train folks in the trades for all forms of building across the board.

In additions to training people for site built construction and incremental development, we need to be able to use all manner of systems built housing, depending upon what the right tool for job might be:

• ANSI spec Tiny Houses.
• ANSI Spec Park Models.
• HUD spec mobile homes. (also know as capital "M" Manufactured Homes)
• IRC spec modular buildings in single box and multiple box configurations.
• IRC spec wet core modules with site built additions.
• IRC Spec Panelized Construction.
• IRC Spec SIPS construction.

The MEMA Cottages produced after Katrina were dual certified as IRC off-frame modular Homes and on frame HUD Spec Mobile Homes.  They could be placed temporarily as HUD spec mobile homes.  Once you removed them from their trailer chassis they could be placed upon permenant foundations as IRC spec Modular homes that comply with the standard local building code, while being inspected by third party engineering outfits at the factory.

Below is a 12' wide MEMA Cottage w/ 8' ceilings (one bedroom).  This cottage had its porch tuned up a bit and got repainted when it was taken off the trailer frame and set on a permanent foundation in Ocean Springs.

Last weekend I was working on a charrette crew that included my colleague and partner, Bruce B. Tolar.  Searching through my hard drive today I came across my (improvised) remarks from when the New Urban Guild gave the 2015 Barranco Award to Bruce, the Developer/Builder of Cottage Square in Ocean Springs Mississippi.

"For those of us who knew Michael Barranco and were there for the Katrina charrettes, this is a person who really made a mark on our lives, not just because we showed up and did work together, but because his character was such that it was like playing in a pro-am: You really upped your game when playing around Michael. Very genuine. No artifice. No phoniness. He was genuinely concerned about every person he ever met, and wanted everyone’s life to be better. He decided that architecture was his way to do that.

With his passing, there is a hole in the CNU, but the New Urban Guild offers the Barranco Award to practitioners who are that kind of stand-up guy. It’s about the character with which you comport yourself. It’s about how hungry you are to learn. It’s about how much you care about your community. It’s about how much you love and encourage your fellow-citizens. With that said, I’d like to introduce you to this year’s award-winner, Bruce Tolar, through some of his work. <begin slides of Bruce's projects>

The original Katrina Cottage which by itself was great, but Bruce took it out of the total chaos and mayhem and bad financial circumstances that were pretty much an everyday deal in Ocean Springs at that time, and all along the coast. And from nothing, he created the peaceful excellence of Cottage Square, where he put the pieces together into something amazing which that community cherishes. It has even become a tourist destination. Imagine that: an interim housing solution after a hurricane has become a tourist destination!

So Bruce pulled together all the Katrina Cottages that were built as prototypes for demonstration purposes and brought them to Cottage Square. And he made something out of the pieces, just as we all try to do, which is to aggregate a great place from small incremental parts. It is a modest place, with gravel sidewalks; a place where you can operate a tiny business out of those tiny buildings. And the community that has formed there has become a real anchor to Ocean Springs. From there, Bruce launched an expansion, which was an incredibly ambitious project in a place governed by FEMA… <cough> <laughs and applause> … a terrible environment to work under, but he is doing amazing, excellent work with modest little pieces.

He reached out to nonprofits in the area; he connects with so many people; he’s been in that town forever, serving on many boards; and the idea that there was something to be done after a hurricane, and fixing civilization in general, was a natural thing for Bruce. The people love this neighborhood. The nonprofits he’s been working with have been tremendously empowered by seeing one guy’s ability to put people together and make things work. Bruce is the best design caulking gun you can imagine, pulling everything together on modest means and making things happen. So with that, I’d like to present this year’s Barranco Award to Bruce Tolar."

If you are traveling along the Gulf of Mexico between New Orleans and Mobile you should give yourself a treat and stop to walk around Cottage Square.  It is a special place built in tough circumstances by a remarkable guy.