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.

 

I commented on a friend's Facebook thread in which he lamented the lame podium building getting built on his street. Somebody posted a comment that "It's all about maximizing the developer's profit" to explain why the building was not great.

I gotta say, that's really over-simplifying what it takes to get a building constructed in Portland.  There is a pretty good chance that trying to build a building will result in the developer losing money if they are not on top of things. I guess Not Losing Money may be the same as Maximizing Profit, but there is a lot more to the work. If you lose money often enough you become a former developer.

Most developers are minimizing risks and maximizing returns within the current crop of constraints which include local, state, and federal regulations, local approval processes, skilled construction labor shortages, and a number of can only be described as short sighted bad habits. Over the life a a project it is too easy for design to end up as the superficial consideration -kinda like deciding how a cake will be frosted. All of the other things (that will blow up your project if you don't pay attention) are about the cake. Attention to urban design and place making should be part of the cake because they can add a lot of value and solve some gnarly problems. The developers that get that employ urban design as a tool with great flexibility and utility. For the rest, well, that design stuff is just frosting.

While we can beat up developers for being unaware of the power of design to manage risk, let's bear in mind that there is plenty of cluelessness to go around.  Some of the problem with how buildings are currently conceived and delivered be found in the unfortunate culture and habits of the design community. Most planners, urban designers, and architects are satisfied with remaining uninformed and unskilled when it comes to developer math and operations.  In the end they don't have much of a common vocabulary to communicate with their clients (which is unfortunate.)

The bar for decent infill is pretty low these days -even in a place that likes to consider itself forward thinking and progressive like Portland.  It is very hard to build trust with local folks who have seen a lot of lousy buildings go up recently. If you do succeed in building something  something decent, you can start to carve out a place for yourself in the neighborhood. No matter how good your built work is, chances are good you will still be treated with contempt if your chosen line of work is to be a developer. Other people get paid at their job, but getting paid to make buildings happen is somehow something sleazy in the minds of some.  Development work is considered a vocation reserved for individuals of low character. Your buildings will have to speak for your character after you are dead. In the mean time, most folks will just think you are an asshole.  That does not mean that you can consider yourself some sort of community builder/martyr.  It's an everyday thing.  Humans prejudge strangers based upon fear, myth, or by their direct experience of some recent bad building put up by somebody that you resemble.