How Real Estate Developers Think: Design, Profits, and Community (The City in the Twenty-First Century)

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9780812247053: How Real Estate Developers Think: Design, Profits, and Community (The City in the Twenty-First Century)

Cities are always changing: streets, infrastructure, public spaces, and buildings are constantly being built, improved, demolished, and replaced. But even when a new project is designed to improve a community, neighborhood residents often find themselves at odds with the real estate developer who proposes it. Savvy developers are willing to work with residents to allay their concerns and gain public support, but at the same time, a real estate development is a business venture financed by private investors who take significant risks. In How Real Estate Developers Think, Peter Hendee Brown explains the interests, motives, and actions of real estate developers, using case studies to show how the basic principles of development remain the same everywhere even as practices vary based on climate, local culture, and geography. An understanding of what developers do and why they do it will help community members, elected officials, and others participate more productively in the development process in their own communities.

Based on interviews with over a hundred people involved in the real estate development business in Chicago, Miami, Portland (Oregon), and the Twin Cities of Minneapolis and St. Paul, How Real Estate Developers Think considers developers from three different perspectives. Brown profiles the careers of individual developers to illustrate the character of the entrepreneur, considers the roles played by innovation, design, marketing, and sales in the production of real estate, and examines the risks and rewards that motivate developers as people. Ultimately, How Real Estate Developers Think portrays developers as creative visionaries who are able to imagine future possibilities for our cities and communities and shows that understanding them will lead to better outcomes for neighbors, communities, and cities.

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About the Author:

Peter Hendee Brown is an architect, planner, and development consultant based in Minneapolis, where he also teaches at the Humphrey School of Public Affairs at the University of Minnesota. He is author of America's Waterfront Revival: Port Authorities and Urban Redevelopment, also available from the University of Pennsylvania Press.

Excerpt. © Reprinted by permission. All rights reserved.:

Prologue
A Brick Wall in Evanston

We used to call them our town founders and we honored them by erecting their statues in our town squares. Today we just call them "developers."
—Andrés Duany, Miami architect and planner

The Costs of Opposition

In 2002 a Chicago developer named Neil Ornoff hired the architect David Haymes and his firm, Pappageorge Haymes, to design a twenty-unit residential project on a corner site at 525 Kedzie Street, in Evanston, Illinois, a northern suburb of Chicago. "The alderman—the city councilman—was really fearful of the people who lived in the adjacent building and were concerned about losing views they had across the vacant parcel, so he asked the developer to work with them," recalled Haymes. "We designed a beautiful building," but the design required a small portion of the building to be a little bit taller than what the height limits in the code allowed. The site plan also required the developer to seek relief on a parking rule that required a twenty-foot setback from the street to the building face to allow for on-street parking for the property, even though all of the parking for the building was going to be accommodated onsite, within the building, and concealed from view. These were routine and modest variance requests but, as Haymes recalls, "The neighbors simply said no, we are going to oppose the project."

So Haymes went back to the drawing board and redesigned the façade on the side of the building that faced the neighbors, adding articulation and setbacks that made the building look better from the neighboring property but increased project costs. This time the neighbors said, "No, that is a very nice design, but we are still going to oppose it." So the developer said, "That's it—we will build it 'as-of-right,'" which means per the letter of the code and without any variances. Haymes redesigned the building, eliminating the small portion that was to be taller and changing the site plan to accommodate the required twenty-foot setback. He stripped off all of the articulation and setbacks on the side facing the neighboring building because there wasn't room and the developer no longer felt the need to incur the costs required to curry favor with the neighbors. "We gave them an unadorned brick wall facing their building because we had to push our own building so far back on the property." In the end, it took the developer and his team more than two years to obtain the approvals required to build a small, twenty-unit condominium project and by then it was late to market. The project opened in 2007, just as the housing bubble burst. The condominium units failed to sell out at pro forma prices so the developer was unable to fully repay the construction loan. The bank foreclosed on the property and sold it to another owner who converted it to apartments.

In addition to providing architectural design services to developers, David Haymes and his partner have done some small development projects themselves and Haymes is also the head of his own community organization, so he has seen development from those viewpoints too. "There are still some in my community group who harbor those really harsh feelings about developers; they just don't want change. They don't trust developers because anything a developer does is going to be a change, and so they hammer any developer who comes in. Fortunately," says Haymes, "over time, my community group has become more sensitive and understanding of what development is. We have also come to understand that we are better off having a say than not being involved at all, because if you take the attitude that you don't want to talk to somebody then you are going to have to live with the consequences."

Haymes sympathizes with how the public views developers but at the same time he finds that the whole process is far too distrustful to be productive. When Haymes presents at a public meeting, his job is to support his client by positively representing the project, but Haymes says he almost always fully backs and believes in what he is doing for that client. "That is why it is disturbing for us when the developer really is making an honest and forthright effort but he's being abused and we are being called liars and whores." Haymes is disturbed not only because the developer's efforts are being minimized, but also because good things for communities are being passed up—like what happened in Evanston.

In what became a lose-lose outcome, the developer spent extra time and money in a costly and fruitless effort to secure the support of the neighbors. But at the same time, in overplaying their hand the neighbors failed to stop the project and also still lost their views across the vacant parcel, views that were not really theirs to begin with. In giving up their leverage they also gave up views of a more handsome façade from their own windows in exchange for a plain brick wall. By forcing the developer into an as-of-right design, the neighbors forfeited the opportunity to let the developer of the adjacent property increase the value of their own property by building a more attractive building next door.

Unfortunately, for everyone involved, the neighbors misunderstood that the developer had rights and options too. Indeed, his best option was to give up trying to do a more creative design that required minor variances and settle for an as-to-right design that complied with all codes and regulations and could be administratively approved without the need for zoning commission review and a public hearing. The developer could no longer bear the carrying costs on the property, the uncertainty of the approvals process, and the related risk of being late to market. He needed to regain control of the project.

More important, the developer understood the neighbors' strategic position better than they did themselves—certainly better than they understood his position and particularly his property rights. If the neighbors had only been able to see the project from the developer's viewpoint, they may have realized that taking an absolute position—opposition—was a risky strategy that was not necessarily in their own best interests. Then they may have been more open to a collaborative approach and the ability to influence the design in a way that would have maximized the benefits flowing from the project to them and to the larger community.

A Common Story

Unfortunately, this is a common story and anyone who lived in an urban neighborhood in the 2000s and since can probably remember attending a meeting of the neighborhood organization and hearing a contentious debate over a similar project. Nearby neighbors of development projects deserve consideration, and savvy developers know that they will gain public support and attract more potential buyers and tenants if they listen and adjust their designs to reflect the community's feedback and concerns. But how can community members most effectively use their influence to improve the design of a project? Which things can a developer change, which are nonnegotiable, and how can the neighbors tell the difference? How can the neighbors even tell the difference between a good project and a bad one? What powers do members of the community have to influence private business decisions through the public regulatory review process? And what should the neighbors do when a developer walks through the door with a proposal for a project?

The most common strategies are apathy or opposition. Apathy means de facto support and forfeiture of the opportunity to become engaged and to contribute useful local knowledge to improving the project for all parties. Blanket opposition, on the other hand, signals the end of a discussion rather than the beginning of one, and, again, it turns away from the opportunity to positively influence a project. When community members stop talking to developers, they give up whatever voice they do have in shaping projects in their community. Worse, as in Haymes's story, successful opposition may kill a good and creative proposal only to pave the way for something of lesser quality. The answer lies somewhere between the simple extremes of apathy and opposition—in conversation, compromise, and understanding. Before neighbors and community members can effectively participate in this kind of conversation, they must come to a better understanding of developers and, before that, they must first acknowledge their own motives, interests, and fears.

Fear of Change

Buildings made of glass, stone, and metal make us think of permanence. But cities are fluid and ever-changing places where, over time, streets, infrastructure, public spaces, and buildings are constantly being built, improved, demolished, and replaced. For the people who live next door to a potential development site, such as a vacant lot or an old obsolete building, this means something new will be built on that property sooner or later and it is not a question of if but of when. Yet change is frightening and many people are more comfortable with the familiar, in part because they have difficulty visualizing how a proposed project might actually look and fit into their community. Fear of the unknown begins with rumors of a potential development and increases when community members see the first images of the proposed project at the neighborhood meeting. For people who are not in the development business, it can be difficult to know what to focus on, what to worry about, and how to try to influence the project. Neighbors also have a relatively brief period of time to review the proposal and offer their feedback to the developer and city officials in community meetings and at public hearings. And if the project is approved they know that the inconvenience and aggravation of construction will soon follow.

For a typical project all of this may take less than two years but in the heat of the moment some community members will be unable to pull back and take the long view of this relatively brief period of stress and discomfort. They will have difficulty imagining how the completed development might improve their own lives and make their community a better place—for years, decades, and even centuries to come. It can bring new benefits to the community, including more neighbors, businesses, services, bars, restaurants, retail shops, and perhaps even a grocery store. The development will also increase the tax base and cause the city to increase spending on infrastructure, parks, and other public facilities. And a real estate development project represents a significant and concentrated investment in the community that usually increases surrounding property values. But well before any of these good things will happen, those community members must attend that first public meeting where they learn that change is coming—and that the person who is delivering that change is the real estate developer.

The Stereotypical Developer

Each year, on the first day of the real estate development class that I teach, I ask my students, "What words come to mind when I say 'real estate developer'?" Their answers include "rip-off artists," "greedy," "bloodsuckers," "bulldozers," "used-car salesmen," "devils," "rich white men," "opportunists," and so on. They pile it on and I have difficulty writing everything on the board fast enough. Then, after most of the class has exhausted itself, someone nervously chirps, "entrepreneur" or "creative" or "visionary" or "risk taker," and a more positive, if shorter, list emerges.

Like my students, I suspect that many people believe that developers are rich, greedy, and driven by profits alone; that they know little about planning or design; that they are egotistical if not arrogant and often untrustworthy; and that they neither understand nor care about the impacts of their projects on nearby residents and the larger community. But developers are not all the same and as in any other business or industry, while there may be some "bad" ones, there are many others who have made and continue to make important contributions to cities and communities. As with other industries and government agencies, sensational media accounts of the antics of a few often overshadow the good efforts of many others who quietly go about doing their work. Many people have never met a developer and they know of only the famous and larger-than-life Donald Trump. Some have met developers at neighborhood meetings and others through the experience of buying a new home or condo. And then there are those pervasive stories and sometimes all-too-personal experiences with developers that reinforce the stereotypes listed above.

To the people who buy or rent units or space in their finished buildings, developers can be known to overpromise and underdeliver, hyping their projects in the beginning but cheapening them in the end. To architects, contractors, and other members of the project team, developers are seen as risky clients to work for, because they are known for squeezing their team members' fees when they are negotiating contracts at the beginning and then withholding payments for completed work, particularly when times get tough. And many members of the broader community, particularly architects, think developers either do not know or do not care about good design. Rather, they think developers always take the cheapest route by dumbing down design and reducing material quality to maximize profits. Many people conclude that cities are not as good as they could be because of the work of developers. So when community members make suggestions in neighborhood meetings like "can't you just make it shorter, give it more articulation, use better materials, put the parking underground," and so on, their suspicions are reinforced when the developer's answer is more often "no" than "yes."

And developers seem so different from the rest of us. They appear to enjoy great wealth, dress well, drive fancy cars, own several homes, take exotic vacations, go cruising on their yachts, fly around in private planes, and live in a world that is completely different from our own. They can also be charming, charismatic, bright, knowledgeable, and fun to be around and talk to. They hobnob with local politicians and business leaders, are often viewed as local celebrities and important civic leaders, and can seem bigger than life in person. So when they come to neighborhood meetings they generate feelings of ambivalence from community members who find themselves attracted to these important and alluring people while also feeling distrustful of their motives and methods and, in some cases, jealous of their lifestyles.

But stereotypes can be misleading: While they are often rooted in truths, these generalizations fuel the public's distrust by painting all developers with the same brush. In the near term, distrust and misunderstanding reduce the potential for collaboration between developers and members of the community and the chances for developing the best and most creative projects for communities and cities over the long run. And stereotypes are often one-sided and do not reflect other important truths.

For developers to remain in business they must finance and sell a product in advance, for a price that is greater than its costs. Their projects can take years to complete so inflation and unforeseeable market forces make cost control more difficult and increase uncertainty. They must walk a fine line with their buyers, attracting them with a comp...

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