Lifecycle of a CA Multi-Family Development Deal

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Hi Everyone

After reading through many excellent posts, include the "Diary of a New Construction Project" by @J Scott and @Joshua Dorkin, I thought I might add our voice here on BP. I am proposing to track the entire life cycle of an urban infill 4-unit rental housing development project in my hometown of Long Beach, CA. My proposal is to create weekly posts that cover a development project from beginning to end, and to give explanations about what and why we do things certain ways in this project, as well as, the logic behind our decisions. We will share site selection, initial underwriting/proforma analysis, design development, permitting, construction/build out, lease up, and (for this project) final sale. 

First, an introduction. My name is Scott Choppin. I have been married to my college sweetheart Rebecca for 17 year (together for 23) and we have three kids 15, 13, and 9 years old.

The purpose for this series of posts, is to walk everyone through the development process, demonstrating the details and life cycle of a development project. I have had the great benefit of many very savvy teachers, and would like to give the gift of passing on knowledge to others. As well, my purposes include building my own networks of help (tactical, transactional, and professional) to learn, raise more capital, and find more great projects to work on. This is, as you all know (or you do now), the lifeblood of all developers.

Finally, out of respect to my partners in this project, some details and proprietary information will stay private and so you may see redactions from time to time. As well, I will try to answer questions, but must limit cost in regards to time, so may be not be able to answer all questions. My goal, is simply to pass on knowledge, be an offer of help, and facilitate new folks in my network. So here goes....Sláinte.

Project Basics:

City: Long Beach, CA

Unit Count: 4 units, rental housing, to be sold upon completion and lease up.

Construction Type: Type V, 1 hour, with sprinklers. 

Type V (pronounced Type 5) is a reference for wood framed construction that most of you are familiar with, with "1 hour" referencing the fire rating between occupancy areas (say between a garage, or other units) where extra drywall is added in the walls between these areas (there's more to it than that, but keeping it simple). The other types are Type I, II, III, IIIa, etc. These would be various forms of concrete, steel, wood and steel mixed. "Sprinklers" means what is says, all units and garages will have residential grade sprinkler systems installed (residential sprinklers normally have plastic or PVC pipes versus steel that you see in commercial applications).

Construction style: 3-story on grade town home, direct access ground floor garage. 

"On grade" is the typical construction methodology that you are all used to where forms are built for the slab and poured onto the graded dirt pad, this is in contrast to "podium" where the cars park underneath in a concrete garage, and another type is high rise construction. "Town home" describes a type of unit, where the living space is on multiple floors, with the same tenant on all floors. Versus stacked flats, like typical apartment units, where different tenants live above and below each other. Garages are the bottom floor of the town home and are direct access to each unit.

Unit Type: Multiple bedrooms rented to families.

Some maps and then that'll be it for today. Next time, site selection including site photos and discussion about zoning. 

For my second post (sooner than weekly for these early posts, have some catching up to do) we'll discuss site selection and initial project programming (product selection, unit types, unit mix, unit yields, etc). 

Part of the developers' "value add" is to select sites that are feasible for a given development "product" i.e. single family, duplex, triplex, multi-family, etc. We are always thinking about how many units can fit on a given size piece of land (yield analysis). Now, you will say to yourself: doesn't that depend on what the architect can fit when he draws plans? And the answer would be yes, but.... we as developers (and you as developers) must already know what the product is to be. Usually you look at sites based on what you know, are comfortable with, what you know works, or a new trend that you know from research is viable. Maybe it's SFR, duplex, or whatever makes sense. And, you'll always be evolving your thinking and action in the offers you present to the markets in terms of "what works now".

An example, in SoCal and CA generally podium projects (concrete garages below grade/on grade, with 2-5 floors of wood framed apartments above) have been a new trend since around 2000 (although the product has been around LA and many metros since the 60's). Podium has been the thing in the last decade+. The reason for this, podium is the product that fits most units given parking and other zoning requirements on a given piece of land, to increase economies (i.e. most units on given land), to max economic yields to capital. 

In the year 2000, urban infill was just coming into it's own, and we were designing units that ranged from 800 s.f to 1,200 s.f. and mix was composed of 1, 2, and 3 bedrooms units. Today, given demographics related to the Millennial population, we are developing mostly studios (efficiency), 1's, and a small amount of 2's.

So the podium style building is the same, but the unit mix based on demographic and economic trends changes. As the developer, you adjust the unit program (mix of bedrooms types, and sizes) to adjust to the market at the time of the deal (or what you think the trend will be when units are delivered). As professional developers, we always know to anticipate changing trends and use those to our advantage (and sometime to get the heck out of a deal or market if trends are against us)

Our Cedar project will be different, in that it will serve larger, dual, and multi-generational urban families. We do this with a larger number of bedrooms, using as you'll recall from first post a 3-story on grade townhouse style unit (in a later post I'll upload some plans to review).

So for all this explanation, the short story is to select sites that:

- are in neighborhoods where your tenant profile wants to live and pay the rents you want (really need) to charge

- can accommodate unit types that renters want 

- fit the maximum amount of units that are needed given economics and zoning of your deal

- can be built cost effectively

- capital wants to finance

- can be bought for land prices that work for your deal economics

That's a lot of detail packed into that sentence, so feel free to ask questions here, lots to think about and consider.

Regarding the process of finding sites. I won't go into great detail, but do build your networks of deal finders: brokers, planning departments, other developers, bird dogs, etc. Also, I have found many great sites by driving around neighborhoods that I have identified as a place where we want to be. Obviously, for those who don't live in the markets you want to develop in, this presents a logistical challenge to be there to drive neighborhoods. Basically, I am looking for sites everywhere all the time, and I challenge all those on my team to do the same. Amazing what happens when eyes and ears are peeled looking for sites. Also, don't always be looking for vacant sites, look for empty buildings, parking lots, junk houses for tear down. In any given urban market, most of the best sites won't be obvious. I also say that if a site is vacant in the middle of a built out urban area, there's some story there: difficult owners, environmental issues, zoning and planning issues, etc. 

Once we find a site that we think fits the "model" - in this example a 3-story townhome project, we do some basic math to see what fits on the site. From our others projects we know we can fit one unit on 1,700 s.f. of land (with driveway), we then find a 7,500 s.f. site (Cedar). Divide 7,500 by 1,700, and we get 4.41 units, we then round down (always round down) and we generate 4 units on this 7.5k s.f. site. You get the 1,700 by determining what product type you want, in this case larger family rental, fit the necessary parking, bedrooms, set backs, driveways, and common area, then measure the footprint of the unit. This requires some design iterations on our part when we first design a new product offer for the market. We now do this very rapidly as our team has been doing this for a while. Hiring a good architect will help in this process greatly.

Another way to think of this calculation is in terms of dwelling units/acre (du/a). So 1,700 s.f. per unit of land area, divided by 43,560 s.f. (1 acre) gives us 25 du/a or dwelling units per acre. If you had a two acre site, that's 50 units (2x25).

These methods can be used interchangeably. Of course, your zoning density will always dictate your du/a, sometimes effected by Floor Area Ratios (FAR's), and always by setbacks and parking requirements. In the case of Cedar, we were already looking for sites that had a specific zoning designation from the City of Long Beach that worked for this type of project.  

Ok, that's a lot to digest, so we'll stop there. Here's some site photos of the Cedar site. Note that this site has access from the street and the alley in the back (we are only using the alley access in our design). 

Basics:

Site dimensions: 50' x 150', 7,500 s.f. site area

Topography: Flat

Utility locations: Water, sewer, electric, telco, cable, in alley way.

Site photos (what did we do before Google Maps!!)

     

Thanks everyone!

Hi Everyone:

So far, we have covered:

Basic Project Information and Physical Design Characteristics

Site Selection and Design/Project Programming 

Next we'll cover (over several real time posts, in roughly working order of the actual development process)

Zoning

Project underwriting - proforma analysis and apartment financial return basics

Land contracts - structures and strategies

Due diligence process and risk assessment

Construction plan production process - working with consultants, architects, engineers, and disucssion about project specifications

Plan check and permitting process

Build out - guidance on working with general contractors and subcontractors

Build out - real time photo essay of build out process

Lease up and operations

Sale upon completion and demonstration of returns generated

All real estate development projects will generally work through this same process, no matter the project type.

My objective is to provide a framework that anyone can work from in the development process. Think of this as a fundamental guide, applicable to any project, at any time, anywhere in world. It is fundamental because all real estate development projects work this way, and only the specifics change given time, location, project type, developer type, etc.

Let me know if you see anything that is missing for you and I'll do my best to add in as applicable.

Zoning covered in the next post.

@Doug Woodville Happy to be an offer of help. Let me know if you have any questions or guidance you might need on future deals. I have family in Los Gatos, Campbell, and the City. Get up there often. Talk soon and thanks.

The next step in the development process is to research and assess zoning for a particular project. 

We'll do this in two posts. First post will show you how to search for what zone your site is in for a particular city or county. The next post after that will show you how to research what you can actually build once you know what zone your site is in.

Zoning is one of the more obscure aspects of the development process, but in our experience, once you acquire significant strategic knowledge and create practices around this research and identification process, the value and marginal utility to be generated can be very significant. 

You can hire an architect to do this zoning research for you, but as a developer a big part of your "value add" is to identify strategically what areas have the zoning that you need, or where you found a site and the zoning works for what you want to build. An architect is best left to refine the research and the minute details of the zoning code, after you as the developer have found the site, identified the zoning, done the math to determine that the zoning density, site area, and unit count that work for your type of development project. Plus, you can do this much quicker then they can and you keep your predevelopment costs down by doing the work yourself. Ultimately, as a deal maker, you are in the best position to move first/move fast to find sites and and make initial zoning assessments that work for you as a developer. 

Once you have identified a piece of land that is in the neighborhood that you are focused on, or found a site, you then want to research the zoning of the property. 

Now, you may say: shouldn't you check zoning first and they find a site you want in that area? The answer is yes, but it can be done either way: find the zoning then the site, or find the site check the zoning. 

If you are willing to farm an area with the correct zoning that's great, but in our experience with market ups and downs that are always part of our thinking and action as a developer, we want to focus on sites that are ready to transact. Maybe you find them on Zillow, or Loopnet, or through your networks of help - brokers, bird dogs, wholesalers, etc. Either way, you want to be able to work on projects and land sites that can move forward with expediency. Either of these methods works, you just need to keep time to market in mind as you make this decision for yourself.

You have identified your site, now you want to check the zoning:

1. Find out what city it's located in. Be very careful to use mapping systems that have the correct data for what city or municipality the site is located in. Google Maps does not suffice for this, as a mailing address, or Gmap address may name a specific city, but it's jurisdictionally in another city or county. 

Example:

This says city of Los Angeles, but it's really in the unincorporated county of Los Angeles. 

This difference is critical, as all zoning regulations are specific to the city or county that your site is in, and every city's zoning codes are different. As well, the time to process entitlements (project approvals related to zoning and land use) may be significantly different. In this case, the county of Los Angles is notorious for being slow.

You can start with GMap search, then as part of your zoning check, you'll identify where the site in the city you have identified or selected.

2. Next, as you've identified the city or county that you believe the site is located in, you need to check the zoning (and by default if the site is in that actual city)

There are two main ways to do this:

1. Google search for this term "city of xxxxx zoning map". So for this example we'll use a random city in Orange County - the city of Stanton. Do the Google search and you will get this:

Here you'll see the city website, with a link to "General Plan-Land Use" where it lists in small print link text "Zoning Maps". Click on that and your see this:

Click on the link that says "Official Zoning Map" and you'll then see this:

City of Stanton Zoning Map

Click on the image for link to actual zoning map

Then search for your site on this map. You'll have to cross reference streets named on the map and then find your site. The best way is to find the nearest major intersection actually listed on the map, then your street, then the outline of your site. It's tricky but can be done. If you determine that your site IS NOT on this map, then you need to move to the city that covers your site. In the sample map, you can see that they identify adjacent cites on the map, although not all zoning maps do this. Once you have determined that your site is on this map then you can move on to the next step.

Next, see what color the map is where your site is located and then look at the legend on the map to identify the zone your site is in. Let's pick the dark gold color for example purposes and you'll get "High Density Residential". This is your zoning designation for the site.

2. For larger cities or counties, some cities have GIS (Geographic Information Systems) websites or web portals. In the case of the county of Los Angeles it's called "Z-Net". In this case, you go to the website, and you'll usually see a search box where you can search by site address or Assessor Parcel Number and this brings up information on the site including the zoning. 

3. You can call the city or county planning department and ask them what zone your site is in. In our experience, and in bigger cities, the planners almost never answer the phone. In smaller cities a phone call may work, or better yet, an in person "over the counter" visit to check zoning. 

Sometime email works, but in any case, it's too slow for us. We want to be moving with velocity and be making assessments of sites rapidly. Both to be reviewing and assessing lots of site everyday, or a site may come on the market and you need to make assessments rapidly because your competitors are also looking at the site.

Next post will cover how to research what you can actually build (or not) given the zoning for your site.

Thanks.

Hey @Scott Choppin the posts are a good length. Heck I wouldn't mind them being even a little longer! Thanks so much for sharing your expertise!

Posts are good lengths right now! I just checked a zoning map of a parcel I found around where I'm at (it's zoned residential, high density, 35 units/acre)  and I've recently sent the owner a letter seeing if she's interested in selling. Crossing my fingers....

We have now identified what zone our property is in. 

Next we need to check the zoning standards or as they are sometimes called development standards. These are the requirements and conditions for the development within that zoning designation.

A quick high level note: There are two types of projects when it comes to zoning, those that fit within the existing zoning or what we call "by right" or those that do not fit the existing zoning and require the zoning to be changed, what we call an "entitlement" project. Both of these are possibilities, with the main differences between the two being:

A. Time - it takes time to rezone or change the entitlements of a project, we have had projects take 18 months to get approvals.

B. Money - it can take from $5K up to $1M to process a zone change or entitle a project.

C. Risk - once you enter into entitlement domain, you now are subject to political risk, or entitlement risk, due to the discretionary nature of zone changes. Discretionary approvals mean that someone can say "no" to your project and not have any liability to you for loss. This is where you go to the planning commission or to the city council, and this also where if you have neighbors that don't like your proposal, or neighbors that don't want or like change, they can show up at a public hearing and sway commissioners or city council folks to vote against your project. And by the way, as a developer, we are ALWAYS the agent of change, it's the very nature of real estate development to produce change, and most folks we run into don't do well with change. Some people will love you for producing a new project, upgrading a site or neighborhood, but many will just resist change for change's sake. This is why they call them BANANA, "Build Absolutely Nothing Anywhere Near Anything". A more common term is NIMBY's, "not in my back yard".

Many development and home building companies choose not to deal with political risk at all, and so buy land that is either already zoned, or where someone like us had processed the entitlements and will deliver the land with approvals already in place. Our company, Urban Pacific, does both by-right and entitlements projects, and in fact, most of the projects we have done since 2000 have been entitlements projects. 

Using our city of Long Beach example, the zone is R-4-N. Our Cedar project is by-right for our design, or more accurately, we designed our project so that it fit within the zoning envelope and became by-right through our efforts.

This is the general order or checklist to use when reviewing zoning standards for your development project:

1. Determine if your use is an allowed use. Each zone will have a list of allowed uses. In our case in Long Beach, the zone is R-4-N, with the "R" designating "Residential" Now, be careful here, sometimes cities use "R" sometimes not for residential. It is best to ALWAYS check the zoning designation on your map, then check what is allowed. One opportunity is to look for zoning that is not obviously residential, but say commercial, or mixed use, or industrial, and that allows residential within that zone. Sometimes cities say residential is allowed in a commercial zone with a Conditional Use Permit (CUP), or some other process that allows the city to "condition" your project, but yet allows residential in an non-residential zone. Adding conditions, means to add extra requirements to the normal requirements. This might mean better exterior finishes, or you'll need to pay extra impact fees, or anything and everything they can think of. And by the way, it's not always fair what they want to add, and that's the life of a developer. This is where your soft skills or political skills come in, where you as the developer are tasked with convincing a person at the city, a planner or city council member, that you want that extra condition that they want removed or eliminated. This is a key skill for a developer, managing the bureaucracy and the bureaucrats. 

2. Determine what density this zone will allow. You will remember from my previous post, that our UTH product lays out at 1,700 s.f. of land area per unit. Now you need to check the zoning standards to determine that this du/a is allowed. In our case, R-4-N allows 1,500 s.f. of land area per unit, so we are in good shape being slightly above (less dense) than the zoning standard.

3. Check your height limit. In our case, we utilize a 3-story unit plan. On the Cedar project, R-4-N allows 3 stories or 38 feet in height. It's critical to read all the fine print and footnotes. That's where they delineate "exceptions". Example, City of Los Angeles in their RD1.5 zone, allows in the 1XL height zone, if your project is purely residential, to only be limited to height in feet not number of stories. So if you can fit 3 stories inside of 30 feet, you are welcome to do so. For our UTH product, it works much better at 3-stories. We can do 2 stories, but it's a different design effort and won't fit on 1,700 s.f. of land area per unit. Going to 3-stories allows us to increase total density, as long as the height standards allow it. 

4. Parking - make sure you understand the requirements for parking. In the R-4-N zone it's two spaces per unit, plus guest parking at 1 space per 4 units or .25 spaces per unit. For our 4 unit project, we need to provide one guest parking space. We meet the unit parking standard by providing two spaces in our ground floor two car garage. You could supply these spaces as surface spaces, open to the sky, like most apartments projects. But we like the marketing benefits of an attached two car direct access garage, it's more appealing to the family tenants that we serve. As well, don't forget to include handicap parking space requirements. The ADA standards are pretty clear cut, and apply to all projects over 3 units. HC spaces require one van accessible space, which is about the width of 1.5 spaces, so really your using two regular spaces to meet your HC parking requirements. Your architect should know this stuff inside and out. On Cedar, our one guest space is also our HC van-accessible space.

5. Check set backs. These are the distances that your building must be placed away from the property line or "PL". So if you have a 20' rear yard set back, your building face at the rear of the property or back wall cannot be any closer than 20' feet from the PL. Again, as always, view the footnotes, as you may find exceptions depending on the zoning code. All projects will have front, side, and rear setbacks. These setbacks, plus the height limit, make up what I call the "zoning envelope", that space within which your building can be designed and built.  

Here are some screenshots from the City of Long Beach Zoning Code and Residential Development Standards. When researching new zoning, just Google "City of XXXX Zoning Code", that should bring up search results that cover your particular city. If they don't come up, go to the city website directly and use the search box on the city website and search for "zoning code".

So there's ton more that I can't cover here. I would encourage you to read the zoning thoroughly when working on your first few projects and I mean read ALL of it. As I've said before, you may hope to rely on your architect for these nuances, but it's your butt on the line when you put a deal together and raise capital, you want to make SURE the zoning really allows what you want and need. Please ground your assessments about zoning standards and your project's fit within those standards before you launch. Here, precision and grounding are a strategic advantage and marginal utility. Plus, as the developer, you will be a better deal maker than your architect. You will always be more creative in thinking of ways to make your project work, by using creative thinking, the exceptions, and footnotes. You are incentivized to figure out ways to make it work. Deals and projects don't always work, you have to know when to quit a project, but being an entrepreneur in real estate demands that you solve and resolve these types of constraints and limits on a daily basis. This amongst other things, is why developers can and do receive high value for their offers and practices. 

Good luck. Next post in a few days.

Thanks.

Hi Scott,

Just came across your post. I'm in the process of educating myself & have decided to to focus my efforts on MF properties. I have also thought seriously about intercity development but wasn't sure where to start. So coming across your post is perfect timing.

I really appreciate the posts & level of detail. I don't think that they are too long as I enjoy learning. Keep up the great work.

Cheers,

Michael

Hi @Scott Choppin  

Thanks for posting. Currently I have my eyes on a very similar project in LA. 9,000 sqft lot, LAR1.5 zoning. Thinking of building 4-5 units. 4 will be easier to sell, as it doesn't require a commercial loan.

I would love to pick your brain regarding construction costs. The plan is to build two story fourplex, with 4 3/2 units. Nothing fancy, but good looking. I don't want to spill all the specifics here, not my intention to hijack your post.

Is it possible to reach out to you te get a better understanding of cost range?

Thanks!