New to Real Estate · San Diego, CA · Member since 2020 · 10 posts · 1 vote
Hey ya'll!
So I was in a meeting today with an architect talking about my current project.
I showed him a property that's zone rm-2-5 with a 40' height allowance. It's basically a teardown on a 7500 sqft lot. Right now listed at $560k... A little steep, but maybe they would come down. I haven't run any numbers, but the architect said that if it was development as affordable housing, you can double the number of units as long as over 5 units are allowed.
I'm not really sure where to start on looking in to this. It would probably be a conversation with the architect to find out more about the building requirements. I also have no clue on how the rent system works for section in terms of how you collect rent when its subsided.
It's really intriguing and I'm gonna look into it more! There's potentially to create some really interesting architecture, provide affordable housing, and create a great cash flow asset.
Does anyone have any experience with this kind of development? Does it work?
I started by sending an email to the real estate agent just to get a read on where the seller is at. It's been on the market for 90 days. So maybe they'd be open to negotation...
If we ran the numbers and the construction/time cost maybe it would be worth it and could be our next project!
Real Estate Agent · San Diego, CA · Member since 2014 · 205 posts · 123 votes
6y
@Nathan Vaughan I’m not a developer but have some food for thought. I once looked into a similar kind of project in NorCal and discovered that the city fees to get utilities on site (water meters at street, electrical transformers, ect) were in a certain range depending on the unit mix. The fees were not that much higher for a 3 bed 2 bath than for studio apartments. So the smaller units didn’t pencil out (It was zoned for up to 12 small units.) I then realized why all the developers were building 3-2’s.
I would find an experienced developer to nail down these numbers because the cities are horrible at getting accurate info to you.
Real Estate Agent · San Diego, CA · Member since 2014 · 205 posts · 123 votes
6y
@Nathan Vaughan I’m not a developer but have some food for thought. I once looked into a similar kind of project in NorCal and discovered that the city fees to get utilities on site (water meters at street, electrical transformers, ect) were in a certain range depending on the unit mix. The fees were not that much higher for a 3 bed 2 bath than for studio apartments. So the smaller units didn’t pencil out (It was zoned for up to 12 small units.) I then realized why all the developers were building 3-2’s.
I would find an experienced developer to nail down these numbers because the cities are horrible at getting accurate info to you.
So I was in a meeting today with an architect talking about my current project.
I showed him a property that's zone rm-2-5 with a 40' height allowance. It's basically a teardown on a 7500 sqft lot. Right now listed at $560k... A little steep, but maybe they would come down. I haven't run any numbers, but the architect said that if it was development as affordable housing, you can double the number of units as long as over 5 units are allowed.
I'm not really sure where to start on looking in to this. It would probably be a conversation with the architect to find out more about the building requirements. I also have no clue on how the rent system works for section in terms of how you collect rent when its subsided.
It's really intriguing and I'm gonna look into it more! There's potentially to create some really interesting architecture, provide affordable housing, and create a great cash flow asset.
Does anyone have any experience with this kind of development? Does it work?
I started by sending an email to the real estate agent just to get a read on where the seller is at. It's been on the market for 90 days. So maybe they'd be open to negotation...
If we ran the numbers and the construction/time cost maybe it would be worth it and could be our next project!
- Nate
It's all about the numbers. The first place to start I your local housing authority. They are the ones that need to sign off on the project and or property as they will be the ones that pay the rent directly to you on behalf of the tenant. You sign a lease with the tenant but the housing authority pays the rent.
@Nathan Vaughan I’m not a developer but have some food for thought. I once looked into a similar kind of project in NorCal and discovered that the city fees to get utilities on site (water meters at street, electrical transformers, ect) were in a certain range depending on the unit mix. The fees were not that much higher for a 3 bed 2 bath than for studio apartments. So the smaller units didn’t pencil out (It was zoned for up to 12 small units.) I then realized why all the developers were building 3-2’s.
I would find an experienced developer to nail down these numbers because the cities are horrible at getting accurate info to you.
Best of luck!
Hey David,
I agree, I'm definitely not at the point where I could accurately get a sense for those numbers especially some of the more esoteric costs. I dug a little deeper in to the city code and it looks like there's a 100% density bonus for 'micro-units' that average a total of 600sqft. So you could do (10) 600sqft units. Or you could do something like (4) 400 sqft studios and (6) 730 sqft 2bed/1ba. There's probably a configuration where this would make the most sense, especially if you were to be really careful in your design and construction costs.
Architect · San Diego, CA · Member since 2013 · 244 posts · 101 votes
6y
Hi Nate, you are absolutely right about the 100% density bonus. Also to clarify on the affordable units, you would only need to provide 15% of the base units (in this case 15% of 5 = 0.75 = 1 affordable unit) as affordable for very low income tenants to get a 50% density bonus or 100% density bonus if you're in a transit priority area. In addition to the density bonus you also get up to 5 "incentives" which can be used to alter or reduce development standards (such as increased FAR, reduced setbacks, etc). The incentives are meant to make the project more feasible in return for the lower rent you'll be receiving.
The affordable units are not subsidized, they are rent restricted, and the max rent you will be able to charge for that unit is based on the following which I pulled directly from a density bonus agreement:
The monthly rental rate for each Affordable Unit (which shall include a utility allowance based on the utility allowance schedules published annually by the Housing Authority) shall not exceed 1/12 of thirty percent (30%) of fifty percent (50%) of the Area Median Income, as adjusted for assumed household size and utilities. The imputed household size for each Affordable Unit shall be equal to the number of bedrooms in the unit plus one. For example, the rent for each ___-bedroom unit shall be calculated using fifty percent (50%) of the Area Median Income for a ___-person household.
Real Estate Agent · San Diego, CA · Member since 2014 · 205 posts · 123 votes
6y
@Nathan Vaughan The density bonus is an interesting thing. Very cool.
@Colin L. Good info on the affordable units. This development stuff is so in depth but super fun. For those willing to learn the ins and outs it could be a valuable thing.
Developer · Naples, FL · Member since 2018 · 7 posts · 2 votes
6y
I agree. So much fun and when done right, an opportunity becomes a blessing for one party and the legacy of another. Digging deeper, going farther to understand this process is never waisted time.
New to Real Estate · San Diego, CA · Member since 2020 · 10 posts · 1 vote
6y
I wonder if there are any case studies where this has been done well in San Diego or elsewhere in California. It's surprising the allowance for that kind of density on a rather small lot! It's hard to imagine, but I know there are architects out there doing some really intriguing things to address this lack of housing on micro scales or with unusual infill lots.
Affordable is so relative too! In San Diego affordable is probably 3x the rent for somewhere in mid west! And we're not as insane as the other rental markets in California like the Bay Area or parts of LA. It's gonna be interesting to see how developers respond to these new measures and how the city changes over the next few decades as more and more downtown and downtown adjacent neighborhoods are revitalized. Fascinating for sure!
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
6y
@Nathan Vaughan There are many, many projects coming in San Diego that make use of the microunit ordinance - there are some big reasons they make more sense that traditional density bonuses, along with some important ways in which don't. But, one thing they won't result in is lots of what people often refer to as "affordable" housing - these projects are still expensive to build, and they still need market per sf rent rates in excess of current market product to make financial sense. However, because they are smaller units, they do provide options for people who want newer housing at a lower absolute price point (though, higher price/sf than other options out there).
One common thing I hear in threads (including this one) is a lack of distinction between the roles needed to execute projects like this. This is blatantly obvious to me after moving from smaller projects to these medium (10-50 unit) MFR developments - you need to fill at least five roles:
1. Developer. This is the person who finds property, identifies the goals of a project, decides what to build there (amongst many, many options) to maximize for those goals, raises the money, hires the team, holds people accountable for timelines and commitments, negotiates contracts, solves the problems, and overall sees it through. Think of this as the CEO of the company - someone needs to be the leader and make sure team members are motivated, communicating, and are setup for success.
2. Designer. This is the person who has the technical knowledge to design, draw, and process permits for the project. They know what materials are available, what physical forms most efficiently accomplish the goals, how ordinances are setup and how they interplay to maximize the project goals. They understand and need to think about how people and spaces interact so what gets produced is something people will desire.
3. Consultants. These people have specific technical knowledge the Designer does not. Lots of these people are going to have "Joe Smith, P.E." at the end of their name. Many of these folks are professional engineers - soils, geologic, structural, MEP, civil, utility. There's others.
4.Builder. This is the person who can take paper drawings and turn them into physical buildings. They need to be good working with and negotiating and problem solving with subcontractors. They need technical knowledge for how buildings are built. They need to be able to manage budgets. They need to be able to make commitments and followthrough.
5. Sales / Operator. Once you build something, you need to do something with it, whether you're doing to sell it, operate it, or some other thing.
In small projects, one person can do multiple of these things. But when you start getting into MFR buildings in urban San Diego, that's not going to work - the reason is you need a ton of knowledge and contacts, and to get value from that knowledge and relationships, it makes sense to build a pipeline of projects that leverage all of it. It doesn't make sense to do just one. In my case, I had to involuntarily quit my day job once I realize that I couldn't just develop on the side after starting to do projects in the 5-10 unit size. By all means, if you've got a passion for developing real estate of this type, go for it ... but my message is just that the work and time involved should NOT be underestimated. It is nothing like building a single family house or doing a full gut renovation or flip or whatever. The role of the Developer is significant and absolutely critical, and every decision (starting with what, amongst all the options available, should be done with a property) takes a lot of time and experience and knowledge and learning in order to get right. The dollar amounts are high. There are many decisions that you can't pay someone else to make.