Interviewing a housing investor

[MacheteJames]

Hi all,

I'm working on zoning code audits for a few communities. We're helping them develop a series of zoning text amendments to help increase housing production (without getting our heads taken clean off by the public, hopefully). Through a connection, I have the chance to interview an investor in the housing space in order to get a banker's perspective, since it really is the capital side that is driving so much of the results that we end up with. The hidden hand, if you will.

If you had the chance to talk to someone like this, what would you ask? I'm thinking

• What weight do you give to comparables in the underwriting process? i.e. what would lead you to take a risk on an unproven or under-represented housing typology in a given market (or not take a risk)?
• How much skin in the game by the owner do you want to see (this has big implications for small, incremental developers, I think)
• Have you ever had a deal go south? Why'd it go south, and what did that mean for the development site?
• What kind of cap rates are you looking for in an optimal deal?
• Where are the emerging markets in our state and region, as you see it?
• What should planners and the public know about housing finance that they overlook?

What am I missing? I'm not a development guy, but I want to understand their world as much as I possibly can.

 

[Faust_Motel]

Do you know Jonah Richard at all?

https://brickandmortar.substack.com/ (Brick + Mortar | Jonah Richard | Substack)

I feel like he's a walking example of the stuff small-time developers/redevelopers run into, and reading about his experiences might inform some more questions to ask an investor (Do projects like this guy's stuff make sense to you? What would convince you to loan him money? Are there things that have gone south for him that you'd want to know about up front? How?)

Some questions:

-How much difference does process and time make? A What sort of permitting timeline should a community that wants to be supportive of housing strive for?
-How much of a dealbreaker is it to work in a community with inclusionary Zoning (and how strict does it have to be to kill a project vs. what is reasonable?)
-Are there communities you just won't loan on projects in because of past bad experiences with appeals or stalled approvals?
-Do you worry about parking?

 

[MacheteJames]

This is a fantastic list. Especially the one about the blacklisted municipalities, because you know that lenders must have a sh!t list of communities that they won't make deals in. The ones that repeatedly pull the rug out from under them and torpedo deals at the last minute because some element of the regulatory process isn't transparent and intuitive. Or a weak planning board chair who capitulates to public comment vs upholding the standards.

I think one that I left off, but should include, is how much the lending side talks among themselves about which developers, which communities, which typologies have the best yields and greatest chance of success. Relates to the one above.

 

[joscoffee]

• What kinds of common "eleventh hour" surprises do you run into that we/the muni could design around daylighting?
• (Seconding the parking question from above) What types of parking calculations are you using for feasibility/marketability (i.e., can we ground truth our local parking scheme against what will be required by lenders?)
• For any particular community, are there points in the development process/code that are routinely different from what's written?
• And to be trendy: What, if anything, does the City need to prep to make pre-approved infill plans easier for approval on your end?

 

[Faust_Motel]

• For any particular community, are there points in the development process/code that are routinely different from what's written?

This is a good one, and adding from local experience, the unholy interplay of municipal vs. state-level jurisdictions- when one has an unwritten rule that they won't really consider a project until it has been through the other process.

Another that would be really interesting to ask about/quantify is how many continuances are typical. The community I work for strives to be a "one and done" hearing process but I know we have neighbors where things drag on for months and months as the boards add more and more information requests they want the applicant to respond to..

 

[DVD]

I talked to one about affordable housing. The big take away, building affordable housing is waaaay different than building housing. A guy that builds houses does not know how to build affordable houses. Lending is different, regulations, etc.

 

[bureaucrat#3]

Do you have the same willingness to lend to a greenfield/suburban project vs a downtown or infill project?
What regulations or restrictions do cities place on a development that would prevent you from investing?
Is there a standard occupancy rate that you look for to make the project work? (At times investors have told me that they are shooting for 80% within "x" number of days. But in the college community I worked for they were ok with just over 50%).
Is there a particular incentive that could work to make non-traditional projects more enticing?
How does adding a mixed use component affect your willingness to lend to a project? Is it more enticing or does it add complication?
Do you care about parking ratios?

 

[MacheteJames]

I talked to one about affordable housing. The big take away, building affordable housing is waaaay different than building housing. A guy that builds houses does not know how to build affordable houses. Lending is different, regulations, etc.

Yup. Stuff like BABA, additional ADA regs that get tagged onto LIHTC, meeting state housing authority design guidelines, and a ton more make affordable housing development seem treacherous versus market rate. The subsidy is a double edged sword if there ever was one. Sort of emblematic of what the book Abundance talks about.