Profitable infill

Building homes the old-fashioned way yields lucrative returns in North Carolina. A development of new homes in a historic city neigh borhood riddled with vacant lots would seem an unlikely candidate for a 42 percent rate of return on investment — a high yield for any real estate project. Yet that’s the performance, based on cash outlays and profits over a three year period, of a six-acre new urbanist infill development under construction in Durham, North Carolina. Moreover, the houses in Trinity Heights maintain unusually high design and construction standards — to the extent that the project won a historic preservation award from the Historic Preservation Society of Durham. The homes, which have detached garages on alleys, are based on classic four square and bungalow styles. The Trinity Heights project includes 24 single homes (most of which have accessory units), and 15 townhouses. The developers are TND Partners and Duke University. Wachovia Bank financed infrastructure development with a $500,000 loan. The housing construction costs were financed by the builders, McNeil Burbank (single homes), and GP Custom Homes (townhouses). The project is adjacent to Duke University’s East Campus in a neighborhood which had seen little new construction for decades, and where the university had acquired land over many years. The school had originally looked at a more conventional project, but development partners Robert Chapman and Milton Grenfell convinced officials to take a new urbanist approach. Duke, which owned the land, stipulated that units be made available only to faculty and staff of the university. The 1,550 to 2,330 sq. ft. units ranged in price from $154,000 to $233,000 (actual purchase prices were usually higher due to the addition of accessory units and other options). Most houses sold for between $100 and $110 per square foot. Strong demand With very little marketing, reservations were placed on all units almost immediately. However, a number of buyers backed out after construction was delayed beyond the usual academic move-in season. The market demand and home prices were surprising, given the neighborhood. “One experienced broker told me that nothing would sell for over $150,000 here, but we haven’t sold anything for less than $150,000,” notes Chapman. He adds that “people saw these houses and they loved them.” Most of the delays were due to the infill site. For example, existing underground piping was larger than expected, forcing the developer to raise or lower new utility lines. Sometimes this resulted in regrading. As of January, 2001, eight units (six townhouses and two homes), were available. These were expected to be sold in the spring of 2001. As the landowner, Duke is receiving $9,300/unit, a total of $363,000 gross payment for the site, which works out to $60,000/acre. The university agreed to allow the land to be used as collateral for the development loan. The contribution to profit and overhead for the developer is $458,000, while for the builders, that figure is $865,000. Implementation details Partly due to the characteristics of new urbanist and infill projects, Trinity Heights was unusual in its logistics. The developer built alleys and two small pocket parks, but the existing streets were saved. Development infrastructure expenses totaled $340,000, or about $9,000/unit — a below average cost. However, more time is needed to build infrastructure on a site such as Trinity Heights, Chapman says. The cost for design and architecture — $150,000 — is above average for a project of this size. Chapman estimates that 85 percent of that cost is architecture and the rest site planning. Because the architect, Milton Grenfell, is a development partner, most of these costs were carried as developer sweat equity until the houses sold. Site planning was done by Grenfell in consultation with Tom Low of Duany Plater-Zyberk & Co. Although the planners were working with existing blocks and streets, issues needed to be resolved. The planners wanted 12 foot alleys — narrower than the city’s standards, and this required presenting officials with a study to prove the proposed width is sufficient. Given the security needs of the infill site, an attempt was made to restrict access to the interior of the main block through the use of picket fences in the spaces between houses. The alleys are open, but could be closed at the discretion of residents. Directing the design Grenfell designed every home — six single models and seven types of townhouses. “We handed the builders the plans, saying ‘this is what we want you to build’,” Chapman explains. “That’s never done in conventional development. A lot of new urbanists do it this way, but many rely on pattern books or codes.” A builder in a conventional subdivision might buy a house plan for $1,000, and spend another $1,000 modifying the plan, and then repeat that plan 50 times. That results in a design cost of $40/house. In Trinity Heights, design costs were slightly under $4,000 for each house — still a very reasonable price for the quality of the units. In a larger new urbanist project, design costs would be substantially less on a per unit basis. The single homes were based on plans purchased from the TND Series plan books published by HomeStyles (see www.TNDhomes.com). Grenfell reworked these plans and elevations. The townhouses were based on historic units that Grenfell studied in Chestnut Hill, Philadelphia. Getting conventional builders to go along with this program was problematic. Chapman interviewed 15 builders in the area. The first builder selected for single homes turned out to be a bust. The developer worked with this builder for four months, but they couldn’t see eye to eye on construction quality and design. McNeil Burbank came to Chapman’s attention through a new urbanist colleague. The builder also had completed some good looking homes in Southern Village, a new urbanist development in Chapel Hill, North Carolina. The firm has strong financial backing, as does GP Custom Homes. Maintaining standards But even after this careful selection process there were disagreements with the builders on construction issues, Chapman says. The developer was able to prevail on all of the important design and construction standards — including 6 foot tall windows, deep profile muntins, eight foot deep porches, raised brick foundations, smooth-finish fiber cement siding, steep roof pitches, wide eaves, nine-inch interior molding, and solid doors. With all of these upgrades, the construction costs average about $75/sq. ft. in Trinity Heights. Lot prices were used by Chapman and Grenfell as leverage in construction negotiations. Builders generally pay lot prices of 18 percent to 23 percent of the sales price. TND Partners offered 17 percent, providing the builders do things the developers’ way. Because Trinity Heights is an infill project built on an old block and street structure, the single homes have the advantage of unusually deep back yards — 140 feet — and mature trees. Despite the urban location and relatively high density, the site has a shady, natural feel. House lots range from 36 to 50 feet wide, giving the single homes a net density of 7.5 units/acre (with accessory units, the density will be almost 12 units/acre). The townhouses achieve a net density of 19 units/acre. About $2,000/unit was spent to provide high-speed internet connections and service for a three-year period. This was a stipulation by Duke University.