Rybczynski writes 'Art of the Deal'
Architect Witold Rybczynski, editor of the Wharton Real Estate Review, has written one of the best financial analyses to date of new urban communities. “The Art of the New Urbanist Deal,” in the fall issue of the Review, examines four new urban communities, three of which – Seaside, Haile Village Center, and Lakelands – have been highly profitable for their developers. The developer of the fourth, Kentlands, was forced to give the project to the bank. Kentlands failed because of the 1990 recession, the developer’s inexperience and lack of capital, and the inability to find town center tenants in a slow economy, Rybczynski reports. However, Kentlands has since generated profits for the builders who finished the project. Rybczynski offers convincing evidence of the increased value that good new urban design brings to a real estate project – even as he raises questions about the success of some aspects of town centers, particularly the one that serves both Kentlands and Lakelands. He also reports that while Seaside and Haile offer examples of successful slow-developing New Urbanism, Lakelands proves that it can be geared up to a far faster level of production. Lakelands sold 400 units a year for the first three years, and at the same time realized substantial increases in real estate value. While all three projects cost more to build than conventional developments, the developer of Lakelands was surprised at how little the premium was, in reality. “We thought it would be a 20 to 30 percent premium,” developer Tom Natelli told Rybczynski, “but it turned out to be much smaller, 5 to 7 percent.” “In general this premium appears to be covered by the increase in value that seems to be attached to new urbanist projects,” Rybczynski concludes. A two-year search for financing recently paid off for Terry Stamper, developer of the Peninsula Neighborhood in Iowa City. Stamper and his partners received a $2.25 million loan from a Kansas bank to move forward with the first phase. The lender, however, required a quicker payback to compensate for a perceived higher risk of New Urbanism. Instead of the usual 55 to 60 percent of revenues going to the bank to pay back the loan, 85 percent will be directed there, Stamper says. That means the equity investors in the project will pay operating expenses until the loan is paid off in about eight months, he explains. After that, all of the revenues from home and lot sales will come “free and clear” of debt obligations. The perceived higher risk is due to lack of experience with New Urbanism in Iowa, Stamper explains. “Banks say ‘yeah, it looks good, but what happens if you drop out?’ There’s no other new urbanist developer within 500 miles, and no available builders to take over.” Demand is pent-up for much of the 86-unit first phase – a variety of single homes, townhouses, live/work units, duplexes, and apartments, Stamper says. Customers placed reservations on 40 homes, but half of those were lost because of delays last summer. Now Stamper is trying to get some of the lost reservations back. “I have a certain number of easy deals – say 20 or 30. After that we will be fighting for sales just like everybody else.” To generate demand for future homes, Stamper wants to get a couple of blocks of good urbanism built in the next six months. The 380-unit project was planned by Dover Kohl & Partners, with detailed planning by Geoffrey Ferrell Associates.