Catalytic Redevelopment Part 2: Project Costs
(This post is Part 2 of KUA's guide to evaluating catalytic development projects. Click here to read Part 1: Setting Goals)
In our last post we covered some common stakeholder goals in redevelopment projects and touched on the difficulty of simultaneously achieving all of the goals on the list without some strategic compromise between the development authority issuing the RFP, the developer, and the community. In the next two posts we’ll discuss the financial aspects of catalytic redevelopment, and how stakeholders can balance goals with the need for a financially feasible – that is, actually buildable – project. As in the last post, we’ll use past KUA projects – the unbuilt proposal for Murphy Crossing, as well as our work at the Lee+White redevelopment – as real-world examples.
We often tell our clients that there is one constant when it comes to design and construction: there’s good, cheap, and fast – and you can only pick two. In a reality where resources are limited and not everything is possible, the key is to identify and understand the tradeoffs, or how to effectively balance competing goals. Elected officials and neighborhood advocates don’t have to be development or finance experts themselves to be able to evaluate development proposals; you just need to look for a handful of critical factors in a proposal that will indicate how the developer proposes to balance project and stakeholder goals with financial feasibility.
Understanding Project Costs
When discussing the basics of development finance, a good place to start is project costs. Driving around Atlanta, you are bombarded with examples of new development, from large high-end residential to mixed-use projects. Some of the projects look flashy and expensive, others not so much. But even for the more modest projects that may not appear costly on the surface, there are hidden costs – some of them literally hidden from view underground – that developers must balance with other project expenses. Project costs can be roughly broken down into five categories:
1. Land costs: the cost of the land that the project is built on
2. Finance costs: equity and debt
3. Soft costs: design fees, permit fees, attorney fees, surveys, printing, and more
4. Horizontal infrastructure: underground and overhead utilities, parking, stormwater management, streetscapes, green space and more
5. Vertical construction: building construction cost
That’s everything a developer has to pay for through the duration of a project. The higher these costs are, the more challenging it will be for the developer to provide affordable rent rates for future tenants or to include non-rent producing amenities, such as park space. Some of these costs are easier to visualize than others: the cost of land is straightforward; engineers, architects, surveyors have to be paid; the cost of the building is at least something you can see and touch at the end of the project; etc. Let’s dig a little deeper into a few of the less intuitive or obvious costs that make up a disproportionate amount of the total project cost.
Horizontal infrastructure costs take up a big piece of the project budget. This category includes everything needed to support a project that doesn’t generate rent: streetscapes, greenspaces, utilities, stormwater systems, parking, bike and pedestrian infrastructure, etc. When you add them all up, they cost a lot of money. Most infrastructure components provide significant benefit to projects, but a lot (think underground stormwater systems) are hidden from view and will never be appreciated by the project’s users. Regardless, most infrastructure costs are necessary or required for successful projects. Remember: as project costs go up, so do the rents needed to cover those costs – so if a developer chooses or is required to provide a lot of parking, or extensive stormwater detention, the cost of those items will be reflected in higher rents. Parking reduction or sharing strategies can help offset these costs, as well as collective stormwater strategies, which we’ve written about before.
The High Cost of Parking
One of the biggest infrastructure cost drivers in projects, particularly in Atlanta, is parking. Typically, the decision on how much parking to provide for a project starts with the developer’s goals, is modified based on local zoning ordinances, and ultimately must be approved by the project’s lending institutions. Unfortunately, most American lenders have a fear that one of the most likely drivers of project failure is inconvenient access for tenants and guests, manifested in the amount of parking provided. For large catalytic developments, everyone wants a parking deck to accommodate lots of parking and for the parking deck to be kept out of sight.
While parking decks can save significant amounts of land from being claimed by surface parking, they have tremendous upfront construction costs. Structured parking costs on average around $20,000-$25,000 per space at the low end. Note that this is for an above ground deck – underground parking costs even more! By that math, a 200-space parking deck quickly adds $4,000,000-$5,000,000 to the initial project cost, dramatically increasing project costs and making affordable rent rates much more difficult to achieve.
When we started work on the Lee+White redevelopment in 2018, we identified that changing the use of the existing buildings would trigger a parking requirement of 2,228 parking spaces. The site – made up of sprawling single-story warehouses between the future (now thriving) Westside Beltline Trail and Lee Street – offered 771 existing surface parking spaces between the buildings and Lee Street. The project’s limited budget and the initial developer’s (Stream Realty Partners) intent to emphasize pedestrian and bicycle access via the Beltline required that we make the project work with just the existing parking, which required a massive parking variance. In meetings with various West End and Oakland City neighborhood groups to secure approval for the parking variance, an early question was “why not build a parking deck instead?” When they learned that building a parking deck would mean both tearing down buildings to make space and a dramatic hike in rent rates, the neighborhood quickly reversed course. The community valued affordability over parking. Two years later, the development is thriving with local small food and beverage businesses and a creative job incubator.
There are many approaches for reducing the amount of parking required for a project, which we consider one of our specialties at KUA (by our last count, we’ve eliminated 2,946 parking spaces from past projects through parking variances – an estimated savings of around $30M for our clients). It’s a powerful way to free up space in the project budget to achieve goals like more affordable rents and usable amenities like streetscapes. At Murphy Crossing, our team did not propose structured parking even though the RFP asked for it. Instead, we provided a combination of shared time-of-day and off-site parking strategies to reduce the overall parking needs for the property, and on-site surface parking tied into an intricate streetscape network. Over time, as less parking is desired or needed, the surface parking areas could be used for future development. Aggressive shared parking strategies that balance daytime and nighttime users ensure maximum efficiency, resulting in most parking spaces being utilized throughout the 24-hour day. Unused parking spaces, during anytime of the day, are a waste of resources that could be spent on more round-the-clock uses. Avoiding the high upfront cost of a parking deck allowed our proposal to focus on affordable housing, low-rent commercial spaces, and a robust public realm. In our view, these goals were more important than providing structured parking. Remember those trade-offs we mentioned?
Rather than focusing on whether there is enough parking, communities should ask developers how much parking is needed for the development be to successful. Is the amount of parking proposed truly necessary, or was the number stipulated by zoning codes or lenders? Remember that parking costs take away from the project budget; more parking means less money spent on things that will benefit the community. We also see some community members pushing for parking free projects. That is a worthy goal and a reasonable question to ask for sites next to active mass transit, but it is impractical for sites that might one day have transit at some unknown future date. Finally, know that if a proposal includes large-format multifamily and a parking deck, it will likely also include high rents. If affordable units are proposed, it will likely require subsidies – more on that in the next post.
Developers are constantly battling rising construction costs, whether as the result of material cost increases, trade labor scarcity, tariffs, or – lately – global pandemics. One way to reduce vertical construction cost is to salvage and repurpose existing structures.
Over decades spent working on adaptive reuse projects, we’ve often heard the claim that renovating an old building can cost the same or more than building new. There’s no denying that salvaging neglected buildings can be costly, but years of experience have taught us that there are many intangible cost savings in reusing old buildings that often aren’t considered. For one, existing buildings built before 1965 have no parking requirements in Atlanta. This grants greater flexibility and creativity for parking and site design and can have significant impacts on stormwater mitigation costs. Additionally, older buildings that qualify for historic status can pursue historic tax credits, avoid costly upgrades to meet current code requirements, and, in Georgia, seek an eight-year property tax freeze. As we’ll discuss in the next post, we don’t always support property tax freezes, but we believe that a limited freeze to support historic preservation is a worthwhile incentive. Pursuing historic tax credits can drive up renovation costs, but these additional costs are often offset by the aforementioned benefits, reducing overall up-front building costs.
As we mentioned in Part 1, saving old buildings is typically a common goal for communities. In addition to the financial benefits outlined above, adaptive reuse brings the added bonus of providing historic character, nodding to the site’s industrial past, and granting a sense of continuity for the development from old to new that scrape-and-rebuild projects cannot achieve. At Murphy Crossing, Oakland City residents wanted to see the unique former State Farmer’s Market structures incorporated into the new development, a desire which shaped our proposal, in which the old structures played a prominent role in the reincarnation of the historic site. While the existing buildings on the site are in various forms of neglect, a majority are not only salvageable but downright cool. In a city that has done a tremendously poor job of preserving historic building stock, we believe it is important to make the effort to celebrate the history of our places by saving old buildings, especially as pressures of growth and density continue to mount.
It helps to know where the money goes in a development project – project costs – in order to identify where financial resources can be redirected to achieve certain goals. We now know that a lot of funds get taken up by hidden elements like infrastructure and parking, but some of this financial burden can be offset by strategies like parking reductions, collective stormwater systems, and repurposing existing buildings. In the next post, we’ll get into another method for overcoming project budget limitations: outside subsidy.