Impact Development -- place as a platform for positive outcomes

Impact Development — using place as a platform for positive outcomes

Impact Development uses place-based solutions to equitably grow communities and improve quality of life with the intelligent use of resources.

Impact Development — A Primer
FIX defines Impact Development as the use of place to equitably grow communities and improve quality of life with the intelligent expense of resources.  It is the intersection of real estate and impact capital or socially responsible investing, formally referred to as Sustainable Responsible and Impact Investing (SRI or simply, impact investing).  SRI uses capital to support organizations that have a positive impact on social and environmental concerns while generating a financial return.  The outcome is a triple-bottom-line return, with consideration for people, planet and profit.

There is growing expectation for triple bottom line outcomes among investors.  SRI Investing is up 33%, now representing 22% of all professionally managed assets in the US.

In 2016, impact capital in the United States grew to $8.72 trillion which is up 33% from the two years prior, representing 22% of all assets under professional management in the US.  While real estate is not typically a class of impact investing, FIX Impact Development believes it is one of the strongest platforms for creating positive outcomes.  Real estate represents 15% of our country’s GDP, providing a massive opportunity for impact.

The Three Petals of Impact Development
FIX believes Impact Development to be an extension of the triple bottom line philosophy, providing for people, profit and planet with every project.  At the intersection of each is a different opportunity for impact, creating three petals of Impact Development.  Here is how we see the opportunities:

Equitable growth

  • Housing affordability – providing diverse housing options across the spectrum, including more inclusive ownership structures
  • Commercial affordability – creating supportive markets for burgeoning small local businesses to innovate and thrive
  • Access to opportunity – increasing access to diverse types of education and creating employment opportunity

Quality of life

  • Ease of mobility – enabling more people to move more easily locally and across the region
  • Access to nature – nurturing a connection to and appreciation for nature for all people across all neighborhoods
  • Thriving arts & culture – supporting the spiritual growth of that comes with the creation and enjoyment of expression

Resource intelligence

  • Smart design – designing with best practices, including traditional and advanced techniques, for smart buildings and urbanism
  • Economical project delivery – improving our methods of construction and assembly to reduce all forms of waste
  • Efficient building operations – evolving behaviors to be more efficient with long-term operation and management of places

See our related post for the top five reasons why place is such a strong platform for impact.

5 reasons why place is a strong platform for impact

Five reasons why place is a strong platform for positive impact

(And why we created FIX Impact Development.)

Why place-based solutions for impact
Overall, impact investing represents more than 20% of all professionally managed assets in the US, up 33% between 2014-2016.  Investments target diverse sectors and outcomes, including housing which is the fourth largest sector with roughly 12% share.  But real estate is essential to nearly every sector of impact and has the potential to have some of the broadest influence on social and environmental outcomes while creating positive financial gains.  Here are the specific reasons why FIX believes real estate and place are such strong platforms for impact.

  1. Increases innovation
    Real estate is like the processor of a computer, running in the background, core to its function.  Well-located and designed places can improve user efficiency, communication and productivity.  And its the driver of innovation.  The rate of innovation has been proven to correlate to the number of interactions we have with people outside of our usual circles or disciplines, also known as our “weak ties.”  These interactions form in physical spaces, rarely online and never in isolation.  Place accelerates serendipitous interactions and enables organizations across nearly every sector to improve how they function.
  1. Magnifies the multipliers
    The real estate sector alone represents 15% of the US GDP and directly generates millions of jobs.  But beyond that, real estate provides a secondary lift to local and regional economies by attracting employers which in turn attracts competing businesses, all of which buoys diverse strata of opportunity within services, retail, housing and other sectors.  For example, consider the impact of locating a large tech company, where every tech employee now generates five new jobs across the economic strata from doctors to service workers.
  1. Creates intergenerational impact
    Real estate and urban design typically have decade and often century-long lifespans, driving intergenerational impacts.  Poorly designed, located or programmed facilities can have lasting effects that perpetuate broken systems.  And the opposite is equally true where well-designed projects can have lasting positive outcomes, including through their adaptive reuse over time with new program.
  1. Ripe for disruption
    Buildings consume half of all the energy produced in the US and in their construction, produce more than 40% of our country’s annual 250 million tons of solid waste.  Any industry generating this much waste is ripe for disruption and even the smallest of improvement in efficiency will have massive positive impact.  Some of this innovation will come by way of advanced technology like new forms of carbon-sequestering concrete.  Others will come by way of remarkably low-hanging fruit like diverting beetle kill timber from forest fires and converting them into high-performing new building material using nothing more than glue.
  1. Readily-measured outcomes
    The impacts of real estate are readily measured, often longitudinally, simply given the static nature of place.  Buildings and their tenants are easy to find and track in both qualitative and quantitative analysis.  Building metrics, tenant and user behavior, effects on surrounding communities, and other measures to evaluate and shape projects against their intended outcomes.

See our other post on how we at FIX define impact and use place to create positive change.

Backyard Cottages - the case for killing the Owner-Occupancy policy

The case for killing the Owner-Occupancy policy on backyard cottages.

The single greatest limiting factor in building more of the inherently affordable backyard cottages is not zoning restrictions, it’s not your neighbor’s NIMBY attitude, it’s the bank’s inability to appraise its value.  Kill the Owner-Occupancy policy and you solve that problem.

The Catch-22 of the appraisal
Today, we can create tens of thousands of inherently affordable housing units, simply by enabling homeowners to build ADUs.  Of the 124,000 eligible single-family lots in Seattle, less than 800 have a permitted ADU.  This is in part because of the cost: the average ADU costs roughly $185,000 — enough to require most to take out a loan.  But ADUs do not appraise; there are too few in the market so banks risk not recouping the value of their loan. It’s a Catch-22: to get a loan for an ADU, you must first have the equity you need to construct one or already have built one to appraise.

The single largest category of homeowners who could manage this Catch-22 are the investor home-owners who use their house(s) as a leveraged asset.  There are approximately 25,000 single-family homes in Seattle that are non-owner occupied.  An ADU on each of those lots would equate to 25% more than Seattle’s entire HALA goal for the next 10 years.  Yet our policy precludes construction and/or renting of an ADU on a property that is not occupied by its owner.

The fastest way to build more ADUs is to eliminate the one policy that is precluding the group most capable of side-stepping the cold lending market.  By doing so, we will have a magnifying effect by creating viable comps to appraise, thawing the loans giving average homeowners access to the capital to build more of them.

ADUs are a massive opportunity for increasing density without the use of public funding. ADUs would add inventory to the housing market in the least densely developed areas, which comprise nearly two-thirds of our land area.  ADUs are inherently affordable simply given their small scale and they are low-impact, nestling into the character of our esteemed single-family neighborhoods.

Except a few neighborhoods within Vancouver and elsewhere in BC, few Cascadia cities have taken advantage of this opportunity.  Planners and policymakers here in Seattle and Portland recognize the opportunity and believe ADUs are a logical component of any housing solution.  Defining the opportunity itself is not the limiting factor.

Non-owner occupants are one of the single largest demographic of homeowners representing more than one-fifth of all single-family homeowners.  According to the US Census, 20% of detached single-family houses in Seattle alone are non-owner occupied.  That equates to roughly 25,000 houses or 125% of the HALA affordable housing goals.  According to First American Title, the number of non-owner-occupied units is even larger with 27,047 homes in Seattle (J Tamparo, Senior Commercial Sales, First American Title Insurance Company, December 2015).  If we remove the owner occupancy laws, we will remove a barrier that is limiting one of the largest proportions of likely ADU hosts who most likely have the financial means and skills to construct ADUs immediately.

The Magnifying Effect
Stimulating a small critical mass of ADUs will enable banks to assess their value in appraisals, unlocking loans to tens of thousands of homeowners who could not otherwise borrow the money necessary to build an ADU.  The minimum average cost to construct a backyard cottage in the Seattle market right now is about $185,000.  Few have that sort of liquidity and would look to borrow by leveraging the equity in their home with the exit strategy of refinancing their mortgage once construction was complete.  However, if the bank doesn’t believe that an ADU increase the value of their home, the refinancing exit doesn’t work and homeowners are left saddled with an increased mortgage payment.

This is the number one reason we are not seeing more ADUs currently.  It’s not land-use policy but financing.  We need a sufficient quantity of ADUs in the market for appraisers to draw comparable analyses when appraising other homes with ADUs.

The Second Opportunity
The average cost of a one-bedroom cottage is $185,000.  This is an enormous barrier in itself.  If one were to borrow 80% of that over a seven-year term at 4.5%, that’s a monthly payment of about $2,050.  There are few neighborhoods in Seattle where one guaranteed to clear that cost in rent for a one-bedroom (DADU or AADU), especially after deducting for vacancy, insurance, maintenance expenses, and taxes.  But construction costs are consistent across neighborhoods despite the fact that rents may vary as much as 75% within a mile.  Rainier Beach, for example, has an average rent of low $2.00PSF whereas parts of Capitol Hill is pushing $4.00PSF.

Why would we tax Seattle homeowners to fund construction of affordable housing when those same homeowners could make money by renting their own inherently affordable backyard cottages?

Ironically, the homeowners who most stand to benefit from having an ADU and the associated supplemental income do not live in the neighborhoods that can command this rent.  So even if we solve the appraisal problem and thaw the lending market, the underlying costs limit access, which suggests that after solving the appraisal issue, the next most valuable policy would reduce the total cost of construction and ownership of an ADU.

We have policies that do this already for large institutional multi-family projects: the MFTE and low-interest loan programs for affordable housing.  And what’s most exciting about these when applied to the ADU market is that they provide a triple benefit.  (1) They encourage construction of affordable housing in the form of ADUs; (2) they provide relief and supplemental income to lower-income homeowners, preserving homeownership and wealth accumulation for the lower half; and (3) they do all of this in the private sector rather than burdening OH and SHA to produce the lion’s share of affordable housing for our city.

The savings from a tax exemption program like MFTE and a low-interest loan are significant.  Considering that example of the 80% loan on the $185,000 cottage, if the rate were 2.0% and term 10-years, the monthly mortgage would be $1,360 or a nearly a $700/month savings.  Now a one-bedroom cottage in Rainier Beach starts to make a profit.  Then if we eliminate property taxes for the portion of the property devoted to the affordable ADU, given rough average property taxes and average size lots, that could easily equate to another $300 per month in savings.

If we want to stimulate the proliferation of ADUs, we need to make it more affordable for those who are thirstiest for them and who are most motivated to build them.  To do this, we first need to enable the market to build more cottages quickly to enable the appraisal.  In parallel, we need to offer qualifying homeowners the existing tools we’ve created for institutional scale housing development.  The existing volume of lots available to host inherently affordable cottages is enough to meet this decade’s goal of housing.  It seems foolish not to capitalize on this and, instead, tax homeowners to fund public housing programs when those same homeowners could be earning money for providing housing themselves.