On today’s show we’re talking about how rising real estate prices can kill a rental market, but create an opportunity for new products in the market that might defy conventional wisdom. There’s no question that many different folks are struggling with the changes that have taken place in the market in the past year. Some have lost their employment. The incredibly low inventory of single family homes has seen prices shoot up across many markets. This is particularly true at the entry level of the market where first time home buyers are bidding up the price of entry level homes in order to overcome the fear of missing out on home ownership altogether as prices increase out of reach of some buyers. Many growing markets are also experiencing a shortage of rental housing. But some of these homes are too expensive to put into the rental market. So there is financial incentive for owners to remove rental stock from the market and move it into the owner occupied segment of the market. They can get a financial win simply by listing the property on the market. As soon as that happens, there is one less property for rent in the market which reduces vacancy. The smaller rental supply pushes up prices for rental homes, until a new equilibrium in found. But in some ways, no new equilibrium truly exists. This is because the numbers don’t support creation of new rental stock at relatively low rents. Given the choice of building a rental building or a condo building, the economics don’t support a rental building. The net result is the most successful developers look for the combination of demand in the market combined with the ability to buy in that market segment. Even the home owners who would like to sell are saying that they can’t sell because they have no place to go. So if you have a client with a 4 bedroom house in the core of the city and they still want to live in the same area, how do they cash out of their existing home and move into something smaller, but not something so small that they can’t live their lifestyle. Someone downsizing from a 3,000 SF home will not likely move into a 700 SF apartment, where the bedrooms are 10 feet or less in size. You can’t even fit a dresser in the room with a queen sized bed. So for this specific client, the condo’s need to be at least 900 SF, and in many cases ideally 1,300-1,700 SF. They can afford the larger units because they’re downsizing from a much larger house.

On today's show we’re talking about when an approval is not really an approval. You think that once you’ve got your zoning approval, or a development agreement with the city for a particular property, you’re good to go. The vast majority of the time, that’s the case. But in the rarest of instances, you can experience a reversal of that approval. I’m increasingly of the opinion, that these occurrences are in fact not that rare. Why would I say that? Well, because it has happened to me on one occasion so far in my career and I know of it happening one two other occasions to friends of mine. Then there are the highly publicized cases that make the headline news like the property at 200 Amsterdam Avenue in NYC. That case was a 52 story residential tower in Manhattan. The developer received it’s building permit after a lengthy process with the board of standards and appeals. Local residents objected to politicians after the building was already under construction. A court case followed and NY State Supreme Court justice W. Franc Perry ruled that the developer had improperly deceived the zoning department when it applied for the 52 story tower. The court ruled that the building was illegally high and ordered the illegal floors already constructed to be removed. That would mean demolishing about 20 floors of construction. The ruling was appealed and the appeals court countered that the state Supreme Court should have deferred to the BSA’s “rational interpretation” of zoning regulations. You’re a real estate investor, a developer, or merely a purchaser of a new unit in a project that is to be built. You expect that when the city says yes, they mean yes. In the latest incarnation of a municipal flip-flop, we have a new development subdivision held by one of our team members. There is a signed development agreement. But in the past three months the city has changed their zoning code and eliminated the R4 zoning from their code. The approved site plan would not be approved if we applied today, but the application was started before the change in the zoning. We had been told that the application would be grandfathered. So the application continued and the engineering of the entire plan was completed assuming the building permit would be approved with the final zoning plat approval. The last step in the process to seal the deal is a vote by city council to ratify the signed development agreement. But somewhere along the way, the lawyers for the city reviewed any new development agreement that didn’t comply with the new zoning to see if there was a mechanism to terminate the agreement. Indeed the city fully intends to terminate the agreement. This will require a redesign of the subdivision in order to comply with the new zoning density. The approval process is not straightforward. As we reported a few weeks ago, the city of Caldwell in Idaho is implementing a moratorium on new development applications for 120 days. The risks are not only achieving your desired plan, but time. Time delays are routine in the zoning process and as we have seen, even after all the approvals are granted and the project is under construction, it’s still possible for obstacles to appear. It is for that reason that in our development applications we aim whenever possible to submit an application that complies fully with the zoning and has zero variances. If we’re going to ask for a variance, it’s got to be for a really good reason. It won’t be to get an extra 5%. It’s not worth risking the entire project for such a small gain. If there is a variance to be granted, you have to ask a simple question. What does the community get as a benefit as a result of granting the variance? If the only benefit is that the developer gets to make a bit more money, then that may not be good enough a reason. There has to be a win for the community.