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Welcome back to Trust the Process, podcast that takes you behind the scenes on real estate, construction, and everything in between.
Thanks for joining us today. I'm Krista, joined again by our resident expert, Michael.
Love that. Love.
And we're going to be talking today about subdivisions. So subdivisions specifically in terms of the build process and how that happens.
We have, we're also going to introduce our sort of our highlight project of the moment.
So Serena States is the home, is the community that we're starting, and we're going to introduce that to you and kind of be able to chronicle that as we go along.
So giving you backstory and unfolding that as things happen there.
So I'll let you jump in with an introduction to subdivision and we'll just kind of see, see how we layer that in.
Yeah, well, it's a great intro to that project.
It is.
And I think it's an important component.
The whole subdivision piece is a re, I mean, obviously everything that we do either happens within a subdivision or becomes a something that's right at some point.
So in general, right.
In a part of the whole situation.
It is. I mean, it's, you'll never create more inventory without subdividing existing parcels and everything started off as a larger parcel. Right.
I mean, it's the Louisiana Purchase was the single largest land purchase in 1804.
So I mean, everything starts there and then it's sectioned out. So practically in practical sense, what we're talking about when we talk about in development, larger parcel existing infrastructure is always improved.
And then dividing that parcel into more digestible home sites that can accommodate kind of your average suburban house that runs again from a 4500 square foot cookie cutter lot to a 25000 square foot estate style lot that can accommodate everything in between.
So taking for instance, serene estates, a raw piece of land that is what's the parcel size on that spot.
Two and a half acres.
And then taking that piece of raw land.
How do we get that piece of land, all of the infrastructure that happens to know how many homes will fit on it and what's going to happen within that window or what we'll put on that parcel.
So that's it. I mean, that really is where it starts.
You've identified the parcel.
In this case, the parcel came to me with the landowners that wanted to do it as a joint venture and had the existing zoning in place.
So you're looking at the parcel, is it a marketable area? Is it somewhere that can support a build to sell project?
And what is the existing zoning?
Is existing zoning something that can be changed as a builder in general?
You're always going to see greater returns on the denser you go, which there's a push pull between the city, the residents and the builder.
The builder is almost always going to skew towards more units per acre.
Probably a session or an episode all on its own. But how does that zoning get initiated? Where does it come from originally?
Okay, we'll save that.
I wish there was something more than water in this.
What it comes down to is it started after World War II and it was a push to suburbanize America.
People had moved out of farms early part of the 20th century into cities for job opportunities, part of the Industrial Revolution.
After World War II, we kind of saw a decentralization of the economy.
And the Federal Housing Administration was created as part of the New Deal and that served to ensure mortgages.
And without mortgages and the flow of money, there was no economical way to build.
Previously to that, builders would take parcels in cities and build row houses, apartment blocks.
There really was no zoning. That's why in older cities, you'll see a lot more live workspaces, kind of a mixture of low density, multifamily, high density, multifamily, high rises, commercial on the first floor, residential on the second floor.
It's in suburbia that we're used to these shopping centers and zones strictly for gas stations, zones strictly for office, zones strictly for residential.
So really everything kind of falls in that mold and that was the invention of the cul-de-sac, was post World War II.
Great little back story. That's right. I didn't know we were going to go there.
That's why I didn't either, but this could be its own episode. Maybe there's two parts to this episode and I'm not opposed to that.
But that's kind of how zoning started and it was kind of up to the individual cities that could make their own zoning, but without having product that could be then insured by the mortgage market, federal housing administration, FHA.
You really would have no economically viable way to develop that.
So what it meant was the idea of building and selling multifamily pretty much went out the window because FHA made it really challenging to buy an apartment, which is what we rebranded as condos, but that's an apartment.
You're buying an apartment. You own the air. You don't even technically own the drywall.
And there was a period in time where apartments were being converted.
Of course.
So that you could sell.
And that was as we decoupled from so federal housing FHA mortgages are not a huge part of the mortgage market in general.
It's just that all the other mortgage lenders and people that buy mortgages, what we call qualifying residential mortgage or QRM, they pretty much mirror the FHA.
It's easier to just follow their guidelines, even though it's not an actual loan from insured by the government.
It's maybe insured by Fannie Friday's, you know, the people that buy up these mortgages and bulk.
They're looking at mortgages that predominantly match and mirror the FHA guidelines.
So with that, you saw a move towards single family.
Most of town home where you own the dirt below it.
What you touched on the condo conversions was as there was this huge flood of capital in the early part of the 2000s, which later led to the housing crisis.
They ran out of homes to sell mortgages on so that like, why don't we convert these apartments and then people can get 8% mortgage rates.
They're condos, they're cheap.
That's a housing alternative.
And it worked great until greed got the better of it.
And then, you know, the music stopped and unfortunately, so I know we know the history.
So it's taking a long time to come back from that.
And what is challenging is that I understand the concept is you don't own anything but the air.
So therefore you're completely reliant on the homeowners association taking care of the roof of the building, the exterior, all the infrastructure that goes to the building.
I get it.
I mean, it is a risky.
Exactly.
Yep.
The parking lot, the roads, the curb, the car.
Common areas.
If you get sued because a lot of these places have gyms and amenities, someone gets hurt at the gym.
They sue the HOA.
And if you own in that, you're actually being sued fractionally.
One 200th of that lawsuit is towards you.
Even if you sue your own HOA, you're suing yourself as a fraction.
Right.
So I understand.
And on mass and in scale, and you're, you know, you're, you're, you're guaranteeing mortgages.
I understand why you'd say, okay, well, if we have 30% of our mortgages on the books, that are all condos.
It's risky.
At least townhome, you own the dirt.
You have some communal shared walls and some shared spaces, but it's a lot less risky.
But overall, the, the, the market will go towards the least risk, you know, their risk averse, right?
Right.
Investors are.
Yeah.
So they're looking at single family home sites and they're saying, well, we want single family because you're in control.
You might belong to an HOA, but the main is of your home is controlled by you and you alone.
The HOA might control the gate.
They might control some of the common spaces, but the liability of the HOA and the responsibility of the HOA is so much more manageable.
Therefore, lenders and people that invest in mortgage backed securities are more comfortable investing in those.
That being said, we're in a most city zone.
They're going to zone and lean towards single family residential.
You'll see some multifamily, but that's generally in most markets, especially Las Vegas.
Most multifamily is built, rented, brought to, brought to 90% capacity and sold off to Wall Street in real estate investment trusts.
And they're sold into part of your pension funds and part of your, your investment yields.
And that's, you might own one, two hundredth of an apartment complex and not even know if you have money in a pension bond or if you have money in 401K, that's part of the REIT.
So that's where you're seeing kind of how the zoning story was written.
And now we're seeing the, we're still on those coattails to this day.
So cities favor suburban sprawl because lenders favor suburban sprawl.
And cities follow to, I mean, that's, that's right.
You follow the money.
Right.
And what that, what that is to a city, they love it.
They only have to maintain the main backbone roads.
And now they're almost exclusively wanting HOAs to be generated as part of the subdivision.
So if you're developing in Las Vegas and many jurisdictions, I'm sure mirror this, if you're developing more than five acres, you have to form some sort of an HOA.
Otherwise you have to do an HOA exemption.
And the reason they do that is because then the homeowners are responsible for all the improvements from the initial subdivision onward.
So you're not building exact.
That finishes and the builder steps away.
That's right.
Once a builder steps away, now the homeowners are holding the bag, which is fine because you're, it's kind of a small city on its own.
So if your HOA takes really good care of you're, you're not, you're not beholden to the city to maintain your streets and you're invested.
Exactly.
So if you're in that HOA environment, typically tend to take better care of it.
In general, you, yeah, as a, as, as a rule, now there are a few exceptions, but if you look at the way development and growth favors all of these things, it should be no surprise when you fly in to a major growing metropolitan area.
It's all suburbs.
And that's, that's the method behind it.
And you look at a city like Las Vegas and you look at Charlotte, North Carolina, you look at Phoenix, Arizona.
They maintain their main routes, which are usually getting subsidies from the department of transportation.
They're getting state dollars if they're in the city roads.
And, you know, there's a lot of money going into the pot for that road maintenance.
And then once you turn into your neighborhood, that's on you.
That's kind of how the city favors it.
And it's a way to keep suburban city solvent.
Because before that, if you look even 15 years ago, there was a fear that there was going to be this bubble.
That the cities were rich when they were growing, but then when they had to maintain it, they were going broke,
which is why a lot of Northeastern cities that don't have this model and those Northeastern dense cities,
now density will save a city because you're getting all the tax dollars for a mile of road versus imagine how many suburban homes
you can build on a mile versus how many apartment apartments you can build on a mile.
If you look at that, how we solve that bubble were HOA.
So that was a stop gap.
How are cities going to keep approving?
You're giving them a bill for road maintenance and improvements.
And it's all fun and games for the first 20 years.
But if you're in a cold climate, if you're in the Northeastern corridor in an area that is growing,
let's say out of the DC metro area, maybe you're in Maryland, they've got snow removal.
Who's taking care of all that?
And that becomes a liability on the city.
So cities have since gotten wise to it.
And I think if it means we can grow and if it means that cities can stay solvent and it means more personal accountability from the homeowners.
And it's kind of a pay to play thing that, okay, my HOA is a little bit higher, but my park looks really good.
This isn't a city park.
My gate is never in disrepair.
I'm guard gated or whatever.
You're, you know, and that's probably unpopular to some people, but at least it's okay.
It's the highest form of accountability.
I pay a little bit more.
My neighborhood looks a little bit better.
My values are a little bit better.
And it kind of creates some stratification for better or for worse.
There are definitely downsides to that, but I will say that it, it solved the problem because the alternative would be your city's broke.
Your city can't maintain or your city doesn't want to allow new development.
And then your housing values are higher because there's no supply of new homes.
So it's a necessary evil.
And I, the bane of my existence, half the time you asked me, if you asked me seven out of 10 days, what's the bane of your existence as a home builder?
It would be HOA.
And I think that's just dealing with them and dealing in each ways that I did not create and having to play by their rules.
And even during the bill process, they're on us about various things and grievances and stuff after the process.
That's right.
Yes.
So that's my, so I think that it's a necessary evil.
So I think we should continue this on a second part of this episode and talk about subdivisions on it.
Why they are the way that they are and why we even need to talk about densities and things like that and what goes into subdivision now that we have this background.
So we should do second part of the episode.
Later foundation.
And we'll join you in our next episode as we talk a little further about it.
Thank you.
Thanks for joining us on the trust the process podcast.
We look forward to seeing you again next time.
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