Rethink Real Estate. For Good.

Affordable housing

Small lots. One solution to the housing problem.

At times the housing crisis can seem just insurmountable. Upwards of 11 million Americans spend half of their monthly take-home pay in rent, an increase of more than 30% over the last five years. Almost 25% of housing markets across the country are considered to be unaffordable for the vast majority of citizens. Many different factors influence the rising cost and availability of housing. But there is one that is often overlooked – the design of housing developments. One way to avoid the mistakes of the past and work towards building a better housing future is to think about design from multiple perspectives.

New solutions for old problems

It may seem like housing has only recently become an issue. But while the housing affordability problem has grown in size and scope over the past few decades, it is not unique to our time and place. Over the years, both public and private sectors have tried, but largely failed, to solve the problem. Some infamous examples include housing projects, rent control, Section-8 vouchers, and a whole host of other strategies implemented not just locally but also state and nationwide. In order to change this failing narrative investors and developers should consider identifying and embracing entirely new development models.

Small-lot subdivisions

In the early 2000s, the Los Angeles City Planning Department collaborated with designers, developers, investors, city planners and other stakeholders to tackle the issue of affordable housing. Their collaboration led to several policy ideas that they believed would spur affordable housing production. Among the many ideas proposed at the time, one that stands out is the Small Lot Subdivision Ordinance.

The Planning Department introduced the ordinance in 2005. The Small Lot Ordinance regulates the construction of single-family infill housing in commercial and multi-family neighborhoods. It aims to create a new path for home ownership for first-time buyers by permitting developers to sub-divide small lots and build multiple homes.

Buying a home can be a demanding exercise. Aside from the substantial financial costs, there is also reams of paperwork, lots of professional fees, taxes and many other hurdles along the way. Small-lot or zero-lot-line housing aims to scale down homeownership to make it more accessible to potential buyers, without the use of a traditional condo model – instead, small parcels of land are developed and marketed towards entry-level buyers, or those who may be willing to trade size and aesthetic considerations for the ability to get into a home and start building equity immediately.

At the same time, developers can mitigate expensive land costs through subdivision or the ability to build on off-shape parcels of land, in areas that may not be viable for large-scale development. They get the added bonus of saving on costly risk-insurance premiums that come with developing standard condominium projects.

Unintended consequences

Unfortunately, as is often the case, this new small-lot approach was not as effective as hoped for – as evidenced by the continued and growing housing crisis in the Los Angeles Metro area. As land and housing prices in these areas continued to skyrocket, once affordable small-lot developments became increasingly desirable. Instead of providing a pressure-valve for housing, these homes have been scooped up by speculators, investors, and homeowners of means who wish to buy a piece of these now thriving neighborhoods.

This is not entirely the fault of the originators of the small-lot ordinance. Far from being seen as a panacea to get people into housing, small-lot development was and is viewed as one tool out of many to increase the total housing supply in an area, thus theoretically reducing prices. And it was effective in this goal. What planners in the early 2000s could not account for was the dramatic tide of urbanization, the reversal of residents from suburban and rural areas back to the cities, particularly pronounced in high-dollar regions on the coast, like Los Angeles and San Francisco.

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Small-lot development has a great deal of potential for making housing more accessible, as long as it is used in conjunction with other potential solutions like mixed-income developments, grants to first-time homeowners, and other well-thought-out, rigorously tested solutions. It is not and was never meant to be an all-encompassing solution to the housing crisis. Rather it was meant to be just one tool in a toolbox, a piece of the puzzle that is the modern housing crisis.  

Image of Rosewood, a small lot subdivision, courtesy of the The 4Corners Group

By right, by design.

I spent a most enjoyable hour recording this podcast with Liz Falletta, who is deeply immersed in the nuances of the Los Angeles building codes and their impact on housing production.

Liz just published a book, By-Right l By-Design, an interdisciplinary housing reference text. It studies significant Los Angeles housing design precedents and their related development types. A side-by-side comparison of these projects – real estate development models built in large numbers as of right, versus singular examples of innovative architecture built by variance – reveals new insights for future housing production in Los Angeles and elsewhere. Projects are examined through the lenses of real estate development, urban planning and design, expanding the context in which these works can be understood, evaluated, and, ultimately, built upon.

Liz teaches architectural and urban design at USC’s Price School of Public Policy where she’s taught for over 15 years. Her courses focus on design as an interdisciplinary activity and explore how the intersecting values of architecture, planning and development can inform the design process and improve design outcomes.

In addition to teaching full time, Liz is principal of Falletta Development, which developed one of the first small lot subdivisions in Los Angeles, located on Huntington Drive in El Sereno. She has consulted on many small lot subdivisions throughout Los Angeles and worked as an entitlements consultant on various single and multi-family housing projects. Liz is a licensed architect and a licensed real estate broker in the state of California.

In recognition of the breadth of her expertise, Liz was recently appointed to the City of Los Angeles’ Zoning Advisory Committee (ZAC). This 21-member group is the first line of critique for the city’s recode LA project, a $5 million dollar, five year plan to overhaul the zoning code. Liz is leading the Housing Working Group, a subcommittee of the ZAC working to prioritize issues of housing production, affordability and sustainability throughout the recode project. Ms. Falletta is also a member of the California Planning Roundtable.

Insights and Inspirations

  • Through research for her book “By-right, By-design” Liz learned that more design is not always better.
  • She found that some of the best housing solutions might not be the most innovative designs.
  • Over the years her students have evolved from not caring one iota about design, to caring very much today. And that bodes well for the future of cities.
  • To Liz impactful real estate projects are those that balance design, planning and real estate development well.

Information and Links

  • You can buy Liz’s book, By-Right l By-Design here.
  • Liz loves the Penland School of Craft in NC. She’s been several times for a creative recharge and plans to go more often in the future. (I want to go too.)
  • Something important to Liz is her participation in the Ross Minority Program in Real Estate (Home | Lusk Center for Real Estate) fostering minority participation in real estate development in emerging communities.
Read the podcast transcript here

Eve Picker: Hey, everyone, this is Eve Picker, and if you listen to this podcast series, you’re going to learn how to make some change.

Eve Picker: Hi there. Thanks so much for joining me today for the latest episode of Impact Real Estate Investing. My guest today is Liz Falletta. Liz teaches architectural and urban design at USC’s Price School of Public Policy, where she’s taught for over 15 years. But that’s not all Liz does by a long stretch. Liz is also a small-scale developer, having developed, painfully, one of LA’s first small-lot subdivision projects. She sits on LA’s Zoning Advisory Committee, which is tasked with critiquing the city’s Recode LA Project, a $5 million five-year plan to overhaul the zoning code. Last, but not least, Liz has just published a book, “By-Right, By-Design,” where she researched housing solutions. Be sure to go to EvePicker.com to find out more about Liz on the show notes page for this episode and be sure to sign up for my newsletter so you can access information about impact real estate investing and get the latest news about the exciting projects on my crowdfunding platform, Small Change.

Eve Picker: Hi, Liz. Thank you very much for joining me all the way from California. It’s earlier for you than me, right?

Liz Falletta: Yes.

Eve Picker: I know you teach architecture and urban design at the University of Southern California’s Price School of Public Policy. I think you also have your own development firm, wrote a book, and you were one of the first developers to develop a small-lot subdivision in LA. You’re a very busy woman.

Liz Falletta: Yes. I do teach design across disciplines at the Price School at USC. I’m an architect and, for a long time, I taught in our architecture school, but now I’m exclusively in our policy-planning environment. Thinking about design from multiple perspectives is something that I do a lot. I guess it’s been a long time now since I did that small-lot subdivision project, and I think I’ve blocked a lot of it out.

Eve Picker: Well, I wanted to hear a little bit about your development work. What prompted you to test out the small-lot subdivision? It might be worth telling our listeners a little bit about that zoning-code overlay, which I kind of find fascinating.

Liz Falletta: Sure. The small-lot subdivision came out of an effort by the LA Planning Department, in 2004/2005, to really address housing and our mounting housing crisis, which is now even more of a crisis. They actually invited an interdisciplinary group of designers, developers, planners, other stakeholders in housing to brainstorm what are some ideas, from a policy-planning perspective, that could engender housing production.

Liz Falletta: The small-lot, or, aka, zero-lot-line housing was one of hundreds, I think, and was really the one that got pursued. I think the idea was if you were able to scale down homeownership and also allow development outside a condominium model … Because, really, what the small-lot allows is feasible homeownership on a smaller scale. Contractors and builders don’t have to get onerous builders risk insurance like they do when they build condominiums.

Eve Picker: Interesting.

Liz Falletta: Yeah, no, it’s … I think planners really thought that the smaller scale would create for more affordable housing.

Eve Picker: I’ve seen some of that, and it’s not affordable, is it?

Liz Falletta: No, no. That is the thing that struck me the most is that, if you build a small-lot in Venice on the west side, it’s going to be $2 million a unit, because it’s the west side. Build one in Silver Lake, it’ll be a $1.5 million. Smaller-scale solutions, I think, are a good option. I think ultimately, after having done one, and having seen how the small-lot has evolved since I did the one that I worked on, I think it’s one tool amongst many [cross talk]

Eve Picker: I think what it does do is it sort of maximizes the use of infrastructure that’s already in place. I know that there are cities all over the world kind of densifying areas through zoning so that they can maximize their transit [cross talk] and utility lines. One little house in the middle of a very large lot in a highly desirable neighborhood doesn’t really … It just makes the sprawl go further, right?

Liz Falletta: Exactly. I think one of the things that was actually brilliant about the way the ordinance was written is that it didn’t have anything to do with the zone change at all. It had nothing to do with zoning. It just allowed you to use lower-density, multifamily-zoned sites in a different way. They might have been built as apartments or condominiums before, but this allowed … We have a restricted-density zone, for example, probably 20 dwelling units an acre, density-wise; it allowed those sites to be developed with for-sale housing, which, at the time, was … The small-lot subdivision came out pre-crash.

Eve Picker: If you were to rewrite that today, what would you change about that small-lot subdivision overlay?

Liz Falletta: That’s such a good question. I do think … Because it’s actually not an overlay, but I think using it as an overlay, and being more targeted and specific about where it could be used and how, I think, would be helpful [cross talk]

Eve Picker: So, it’s LA-wide. It’s just a change for the zoning-

Liz Falletta: It’s LA-wide, yeah [cross talk] It’s an ordinance that allows you to develop with a different model. It was sort of marketed as small houses on small lots, and it really has turned into giant houses on small lots.

Eve Picker: Yeah.

Liz Falletta: So, I think [cross talk]

Eve Picker: It’s an interesting- it’s like an interesting lesson in how much you’d have to think about the details of a code like that.

Liz Falletta: Oh, yeah. Also, you have to … I feel terrible saying this – you have to think about the bad actors.

Eve Picker: Yeah. I think that’s right.

Liz Falletta: Who’s going to abuse this, and how, and-

Eve Picker: So, this is not a democracy. It’s [cross talk]

Liz Falletta: Yeah. How do we head off the bad acting? I think we saw a lot of really bulky design that communities pushed back against. You saw a lot of projects … There were a lot of single-family homes that were built on multifamily-zoned sites, so you saw a lot of turnover of those kinds of sites, and communities … You know, communities, in the main, don’t really understand zoning.

Eve Picker: Yes, that’s right.

Liz Falletta: And were very upset to see houses being demolished to build these giant things. Then a lot of rent-controlled small-scale housing from the ’20s, ’30s, and ’40s has been demolished to build them, also.

Eve Picker: Maybe even just saying that if you have the privilege of adding more units to a lot like that, there’s a maximum size to each of them would have kind of stopped that. It’s interesting. What other development are you doing?

Liz Falletta: I have done development in the past. I did two or three small-lots, also, that, in the end, didn’t get built. Then, the market crash happened, and then I started teaching full-time, and then, I started writing this book, which, it turns out, takes a long time to write a book. So [cross talk]

Eve Picker: Yes. So that’s taken over. Okay- [cross talk]

Liz Falletta: -yeah, but I am actually, I should say, looking to do another development. I feel like I learned a lot by doing all the research for the book. I would like to get back into small-scale development in LA.

Eve Picker: What’s interesting about small-scale development?

Liz Falletta: Personally, it’s just the financial scale [cross talk]

Eve Picker: -in LA, small-scale is still really big, and expensive, right?

Liz Falletta: -yeah, still pretty expensive. But also, I think that’s where we can build successful communities. Not that we can’t have large-scale communities that are successful, but I think neighborhood change in giant steps is not palatable to communities. I think smaller-scale changes can be really impactful [cross talk]

Eve Picker: Right. It’s a way to innovate change slowly and gently, right?

Liz Falletta: Yeah, and in ways that people can embrace and see immediate benefit from, as opposed to this 200-unit housing project that assembled 10 lots, and suddenly, the neighborhood is totally different.

Eve Picker: Yeah, I think that’s right. Your work focuses a lot on LA. What conditions have you found that are unique to LA versus just across the country [cross talk] in the research that you’ve done?

Liz Falletta: One of the reasons why this research was well-suited to LA is we really do have a strong history of design innovation, but also a really interesting history of multifamily housing and different multifamily housing types. They’re different types than we see maybe in Chicago or New York. Then we also see these types have persisted. Our city is younger than many on the East Coast, so these types are still extant in a way that maybe they aren’t in some other communities. I think, also, LA has the reputation – and it’s somewhat true – super pro-growth; really driven by development and developers. There’s long been a close association with the city with the development- development as a profession.

Eve Picker: Be sure to go to EvePicker.com and sign up for my free educational newsletter about impact real estate investing. You’ll be among the first to hear about new projects you can invest in. That’s EvePicker.com. Thanks so much.

Eve Picker: Your book is called “By-Right, By-Design.” I’d love to know how you came to that name.

Liz Falletta: So, by-right, as I’m sure you know, just means by-right projects can be built with ministerial approval – approvals where nobody can say … If you meet all the criteria, and the criteria are laid out, nobody can deny approval for your project. Developers really like by-right projects, or permissionless projects, because they’re a lot more certain, and they’re less risky, and they usually take less time. Developers would prefer to build by-right if they can. That’s become increasingly impossible in Los Angeles. There’s been a lot of discussion about by-right housing- elevating the threshold of by-right and actually making more projects able to be built by-right.

Liz Falletta: For my purposes, I needed a second category that was a corollary to by-right, and that’s where by-design came from, because the book really looks at a set of six case studies that look at really famous Los Angeles housing precedents by famous architects, aka by-design, with their by-right counterparts. By-design could also mean by-discretion, or by-variance. All of the by-design projects actually required some sort of discretionary approval to be built.

Eve Picker: Interesting. And do you think they’re better?

Liz Falletta: Not always, actually.

Eve Picker: That’s interesting.

Liz Falletta: No, I was … Because one of the questions I had when I started out on this is like I wonder if all these projects that are really famous, you know, that I studied in architecture school, I wonder if they broke the rules; if they could only do these innovative things by not following the rules. It was true. They all required variances of different kinds. I don’t think being by-design means they’re necessarily better, or better designed, or that if they’re in the by-right category, they’re poorly designed.

Liz Falletta: One of the things that really started this research is some annoyance at the fact that architects always … A. they always believe that unless it was designed by them, it’s not really well-designed, and B. that – I should also say that I’m a licensed architect – but that they really thought more design was always better in every situation, and it’s not necessarily true. I was frustrated-

Eve Picker: That’s a pretty damning thing for an architect to say.

Liz Falletta: I know. I’m sorry [cross talk] bad. I guess typically what I say is I think design really, really, really matters. It just doesn’t matter in the way that many architects think it does.

Eve Picker: How so?

Liz Falletta: I think architects are trained to be innovative all the time, to be focused on image, to be focused on creating things that are new, that are this, that are that. I think that allows them to not see, or to discount other aspects of design that are maybe tried and true, or repetitive, or something that actually really matter to quality of life; because I think the design of housing, for example, really matters, but I think what really matters about it is a lot about density, about spatial organization, about circulation, about how common space and open spaces organize. I should say, also, I think there are a lot of amazing architects doing really great projects who don’t maybe share these attitudes, but I think the profession focuses less on these things; doesn’t feel like these things are as important.

Eve Picker: Yeah. As you know, I’m also a trained architect, and I went to the dark side, too, and became a developer.

Liz Falletta: Yay!

Eve Picker: Yeah, but, you know, I have a sort of similar frustrations with the architecture profession, which I adore. I think that architects are trained in a unique and priceless way, but I think they are not necessarily … Especially young architects don’t really understand how much they’ve learned and how they can put that to use in other ways and follow a traditional path in sort of that branded architecture studio that may not always make the world better.

Liz Falletta: Yeah.

Eve Picker: I wish they’d learn a little more about real estate development, as well, because the pragmatic side of architecture is sometimes overlooked, right? I remember having conversations with an architect about the fact that five units would be so much nicer than six. I’m thinking, “Well, five units won’t be built and six will be …” It’s that sort of basic thinking, yeah …

Liz Falletta: Yeah, because that sixth unit is your profit; that’s your cash flow [cross talk].

Eve Picker: -or I’ll break even. It may not even be profit, you know?

Liz Falletta: Exactly. One of the reasons I wanted to write this book is because I wanted to help architects, and planners, and real estate developers better understand each other’s goals and values so that that architect could use his understanding of the profit motive in real estate to get his or her own goals addressed, or met, or something. Because, if architects just sit there and say real estate developers are terrible because they don’t understand that the five-unit design is going to be better than the six-unit design, that’s completely unhelpful. It’s not going to get us anywhere.

Liz Falletta: I think what architects don’t understand is they have an interest, a vested interest, in the planning and real estate development strategies of the projects they design, right? A good example from the book is Gregory Ain’s Mar Vista Tract, which had a very enlightened developer who had done some development in the ’20s, or early 20’s; hadn’t done anything in the ’30s, during the Depression, and really wanted to build a community, which is fantastic. Ain was also very interested in that. They got a lot of pushback from lenders, and they got a lot of pushback from the city planning department, in terms of how it was laid out, and the style the houses; did it have flat roofs or not? Ultimately, they could only build half of the tract, and that half was a financial failure. So, if people wonder why we don’t have modernist communities, that is one reason.

Eve Picker: Yeah.

Liz Falletta: They had to sell off the rest of their land. and it got developed in the traditional kind of manner.

Eve Picker: Talking about by-right, I know you’re a fan of the recent offering we had on Small Change, Bungalow Gardens, which is in your neck of the woods. It’s a little homeless housing project. I believe that’s a by-right project [cross talk] and I’m wondering why you like that project.

Liz Falletta: I personally would love to build a bungalow court for myself. My goal – I think a lot of people have this goal – it’s going to be hard to do here in Los Angeles. Everybody wants to build a compound, where you can live with your friends and have communal dinners. Actually, also, I should say that the first place I lived when I moved to Los Angeles was a very small bungalow court, and that-

Eve Picker: Oh, cool!

Liz Falletta: It was interesting. I moved out here from D.C. to go to SCI-Arc, actually, for grad school. Finding housing was really interesting, because I had lived in a rowhouse, I think, in D.C., in a basement apartment. I’d never encountered a bungalow court, but I was driving around, and they’re just … Everybody loves them. They are the best places to live.

Eve Picker: That’s really sweet.

Liz Falletta: You know your neighbors immediately [cross talk].

Eve Picker: How big are they, typically?

Liz Falletta: Oh, gosh. They can be relatively large. The one I lived in was probably six units, eight units-

Eve Picker: For our listeners, the bungalow court typology, I think, start being built in the ’50s, right?

Liz Falletta: Really much earlier than that. Probably the latest ones are in the ’30s.

Eve Picker: In the ’30s. This little one that Jason and John built – a building, Bungalow Gardens – is the first one in almost 100 years.

Liz Falletta: You can’t build them now, mainly because of the parking requirements, but also just underlying density is reflected in land values, so you can’t … Basically, if I wanted to build a bungalow court, I would overpay for land and then under-develop it. Part of what makes the bungalow court work, really, is the scale and the individuality of units.

Liz Falletta: Many of the units actually- these were often built for tourists, because people would come to LA for their health, but would also … It took a long time to get here, then, so you stayed for months. They had all this built-in furniture and fun things that allowed you to live in the unit, easily, for a few months, as opposed to having to bring all your belongings and actually move here for real.

Liz Falletta: They’re very efficient; they’re laid out, really, very functional. They’ve got a lot … They’re high, in terms of individuality, so you have a lot of identity with your unit and your space, but then there’s that communal scale. That actual courtyard usually then connects to the block and the street [cross talk]

Eve Picker: It’s very nice [cross talk]

Liz Falletta: -if we could all live in bungalow courts, we would [cross talk]

Eve Picker: -maybe the issue is not … Maybe the issue is not just by-right, and by-design, but also by-cost, because the cost of land clearly drives development, as well, right?

Liz Falletta: You have done your deal when you bought the land, right?

Eve Picker: Yes.

Liz Falletta: If you overpay for land, you’re done. You have determined sort of what kind of project you’re going to do and whether that project’s going to be a success or not.

Eve Picker: How does all of that fit in with affordable housing?

Liz Falletta: One of the other benefits of building small-scale housing and even this- the whole explosion of ADUs is many of those are going to hopefully provide inherently affordable housing, as opposed to subsidized affordable housing. Getting subsidized affordable housing, we just haven’t been able to build a huge number of units. There’s a lot of competition for those funds. We now have transit-oriented communities. It does incentivize the development of affordable units in mixed-use projects. You get some extra density and some parking reductions, if you’re near transit, and they have a pretty liberal definition of transit. I do think that is generating way more affordable units than maybe some of our other mechanisms have in the past [cross talk]

Eve Picker: Interesting. Zoning becomes a serious mechanism for affordable housing. Actually, that brings me to the other thing I’d like to talk to you about. I think you were appointed to LA’s Zoning Advisory Committee? The Recode Project-

Liz Falletta: Yeah. Mm-hmm.

Eve Picker: You’re one of not many people who are critiquing that and leading a subcommittee on housing, right?

Liz Falletta: Yes. I was just talking about this with my students yesterday and realizing that I needed to check in with people at the City, because we haven’t had a meeting in a while. LA’s zoning code that we are still using today was officially created in 1946, even though we had a code prior to that. We had residential districts as early as 1908.

Liz Falletta: Our code has been frustrating to use for … It makes it really difficult for people to do good projects; the kind of projects that the city wants to see. Mixed-use has always been a problem with our code, because it’s very single-use oriented, so it’s confusing to use. There was also a substantial sort of phantom code, or ghost code that, if you were in the know, you knew [cross talk]

Eve Picker: Oh, really?

Liz Falletta: -you didn’t? Yeah, that wasn’t very transparent. It meant that certain people got certain favors. The planning department wanted to do several things. One, make the code more user-friendly; I think, two, make it more modular. Basically, it’s a form-based light code. It disassociates use and form. The idea is that the modularity will make the code more flexible, but then, also, as people want to do different kinds of projects, the tools are already there, in terms of making a zone combination that will facilitate that kind of project. I think the third thing they wanted to do is elevate by-right processes. So-.

Eve Picker: Interesting.

Liz Falletta: -allow more projects to be built by-right, because virtually no projects are built by-right.

Eve Picker: Yeah, and the entitlement process takes a really long time in LA [cross talk]

Liz Falletta: Oh, yeah. No, the first small-lot project I did was the real education because I was like, “This makes no sense …”

Eve Picker: How long did it take?

Liz Falletta: Oh, my God. At least two years, yeah. It was like banging your head against a wall.

Eve Picker: Now, I know, with the Bungalow Court listing, I talked to them probably for two years before we listed it. All along the way, there was entitlement, entitlement, entitlement, right up until the end.

Liz Falletta: Yeah. What I learned is that part of that is inherent in development. Every week, something happens that’s going to kill your project. It’s just how it is, here. I would get upset and there would be crying. Finally, after a few months of this, I was like, “Oh, this is what development is. This is how it works. Okay. I need not get so upset about this, because it’ll kill me, A, and B. that’s the work site traffic control inspector. Sure, he’s going to deny your work site traffic control plan …” That I even had to have a work site traffic control plan was ridiculous, but-

Eve Picker: How many units are we talking about?

Liz Falletta: Four!

Eve Picker: That’s crazy. That’s crazy.

Liz Falletta: It’s crazy, and they already existed. I was using the ordinance. The ordinance was silent on whether it had to be new construction or if it could be existing construction. Basically, I bought two duplexes on a big lot, and cut the duplexes apart, and cut the big lot into four.

Eve Picker: And it took two years to get it approved.

Liz Falletta: Yeah.

Eve Picker: That’s nuts.

Liz Falletta: It was insane. Then they wanted me to build a public sewer.

Eve Picker: Oh …

Liz Falletta: Yeah! It was … I think my experience was maybe more extreme than some.

Eve Picker: I had the public sewer experience in Pittsburgh once.

Liz Falletta: Did you?

Eve Picker: Yes. The sewer was out on the main street, and they’d been wanting to move it into the alley for a long time, behind the building. Our building was at least 600 feet from the crossroad. They wanted us to lay an entire line to the [cross talk] So, every other building on the both sides of the alley could feed into it. It was really awful.

Liz Falletta: Yeah. No, they wanted me to build an eight-inch line with a manhole on my property for four one-bedroom/one-bath units.

Eve Picker: Now you’re in the middle of the Recode Project. How long has that been going on?

Liz Falletta: You know, it was supposed to be a five-year project, so it’s gone on six and maybe seven years, now.

Eve Picker: For a five-year project?

Liz Falletta: Yeah, five years; $5 million dollars. It’s going to be interesting to see how it plays out.

Eve Picker: Do you think that it’s going to be successful? Are there pitfalls that you’re seeing already?

Liz Falletta: There are several. There are many pitfalls, I think. One is mixed messaging about the project and what it would do. I think they promoted it differently to different constituencies. That’s fine, but they have not been very clear about that. I think, two, they have- this is a critique of urban planning. I think there’s a whole sector of urban planning that feels like if they did 800 community outreach meetings, they’ve done their job, and I don’t think that’s the measure of whether this is successful or not [cross talk] I kept getting emails; “We’ve had 800 meetings …” and I’m like, “Great …”

Eve Picker: Wow, that’s a lot meetings.

Liz Falletta: It was a lot of meetings. It definitely was. Then, thirdly, these zones are basically being applied in a community planning process … I unfortunately know very little about planning on the other cities or the East Coast but, in California, every city has a general plan, which is sort of the constitution for growth and development; has different elements. One of them is about land use and planning for land use. In the city of LA, we have 35 different community plans that basically apply zoning and apply various planning tools to specific parcels and talk about how neighborhoods are going to grow and change.

Eve Picker: Right.

Liz Falletta: We update … We don’t update those very often. Five or six years ago, we’d updated four or five in the past 20 years. We didn’t update them very often. What that meant for the zoning code was that most communities wouldn’t see the benefit of this new code for decades. We’d have a dual kind of code system. The mayor, then, vowed to update all the community plans within six years. I don’t know the status of that, right now [cross talk]

Eve Picker: It sounds like a monster project.

Liz Falletta: Yeah, no, it’s just … I fear that it was oversold, and people aren’t really going to see the benefit of it.

Eve Picker: That’s a shame. What do you think is the best possible outcome for this code overhaul for LA?

Liz Falletta: What all of us really focused on was identifying and reducing the barriers, which are legion. But then there was a lot of … I think there are a lot of people out there … I’m one of these people who want- I want to do interesting small projects, and I can’t, for a variety of reasons. You have to cobble together … It’s so interesting to me that the Bungalow Gardens project really could only exist because it’s in a TOC designation, because they don’t have to have parking.

Eve Picker: Oh, and probably because the developers are non-profit [cross talk] they spent two years on that project, and I don’t know what for-profit developer could do that.

Liz Falletta: Right. No. A for-profit developer would slide right past that project, or at least definitely not do it in the same way-

Eve Picker: Yet they got an award for innovation on that project. So, there’s something really broken, right?

Liz Falletta: Yes, that is- that’s exactly right. Part of the reason, also, that I wrote the book is I think … We’re having to have a citywide conversation about housing and how to produce it. Our ability to have that conversation is just as broken as all the tools that we use to try to generate housing – affordable housing that costs $500,000 to $700,000 a unit to build. I’m even beginning to think that these sort of silos that we exist in are a problem, when we think about gentrification, also. It stops the conversation. We just don’t get anywhere.

Eve Picker: Yeah, I think that’s right. It’s kind of depressing.

Liz Falletta: Yes. I’m sorry. No, I mean-

Eve Picker: You know, John Perfitt said something, actually, in the podcast I did with him and Jason about the work they do as a nonprofit housing developer that I think was really sad. That was engagement of community is very difficult for them and very expensive, if they’re going to … It’s kind of had the reverse impact on involving community because if they’re going to spend a long time on a housing project, they simply can’t afford to have it shut down by someone at the end of a two-year process. They don’t have the money for it. That means that they almost have to avoid some community engagement, which is kind of the reverse that you want, right?

Liz Falletta: I think that’s one of the big reasons, also, that you’ve seen more housing initiatives in California at the state level. People interested in taking local control over housing away, because communities have shut down projects, basically because they’re only looking at them from a singular perspective, which is their own. We can’t move forward, as a city, with that.

Liz Falletta: For a long time, Christopher Hawthorne, who is now the city designer; I forget exactly what his title is, but he was the architecture critic for the LA Times for a long time. Then, Mayor Garcetti hired him recently. Basically, his analysis of the city really was for a long time we had so much- enough space to be 10 different cities. We could be the industrial engine. We could be the idyllic single-family home and the garden. We could be the diverse multifamily community. But now, we’ve run out of space, so all of those images and versions of the city are competing with one another and conflicting. We have to have a higher-level conversation. There needs to be a lot better education of the public about housing and how housing works [cross talk]

Eve Picker: -just on a broader level, impact investing … How do you think it’s aligned with real estate and the importance of it in your mind?

Liz Falletta: Well, like I said, I was super-excited to be able to invest in John and Jason’s project. I actually have been teaching design to real estate development students for about 15 years, 16 years; increasingly horrifying amount of time. It’s interesting, the evolution of the students that I’ve encountered, because when I first started doing it, none of them thought design was important. None of them wanted to be there. I got ones on my evaluations. Everybody hated me. It was demoralizing and terrible.

Liz Falletta: Now, the students are not only aware of issues of gentrification; really aware of the perception communities have of developers and development; aware of social issues, like homelessness. Also, they’re really interested in building communities, and innovative communities. I think the interest in impact investing is going to track that. I think my generation screwed it up or it was part of the problem. I think the students- I think kids in their 20s and 30s are going to really change things.

Eve Picker: They really care about the world, I think, in a way-

Liz Falletta: They do. Climate change … I think they really understand development as a responsibility, as opposed to a way to make money. Don’t get me wrong; they want to make money, totally, but it’s interesting; a lot of them have fathers or mothers who are developers, and their parents’ development practices really bother them. They’re like, “You know, my dad doesn’t spend any money on this part; this thing that I think is really important.”

Eve Picker: Interesting, yeah-

Liz Falletta: Things are changing.

Eve Picker: I think that’s right. I think my parents didn’t think that way either. It’s a definite shift, which is great.

Liz Falletta: Yeah, and I’m wondering how it happened. I’m not sure I know. I don’t know if you have children, because I don’t. I just see the students and see how they how they shift and change.

Eve Picker: Yeah. I think climate change is probably- is there, and people are thinking about it at a much earlier age. That surely has to impact the way they think about the world. Then, there’s so much access to information easily-

Liz Falletta: That’s true.

Eve Picker: -that a generation or two ago, we just didn’t have [cross talk] there’s more knowledge to-  or more access to knowledge, whether it’s fake or not. I mean, you have to sift through it all, but there’s just more access. I don’t know. I think all of those things together change things.

Liz Falletta: I think, too, their expectations have changed, in terms of how they’re going to live. They don’t all assume they’re going to buy single-family homes; either because that’s out of reach or because it’s just not something they’re going to value-.

Eve Picker: Or because it’s illegal in some cities, now.

Liz Falletta: Right, exactly.

Eve Picker: So, I’m going to I’m going to sign off now. We’ve been talking for a while, but I wanted to ask you three questions that I ask everyone. That is what’s the key factor that makes a real estate project impactful to you? What really matters to you?

Liz Falletta: I talk about triple-win projects in the book, and these are projects that perform well from the perspective of design, planning, and development. For me, that’s the real hard hallmark of a good quality project. Because the interesting thing to me was the projects that balanced those perspectives from their inception really were the more resilient projects, over time, in terms of being valuable projects from all three perspectives. The Village Green, which is a really famous Garden City garden-apartment projects in LA is a really good example. It was definitely innovative, when it was built, but also very financially successful, when it was built, and really created a community. It’s performed well in all those measures, throughout its history.

Eve Picker: That’s really interesting. Other than by raising money, do you think that crowdfunding could benefit small-scale or impact real estate developers like you?

Liz Falletta: Yeah, I hadn’t really thought about using it as a tool, but I do think, as John and Jason talked about, it is an interesting way to do community outreach and involve neighbors in projects. I think that is pretty brilliant, giving people the opportunity to invest in something next door. I think it’s probably also a really great networking tool. I could imagine that, for John and Jason, the people who invested in this project are probably going to invest in other projects [cross talk]

Eve Picker: -we can only hope, right?

Liz Falletta: Yeah, no, I’m up for it-

Eve Picker: We hope that they build more. Then, if there was one thing that you would change to improve real estate development in the United States, what would that be?

Liz Falletta: Oh, gosh, what would that be? That’s such a good question. I think it really comes down to bad acting. I think a lot of our policy is retroactive and is responding to bad acting instead of promoting high-quality, community-oriented projects created by people with good intention.

Eve Picker: Oh, yeah.

Liz Falletta: So, I guess that’s really about changing the culture of the profession, which I do think is changing. Maybe it could change quicker.

Eve Picker: Well, thank you very much. I really enjoyed talking to you and good luck with everything.

Liz Falletta: Yeah, thank you. You, as well.

Eve Picker: Actually, I have another question for you, Liz, I think I’m going to add in. What’s next for you, now you’ve written the book?

Liz Falletta: Oh, gosh, I have to say that-

Eve Picker: A break?

Liz Falletta: -yes, it is … I’m doing some book promotion, and I am looking for a real estate project right now, in between teaching, and also sort of … I’ve been teaching now for nearly 25 years, and I’m wondering if it might be time for a larger-scale change; maybe doing something more entrepreneurial with real estate.

Eve Picker: Oh, wow.

Liz Falletta: Yeah.

Eve Picker: Keep me posted!

Liz Falletta: I will.

Eve Picker: Okay. Thanks, Liz.

Liz Falletta: Okay, thanks so much. Take care.

Eve Picker: That was Liz Falletta. What an amazing woman. Here are some of the takeaways from what Liz shared with us today. First, through research from her book, “By-Right, By-Design,” Liz learned that more design is not always better. She also learned that some of the best housing solutions might not be the most innovative designs. Over the years, her students have evolved from not caring one iota about design to caring very much today, and that bodes well for the future of cities.

Eve Picker: You can find out more about impact real estate investing and access the show notes for today’s episode at my website, EvePicker.com. While you’re there, sign up for my newsletter to find out more about how to make money in real estate while building better cities. Thank you so much for spending your time with me today, and thank you, Liz, for sharing your thoughts with me. We’ll talk again soon, but for now, this is Eve Picker signing off to go make some change.

Image courtesy of Liz Falletta.

Closing loopholes for better neighborhoods.

Unfortunately, loopholes are far too easy to find in the real estate development industry. They are hiding in plain sight in lots of places. Taxation, zoning, affordable housing programs or even government incentives jointly provide an abundance of loopholes and unscrupulous developers will find a way to take advantage of them. For many years, unethical, or at the very least short-sighted development has been the norm. Now, with the rise of sustainable and socially conscious development, a new generation of investors and developers are shedding the profit-driven dogma of the past to work towards a more ethical real estate industry. This includes creating more livable and equitable housing which can generate returns similar to traditional, profit-driven development projects.

The worst outcome

Perhaps the worst outcome of unethical real estate development is displacement. Projects initially pitched to provide a rebirth and revitalization for underserved neighborhoods can instead, sometimes unwittingly, lead towards gentrification, in turn driving long-term residents from their communities and homes.

Many areas slated for “urban renewal” in the past were primarily filled with single-family homes while the neighborhood itself was zoned for both single-family and multifamily properties. This provided a particularly attractive opportunity to profit-driven developers since the density of the neighborhood could be increased with apartments and condominiums many of which were out of the price range of current residents. This in turn led to a great deal of residential turnover in these communities and an acceleration of the harms associated with that turnover.

Community pushback

After years of such unchecked development, many communities- and aligned developers and investors- have started to push back. More appropriate zoning, sustainable and energy efficient housing, community cohesion, walkability, bike-ability and equality, amongst others, have moved to the forefront of the conversation. Often these conversations have been led by local organizations dedicated to preserving neighborhood character and ensuring positive growth in housing and commercial enterprises. Now, single-minded profit-driven real estate development is being supplanted by a collaborative approach- with local stakeholders and community-minded real estate professionals, developers and investors all talking to each other to plan for the best community outcomes.

Mix it up

Bigger or more of the same is not always better if your goal is to create diverse and livable communities. Studies have shown that mixed-income neighborhoods thrive compared to monoculture neighborhoods primarily comprised of a single social or economic class. Many of the worst examples of suburban sprawl or overzealous urban luxury development prioritize high-income, white-collar workers and families at the expense of others who may not be as socioeconomically well-off. 

These monoculture neighborhoods can be islands that residents commute to and from, only serving a small and elite sub-set of our country’s demographic. And let’s not forget what these isolated communities spawn – environmental and health issues related to commuting, lack of walkability and lack of long-term sustainability. These neighborhoods also degrade over time from A to B and C Class housing, and residents are left with vast tracts of homes, with little commercial or social activity within the bounds of their neighborhood. 

Smaller steps

A focus on developing smaller projects, such as micro/economical single-family homes, duplexes, or apartment buildings can avoid many of the headaches and harms that come with large-scale, homogenous development. Rather than knocking down existing affordable housing, or dominating an area with mega-structures, developers can work to maximize usable real estate and land (even non-traditional, unique and oddly shaped lots) while largely preserving the character and makeup of the neighborhood. These smaller projects can be much easier to finance for developers, as capital investment costs will be lower. And investors can benefit from the diversification value of multiple small projects as opposed to a single large project.

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We can’t change the mistakes of the past, but we can work to ensure they are not repeated. Housing affects every facet of our society, from employment opportunities to the environment, to social and economic justice within a neighborhood. While legislative and community-based solutions are absolutely necessary to weed out bad actors and unethical development, pro-social developers and investors can also make a contribution to a future with carefully planned communities and neighborhoods.

Image, Riverview Terrace, courtesy of Small Change.

Greenfields are boring.

Adrian G. Washington is the founder and CEO of Neighborhood Development Company (NDC). Their mission is to develop exciting residential and commercial properties that cultivate vibrant communities. What does that mean? And how does a developer do that?

Well, that’s what Adrian and I talk about so listen in.

Adrian has over 30 years of experience in urban real estate development, construction and management. He founded NDC in 1999 and has served as President since then — except for a two year leave of absence from 2005 – 2007 when he left to lead the Anacostia Waterfront Corporation (AWC), the entity charged with leading a $10 billion, 20-year initiative to revitalize Washington, DC’s Anacostia Waterfront and surrounding communities. NDC has developed over 1,000,000 square feet of real estate, focusing on emerging urban neighborhoods while respecting the rich diversity of their existing fabric.

Adrian grew up in the city’s Anacostia neighborhood and is a lifelong resident of DC. He received his B.S. in Economics and Political Science from Stanford University and his M.B.A. in Marketing and Finance from the Harvard Business School. And he has received numerous individual awards reflecting his leadership in the development industry.

Insights and Inspirations

  • Why develop a green field when you can redevelop an existing neighborhood and help it to thrive?
  • See the people who are living there. They embody the neighborhood.
  • Mix it up. Build affordable housing right next to luxury housing.
  • Work with small businesses out of the community. They can become valuable tenants, not just for the developer but they bring value to the community as well.
  • There’s lots of opportunity in Opportunity Zones.

Information and Links

  • Adrian is excited to see NDC’s Benning Market built. It’s a food hall in River Terrace North East, and many of it’s investors came through a Small Change offering.
  • NDC supports DC Greens, a local non-profit dedicated to food justice and health equity in Washington, DC.
  • The project that Adrian is most proud of is the Residences of Georgia Avenue. This block buster project increased affordable housing options and healthy food options in a neighborhood considered a food desert. 
Read the podcast transcript here

Eve Picker: Hey, everyone, this is Eve Picker. If you listen to this podcast series, you’re going to learn how to make some change.

Eve Picker: Hi there. Thanks so much for joining me today for the latest episode of Impact Real Estate Investing. My guest today is Adrian Washington. Adrian is the founder and CEO of Neighborhood Development Company, a Washington, D.C. real estate company focused on rebuilding vibrant communities through their work. Adrian fell in love with this type of development work and decided to make a career out of it, much to the good fortune of the neighborhood he works in. For Adrian, greenfields are boring. Nothing gives him greater pleasure than digging into a forgotten and neglected site and turning it into a neighborhood asset. I’ve had the good fortune of working with Adrian at Small Change, helping to raise funds for some of these projects.

Eve Picker: Be sure to go to EvePicker.com to find out more about Adrian on the Shownotes page for this episode and be sure to sign up for my newsletter, so you can access information about impact real estate investing and get the latest news about the exciting projects on my crowdfunding platform, Small Change.

Eve Picker: Good morning, Adrian. Thank you very much for joining me.

Adrian Washington: Thank you, Eve. It’s a pleasure to be here.

Eve Picker: So you have a real estate company called Neighborhood Development Company, and we’ve been lucky enough at Small Change to help you raise funds for one of your projects. Your company is in Washington, D.C. I’m just wondering if you’d like to tell us how long you’ve had Neighborhood Development Company, or NDC, and have you lived in D.C. all of your life?

Adrian Washington: I’m a native Washingtonian. I’ve lived here most of my life. I went away and went to school down in California; lived out there for a while; lived in Boston, but, essentially, I’ve been in D.C. all of my professional … I grew up here, and I’ve lived here all my professional life. I’ve been involved in real estate, altogether now, going on over 30 years and formed Neighborhood Development Company a little over 20 years ago, back in 1999.

Eve Picker: That’s quite a stretch. NDC’s mission, in your words, is to develop exciting residential and commercial properties that cultivate vibrant communities. What does it mean to you to cultivate vibrant communities? How does a developer do that?

Adrian Washington: We’ve always operated in urban areas of primarily Washington, D.C. and really always neighborhoods that were emerging; that were maybe down and out at one time or were starting to turn around. What we found in these neighborhoods is that we don’t look at them just from a brick-and-mortar perspective. We see the people that are living there now. They want their neighborhoods improved, but they don’t want to be displaced. They want shops and things that serve them, but don’t serve just outsiders. They welcome newcomers, but they want to feel those newcomers respect the place that [inaudible]. We see our role as balancing those things of making a neighborhood better for people who are living there, attracting new residents who want to be part of those communities, attracting businesses that want to be part of those communities, but not to displace people and not to alter the fundamental character. As developers, I think it takes like a real balancing act that we work with on a day-to-day basis.

Eve Picker: I do think it is a real balancing act. How do you fend off displacement?

Adrian Washington: We do it in, I guess, a number of ways that I think are unique in some developers in that we do both very high-end market-rate developments, but we also do affordable housing. We do affordable housing in a number of ways. We do it in traditional ways that more traditional developers do it, using government subsidy and the many programs involved. We also do it in more creative ways. For instance, we’ve worked in the past with failing cooperatives, where a group of tenants own their building collectively, and it’s just not working out, either because of bad management, or whatever. We team with them to provide our services with them but do it in a way that allows them to stay in their homes. That’s one way we do it.

Adrian Washington: Another way we do it is we really, in our commercial work, really like to work with entrepreneurs. Your typical developer may want that credit tenant. They want that CVS, or that Walgreens, or someone national. We really- we don’t go that way. We go in the opposite direction. For instance, in one of our developments, we have a salsa teacher, and she was doing lessons- it was a nice young couple. They were doing lessons out of their basement in the neighborhood.

Adrian Washington: They were so successful, they wanted to have their first studio. They came to us, and we had a space in one of our buildings, so we worked with them on the design; we worked with them on getting government grants to help them build out. We helped them with the construction. We gave them a favorable lease that started out low, and it allowed them to develop the business.

Adrian Washington: It was just a great neighborhood success story, where they stayed in the neighborhood. They had a service that appealed to both the newcomers and people who were in the neighborhood. They successfully grew their business. They’re now opening a second location. I think it’s really about creativity; using the skills we have as developers and businesspeople and connecting with people who have hopes and dreams – maybe not the same skills – and working out win-win solutions.

Eve Picker: That’s a really lovely story. Other developers might say that’s taking a risk with a little startup business that you don’t necessarily need to take. You could go get a credit tenant. So, why do you take that risk?

Adrian Washington: Well, I think a couple of reasons. It is kind of, on paper, riskier. Although we see with all the changes in the retail economy, yeah, you could have some business like a Blockbuster – going back in time, when everyone thought it was really successful, and now it’s out of business [cross talk]

Eve Picker: Yeah, that’s true.

Adrian Washington: Or even something like a McDonald’s, where everyone thought McDonald’s used to be the gold standard. Even now, you see some of those stores shutting. There’s not ‘no risk’ in a credit tenant, but I agree that there’s more hand-holding; there’s more involvement. You’ve got to pick your entrepreneurs carefully. You’ve got to help nurture them. Typically, they’re people who are great enthusiasts about what they know – if it’s salsa dancing or handmade pottery – but they don’t know about marketing; they don’t know about financing. You’ve got to work with them more.

Adrian Washington: We just find that more rewarding. It’s just fun. It’s creative. We feel like we’re helping people. We feel that we’re seeing eye to eye, because even though we’ve been in business 20 years, we’re still thinking of ourselves as an entrepreneur. The neighborhoods love it, so I think it makes us more popular in the neighborhoods. We’ve found that the success rate that we’ve had with these businesses is really pretty high and that the occasional failure that comes along, we just kind of build that into our pro forma. We’ve found that we were able to replace people who don’t like it with other people. All in all, we just find it’s more socially rewarding, it’s financially fine, and it’s just a lot more fun.

Eve Picker: It adds to the economy of the neighborhood you’re in, which is really lovely. Developers do lots of different sorts of things, and I’m wondering how you ended up here. How did you …? There must have been a path that took you towards this type of development.

Adrian Washington: Eve, I think it’s like a lot of things in life. I don’t know, maybe there are people who have these- design these great plans at age 12 and follow them through. I really didn’t. I went to undergrad; I went and got an MBA. I worked for a national consulting firm, and I thought that was my path, but I really hated it. At the meantime, I had bought a house in an emerging neighborhood and fell in love with that culture. I think I was really ahead of my time. I saw the appeal of walkable, livable neighborhoods. I saw the appeal of eclectic neighborhoods that had different types of architecture, that had different types of people, different races, different income groups, that was close to urban centers. I just thought that was great. I loved being in that neighborhood. I loved the change that I saw was going on. I loved the physical aspect.

Adrian Washington: Back when I was younger, I did everything. I did carpentry; I did plumbing [inaudible]. I just loved that whole environment. I think I was always an entrepreneur at heart … I was going to a day job that I hated, and I had this hobby that I loved, so I said, “Well, why don’t I see if I can turn this hobby into a business?” That was 30 years ago. It hasn’t been a straight line. There were struggles; there were failures; there were just dumb-ass things that I did that didn’t work out, but I always came back the next day and tried to do it better, and I’m really glad I did.

Eve Picker: Be sure to go to EvePicker.com and sign up for my free educational newsletter about impact real estate investing. You’ll be among the first to hear about new projects you can invest in. That’s EvePicker.com. Thanks so much.

Eve Picker: That’s a great reason why. It’s pretty wonderful to be able to be doing something that you really love and that adds to communities everywhere. So, I’m going to move on now to a project that I know you’re working on, called 1100 Eastern Avenue, which is one of your latest projects. We’re fortunate enough, at Small Change, that we’re going to be helping you to raise a little money for this project. I wanted to talk a little bit about it. Can you just tell us a little about what the project is, how big it is, the uses, where it is?

Adrian Washington: Well, sure, Eve. I’m really excited, and our whole team’s excited about 1100 Eastern. It’s really a project that embodies our beliefs, and uses all of our skill sets, and is just very exciting. It’s a mixed-use projects. Ground floor is a retail component; not that large, about 4,000 square feet. I think one of the great things about it is that there were … The site is sort of a rundown former- like a strip shopping center. A couple of the tenants there were folks that, frankly, the neighborhood was happy to see leave. It was a liquor store and an old carry-out. Not to knock those people, but they weren’t really what the community wanted.

Adrian Washington: There were a couple of tenants the community really did like. It was a barbershop that had been there for really a couple of generations. The current owner’s father had founded it back 35 years ago. She was still running it, and it was really a neighborhood institution. Then there was a daycare center. One of the things that we’re doing is allowing those people to come back to the new development in brand-new facilities. We’re even able to offer them, starting out, kind of with our philosophy, at the same rents they were paying, which were far below market. It’ll allow them to build up the market over a number of years, so we’re very excited about that.

Adrian Washington: Now, on the floors above it, there are five stories above it. These will contain 65 units of mixed-income housing. There’s housing for very low-income people, who were formerly homeless, who will be able to get wraparound services to allow them to transition to a more normal life. Then there are other units that will be for people of moderate incomes; people anywhere from – these are technical terms – but from 40 percent to 65 percent of the area median income. These range from what we would call pretty subsidized housing to more workforce housing, so we’ll have a range of people there.

Adrian Washington: We’re also very proud of what we’re doing is that we’re giving a really big mix of unit types. Typically, in any kind of new construction development, you’re seeing just people were just building one- and two-bedrooms, or studios. What we’re able to do in this building is to provide one-bedrooms, two-bedrooms, three-bedrooms, even a few four-bedroom apartments. It really will serve a number of different types of people in the neighborhood – seniors, people with families, people with kids. It’s just a great project that will really help everyone in the neighborhood, so we’re very proud and excited about it.

Eve Picker: That sounds really, really wonderful. The four-bedroom units are so unusual nowadays, and extended families are important, so that’s pretty great. I understand it’s also an Opportunity Zone, which is, as we all know, a very hot topic right now. How will that impact the development?

Adrian Washington: Opportunity Zones are exactly what you said, Eve; it’s a very hot topic. People are still figuring it out. I think that, unfortunately, early on, a lot of the Opportunity Zone benefits are going to people who are creating projects that would have been created anyway. We’re very proud that we feel this project will fit in what the Opportunity Zone true mission is, which is to bring capital to underserved neighborhoods – as I said, our commercial businesses, our neighborhood-serving businesses that were going to be displaced and that people in the community wanted to stay.

Adrian Washington: What we’re doing is we’re using Opportunity Zone benefits to attract capital to help keep these businesses in. So, I think that’s important. But, also, I think one of the key things I feel that Opportunity Zones is that the projects have to make sense, even if they weren’t in Opportunity Zones. We are a business that prides itself on not just being do-gooders, but being solid businesspeople, so we’ve underwritten the project carefully. We understand the costs, and the risks, and all of the factors. We think this is a project that works, even if it wasn’t in an Opportunity Zone. But we’re very happy to allow people who are investors who want to get a good return on their money, but also to have a meaningful social impact, to have all that, plus the tax benefits of the Opportunity Zone.

Eve Picker: For listeners who don’t really understand Opportunity Zone funds, because they are very complicated … Took me a long time to understand. The fund, in this case, is actually the project. It’s just the entity that the project is using as a legal entity, the LLC, that will become a fund, right? If people invest-

Adrian Washington: Yes, that’s right.

Eve Picker: It’s a 100-percent Opportunity Zone fund because it’s just a single-use fund, just one project. So, if people invest in it, they’re investing actually into the project itself, not into a fund that then serves a whole series of projects. They can take a really close look at the underwriting and see if they like it. I would agree with you, at the moment, the Opportunity Zone fund benefits are kind of gravy. I have yet to see a project that is moving forward simply because of those benefits. They don’t seem to be enough to make a project happen, right?

Adrian Washington: Exactly. We’ve used that approach, not just in Opportunity Zones, but with our other investor- projects. What we found over the years is that people- they want to know what they’re investing in, both from a business standpoint … They want to kick the tires, see if they believe in the construction costs, and the neighborhood statistics, and the tenants that are being there. They want to understand that. They also want to understand the story behind it. What’s going into the neighborhood? How will my investment benefit [inaudible] neighborhood? They really want to touch, and feel, and see that. We’ve had a lot of success over the years in doing that. This project really works in the same manner, where people can really learn about it, learn about us, learn about the neighborhood, learn about the businesses, and say, “Yeah, I want to put my money here. I believe in it as a financial investment. I also believe in it, in terms of its social [mesh].

Eve Picker: I think what I’m most excited about for Small Change is the fact that we’re helping you raise money for this Opportunity Zone fund. We may very well be the first Opportunity Zone fund offering investments- very small investments to everyone over the age of 18, not just accredited investors. I think many of the funds that we see around the country have really big minimum investment amounts of $100,000 or $200,000, or $500,000. This is going to be much smaller for everyday people, which personally I find very exciting. It’s yet another way to make it accessible to your investors in your neighborhood, right, Adrian?

Adrian Washington: Right, and we’re excited, too. Eve, as you know, and the audience may not know, is that you guys raised money for us on another project, our Benning Market project – a neighborhood called River Terrace. It was a nice way to raise money, but I think more importantly, it helped build support and build involvement in the project. I have people in that neighborhood who told me, “Yeah, I saw … I’m an investor in your project, and …” [cross talk]

Eve Picker: That’s great. That’s really great, yeah.

Adrian Washington: -“… and I saw it because I lived down the street and I wanted to be a part of it. I just thought it was cool that you allowed us to participate in that.” I think it really does build more of a sense of community; it builds more of a sense of involvement; it invokes transparency, because, frankly, I think that, in these days, developers are viewed with a lot of distrust. I think that by allowing community members to invest at investment levels that they can afford really helps to break down those walls, and do that, and helps to increase visibility. We were really happy with the results we had with you on our first investment, which is literally breaking ground in a couple weeks, and we are very excited to work with you again on the Eastern Avenue Project.

Eve Picker: That’s great. You’re going to have to send me updates on the first one, because we’ll post them for our other investors. People like to see [cross talk].

Adrian Washington: We’ll send you groundbreaking pictures. How about that?

Eve Picker: That’d be fantastic, yeah. Talking about this little piece of community engagement – crowdfunding – community engagement has to play a big role in your projects. I’m wondering how you handle that. That can be tricky sometimes.

Adrian Washington: It can be tricky. Like I said, there’s just a lot of distrust around development, and in our political climate, I think there’s just [riding] distrust in everything, so I don’t take it personally. I think the key is you’ve got to be out there early and often. We’re working a different project, in a different part of the city, and we’re a couple years away from groundbreaking; really a year away from an actual serious design and engagement, but we’re already out there in the community, asking people what they want, telling them about ourselves, letting them see some of our other projects.

Adrian Washington: You’re never going to please 100 percent of the people in any community. What I’ve found over years is that what you can do is the best you can do, which is to be accessible, be transparent, to listen, to be honest. Sometimes, people want something, you’re like, “Yeah, we can do that.” Other times, people want something, and I’ve seen a lot of developers be vague and sort of say, “Oh, well, maybe we’ll look at that.” I try to be honest; I try to say that, “Sir, ma’am, we just can’t do that, and here’s the reason why. I know you won’t be happy about that,” but I think it’s more important to be honest than it is to try to gloss over a problem.

Adrian Washington: It really takes a lot of work. It’s changed over the years. 20 years ago, we didn’t have to do nearly this level of community involvement. I think, particularly in underserved neighborhoods, that people were happy that you were just there and building something; pretty much, you didn’t have to do more than that. Nowadays, it’s different. People realize that their neighborhoods are an asset, and that people want to develop there, and they are demanding to be heard and respected. If you’re not there, you don’t hear them, you don’t respect them, you’re gonna suffer for it.

Eve Picker: Yeah, I think that’s right. Moving on to more global themes, here, I’m just wondering what you think we all need to do to make our cities and neighborhoods better places for everyone, so that no one gets left out.

Adrian Washington: That’s a big question-

Eve Picker: It is a big question.

Adrian Washington: -I don’t know if we can solve that all in one podcast. I’ll focus on our roles as developers. Clearly, there is a need for more housing in our cities. There’s a need for housing that serves all different income levels and all different family types. It’s not the ’50s anymore. It’s not just mom and dad, and 2.3 kids, and a picket fence. There are all types of households.

Adrian Washington: The development process has gotten tougher. Besides the community involvement piece, the environmental and sustainability requirements are much higher, the zoning is trickier. It’s hard work. I think our job is to use the skills that we’ve developed over the years to work in partnership with communities, to let them see how they can help us, and, in turn, using our skills to help them work on win-win solutions; involve government, because, obviously, they’re important, and have patience, but have perseverance. Development is tough.

Adrian Washington: I think that to be successful, you’ve got to have a long-term view. You can’t feel like you’ve got to make a killing on every project. You’ve got to look at your entire body of work, so at the end of the day, at the end of your career that you’ve made a fair return on your investment, your time, and your risk, but you’ve also contributed to society. I think it’s possible, if you have those things in mind. Honestly, it’s more rewarding and it’s more successful, if you do it that way.

Eve Picker: Clearly, you think socially responsible real estate is necessary in today’s development world, and that’s the way you manage your business, but I’m wondering, are there enough developers out there thinking about impact and thinking in the way that you’re thinking? If not, how might we improve that? I still see a lot of greenfield developments that, quite frankly, shock me in this day and age; that that sort of work continues. I still see banks wanting to finance those models over and over again, because it’s easy to think about them. I’m wondering how we shift to a [kinder] development world.

Adrian Washington: I think it certainly is growing. I agree with you completely. I drive around, particularly when I’m not in D.C., and I see so many greenfield developments. Just to me, personally, it’s just kind of boring. I didn’t get into this just to make a ton of money. Like I said, I want to be fairly compensated for what I do, but it’s more about that.

Adrian Washington: To answer your question, I think I see more and more of it. I think, particularly the younger generation … I’m older. I’m not a millennial. I guess I’m a young baby boomer. But, particularly in the generation behind me, I see people who want to do that, and not just in real estate development, but in other fields in life. They want to do more than just do a job and make money. They want to make a meaningful impact on the world. They want to have that reward, which helps them feel better.

Adrian Washington: Also, what I’ve found in my business, is it helps to attract and retain young employees. They don’t want to just build some cookie-cutter, 200-unit apartment building in a greenfield, just like everybody else. They want to do projects that are creative, that involve different financing sources, that touch people’s lives, that take challenges [cross talk] and from a business standpoint. I think it’s a movement that is slow in coming, but I clearly see it’s building, and I think it’ll be more and more.

Eve Picker: Yeah, I think you’re probably right that it’s gradually building. Do you see any current trends in real estate that you’re fascinated by or you think are going to make a difference moving forward?

Adrian Washington: Yeah, I see … Clearly, the trend for co-living and coworking is the big trend. WeWork is obviously the big kind of corporate behemoth example of that, but there are a lot of other smaller, more entrepreneurial types of interests. I’ve see coworking spaces designed around women, or women with kids that have daycare centers, or people with social causes, like a nonprofit type of thing. I see that as a big trend.

Adrian Washington: I see co-living. I think that where people, either because of monetary reasons, or because of social reasons, don’t want that house by themselves, but want an opportunity where they can either live with roommates or live in a more communal environment, where things like kitchens and things are shared, and where there’s a social network in place that typically people who are new to an area- it’s a way for them to connect. I see a real sort of striving for more connectedness, as our world, in a way, becomes less connected. I think there are great opportunities to expand on that model. I’ve seen some very successful ones here in Washington, D.C., so it’s something I’m keeping my eye on.

Eve Picker: Yeah, I think a lot of people are. I’m going to ask you three signoff questions that I ask everyone. The first one is what is the key factor that makes a real estate project impactful to you?

Adrian Washington: I’d say the key factor is that it meets the needs of the community that it’s in. The only way you get that is to get out, and talk to the people there, and understand what they want. Some communities, they want more affordable housing. Some people, they want less. Some people want retail that’s a particular type; other people might want a retail that’s missing, like, say, a Fresh Grocer, which is like an example of another project that we did. We put in a Fresh Grocer where it’d been a food desert. It really involves talking to the community, understanding what they want, and then using your skills to develop- to deliver it.

Eve Picker: When it comes to crowdfunding, do you think there are other things that can help you as a developer, not just involving investors, but how might crowdfunding benefit your project, as a whole?

Adrian Washington: I think crowdfunding benefits us in a number of ways. The couple that most come to mind – and I [inaudible] an example earlier for one of our projects – is many people in the neighborhood become investors in the projects. They’re invested not just financially, but they’re invested emotionally. They tell their friends; they frequent there more often. I think the crowdfunding helps allow, particularly, local residents to be involved.

Adrian Washington: I think the second way that that’s really helped us and helped the project is that it’s a real brand builder. Eve, when we did the project with you guys, we got so many press kits about the project. We were [cross talk].

Eve Picker: That’s fabulous. That’s really fabulous.

Adrian Washington: I was interviewed a couple of times at the local news station, I was interviewed by national publications. People that I would- said “Hey, I heard about your project. What’s crowdfunding like, and how do you like it? It just really enhanced our company’s visibility, our project’s visibility; it was a real brand enhancer, and it’s something that I did not expect and something I was very pleased with.

Eve Picker: I’m grateful to hear that. That’s wonderful. Then, this is a really big one – if there were one thing that you could change about real estate development in the U.S. to make it better, what would that be?

Adrian Washington: I think that the thing that I would really change is not so much government policies. I understand the need for regulation around safety, and sustainability, and community impact, but I would change more the attitude of the people in government who do those. I think there is too much of a – particularly in inspections – ‘gotcha’ mentality, where, instead of working with us, and understanding that we’re doing the best we can … Yes, maybe this one particular light switch was two inches too high or too low-

Eve Picker: Oh …

Adrian Washington: Not just a ‘gotcha’ mentality, not just, “Okay, you messed up on that. Fix it, and we’ll come back when we’re ready and tell you whether you missed anything else,” more a partnership for governments to understand that we’re good guys. We’re doing the best we can; that we want a safe project, a sustainable project, and to work more cooperatively with us, and help us succeed as partners, and not to be adversaries.

Eve Picker: That’s a great way to end this interview. So, Adrian, thank you very much for your time. I really enjoyed talking with you, and I’m sure we’re going to be talking again.

Adrian Washington: Great, Eve. Thanks for having me.

Eve Picker: That was Adrian Washington. Adrian is not afraid of a challenge. His company focuses on challenging sites in challenging neighborhoods, always making sure that neighborhood folks are involved and that their neighborhood is improved by the final project. I love that Adrian finds greenfields boring. I love that he sees the people in a neighborhood first, and I love that he nurtures local businesses, bringing even more value to the projects he develops.

Eve Picker: You can find out more about impact real estate investing and access the Shownotes for today’s episode at my website, EvePicker.com. While you’re there, sign up for my newsletter to find out more about how to make money in real estate while building better cities. Thanks so much for spending your time with me today, and thank you, Adrian, for sharing your thoughts with me. We’ll talk again soon, but for now, this is Eve Picker signing off to go make some change.

Image courtesy of Neighborhood Development Company

Bite-sized investments.

Equity crowdfunding is changing the real estate development landscape. Importantly, beyond raising equity, crowdfunding can help build support within communities that may otherwise hold neutral or even hostile feelings towards the building of a new real estate project. Micro-investments via crowdfunding platforms give community residents and stakeholders the opportunity to participate in and take ownership of the development. And this means that everyone will have an interest in its success.

Developing in underserved neighborhoods is not easy

Since Franklin D. Roosevelt kicked off the New Deal Programs in 1933, federal, state and local governments have tried to find ways in which to deliver high-quality housing to all Americans, not just the privileged few. But while the numerous programs created that support housing have helped over the years, they have not solved the problem. Government-developed housing projects, low-income housing tax credits (LIHTC) and Opportunity Zones have not stemmed the tide of housing insecurity.

Many in the private sector only develop in these under-served communities due to the existence of such programs. This is due to the fact that risk-adjusted returns in many major metros are substantially lower than the return on investment an investor can anticipate from middle to high-end housing, like luxury condos or single-family homes. Making the numbers work is hard enough, and when slim margins are combined with vociferous opposition to a project, it can be hard to convince investors to get behind projects in the places that need them most.

Crowdfunding as a signal

Developers have a bad rap in communities. After years of dealing with bad-faith actors, and after suffering from the effects of gentrification and “revitalization” efforts, many in the communities that need housing the most are not inclined to work with them any longer. It is critical to send the right signals to community members in order to break through years of mistrust. One way is through crowdfunding. Instead of new projects only benefitting developers or investors, crowdfunding can allow those residents to have a direct financial interest in the success of the project.

Bite-size investments and the local community

The vast majority of real estate crowdfunding platforms require that users be accredited investors. In other words, they must be one of the 3% that have net worth of over one-million dollars or a salary of at least $200,000 per year. In 2016, in an effort to democratize investment, the Securities and Exchange Commission released Regulation Crowdfunding, a rule that permits anyone over the age of 18 to invest. Now there are some emerging crowdfunding platforms that employ this rule, like Small Change.

Most socially conscious real estate development projects take place in economically disadvantaged areas, as these are the neighborhoods that need the most help. If development projects are completed without concern for locals, they can end up hurting the people that the impact-investment was supposed to benefit.

Most residents in these areas probably can’t meet the $200k yearly income or one-million dollars net worth requirement for accredited investment. Small-dollar investment crowdfunding platforms allow developers to invite residents of the community they are building in to invest, and share returns with them, rather than faceless investors that live anywhere from San Francisco to Tokyo. Not to mention that crowdfunding provides developers more access to capital from sources other than traditional lenders.

Closing the gap

We all know that private developers cannot solve the housing crisis entirely on their own. There need to be significant structural and regulatory changes made in order to provide substantial decreases in housing insecurity, particularly in the very high cost of living areas on the coasts. However, private developers can make a dent in the housing affordability gap through projects that use local communities as a resource, rather than viewing them as an obstacle to be overcome.

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Small-dollar crowdfunding offers real estate developers a way to turn a group of potentially opposed stakeholders into firm allies with a direct financial interest in the project, in addition to their interest as residents of the local community. With so many obstacles to overcome when creating sustainable low and mixed-income housing, developers need all the help they can get. It’s a win win.

Image courtesy of Small Change