Finance

Eve: [00:00:08] Thanks so much for joining me today for the latest episode of Impact Real Estate Investing.

Eve: [00:00:14] My guest today is Jim Kumon who heads the Incremental Development Alliance, which is based in Minneapolis. The Alliance began in 2015 as a collaboration between two small-scale developers who found that people kept asking them the same question: how do I build a small building in the place I love? They joined with Jim to create an organization with the goal of resurrecting the small developer. And they built a suite of classroom-based coaching tools and scaled them across the region and the country. In the first year they did big camps in Portland, Dallas, Providence, Fayetteville, Washington, D.C. and Detroit.

Eve: [00:01:12] Be sure to go to rethinkrealestateforgood.co to find out more about Jim Kumon 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: [00:01:42] Hello, Jim. I’m really happy to have you on my show today.

Jim: [00:01:45] It’s great to be here and actually to see a little bit of Spring coming around the corner here in Minnesota, so it’s actually where I’m at, so it’s good to actually get out to the world and see some things. So, glad we can connect here and talk about stuff since I haven’t been able to leave the house much currently.

Eve: [00:02:04] Right, we’re all kind of stuck. But, you know, I’ve been really fascinated by your organization, the Incremental Development Alliance for a few years now and your work is pretty squarely focused on small-scale projects and small-scale developers, which I really love. So I wanted you to start by telling me a little about why the Incremental Development Alliance exists.

Jim: [00:02:29] Yeah, well, we’re coming up in about five years now of our work as a nonprofit organization. We work nationally to support implementers of small-scale real estate development projects and the ability for local places to have those kind of real estate projects happening in their communities. And so we exist in large part to be able to essentially re-enable and re-share the information that we used to have as a society. All real estate development was largely small-scale development for, you know, really centuries up until really post-World War 2, for the most part, and we did some things in the skyscraper era, you know, the early nineteen hundreds, but for the most part, small-scale, small-lot development was the traditional development pattern. And so, one of the major reasons we exist is essentially trying to re-learn and re-share information that we used to know across a broad spectrum of our society. And it’s now been complicated by the fact that we have had 50 or 70 years of real estate development that has largely become specialized and become highly, highly tuned to scale and largely to scale finance. The kinds of developments that we see in this country are in large part due to the financial mechanisms we have. We see the things we have because they’re easy to finance. And so the traditional pattern that we’ve had up until that point in time in the mid century nineteen hundreds is, is actually the unusual thing now. We can build big box stores and subdivisions and office parks and industrial parks, but the idea of putting a duplex on a 50 foot wide lot is actually pretty foreign in most places. And so we’re trying to help put the knowledge back together within the 2020 framework and not the 1920 framework of what you have to do to follow rules and to get things financed, to make real estate transactions happen. And so we do so.

Eve: [00:04:38] Why is it important?

Jim: [00:04:40] It’s important largely because it’s a lost art. People think it’s, especially when we first started out, in large part people think it’s almost impossible. Like, well, how can we not do this? How can we not be able to do this for so long now? Large part is a) people really hadn’t tried or if they looked into it, they gave up because there were so many barriers. And secondarily, there are places that really want to see this kind of development happen, but they’re missing the know-how within their human resource, their human capacity of a community that’s both public, private and nonprofit sectors. And so really, our organization started as a network of doers who were comparing notes and a couple of my co-founders in particular who were essentially mentoring people on the side. And it got to the point where you couldn’t have that many one-on-one phone calls and still do your job, to make major money. And so, you know, we essentially bound together to help essentially take that wisdom that’s sort of hard earned from the field, in-practice wisdom, and put it into a format that can be shared more widely and both in sort of beginners terms, as well as more advanced work that we have to do, either in markets that are disinvested or in markets that are too hot, they’re over-invested. And so we see the conditions across the US in one or the other. And how you get real estate products done differs greatly, obviously, depending on if you’re in a hotter market or a colder market.

Eve: [00:06:16] How do you help like small-scale developers or places that want to introduce interstitial small projects into their urban fabric?

Jim: [00:06:26] When we started the training work out, we realized that the two biggest issues were: one, the process. Being a small developer was sort of unknown. You had lots of people who are involved in the development industry, people who are contractors or real estate agents or architects. People, sort of, a known kind of related industries to real estate. And so those folks who were in an industry, you know, largely had a sense of the process, but really just knew they’re one stop along the way. And so, many people may have some of the skill sets to put a real estate transaction together, but didn’t have a complete working set, right. And no-one knows everything about each aspect of a development project, there’s too much to know. But you have to know a little bit about each part of the process and know how to find other people who can help you with the things you’re weak at. And so, the ability for us to help, essentially teach people, what is the process and how does it work and particularly how does it work for small scale projects? And we define those projects, you know, 1 to 20 units of housing – they could be mixed use residential or commercial and usually under 15,000 square feet, that’s sort of the max-sized project and really…

Eve: [00:07:40] I fit squarely into that group.

Jim: [00:07:42] Yeah, and we’re usually more talking about buildings between, you know, 500 and 5000 square feet, you know in reality. And so, those buildings are the ones that are overlooked and kind of caught in the the seams, in the cracks and crevices of our regulatory system and our financial system, because the rules change. So one of the things that we teach people is how to line up the financial regulatory system and banking system, how to line up the land use system that actually controls what you can put where and the building codes. And so, the thing is, is for larger projects, most projects fall under the same set of rules. Like there’s certain zones of a city, there’s the international building code, which is basically everything over three units of housing and largely commercial buildings. And the, you know, the financial mechanism of the commercial mortgage, right. The rules are largely the same for big buildings. And what makes it hard for small projects is they straddle an intersection of all three of those elements where the rules shift, right? One in two family zones are different from three and up in zoning land. There’s a completely different building code that regulates one to two family buildings from from how you build a building in its construction. And then we have a financial mechanism for residential buildings that allows for one to four unit buildings. And you have to make sure that you know how those pieces intersect, because otherwise you find out, usually at the most inopportune time, that you’ve got a discongruent operating requirements, right. Hey, I didn’t know that when I went from a duplex to a triplex I need a sprinkler system now. And that’s not the kind of thing you want to find out on accident because sprinkler systems are not cheap. And so that’s kind of how we got people.

Eve: [00:09:40] I’ve had this sort of experience myself when I built a small, it was supposed to be a four residential unit building in downtown Pittsburgh, and I got all the approvals, everything, permits, everything, started building. And one day on-site, the building inspector said, hold on a second, you can’t do four units without an elevator. Because one has to be handicapped accessible. So we had to really on the fly completely redesign a couple of the units because it’s a tiny little site and we could not put an elevator in. So, it seems to me that not even the city kind of really understands how difficult they are for small buildings.

Jim: [00:10:23] Well, and the question, in large part, probably was who is the last person before you tried to build a new construction four unit building? Probably a long time. Yeah. And a lot of folks who are alumni are exactly that person that you were. Right. They’re the first person broaching these subjects within their building departments and zoning departments and with their local officials and their neighbors.

Eve: [00:10:47] This could be my entire career in development that you describing.

Jim: [00:10:54] Right, you did it all the hard way, didn’t you Eve, yeah?

Eve: [00:10:55] Damn, it was fun.

Jim: [00:10:57] Yeah, well, and that’s a part of this shared wisdom that we’re trying to…We don’t have enough time with, especially in the housing sector, we’ve got a lot of housing to build in this country and we don’t really have time for everyone to make the mistakes and to to go through the vagaries that that you went through yourself and others who are faculty members went through, right, to find all this stuff out the hard way.

Eve: [00:11:21] Small-scale development could be perfectly efficient and make developers money except for all of this. Like when you have a banker telling you, oh no one’s going to live downtown and they just won’t give you a loan because you happen to be the first to the loft development in a downtown, that’s a problem even beyond the written regulations that we’re talking about. That’s now a cultural issue that you’ve got to also break through, right?

Jim: [00:11:47] It’s much harder, actually, the part between the between the ears is a way more difficult issue, especially given that even though if we were talking about the US, while we’re one country we’re many subcultures. And so, the way that different parts of this country and different real estate markets in different parts of the country behave, and the way that people believe that their communities should be, is vastly different. Tinkering with your zoning code is pretty straightforward, it’s mostly numbers and a couple of pictures, if you’re lucky, I can sit down with someone’s zoning code and help them remove things that are barriers fairly quickly. But, you know, banks, neighbors, even people in the construction industry. I was, we were, there were some small houses that one of our faculty was looking at some small houses with one of our alumni in, in Tennessee. And the local building culture in that city basically was like: two by six construction, well, we don’t do that. That’s gonna cost more, I mean, if we gottta take this one stud off the truck and it’s a different size than what used to, that’s just gonna cost way more than putting in a two by four, I mean, obviously, you know. And you’re just like, what?

Eve: [00:13:04] I had a really bizarre issue in Pittsburgh, when I was building a tiny house here and, when a lot of people left and houses were abandoned, people just sort of collapsed them into the basements, so you end up with land that’s pretty unbuildable. And I was talking to Jonathan Tate in New Orleans and he said, well, we just have these little trucks with pile drivers that drive around and drive piles past all of this stuff, right, which is brilliant. But not in Pittsburgh. I couldn’t find a small pile driver. It would have been a very large rig that would have been deployed for a tiny little project. So, from region to region you have like these weird issues popping up.

Jim: [00:13:48] Basements, no basements, right. You don’t put a basement in Louisiana, right, cause you’d be…

Eve: [00:13:53] You had to do something with the ground, so it was like…

Jim: [00:13:58] Years ago I worked in, in a city in, outside of New Orleans, it’s further out, further afield in the state and so a little bit swampier land of the states. And so, there was a local joke about some infrastructure projects was, you know, “my daddy used it to fish for crawfish in your basement” which, of course, there was no basement. Which is to say you built your house in the low ground. You shouldn’t wonder why it’s flooded over and over and over again.And so these, these kind of, you know, climate and regional issues is what is another thing that kind of makes our approach different than most real estate training and technical assistance is that our our commitment to urbanism, our commitment to neighborhoods, and that’s really where we operate, the neighborhood scale, all of our cities and towns in this country are really just increments of neighborhoods.

Jim: [00:14:54] And so what’s important from our perspective is there’s both small scale as well as incrementalism. Those two things go hand-in-hand, but they’re really separate. And one of the things that ties them together is the idea of time and scale. And so, you can be thinking through how something, a process, works in a place for how you build a building. But you have to think through the ways that those technical elements fit together and what’s, how it’s really going to work when you, when you set out. So for us, thinking through a housing project for a small building, you have to really take it into its parts and you can’t strip out the financial piece from the physical piece. And so, most of the real estate training that I took and other people took that are involved with our organization, they were so strictly focused on the financial pro forma. If you can make the numbers work, somebody else would figure out how to make a vertical three-dimensional building out of that spreadsheet later, right. If we could just get these rents and the costs isn’t over this, it’ll be fine. And it’s like, no, actually, you know, what goes in that building matters. If you build the building, that, as you found out, unfortunately requires an elevator, that’s not, that’s not an inconsequential thought process. So our belief that the built environment and its regulatory framework has to be front and center and iterative in the process, along with the financials, along with the the most usually forgotten part, which is the humans, right? Who is the occupant of this building and how is this building achieving needs of humans? And, as I was an architecture student as an undergrad, I always kind of thought that, and in my time when I was in school, I was looking at inspirations like the rural studio. People who were actually going out there and trying to build things and think about the humans, you know, part and parcel and the economic conditions that they were a part of, in that part of the country. And so, to be able to actually look at these things and say, know what? we can’t separate this idea of the financial part of this building from the people and the actual built edifice, we have to think of them together.

Jim: [00:17:23] And small scale buildings are so critical because it’s not, it’s a jewel-box, right. I mean, our buildings, our built environment, is largely an aggregation of many, many, many small buildings. The big building is actually the outlier, the exception in the built environment we have. And so, one of the challenges we have in this country today is that we forgot how to build neighborhoods. We know how to build complexes. We know how to build parks right, of.. the office parks and industrial parks. But the idea that fine-grained elements that differ in use and size can fit together, that’s a skill we lost post-World War Two, in planning, design and construction. And so, being able to teach people how to use that part of their brain, how to use that part of the thought process, is the critical missing piece in implementation, right. We have the ideas, we have desire. We were missing the actual how to. And that’s why we created the Alliance was to sort of fill in that void.

Eve: [00:18:23] Really, what I’m hearing is, and I know this to be true, that small-scale is incredibly challenging, is, you’re sort of up against, you know, the same issues as a large scale development, but maybe even more because of cultural beliefs, because of the way the banks like to lend, because of zoning codes that aren’t really geared towards small. So it can be a lot more challenging than something large and efficient.

Jim: [00:18:51] Yeah. And we like to say and this is one of the, one of the old analogies by one of my co-founders, John Anderson, who said that small developers operate on the economy of means, as opposed to large developments, which really are, as you say, the economy of scale and efficiency. And the economy of means is largely about relationships and time. There’s a finite amount of people and resources that a small-scale developer has. And so, what is important to understand is that small-scale development isn’t inherently hard, it’s only hard within the context that our American society has built its habits and practices about how we finance, value and built. And so what is important and what were some of the ideas that we hang our had on about, you know, what can you do with a 30 year mortgage? That was a question that came out of the last recession, as I’m making the broad assumption here that we are already in a new recession. With the last recession,  is, was a question of what if commercial finance, as we know it doesn’t come back? And so, John was one of the people who was staring, looking at this and saying, gosh, what could I do with a federally backed mortgage product? What does that allow for?

Jim: [00:20:15] And so being able to look at something very basic and very simple really shows what the power of that is. Because if you think about the millions upon millions of 30 year mortgages we have in this country today, it’s a ubiquitous tool, except that there were features of that tool that were underutilized. And so really we were exploring and trying to cross-pollinate what could you do with 1 to 4 units if that was your framework? And so, one of the things that we’ve developed over the last three to four years and my colleague, Grayson Johnson, and co-founder, this is one of her big pieces and contributions to our work, is helping us catalog. And my background comes out of the built environment in architecture and I did housing in California in the boom years and saw all kinds of crazy things that were going on when you could build a courtyard apartment building, which has got 42 units, which is like 42 custom homes like stacked on top of each other and beside each other, all selling for, you know, six hundred thousand dollars. This is sort of the the rarified air of Southern California real estate in 2007, right? And you get down to this, you know, like, wow, this is an amazing building type that no one’s done in 40 years, 50 years. And you realize, gosh, these are all these different ways we could do this. And so that idea of a building type from something very complex, like a courtyard apartment building, multifamily house to something as simple as a duplex or a triple decker as we have in the Northeast or all the various kinds of cottages you find in the south where you’re trying to spread out and keep air between buildings, right, and battle humidity. All these different building types that are from a climate perspective and a local culture perspective akin to a place.

Jim: [00:22:11] And really because we’re a national organization, we gathered up all these different types that largely had a start in a local place and have, you know, regional sort of preferences or regional sort of ability to, you find them often, right. And we said, look, well, how can we use these building types in many places? And so we created this idea called Step Buildings, which would be a way to help people organize through these important thresholds of finance, building code and zoning code and Step Buildings is an important idea, largely because we’re having to reintroduce things that are in plain sight in many places in this country, but we don’t recognize what they are. And the term STEP is also an acronym. It stands for Small-scale, Time-enhanced, Entrepreneurial and Purposeful. And really, the ability for us to understand what these buildings are, and having spent time in Pittsburgh, I love, especially in the working class neighborhoods, the just sheer variety of sizes of building, right, and attachments and additions and that incrementalism of, before we had the 30 year mortgage, we only built as much housing as we could afford, which was not very much. And if we have kids or a family or parents, you know, we made these little additions and, you know, cultivated up a structure. And so as humans, we had all kinds of ways to house ourselves. They just didn’t fit into the model we started doing after World War 2, which was a single family house stamped out in great scale and volume in, sort of, cookie cutter tranches of financial thresholds, right? Like, well, this subdivision is going to be for houses that will cost between two hundred and ten and two hundred twenty five thousand dollars and we’ll build a hundred of them. And then get another plot of land next door and build one hundred that are between three hundred and three hundred ten thousand dollars, right. Somehow we went from this fine-grained ability to house people at different points of their life cycle to, you have to pick up and move yourself to a new hunk of land every 10 years in order for, you know, your housing type, that need that you have, to happen. And so, we’re trying to catalog all the different ways that you can mix and match buildings together and be able to explain them to people who may not realize that they live in a place that has all these things.

Eve: [00:24:44] Can you share an example of a project or a place or a developer that you helped through the alliance that you are proud of, or you think is particularly interesting?

Jim: [00:24:55] Well, there’s a couple different conditions by which we end up coming to a place, Now, first of all, we don’t just show up in a town and do a training class. We only go places that invite us and our sponsoring spills through their hustle and through their financial support. So we go to places that want us and want this type of work. If you don’t want this type of work, it doesn’t get anywhere. And we’ve been to a couple of places who said they really wanted this and then when we got there, they weren’t really all that serious, right. They were checking a box, they were, you know, throwing something, throwing a bone to a neighborhood that’s been overlooked. And they weren’t really serious. There were some people on the ground there who really cared about their place. But the people who brought us, or maybe who paid the bill, not so serious. And so people ask me a different version of the question you just asked me, which is, you know, who’s, what is success or what happens when someone makes it? And the challenges right now is that there’s a lot of people who want to get something going, and for some of things I’ve already mentioned, can’t, right. There are some deal-breaking issues that stop people from getting going. And so, one of the things that’s important, and why we do work that’s both for the individual as well as for the city, is that they need each other. right. Cities, we talk to people in government all the time like, gosh, I would love to make sure that we can legalize cottage courts and then sometimes they go off and do it. And then, like Jim, so we went changed our zoning code and tinkered with a couple of local practices for our infrastructure and, gosh, you know, cottage courts should just be no problem. And I’m like, does anyone know how to build them? And so. Like, has anybody had the idea of putting five small single-family houses together in one lot? Does anyone understand how that fits? Don’t like hah, no, I guess not. Well, that could be why no one’s building them.

Jim: [00:26:43] So, we’re at an interesting point in time where there is now, you know, especially compared to five years ago, a much larger acceptance of a lot of great ideas that could happen and could happen in your place. And so, we’re working through trying to figure out what’s the path of least resistance. And so I can describe a couple of those examples of people who are are finding that first step in their place.And we have a couple of longer-term relationships with places, which I think is where our best examples come from, from alumni. We have a bunch of, up on our Web site, we have incrementaldevelopment.org, we have a bunch of little alumni stories about people and projects. So I’ll just cherry-pick a few of those. But it is a project, a couple places that we’re working that we have some really exciting products going on, one of which is South Bend, Indiana. And we’ve been working on and off there now for a little over two years, specifically on the northwestern and western parts of the city. We are brought in typically for two reasons to a place. One, because there is uncontrolled or unhealthy growth, right, which is to say the place is a little too hot, that the real estate market is too hot. People are being either displaced or threatened to be displaced. Or we have the opposite. The place maybe got the wrong end of a bulldozer for a few decades. And the question is now what? How do we piece this back together? And so, interestingly enough, the tools by which we bring to the table are the same, but the the math in many cases is the part that’s really different.

Jim: [00:28:25] So in South Bend, you’ve been brought there by, we were originally brought there by the private sector, a gentleman who really used, he’s a retired professor and really just cared about the area adjacent to where he lived. And he was kind of right a the cusp between two neighborhoods and, sort of, a typical, especially Mid-western legacy of segregation, you know, the white neighborhood and the black neighborhood, he lived kind of right on the edge of it and was like, why is it that right across the, sort of, main street here that I live next to, there are, you know, half the houses are torn down and gone. And on my side of the street, you know, largely the neighborhood’s intact. And so, when you have a neighborhood that is, you know, economically in a down cycle, you know, the first thing you have to do is start the rehab project. And so he came to one of our early training classes and began to understand that, well, rehab is where I have to start.

Jim: [00:29:19] But he originally said, well, I don’t really want to own and lease buildings. I just want to fix some things up and sell it off to somebody else and have them be able to gain wealth. But then he realized that the math problem of when you fix up a building, sometimes it doesn’t appraise for the amount that you’ve now put into it, to buy it and to fix it up. And he realized he couldn’t sell it and couldn’t finance it. You know, he had to kind of hold it for a while and lease it and try to kind of nurse it back into financial health. And this is true of both a couple of residential products and a couple of commercial buildings that he and a few partners bought. And so, the thing that was different about him and is different about the approach that we espouse, was that, while there are a lot of really difficult physical things to overcome – most of the houses in this neighborhood were over 100 years old, many of them were beset with typical issues of neighborhoods of that age where you have a lot of lead paint or other environmental things – and so, you know, these are definite headwinds to doing even rehabilitation of buildings, you know, cheap ones. Not even getting too fancy, but just enough to make it a decent place to to live. And so, I think the story there was that he began to build friends, not only people who were doing work alongside him, but folks who might want to move to that neighborhood, who might want to rent in that neighborhood, people who want to start businesses in cheap commercial spaces that have been largely left vacant.

Jim: [00:30:42] And so, when all else fails with math and with the physical rules, relationships are the thing that bind us together, that helps us overcome when we have issues with rules. And so he’s been slowly building a group of people in the neighborhood to begin to help him. He didn’t want to be the hero. I don’t want to buy up every lot in the neighborhood. And then I have to be responsible for everything that happens. He wanted to have many people share in that work and to support each other. And so, I think His name’s Mike Keane. Mike is one of the success stories, not only of getting a couple of projects off the ground, rehabbing a few things and now he’s working on, probably will be one of the first few non-subsidized, deeply-subsidized new construction buildings in the neighborhood in probably 50 years. And so, you know, but none of that work would be possible unless he’d started with picking up trash in the neighborhood and building relationships with his neighbors and buying a couple of buildings for cheap and fixing them up and finding a few people who would be in them to bring life to those buildings. That’s, that’s one of the places that we are starting to see that the compounding effects of many people like Mike, who are now working there, both in the private and nonprofit sectors.

Eve: [00:32:03] So just generally, how do you, how do you think we need to think about our cities and neighborhoods so that we build better places for everyone?

Jim: [00:32:12] Well, first of all, neighborhoods are living organisms. They’re not static things. And that’s one of the key aha moments that we have to have with government officials and particularly planning and economic development and housing department folks. They’re largely in place to disperse funds and make sure people follow the rules. We like to reframe their job descriptions as: you are stewards of resources and you’re responsible for creating a productive tax base because, you know, that’s really what our public sector has to do for us. Our public sector has to create a ability for services we want to provide as a place and we have to have a tax base for that,  we have to have a productive economy and a local productive economy, not one that’s relying on state or federal subsidies to make it’s ends meet. And so, one of the ways that we need to do that is that we have to make sure that our place is constantly evolving and it’s wherever it’s at now, there’s another place that it can go to to be either economically or socially more welcoming and more accessible. And so, the building types and the Step Building thought process is we actually have little cards we’ve built that essentially have a picture on the front and on the back explain, hey, this building is in the, this building code type and, is largely found in these kinds of zoning codes or have these kind of attributes. These buildings require sprinklers, these ones don’t. These buildings are financeable by a 30 year mortgage or they, or they’re not. And it gives people a sense also for what’s possible, right. An owner-occupied duplex is like one of the most accessible building types you can put in any neighborhood. And yet, you know, most of those types you’re going to find are buildings that are over 100 years old. We don’t have a mechanism that is widespread in this country that takes advantage of the fact that you can build a building that has someone living into it through the wall for maybe you as the owner that’s helping pay the mortgage and also allows us to have a finer-grain control over what rents are charged in a neighborhood. And, because we’re not looking, you know, you, as an owner occupant probably have a day job. And, you know, you’re using this as income or maybe as a long term retirement strategy, right. And so, you don’t need the top-level rents over time. Now, you probably need decent rents upfront, though, because our financial system, unless you’re independently wealthy and can build a duplex out of your own pocket via cash, requires certain amounts of money upfront and requires a certain amount of, of conservative cost estimating.

Eve: [00:34:57] Well, this is something that you and I need to talk about because you’ve been fixing on a 30 year mortgage. But while you’ve been building the Incremental Development Alliance, equity crowdfunding has been [indeed] gathering steam. I really believe that we’re going to see different types of financing available more readily for projects like this. And I don’t know if you’ve been thinking about that at all.

Jim: [00:35:24] Well, I think there is a fantastic role to get into a little bit of of wonkishness for folks who maybe have not, don’t have any background in how a general real estate transaction works but typically, whether you’re building a new building or an old one, you have two components, right? You have debts, right, if you are going to buy a building and finance it, you have the loan, you’re doing it from the bank and you have what we call equity, which is essentially your skin in the game that you or someone who is investing with you provide to basically have a stake in the game. And that is sort of, you know, that the bank security, that somebody has the financial wherewithal to be supporting this project.

Jim: [00:36:09] And so I think where there is a great opportunity for crowdfunding and small dollar funding in terms of aggregation, isn’t that equity piece because, you know, people typically show up and when they come to our class before they go through it and we disabuse them, this idea is that, gosh, I don’t have enough money to be a developer.Well, do you have enough plywood to become a developer and build a building? Well, what do you mean? Well, you say you don’t have enough money. Well, do you have enough plywood? Do you have enough screws? Do you have enough, you know, do you have all the things necessary upfront? No, you don’t go out and buy a truckload of plywood just to have it on hand, right. When you need plywood, you go to a lumber yard and you buy it. That’s the same way loans work. The trick is to get a loan, you need to bring money with you. And so that is the case, right? You do need to have some money, but people have money.

Jim: [00:37:07] What we lack in small development, and this is what our one day workshop, which is sort of our flagship training is focusing on, is actually teaching people A, there’s a process B, this is how the process works and C, one of the biggest things that we lack to make small scale products happen is someone who knows how to put together the “if I could, would you?” proposition, largely in writing? If I had 20 percent down of whatever cost it would take to build or to buy a building, could I get a loan at this rate at this..so much. And so, what we lack is people who actually know how to put the transaction together. We can find people who have money and it may come through one deep-pocketed investor. But it also may come through 10 or 20 neighbors pitching in, you know, five hundred or fifty or five thousand dollars a piece. Now, what’s tricky about that is this little thing called a loan guarantee. This is, this is a tip I can, listen to, leave with your listeners today. If this is the first time you’re hearing about real estate transactions and how they work and why we don’t see the things that we think you should see, one of the tricks about figuring out good ways for us to be able to use small dollar capital is this problem we have that banks want somebody on the hook if something goes wrong, just want a kind of a loan guarantee. And so somebody who has enough net worth to functionally backstop, you know, all of a sudden all your tenants not paying rent or something else going out bad financially. And so, small-dollar capital, while we might be able to amass the capital necessary, unless you are the person who has the balance sheet necessary to backstop a large loan, we need other mechanisms to be able to make that loan guarantee work.

Eve: [00:38:52] Yes, but small-dollar equity can help a developer like Mike Keen do, want a project or another. He may have the balance sheet. He just may not enough to get it going.

Jim: [00:39:01] Indeed. Yes. Absolutely. Yeah, it is, it is absolutely way more accessible to normal people with normal jobs. My wife and I, we know we have two incomes. We don’t either of us make a ton of money, you know, we just, you know, we have a regular, you know, two regular, you know, white collar jobs. But yet, you know, we would be, we would have enough, between some retirement savings that we have, we don’t have very much debt, which is important, especially for qualifying for a 30 year mortgage out the backside is having a low amount of debt and we don’t really have any but the house we own. And so, you know, that’s enough to get a fourplex going, you know? So for most of these buildings you would finance for a 30 year mortgage, you don’t need really that much and there are people you can find who have it if you don’t. And you can just pay for that purpose as well.

Jim: [00:39:52] We’re also finding if you, if you’re working in a neighborhood that is maybe disinvested, though, that’s one of the great places that we’re working to try to get local governments, foundations and institutions, whether they’re hospitals, universities or corporations who are civically minded, to be a part of that because if, and we’re working on a project in Memphis that is sort of structured this way, we’re essentially creating a consortium, kind of an umbrella for, as sort of a master developer who sort of say, hey, you know what, we’re gonna create an ecosystem by which many small developers, of which we’ve trained through the Alliance, can actually have the backstop where they don’t need to go get, you know, a huge loan guarantee, right, where, there’s going to be capital and we’re going to be able to know that when we’re going to build five or 10 or 20 buildings at a small area, because there’s a bunch of empty lots and they’re controlled by property owners, we can use one at a time, help each other build up the value in those buildings so that they do regain their value. The first one’s going to be difficult to get the right appraisal for. The second one, less difficult. The third one less. And hopefully by the fourth or fifth or sixth that are all on the same block or nearby to each other, we overcome some of those structural problems that we have in disinvested neighborhoods.

Jim: [00:41:09] And so, I think the biggest thing that we stress when we come to a place and we talk to people in both public, private and then sometimes nonprofit sectors, is that you’re all gonna have to come to the table and think a little bit differently, right. We can band together as neighborhoods and as neighbors and put together enough capital to have the downpayment to buy that house on the corner that Miss Mary used to live in but, you know, she passed and the house got boarded up because people were breaking into it and now it’s sitting vacant but what a great house that was. But, there’s a couple of things we have to overcome and so, being able to have a have a community dialogue about how do we help a bank make a loan in a neighborhood it’s supposed to be making a loan in anyways, but banks are regulated. We have to make sure that banks can check their boxes, too. Well, how do we do that? So community resources being able to bring together different aspects. Governments don’t want to be responsible for buildings, right. But they can provide balance sheets. They can provide downpayment assistance. They can provide facade grants. So if everybody comes together and understands the process, they can figure out how to work it out.

Eve: [00:42:20] Yeah, they could provide relationships with banks and banks to the table. They could provide a lot of things. This has been really fascinating but I want to ask you one wrap-up question before we finish for today. Or actually two, I have to say, and that’s what’s next for you and what’s next for the Alliance?

Jim: [00:42:37] Well, two things. Myself, personally, my wife and I have a small development company called Heirloom Properties. So, we have been evaluating both opportunities we have on our own lot, we have a single family house on a lot that at one point in time, in the past before we bought it, had a garage on it. And so as rules in Minneapolis have changed over the past couple of years, you know, we were looking into an accessory dwelling unit, a backyard cottage. And then, and now with the new rules we’re contemplating, hey, why just stop with a backyard college? Why not a backyard duplex? And so we started thinking about that. But in the meantime, as that happened, we were saving some money up to work on a project like that. There was another vacant lot in our neighborhood that we are pursuing to build a small multiplex. And so, my wife works in affordable housing and so she does project management for big projects. But even, even affordable housing these days is not what it used to be. And so she’s spending a lot of her time trying to figure out how to provide housing for folks who are not at the lowest of low income levels, because at this point, most of our federal and state subsidies are going toward the lowest of low income levels. And that’s great. And that’s desperately needed. But the challenge is, is that’s not enough to house the rest of the folks need to house. And so both her projects at her day job, they’re a bit larger, maybe 60, 70, 80 unit buildings and then some of the products that we’re looking at that are 2 or 6 or 12 units that we’re looking at personally in our in our neighborhood are kind of getting at that in-between scale that we luckily now, as a city, have come to a conclusion that we’re actually going to allow again, we’re actually going to make sure that it’s possible to put more than a single family house on, you know, 60 or 70 percent of the land in our city that was previously allowed to only have one unit on it.

Jim: [00:44:31] So we’re seeing in the last five years that the Alliance has been around, we’re seeing places start to get some of those pieces of the puzzle right. And we’re happy to have been a part both politically as well as from a technical perspective of some of those changes here in Minneapolis. But the work is is large. There are a lot of lot of places that need both cultural and technical changes to the way that they look at real estate, especially at the small scale of buildings, and so the Alliance is kind of doing a couple of things moving forward. We are expanding our services to support governments and non-profits and institutions, many of which have neighborhoods directly, either target neighborhoods if they’re a city or if they are an institution where they have a neighborhood adjacent to the place that they maybe have their campus or facilities. And so, largely those places are trying to help jumpstart a real estate process and/or if you’re, if they’re in a hotter market, provide housing. If you’re a hospital and you employ a massive cross-section of humanity in terms of income levels and household sizes and you’re trying to make sure your workforce is nearby and doesn’t have to commute an hour one way, there’s probably a lack of housing of some type. And so we’re trying to help those places create or recreate a viable housing market in the neighborhood. We’re also helping to make sure that there are neighborhood services. So just because you have housing doesn’t mean you have all the services you need that make it desirable to live there. And so, we’re doing mixed use buildings, especially older ones that you can rehab, which is its own sort of trick in itself. How do you help those pieces come together and in assisting in that way? So, sort of, master developers as well as we continue to expand our services both electronically as well as in person to help cities get their rules right and get their processes to re-legalize, in many cases, the developments they already have, the neighborhoods they already have which have 30 and 40 and 50 foot wide lots and small buildings that don’t quite conform to the rules that were created after those buildings were built. And so we’re unwinding a lot of things, but we’re also starting to create really fun new things. And one of the projects that we’re gonna be working on here this Spring, especially as we have a little downtime, as many of our in-person events have been postponed, is working on getting some of these technical tools to all line up, to have the right financing tool box, to have the right building and zoning recommendations and policies, to be able to use the tool Step Buildings to help people envision the kinds of buildings they want, not just the buildings that someone has figured out maybe they can make some money at doing and we’ll just keep doing it over and over and over. But to say, hey, you know, we want these kind of buildings in our neighborhood. How do we make those happen, and how do we join together as neighbors to maybe do it ourselves if no-one’s going to come for us to do it? And that’s largely the case. No one’s coming to your neighborhood to do the real estate development you want to see, most likely. If they were, they’d be there already. And so we’re trying to help democratize the information so that people can use their relationships and create the local systems to encourage the kind of things and to make them happen, actually just to make them happen. You know, we’re here. We can run around the country and as an organization and just train people all day or give them advice. That’s not what we’re here to do. Our goal is really here to actually help people learn the skills, but to use those skills to actually make the buildings happen, to rehab them, to make, to build them new. That’s that’s what we’re here to do. We’re not here just to talk about this. We got plenty of advocacy and policy organizations. And so we hope that those of you who may be listening to this hearing about us for the first time. If you’re waiting for someone to come, that person you’re waiting for might be you and your neighbor. And so, think about what your role could be as a small developer and even if that’s not your role, we need champions for many of the changes we need to re-legalize our places, to make them vibrant, to make them, and especially in the wake of our current crisis, ant-fragile. To be able to grow in strength through adversity, not just survive. So we think small-scale development is probably the way forward, once we get over the near-term humanitarian crisis of warding off a virus. We’re still going to have the very same housing challenges, the very same economic challenges that we did six weeks ago. And so how do we deal with that as a country and as our neighborhoods?

Eve: [00:49:11] Well, this has been really, really fabulous. And I think that in the next five years, we’re going to see a whole lot more incremental developments. So thank you very much for your time. and I’m sure we’re gonna be talking again.

Jim: [00:49:22] Appreciate the opportunity, Eve. Thank you so much.

Eve: [00:49:27] Bye.

Eve: [00:49:27] That was Jim Kumon who leads the Incremental Development Alliance. The alliance is focused on helping locals strengthen their neighborhoods through small-scale real estate projects. They provide training and technical assistance to anyone interested in tackling projects that you are probably all familiar with. Housing, retail and mixed uses projects on main streets and in neighborhoods. Projects typically range from one to 20 units. These were once everyday development exercises, but have been pushed aside in favor of larger, more efficient projects of scale. Today, it’s a challenge navigating zoning codes and financial institutions to get projects like this built. And that’s what the alliance focuses on.

Eve: [00:50:34] You can find out more about impact real estate investing and access the show notes for today’s episode at my website rethinkrealestateforgood.co. 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.

Eve: [00:50:51] Thank you so much for spending your time with me today. And thank you, Jim, for sharing your thoughts. We’ll talk again soon. But for now, this is Eve Picker signing off to go make some change.