Developer calls for finance reform

Underwriting and financial criteria must be changed, and permitting must be expedited, to enable new urbanist developments to compete with suburban sprawl, according to the developer of Abacoa Town Center. All’s well that ends well, but developer George de Guardiola has followed a rocky path on the way to building his first new urbanist project. De Guardiola was with Corepoint Corporation, which hired new urbanists Duany Plater-Zyberk & Company (DPZ) in 1989 to design the 1,500-acre Town of Wellington, which was never built (Corepoint’s lender failed in 1993). Two years later, de Guardiola and the MacArthur Foundation hired DPZ, Calthorpe Associates, and Moule & Polyzoides to master plan the 2,100-acre Abacoa in Jupiter, Florida. The project broke ground in 1996. Subsequently, de Guardiola sold his share of the larger project and purchased the rights to develop Abacoa’s $80-million town center, which opened in November 2000. “That $80 million did not come easy,” says de Guardiola. “I’ve lost count of all of the Walgreens and Eckerd drugstores developed on most major intersections in Palm Beach County while I was trying to finish Abacoa Town Center.” The town center includes 412 apartments, 47,000 square feet of office space, and 92,000 square feet of retail in the first phase, which is 90 percent leased. Phase II includes a 16-screen cinema and four-level parking garage under construction, and a future hotel. The town center is flanked by a campus of Florida Atlantic University and a spring training baseball stadium. Although he calls Abacoa Town Center a “great success,” it would have been more successful if the permitting and financing processes had been faster, de Guardiola says. “Nothing influences real estate more than time use of money,” he says. “If we took one year [to obtain permits] instead of two, this would have been widely successful rather than just successful.” Abacoa has an internal rate of return (IRR) in the “high teens,” de Guardiola explains. With faster approval, that IRR would be in the “low 20s — at that level it would be a very attractive project to the lenders and institutional investors that do not normally look at such a project.” The goal of the development industry is “to make as much money as they can, as fast as they can,” says de Guardiola. He adds that “the majority of developers I know love the New Urbanism concept. The questions I’m always asked are how much money does it make and how fast.” The first question can be answered conclusively, he says — the New Urbanism (NU) does generate solid returns — but the second question is more difficult, due to a lack of lending mechanisms and the slow approval process for NU. Conventional developers “have familiar sources of capital, tried and true methods of real estate, and they make deals all day long,” de Guardiola says. By contrast, NU has only “great speakers and great plans,” he adds. There are two major problems with NU financing, he explains. Underwriting criteria “simply doesn’t recognize mixed-use projects,” he says. One problem is with mixed-use buildings. The value of the second use is usually heavily discounted, he says. Another issue is shared parking, which the underwriters don’t recognize, he explains. “It’s very difficult to meet the parking requirements based on straight line single use.” New urbanist projects “also don’t meet the financial criteria. There is no desire among the investment community to purchase the projects once they are built, which is like a double whammy to the project.” These investors only look at specific categories, such as office, industrial, retail, or residential. “Not one institutional investor has mixed use on their radar screen as a product they would like in their portfolio,” he says. “It is infinitely easier to to finance and sell an office park, a strip center, a power center than the most exquisitely designed town center and mixed-use project that I know of,” de Guardiola concludes. He urges NU leaders to lobby the leaders of financial institutions to create and substantially fund programs to finance NU and smart growth projects. Second, institutional investors like major universities, insurance companies, and state pension funds must be convinced to invest in built new urbanist developments, de Guardiola says. “If they had a desire to purchase these projects once they were built, they would be built,” he contends. In addition to finance reform, the other major barrier to building New Urbanism is permitting. New urbanist leaders should “go to the communities that want this kind of growth and get them to enact a streamlined approval process,” he says. Finally, NU spokespeople need to laud the financial benefits of their projects, de Guardiola says. “The colossal irony in all of this is that these projects indeed make financial sense. As with any real estate project, they must have the basic marketing bases covered and their development uses need to be in line with market demand. Having accomplished this, the investors in these projects can expect the same or better IRR than their single-use counterparts.” De Guardiola spoke in Atlanta at “The New Urbanism for the New Economy” conference sponsored by the National Town Builders Association. Some comments in this article were made during a subsequent telephone interview.