Using multifamily housing to attract financing

To ease financing, developers of TNDs need to reduce the risk premium for the lenders who make the initial loans for land acquisition, development, and construction (ADC). One way to do that is to get a developer/owner of multifamily housing involved in the TND from the beginning, says Todd Zimmerman of the market research and development consulting firm Zimmerman/Volk Associates. “Where the market allows, you can sell a piece early to a multifamily player, so that you are offsetting the up-front infrastructure cost and giving your ADC lender the comfort that there is an exit strategy for at least one parcel,” Zimmerman says. In conventional master planned communities, even those with a mix of uses, lenders know that various types of builders will buy a specific, single-use portion (also known as a pod). In TNDs, says Zimmerman, “land uses are typically more complex. It’s rare that you are able to move a single-product parcel to an individual builder. The exception is a block, or a couple of blocks, of multifamily housing.” Multifamily housing developers/owners are attractive to lenders because they by nature are large balance sheet companies. The development may also benefit in other ways. Zimmerman estimates that rental apartments are usually absorbed ten times faster than ownership housing, and that gives the TND a chance to establish a resident population rapidly. Since apartments are typically smaller, residents tend to spend more time in the public realm than homeowners, making a tighter social fabric possible. The best multifamily developers now add small retail elements to apartment complexes as a matter of course, Zimmerman says, and the TND can thus get its retail started with some of the risk pushed on to another player. A TND developer may also dispel some prospective home buyers’ skepticism about living next to rental units if he has a well-built model in the neighborhood from early on. Zimmerman’s strategy is not for all TNDs. “This is obviously predicated on the fact that multifamily is feasible in the location,” he says. Zimmerman suggests that, where the market allows, single family, townhouse, and apartment construction proceed at the same time, ideally around a square or green in the project’s first phase. With four different housing types in one location you can create a focal point where future residents can get an idea of what is to come, and it can be done without building a lot of infrastructure, Zimmerman says. “As the market responds, you build in all the four directions from the green.”