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Filling In: 19-23 Berlin St.

July 14th, 2013

The following is a guest post submitted by Matthew Denker.
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Welcome back dear readers. Today we’re going to try something a little different at Filling In. Let’s actually walk through a lightweight proposal in response to the city’s RFP for 19 and 21-23 Berlin St (due by 4pm this Friday, 7/19). Just as a disclaimer; I do not intend to submit this proposal. Additionally, you are welcome to take it and submit it, but I am not to be held liable for any damages should you do so.

Ok, so, let’s kick this off right. First, show of hands who could find Berlin St. on a map? Anyone? Oh well, as always, Google has us covered. Above is a close up of the exact site.

For reference, it’s 70ft along Berlin St. and 100ft deep.

Before we talk design, let’s spend a moment thinking about the financials of the site. The city would like a grand total of $1,140 for it (yes, you’re reading that correctly). What a steal. Unfortunately, the zoning is an unfavorable R-1, but let’s imagine we could work with the city to get it up-zoned to R-2. This doesn’t gain us any FAR (.5, if you were curious), but it does let us build 4 units here, instead of 2 or 3. We also have, any bonuses not withstanding, about 3500 square feet to work with. For the sake of this proposal, let’s commit to 4 apartments between 700 and 850 square feet. Let’s also make them 2 bedroom units (we’ll circle back to this later). Based on prevailing local rents, we should be able to make anywhere from 500-750 a month on these apartments. These will be brand new, and I am, admittedly, a firm believer in the city’s section 8 program, so that might also be the route to go to get paying tenants. For the sake of this proposal, let’s fix the income on this housing somewhere in the middle at $650 a month. This sets our income each year at $31,500. Time to retire early!

Oh yeah, we’re probably going to have expenses, huh? The basic list of expenses for a property like this is:

Property taxes
Management
Maintenance
Insurance
Refuse
Utilities
Vacancy

So what do each of these items look like? Well, the house next door (29 Berlin St.) paid $1,711 in taxes last year. Let us assume our taxes are four times that (so $6,844)*. Management is 10% of gross rents ($3,150). Maintenance on a brand new building is acceptable to peg at 5% of gross rents ($1,575). Insurance is about $750 a unit ($3,000). Refuse will be about $1,500. For utilities, we will have each of the units metered separately, but water is almost always included with an apartment. That comes to about $250 a year per unit ($1,000). Finally, it is good practice to include a 5% vacancy allowance as part of your budget ($1,575). Phew! So what did that $31,500 cost us? $18,644. Ok, not bad. So we walk away with $12,856. That’s not bad at all. Let’s do this!

Hey, wait a second. You don’t have the cash to fund this venture on your own? Well I don’t have it, so I thought you had it. Crap. Ok, so we’re not out to get rich being slumlords, right? So let’s see what our budget is to break even. We can basically afford $1,050 a month in financing costs and still break even. At a 4.5% interest rate, we can borrow $205,000. The bank is going to want 20% too, so we need to come up with $51,250 (in addition to the $1,140 we needed for Rochester). Even so, it gives us a budget of $80,000 a unit. This is surprisingly reasonable, and I am positive we can break even. Let’s think about doing even better, though.

To get specific about this site, I propose that we pour a slab, and drop a North American Housing Loudon Prefab multi-family home on it. Here it is (above) in an idyllic suburban setting. And this is what it looks like on the inside…

Now before anyone gets all nit-picky, it has blank sidewalls. This is not ideal for this site, and I believe we should spend a little bit of money to customize it with a porch that opens to the bedroom on the first, and possibly the second floor, as well as windows facing Berlin St. Either way, this will do. It will likely cost about $220,000 all in for this unit. Our plan for the site might look a little like this…

This gives us 2 parking spaces per unit, a porch for one of the 3 units, and a playground area for the kids. We could also consider a porch for the rear first-floor unit. Then, a little bit of landscaping tops it all off, and we’re golden. The front door/lobby faces the parking lot. All 3 sides would receive picket fence.

Because we’ve gone prefab, the paperwork and the construction phases can basically happen simultaneously. That would give us a timeline of about 15 months. Move-ins would be expected next fall. Financing can happen one of two ways. A convertible construction loan might be the way to go, or NAH may have nice financing options for their units as well.

So to wrap this up, let’s do a quick recap of everything we’ve covered. First, we are going to buy a property in cash from the city of Rochester for $1,140. Then we’re going to build four apartments on it for $220,000. We’ll need $44,000 of that in cash too, so we’re out a total of $45,140. For our labors (investment), we’ll earn $31,500 a year. From this, we will pay $18,644 in operational costs. We will also pay “the bank” $10,704 a year. When all is said and done, we will put $2,152 in our pockets. While there are theoretically taxes on this income, there will assuredly be enough depreciation from the property that we won’t pay them. This makes our ultimate ROI right around 5%. Not bad for a hard day’s (paper)work.

* It is quite possible we could work with Rochester to get some kind of tax break on this. Many investors would actually balk at the ROI here, as real estate is really risky. This is why the city offers tax breaks for development in the first place. Even a 50% break in taxes takes our ROI to 11%. That’s notably juicier.

Addendum:
The RFP:
http://www.cityofrochester.gov/realestate

The building:
http://www.northamericanhousing.com/OurHomes/ModelDetails.aspx?mid=7607

• • •

About Matthew Denker:

Matthew Denker is a Project Director by day and a fantasy real estate tycoon by night. He has a deep interest in Rochester, NY, as well as the subjects of new urbanism, walkability, mass transit, and land use. Going forward he hopes to combine all of those things to make Rochester a city competitive not only with other small, successful cities, such as Portland and Minneapolis, but even better by leveraging its easy access to the world-class cities of Toronto and New York.

Tags: Berlin Street, City of Rochester, Filling In, Matthew Denker, Rochester, Rochester NY, vacant lot

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9 Responses to “Filling In: 19-23 Berlin St.”

Michael says:

July 15, 2013 at 12:27 pm

Interesting concept. Are there other lots? List of potential properties perhaps? Which agency deals with zoning, rather than multifamily dwelling thinking zero lot line division or live work opportunities.

Interested if I can get a builder on board as partner.
Jason Haremza says:

July 15, 2013 at 1:24 pm

Sometimes I hate my job. Here’s the cold heartless bureaucratic response:

Even assuming you could get the parcels rezoned to R-2, which is unlikely since it would be considered “spot zoning” since there is no R-2 district immediately adjacent, multifamily dwellings are only allowed by Special Permit in R-2.

Fine, not a big deal. However, the zoning code states that each unit needs 3000 sf of lot area, so for 4 units you need a lot size of 12,000 sf. You only have 7,000. So that kicks you out of the Special Permit process and into the Use Variance process. A Use Variance is difficult to get. You would need to show economic hardship. As the new owner, you have no economic hardship since you just created the situation you are in.

Technically, the zoning code does not use floor area ratio (FAR). The code uses the lot coverage calculation, which is not the same thing. FAR adds up the square footage of all the floors in the building. Lot coverage just considers the area occupied by the building footprint. Also, be aware that the code distinguishes between “building coverage” (35% of the lot) and “lot coverage” (50% of the lot).

I’m not familiar with pre-fab modular construction, but $62-80 per sf for construction costs sounds low to me.

You would have to get an agreement to use the adjacent parking lot, which belongs to the credit union on Joseph Avenue. Otherwise, parking needs to be accommodated on site.

The zoning code would not allow the blank end wall of the building to face the public street.

A much easier project would be this:
See if the numbers pencil out for two small, detached, single family homes, one on each lot. They can be pre-fab and modular. Maybe even Katrina cottages. In fact, I’m curious to see if pre-fab construction lowers costs enough to make the numbers work in more cases.

Or, rezone to C-1 (which is adjacent), and propose a mixed use structure (say, 4 residential units and a a leasable office space), which is allowed as-of-right in C-1. Also, C-1 has the advantage of not having lot coverage requirements.
Matthew Denker says:

July 15, 2013 at 2:06 pm

Jason! This is excellent feedback. I will be sure to incorporate such planning in the next article like this (assuming people care about this sort of technical look at a property to justify another one).

Based on what I have seen of modular single family homes, it would not work out monetarily. They are generally more expensive psf than modular multifamily (economies of scale, I suspect). I have not seen single families for enough less than $100 psf to really make it work. Worse, the rent/sales amounts on this would not scale compared to smaller units in a multifamily building (I could not rent a house out, even twice as large, for twice the 2 BR rate).

The rezone to C-1 might be spectacular. Especially if community space would count as the “office” requirement. Even if it didn’t, roughed out office space sitting empty would still keep the entire project turning a profit with 4+ units instead of 2 single family homes.

I reckoned that it could not be a blank wall, and the units would be customized accordingly. As for parking, would 2 spaces per unit, as in my plan, not be enough?
Jason Haremza says:

July 15, 2013 at 5:32 pm

Community space may or may not count as office space. But even a small, 200 sf office for a tax preparer (for example) or something similar, that is separately leasable, would make the building technically “mixed use” and therefore permissible in C-1.

Looking at the context though, the ideal situation would be to convince the credit union to do a land swap so that the mixed use building could be built on the rather large surface parking lot and fill in the gap along Joseph Avenue (arguably the more important streetscape), while replacement parking would be constructed on the Berlin Street properties. I realize, however, that this would complicate the project.

I’m very curious about the possibilities for pre-fab construction. Do you know of any good pre-fab building examples in Upstate New York? Other than the typical “manufactured home” developments which is not really what the city would want to see.

As for parking, you need 1.2 spaces for each two-bedroom unit, so for four two-bedroom units, you need 5 parking spaces (4.8).
Matthew Denker says:

July 15, 2013 at 6:03 pm

Jason, This would actually allow the volume of parking to be slashed significantly, even for a much larger project. Affecting a land swap would, indeed, be more difficult, but might ultimately be worth researching.

I do not, off the top of my head, know of any pre-fab developments in upstate. I shall do some research and get back to you. I would definitely not want to develop the kind of manufactured home development of which you mention. There are a variety of pre-fab townhouse designs out there that would suit even a large site fronting Joseph much better than any trailer park type situation.

Note that I’m not in a position to bid on this property at the moment, but I definitely watch these RFP sales closely and am hoping to eventually be able to get involved.

Jumping back to prefab, I really like these guys: http://www.bonestructure.ca/en/index.php and would love to start a relationship with them for just this purpose. Unfortunately, they’re only in Canada, and they also seem to lack a solid set of multi-family designs at the moment. The large scale prefab work being done here in NYC is too custom at the moment. It’s barely one step removed from rail car construction, and it doesn’t need to be terribly cheap to compete with traditional construction.

Ikea’s prefab home is pretty neat too, but might stray too close to the manufactured homes you reference as being troublesome. They’re also expensive. I priced out purchasing the pair of lots off Goodman just south of 490 that have been on the market forever and constructing 3 of them, but it was a seriously losing proposition.
Jason Haremza says:

July 15, 2013 at 6:46 pm

Have you explored the Katrina cottages at all? I’ve heard they are (or used to be) like $40k at Home Depot and/or Lowe’s?

I would love to find a low cost, pre-fab, “urban cottage” format that looks good and makes sense for city building lot sites. After all, many of Rochester’s historic cottages are in the 800 sf range. I know many Rochesterians will wail and gnash their teeth and say “the market” doesn’t want such small units. But has anyone ever tried? Not everyone needs or wants a 1200 sf 2 bedroom unit.
Matthew Denker says:

July 15, 2013 at 10:21 pm

Jason! Thank you for the hot tip. I started doing some preliminary research this evening. It looks like Lowe’s dropped the kits back in 2011. Plans from Marianne Cusato, the woman who designed the Katrina Cottages initially, are available. Unfortunately, her website recommends estimating construction costs at ~$115/sqft. This seems challenging to say the least. I’m curious if it might not be somewhat cheaper in Rochester based on the prevailing market. It would be interesting to take a lot such as the one by Gleason Works, pave a new road down the middle, and subdivide it into a dozen small lots with small cottages on it. It could be a condo association. I would need to reach out to some contractors to see what construction would really look like. I’m worried about financing, though. I suspect it would be in short supply. This might make for an interesting filling in in the future, though. I’ll be thinking about it all week.
Matthew Denker says:

July 15, 2013 at 10:47 pm

Forgive me for digressing a second, but I have completely fallen down the rabbit hole on this Katrina cottage stuff, and forgive me, but there is some truly disheartening crap going on here. Ok, so the Katrina Cottage concept is sound and totally laudable. But this woman, Marianne Cusato, has gone on to design what is called “The Home for the New Economy.” It has a whole bunch of high praise about living within means, efficient, etc etc. Any of the buzzwords one might expect to read about a house. Except then, anyone with half a brain can start reading the numbers, and there goes the neighborhood.

1.) It’s 1771 square feet. So this is a home for the same old economy, then? This is still 10% larger than the average American home in 1973. Am I to believe that this was somehow insufficient then?

2.) It’s still nearly $100/sqft. That’s insane. I can buy older homes for far less than that still. New, safe, clean construction should be more affordable than that.

3.) The first one(s) are being built as part of “Warwick Grove.” This is where I really lose it. This is advertised as “crafting a new village.” But it’s 56 miles from New York City in a town that no longer has a train (although certainly used to). This “new village” is built more than a half mile away from the historic part of the village on your average suburban meandering road setup instead of a street grid. What is wrong with everyone? Is this the contractor echo chamber of success? Is this the revolution we’re waiting for? I’m glad I’m not holding my breath. There might as well be a Costco with this. Then they could call it CityGate and it’d clearly be the gateway to NYC [sic]. Argh!

Oh yeah, links:
http://www.builderconcepthome2010.com/concepttoreality.php
http://www.warwick-grove.com
https://maps.google.com/?ll=41.257678,-74.351006&spn=0.016163,0.033345&t=h&z=15
Jason Haremza says:

July 16, 2013 at 10:08 am

I would love to see a construction cost comparison, per square foot, of some decent pre-fab homes, standard stick built home (using Rochester area construction costs), and rehabbing old homes/structures. $100/sf sounds fairly reasonable, since my understanding is that’s what typical costs are for an unfinished garage. But I’d like to utilize the economies of scale available with pre-fab and see how low it can go.

We got lots of vacant land in Rochester, why can’t there be little bungalow courts with decent pre-fab homes. I’d even support slabs instead of basements as long as the houses had a storage room for all the crap that typically goes in your basement. I’m assuming slabs are cheaper than basement excavation.

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