Are local cities making it difficult to invest in build-to-rent communities?

arizona build-to-rent market research market updates real estate market Jan 02, 2022

As build-to-rent communities are popping up across the country as a popular investment vehicle, a lot of local cities are dragging their feet and throwing wrenches into new construction rental communities. This doesn't necessarily mean that cities are against multifamily. Most cities need it. Local residents however are typically the ones opposing projects and requiring a unique approach. In this episode, our hosts discuss hurdles they've faced in Arizona as they get a few build-to-rent projects off the ground.

Hurdles We've Run Into Developing Rental Communities

The funny thing is that built to rent phenomenon is responding to the massive need for housing in America. And unfortunately, at a time when we have this tremendous need for housing in America, these idiot cities seem to be going the other way and making it more, more and more difficult.  

So we are going to have a gripe session about the city of Phoenix, Arizona today. That is the purpose of the show. I think people at least like seeing the struggle that we've been having, but also understanding it's not unique to Phoenix. These principles apply to a lot of metros.

Before I get into the specifics of the issue, as a matter of context, you know, Phoenix is a huge city. It employs a lot of people and in the Coronavirus pandemic we have to deal with a lot of these governments taking it very seriously.

And they've got a lot of these mask requirements and you can only go into the office for so many hours. Some people are still working exclusively from home and no matter how you slice it, this equates to it's a lot harder to get things done with a city, especially a big city that was already bottlenecked with a lot of things. 

And you compound that with the fact that there are now record developments happening. People trying to push things through the city. It was already difficult. And now this, you know, they just make it difficult. Okay. So, I don't know who, if you guys want to draw straws or do live rock paper scissors, but what's the obstacle we've run into. 

This is a fourplex project in Phoenix. What's the nature of the problem we've just run into and what have we been? What have we been doing about it? 

Sherida Zenger: So typically we have our project set up as a PUD, a planned unit development. So you're owning a duplex or triplex or fourplex, and you're actually owning the ground below you. 

You have one tax ID number for however many doors you have. Now we're being told, "Hey, this project actually is going to have to go as a condo." 

So what that means is it's going to be individually tax ID per unit, but you don't own the ground below you. You own a percentage of the total ground for the whole project as in the HOA as well. 

So a little bit different, but we're what we're running into is because all of our projects are rental communities, right? So you're not able to have Fannie and Freddie financing. So that then that pushes us into the bucket of a year. You have to be cash or you have to be a commercial loan. This is doable, but on the resell end of it, it's going to make it a little more difficult. 

So maybe we can just talk about that a little bit more and then get into what that means on the flip side of it, for our investors in this specific project.  

Steve Olson: Well, and then we don't necessarily fully know yet what it does mean. We're still figuring that out. It's the uncertainty of the development world. 

In this case, the city of Phoenix gave indications to our development team, "Yeah. You can do fourplexes". Then we get to the final approvals and "well now you can't." 

And by the way, that's a screw-up on our end. Right. Our team should have definitely done the due diligence on a known beforehand. They may disagree. Maybe it was impossible to know this. I don't, we don't know, but we are where we are and you frequently end up there in the development role world. Don't you. Something comes out and now, now the facts have changed and you have to problem-solve. That's why I get paid in real estate as you solve problems. 

So now the designated zoning C3 within the city of Phoenix allows for a condo. And chase and I were talking earlier, he's like, well, you got to find out why they're wanting to do that. And I was saying, it doesn't matter. It's what the zoning says. And they allow for, I mean, they could allow for a zebra farm in the zoning, we don't know. 

Right. They created what they created. 

Sherida Zenger: We also said, we could wait and go back to the city and maybe take another year and get this zoned as a PUD and do our townhomes. Like we normally. But at this time, we're not wanting to do that. We don't, we want to get this project out the door. So we're just kind of dealing with the blow, doing the best that we can put the right people in place. 

But that is another option. But we also could say, Hey, let's go and wait another year and try to figure this out. And they could come back and say, actually, we just want it as a condo. It's a condo. That's what we're doing. That's how you're going to have to do it. So we're kind of just dealing with the blow and making the most of it.

Watch the rest of the episode here:

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