Urban Planning Thoughts

A Perfect Day in Millvale, PA

183:822456250 (Tom Hardy) — Sun, 02 Jan 2022 20:53:09 GMT

Thanks to all of the people that make our favorite places special!

The past two years of quarantines and travel restrictions kept many of us tethered to our homes, imagining a day we could travel more freely again. That’s created a sense of wanderlust but also an appreciation for places closer to home. How would you spend a perfect day in a community near your own home? I’m sharing my answer to that question below in the hopes that you’ll reflect on yours.

As we start 2022, I appreciate how much we benefit from the unseen symphony of people that work every day to keep our communities functioning. Our communities and neighborhoods are more than the mere backdrop for our lives, they inspire us through their creativity and resilience.

Millvale, PA is a town of about 3,600 people along the Allegheny River just across the border from Pittsburgh. The town’s roots date back to 1868 as Millvale Borough was formed from portions of Shaler Township and Duquesne Borough. The name derives from the predominant industry at the time of its founding and its location in a valley, and the town occupies less than one square mile.

There is nothing like an existential crisis to rally neighbors together to save their town and chart a vision for the future. The crisis came to Millvale in 2004 in the form of Hurricane Ivan that put much of the town’s low lying business district and surrounding areas under water.

Millvale rallied in the face of devastation—so much so that when you visit today the events of 2004 might seem like a mere footnote to its 150+ year history. But that would overlook the countless hours that community members committed to rebuilding. After the literal and figurative bailing water was completed, volunteer efforts focused on building a Millvale Community Library as a “powerhouse of local involvement” and now a central piece of Millvale’s EcoDistrict planning efforts.

Millvale’s EcoDistrict planning focuses on three key issue areas: food, water, and energy. This focus came out of an extensive community planning process facilitated by the talented team at evolveEA . The true test of a community plan is not the resulting document—but what the implementation looks like in the subsequent years. And the results in Millvale are impressive and true to the goals of the original planning work.

Why did community planning in Millvale succeed when efforts in other communities fail to generate the desired results? The answers are more complex than can be provided in a single blog. But if I had to summarize in two words — alignment and perseverance. Residents, business owners, elected officials, and non-profit leadership are all in alignment around the plan. Not only are they in alignment regarding the plan — each entity takes a specific piece of the implementation work. It’s amazing what can happen when stakeholders are focused on the desired results and not on who gets credit.

Perseverance is critical because positive community change takes time. It’s the long game. Millvale has benefitted from a continuity of leadership, both elected and unelected, for nearly a decade after the original planning work began. They’ve stayed at it. And the direction hasn’t change. I’ve been fortunate to work with great people that make up Millvale’s Community Development Corporation, Borough council and staff, and New Sun Rising to name just a few of the key entities. And much of the power behind this comes from an inspiring group of volunteers committed to bettering their community.

Before I detail my day in Millvale I start with an apology. I can’t possibly outline all of Millvale’s unique spots and people in a single blog. What follows just represents a narrow sample and is not meant as a definitive itinerary. The best way to experience a place relies more on serendipity than an agenda.

The Ride – 8:00 AM

Millvale is about a ten minute drive from Downtown Pittsburgh, but the best way get there is via two wheels on the Allegheny Riverfront Trail. For me, the ride starts in the Northside where I can drop down to the trail by PNC Park and enjoy a scenic 4-mile ride up the Allegheny River terminating at Millvale Riverfront Park. The trail is well utilized and is a place where you’ll see a diverse range of people exercising.

The investment in a riverfront trail may seem obvious now, but in the late 1990’s when the region was still hemorrhaging population many people were cynical that this was a wise use of public resources. Much credit goes to then Pittsburgh Mayor Tom Murphy for a simple yet steadfast vision of turning miles of industrial riverfront into an amenity that could be accessed by all. Now the headlines of Pittsburgh’s regeneration are dominated by the expansion of tech and life science companies fueled by our research institutions—but without the early strategic investments in quality of life and place making I’m not sure Pittsburgh’s economy diversifies the way that it has over the last decade.

Jean-Marc Chatellier’s French Bakery — 8:45 AM

The best way to start off a busy day in Millvale is a stop at Jean Marc —a French bakery that draws folks from the entire region. It’s hard to beat the simplicity of a fresh buttery croissant. I’ll grab some macaroons for later. And his cakes are legendary. I’m not going to carry a cake around with me all day, but when the next birthday celebration requires one I’ll be back.

Girty’s Woods — 9:00 AM

A group of local Millvale stakeholders mounted a grassroots campaign with the assistance of the Allegheny Land Trust (ALT) to purchase and preserve 155 acres known as Girty’s Woods. Today we are going on a guided hike led by the ALT. The terrain is rugged but beautiful. Previously inhabited only by logging companies and folks on their ATVs, the remnants of these uses are readily visible. Preserving this area from development not only provides recreational opportunities—it helps manage the storm water that originates from communities up the hill from Millvale.

Tupelo Honey Teas — 10:30 AM

The perfect place for a tea shop is, of course, connected to a library. Danielle opened this retail location for Tupelo Honey Teas in 2016 and her passion for tea and community comes through everything she does. She blends and packages her teas on site and in full view of of customers enjoying a leisurely morning in this comfortable store. It’s the perfect setting to watch the choreography of customers and staff. And a great place to pick up some gifts for the tea lover in your life.

Esther’s Hobby Shop — 11:15 AM

We all have favorite stores that you can’t find anywhere else. Esther’s Hobby Shop is one of those places. Walking in here is like walking back into my childhood. The era before electronic games when you bought a model car or train to assemble. These are all here at Esther’s. And my personal favorite—model rockets! The best part is these are exactly the same as when I was young. I feel like I haven’t aged at all in here! Time to grab a starter rocket kit for my son--he’ll like it as much as I do, right?

Duncan Street Sandwich Shop — Noon

Who doesn’t love a good sandwich? And Duncan Street Sandwich Shop has the best sandwiches in Pittsburgh. That’s not a claim I make lightly. Kendyl and Dan make everything make everything here from scratch. EVERYTHING.

Okay, there it is. The gratuitous sandwich shot. I couldn't resist. I went with the Nashville Hot Turkey. Crispy turkey leg cooled with garlic aioli and lettuce between thick slices of bread. The best part is the sandwiches are so large, ½ will fill me up and I’ll get to enjoy this again tomorrow.

Millvale Food + Energy Hub — 12:45 PM

Every community should have a community gathering place. The best ones are not institutional and built by and for the community. The Millvale Food & Energy Hub is such a place. A former Moose Lodge, acquired and developed by New Sun Rising, provides co-working spaces and is home to several other community partners such as 412 Food Rescue and Sprezzatura. It is home to community meetings, trainings, and other events. A few weeks ago I attended a launch for 412 Food Rescue's Good Food Project in the space. I love how the space blends new features yet retains original elements of the space.

I had the good fortune of being involved with the acquisition of the building providing technical assistance to New Sun Rising through Neighborhood Allies’ Centralized Real Estate Accelerator Program. In the current real estate market, proposed community uses struggle to compete with prospective cash buyers eyeing market rate housing conversions. Retaining a building that historically served community purposes, and re-imagining that for current community needs is rewarding work.

Attic Record Store — 1:30 PM

Attic Record Store has been a fixture in Millvale’s business district for decades. After the flooding from Hurricane Ivan, damaged records were piled in mounds outside the sidewalk. For lovers of vinyl like me, it was a heartbreaking scene. Fortunately, Attic Records, like many Millvale businesses, re-built and re-opened. If you are just starting your record collection or need to round out some missing pieces, Attic Records is the perfect place. Records are crammed floor to ceiling on shelves with each aisle only wide enough for a single person. Today I managed to do something I’ve never done before, which is to walk out without buying anything. I’m thinking that will make up for all the other times I left with far more than I intended to buy.

Grist House Craft Brewery — 2:30 PM

The Allegheny Valley area has a number of unique breweries, and Grist House Craft Brewery has drawn people from throughout the region to its taproom. The best part of its taproom is the expansive outdoor space that gets utilized year round thanks to a handful of fire pits and visiting food trucks that complement the beer offerings. And dogs are welcome — which adds to the ambiance. Today I’m grabbing some Siberian Highway Bourbon Barrel Stout which will be perfect to settle in with on a cold winter evening.

St. Nicholas Church Maxo Vanka Murals — 3:30 PM

Pittsburgh has many churches founded by Eastern European immigrants in the early 1900’s and St. Nicholas is one of the most notable of these churches. Maxo Vanka created a series of murals inside St. Nicholas in 1937 and then again in 1941 which draw from his journey as a Croatian immigrant. Vanka’s style is frequently compared to Diego Rivera’s. The breadth of the work is best experienced in person. Each visit is an experience and an appreciation for details I had missed previously. I'm forgoing adding any pictures because they don't do justice to seeing the murals in person.

Ride Home — 4:30 PM

I’ve written in a previous post that healthy communities draw strength form people, place, and planning. Millvale combines all of these elements, and I’ve only been able to provide a couple highlights during this day trip. These past two years have kept most of us closer to home, and shown that we don’t have to travel long distances to appreciate great communities. As the sun gets close to setting, I’m hitting the trail to ride home and though my day hasn’t ended I’m already thinking about my next trip back.

Re-Imagining Main Street Retail

183:822456250 (Tom Hardy) — Tue, 23 Feb 2021 00:02:02 GMT

“We’re not over retailed. We’re under demolished”. This quote was from a retail industry insider before the pandemic. Recent headlines highlight the struggles of restaurants and other retail businesses and conclude that more of the storefronts in our smaller downtowns may go vacant.

This “bricks-and-mortar retail is dead” narrative misses the innovation and resilience that exists at the local level. Local companies are changing the way they offer goods and services. Main Street storefronts, once exclusively used for retail, now combine different parts of the production and sales process. Local communities are promoting experiences rather than discrete shopping opportunities. These strategies offer a road map for supporting and sustaining retail in our local business districts.

Create Place Led Experiences

Within the shopping pattern data there is one area where our smaller downtowns have a competitive advantage – consumers increasing value experiences over transactions. Two seemingly opposed trends are happening in parallel. Consumers are increasing their online purchases yet searching for more goods and services they can buy locally. The popularity of farmers markets is one example of this trend. In a world where all you need is an internet connection and a Paypal account to shop, the desire to connect with local merchants and producers becomes more important to many consumers.

Small downtowns have unique history, architecture, stores, and other assets that make for an interesting shopping experience. These elements attract consumers that desire a unique shopping experience – an experience that can’t be replicated elsewhere. Successful small downtowns brand and market more than just individual stores—they market experiences. They highlight what an enjoyable few hours in their town could include.

Here in western Pennsylvania, a network of small towns adopted a business development strategy based on their proximity to the Great Allegheny Passage (GAP), a recreational trail connecting Pittsburgh to Washington D.C. The experience of a trail user can include stopping for lunch, replacing a flat tire, buying a souvenir to remember the trip—all of which are accommodated within the business district. This strategy breathed new life into older downtowns by drawing from both local and out of state trail users. Other communities have utilized this framework while tailoring it to their own attributes.

As the retail sector changes, we also need to adapt the format of retail spaces.

Right Size Retail Spaces by Incorporating Other Uses

The changes in retail over the last decade led to one premise that we are better off acknowledging than ignoring -- our downtown storefronts now require less space to accommodate local retail needs. Macro level changes in the way we shop coupled with the fact that many of our smaller downtowns have lost population mean fewer in-store purchases. While ten years ago the downtown clothing retailer may have needed 2,000 SF of retail space today that need may be only 500 SF and a fraction of the size of most existing retail storefronts.

Some Main Street businesses have solved this challenge by combining a typical retail storefront with other related functions such as making, assembly and fulfillment. Many retail businesses, including more typical brick and mortar businesses, have grown their ecommerce and delivery platforms over the past few years. Hoffman's Drug Store , a staple of Aliquippa, Pennsylvania’s business district for 100 years now offers free deliver. Delivery helps differentiate the store from local competitors and supplements revenue from walk-in customers.

Oxford Pennant , in Buffalo, NY is a very different business than Hoffman's, but it applies a similar approach using e-commerce. It has a small storefront and showroom at 731 Main Street, although the bulk of its sales are generated online. Fulfilment of the ecommerce orders occur out of this space, so the storefront is not reliant on walk-in sales to cover the cost of leasing the space.

Oxford Pennant's retail space and show room at 731 Main St. in Buffalo, NY

In both examples, the businesses maintain a traditional Main Street storefront that is visually appealing and an active part of the business district. The retail component is still physically front and center, while being supplemented by related activities. This is a change from past patterns where even in mixed-use buildings uses were on different floors. Our zoning and planning laws need to accommodate the changing market and allow for a broader mix of uses within neighborhood business districts.

Update Zoning & Other Regulations to Accommodate New Uses in Old Buildings

Many business districts have older zoning ordinances that permit only retail or restaurant uses on the first floor. These ordinances should be updated to allow for greater flexibility in how these spaces can be utilized and specifically permit light manufacturing, small scale assembly, and fulfillment. These uses can be allowed while maintaining site development standards that are appropriate for a business district – requiring properly sized storefront windows, signage, etc.

One successful example of combining a retail and light manufacturing comes from the Leadville, Colorado’s (population 2,742) historic downtown. Melanzana makes, sells, and ships outdoor clothing from a space on the main street in the business district. The front portion is a retail storefront where customers can browse and purchase items. Behind the retail counter the clothing is manufactured in full view of the customers. Together these functions fill a large storefront that would be oversized for most purely retail uses. This multi-use space creates additional interest for shoppers who want to catch a glimpse of the production process.

Melanzana combines retail and making within a storefront in Leadville, Colorado's historic business district

Many of the traditional business districts in have some larger buildings that once accommodated larger retail items (furniture, appliances, home accessories) that are now predominantly purchased outside of downtown. These larger buildings are good candidates for combining retail with other related uses and our land use policies should facilitate rather than inhibit these developments. Our company is currently facilitating the City of Aliquippa’s downtown planning process and linking that effort with a parallel process to update the City’s zoning ordinance.

The changing nature of retail is more nuanced than the newspaper headlines suggest. Underneath the growth of e-commerce is a current running in the opposite direction—a desire by consumers to have more meaningful and connected shopping experiences. These are the experiences that local merchants and local business districts provide. We can support them by creating place led experiences, right sizing retail spaces, and updating our zoning and development policies.

Small Cities Edition Vol. 1: Kinston, NC

Mon, 11 May 2020 13:39:43 GMT

Leveraging the power of place, people and planning

I experienced Kinston, NC (population 20,083) the way that many people have for decades—just a city that you drove through on your way to somewhere else. Located along the Neuse River in North Carolina’s coastal plains region Kinston is a waypoint between the Raleigh metropolitan area and the Carolina coast. For years its downtown buildings sat largely deserted, it’s infrastructure dilapidated and nothing much to do except maybe take in a minor league baseball game – until the team left in 2011.

That was Kinston then. Now people drive the eighty miles from Raleigh just to eat dinner in one of Kinston’s acclaimed restaurants and stay overnight. Storefronts N. Herritage Street house an eclectic mix of food-based businesses. Locally owned small businesses have increased employment opportunities for residents. These developments haven’t eliminated poverty in Kinston, and there are still issues of access and equity, but the City’s rebirth has been driven by long-time residents and residents that have boomeranged back from other cities to pursue their entrepreneurial dreams.

How do small cities that have suffered from economic shifts and population loss reinvent themselves? Three factors play a leading role – place, people, and planning.

Place

William Faulkner wrote “The past is never dead, it isn’t even past”. And indeed, a city’s history often contains inspirational seeds for its rebirth. Kinston was an agricultural trading post for decades during the 20th century, it’s warehouse buildings home to tobacco and cotton trading. My grandfather captured a tobacco auction in the photo below.

Tobacco auction near Kinston. Photo by Gerald Hardy circa 1960.

Those large warehouse and industrial buildings have been re-purposed into other uses, many of which are food related connecting to Kinston’s agrarian heritage. The ability of people to connect with history and have an opportunity to impact the future trajectory of a place is a competitive advantage of smaller cities like Kinston when compared to their larger counterparts. Our small cities are places where opportunities are, where accessing real estate and capital are possible, and the scale offers meaningful human connections.

People

Every small city could benefit from a superstar chef and a risk-taking entrepreneur, and Kinston has those, but the importance of people to a place’s revitalization goes much deeper than that. A city's culture is reflected in small and unremarkable interactions. Is there a sense of shared commitment and destiny, or do folks orient themselves inward with little sense of connection beyond a common zip code? Places where community members successfully revitalize their communities have people, who regardless of formal leadership position, can push through barriers by sheer force of will.

Kinston has these people. Collectively they’ve revitalized their community in a way that is reflective of a core set of community values and a respect for history. A community’s values are reflected in all aspects of community life, and in Kinston’s case its basketball prowess is Exhibit A.

Sports Illustrated dubbed Kinston the NBA Capital of the world based on the number of players to graduate from Kinston High School and go on to play professional ball. A selection of these include Cedric Maxwell, Brandon Ingram, Reggie Bullock and one that I played against in high school – Jerry Stackhouse. Since the early 1970’s about 1 out of every 53 Kinston High School basketball players have reached the league which compares to less than 1 out of every 3,333 nationwide. Kinston’s community culture of valuing basketball as a pathway to opportunity is a big reason why it’s graduates go on to the NBA at a rate that is sixty times greater than the national average.

Entrepreneurs willing to invest in the early stages of a city’s revitalization are often people with a connection to place. Vivian Howard was working as a chef in a New York City restaurant and decided to return home to the Kinston area where generations of her family had farmed. Vivian opened the Chef & The Farmer in downtown Kinston against the odds and preserved to reach national recognition with HBO series, cookbook, and other related ventures. Vivian’s work helped create some momentum and inspired others that came along behind her with other restaurants, food-based business, boutique hotels, and retail storefronts.

Orders being prepared at Chef & The Farmer

Planning

Good urban planning improves the way that people experience place. The people that I’ve heard describe this concept best are not urban planners by training, but rather folks who understand intuitively what they like and dislike about urban environments. For example, downtowns where it is difficult to cross the street and crossings are poorly marked are places that pedestrians don’t feel comfortable. When the streetscape (street trees, curbs, sidewalks) are not maintained private building owners have less incentive to maintain their properties.

These are very simple and readily apparent concepts, yet in far too many small cities they are not prioritized. Kinston provides a good example of how good planning can improve the streetscape and create a more viable downtown business district. E. Queen St., Kinston’s downtown main street, is a highway where two lanes of traffic traveled in either direction. This created a downtown that was not only difficult for pedestrians to navigate, but also for vehicles to stop and park.

Kinston undertook a major effort to slow traffic through its downtown, improve the streetscape, and create a better environment for pedestrians. This work included:

• Reducing vehicular traffic from two lanes to one lane in each direction

• Allowing for angled parking

• Creating planted areas that reduce stormwater run-off

• Marking crossings

• Adding bump outs to make street crossings easier

The before and after pictures are striking:

Before: Two lanes of traffic in each direction, parallel parking, and poorly marked crossings make downtown difficult to navigate.

After: One lane of traffic each direction, well marked crosswalks landscaped bump outs, storm water management, street trees and angled parking create a much better environment for vehicles and pedestrians.

In addition to improving the streetscape, Kinston is incorporating public art and storytelling into the downtown area. The StoryWalk , which is along the Neuse River which promotes physical activity and reading for children. Along the ¼ mile walk, children read a story using QR codes on signage posted along the walk. The stories change periodically and connect the local community to local businesses and resources.

Dusk at StoryWalk in Kinston

Public art also can play an important role in expressing community memory. Kinston commissioned a sculpture on the site of the former Brooks Tobacco Warehouse. Thomas Sayre constructed a series of seven earthen cast sculptures that reflect the door facades of tobacco barns. His piece, entitled Flue , is visually striking and evokes the role of tobacco in Kinston’s heritage without replicating the building that formerly occupied the site.

Sculptures stand on the site of a former tobacco warehouse

Small cities are laboratories for planning and civic engagement. The have the competitive advantage of being able to leverage small initiatives into noticeable change. Kinston provides an example of successfully integrating the power of place, people and planning. Other small cities can adapt this model and work from their own collection of assets.

Large Cities Edition Vol. 1: Montreal

Fri, 08 May 2020 13:32:01 GMT

Public Art and the Public Realm

If you want to have a European style city without leaving North America, Montreal is a good place to start. This city shares many cultural and architectural similarities to European cities. Public art is ubiquitous in Montreal. It comes in varied forms and formats. Even basic infrastructure such as street lighting and signage are well thought out. This attention to detail extends to even typically neglected public spaces such as highway underpasses.

Public Art

We’ve all seen singular examples of public art we enjoy, but rarely at a scale that weaves its way through an entire City. Montreal has a diversity of public art, both in types and styles, throughout its different neighborhoods. Murals are the most common form of public artwork, and these can be found in a variety of styles. We all have our own aesthetic – what murals I enjoy you may not find interesting and vice versa. Murals that are most compelling are those that convey stories and feelings that are not quite complete. These require the viewer to contemplate the meaning and fill in the gaps.

Projecting images with light on the side of a building is a variation on a painted mural. One advantage of this approach is that the images can be changed periodically. Cities are celebrated in part for their dynamism and using a public art medium that can change frequently reflects this dynamism. Like painted murals, projected images should provoke thought and further discovery. A number of these projections appear in downtown Montreal.

This projection is part of the Montreal en Histoires , which is a networked history exhibition that highlights a variety of Montreal’s historical figures and encourages people to connect via an app for more information. The scale of this project is significant and likely difficult for other smaller cities to replicate; however, the basic framework for encouraging people to interact with history and public art can be achieved on a much smaller scale. In my Small Cities blog post, I highlight Kinston’s StoryWalk project which is a variation on these themes.

The Public Realm

The public realm refers to publicly owned spaces that are accessible to everyone. These include a long list of items including parks, plazas, and squares. These areas, done well, distinguish some of our well-known cities. Think of the National Mall in Washington, D.C, Chicago’s Millenium Park, and of course New York City’s Central park. While these park spaces are often what comes to mind when thinking about the public realm—streets and sidewalks are where everyday interactions in larger cities and smaller downtowns occur. This often-overlooked part of the public realm, which is part of the streetscape, has a significant impact on how we experience place.

Montreal’s diverse neighborhood have a common element—they prioritize a strong streetscape. Sidewalks and curbs are in good condition. Pedestrian crossings are well marked. Lighting covers both the street and the sidewalk. The photograph below is from the Little Burgundy neighborhood.

Streetscape in Montreal's Little Burgundy neighborhood

There are several elements from this streetscape worth noting. First, note how lighting for the sidewalk and street is provided by fixtures at different elevations on the same structure. This eliminates the clutter of having different structures and fixture designs for overhead and pedestrian lighting that are common in U.S. cities.

The second thing to highlight is the sidewalk bump-out that occurs at the intersection. This narrowing of the street serves to slow vehicular traffic and make pedestrian crossing easier. Note how the crosswalk is marked using colored pavers, as opposed to painted lines. This is a more expensive application, but it needs much less maintenance than the more common painted crosswalk.

Having a quality public realm and streetscape is about following good planning principles rather than simply adopting a uniform design. Montreal sets and example of this by following these principals even as the respective design varies from neighborhood to neighborhood. The image below is from downtown. Note how although these modern fixtures are very different from the historic ones in Little Burgundy – yet they match the pattern of providing light fixtures for the sidewalk and the street.

Downtown Montreal's streetscape at dusk

The other notable element from this image is the use of architectural or decorative lighting. The colored lights and visual interest to the streetscape at dusk. We’ve seen this element incorporated successfully in a variety of business districts. In some cases, it highlights the architectural features of buildings. In other cases, such as this example, it creates interesting patterns.

Turning Liabilities into Assets

Build from strength. This is a typical approach to community development. Every community has assets—although these assets vary widely from community to community. Understanding what a community defines as its unique strengths forms the basis for most community development strategies.

We spend far less time thinking about how to effectively manage a community’s liabilities. In terms of the public realm, one type of space that is consistently a liability is the

or bridge underpass. These spaces are often poorly lit, unmaintained, and generally not utilized for anything positive. In many towns and cities, it is taken for granted that these spaces will be unwelcoming for pedestrians. This is particularly unfortunate when you consider that these spaces are the physical connections between neighborhoods that were divided by a highway or railroad bridge.

In Montreal, one example of underpass improvements adjacent to the City’s historic center got my attention. The well-lit underpass area had benches, planter boxes and ping-pong tables. Yes, concrete ping-pong tables!

Underpass adjacent to Old Montreal

I was there in the morning, and I didn’t see anyone using the space, but it struck me as a creative use of a space that typically does not receive any level of planning or an investment. This space isn’t going to be a destination in its own right, the way other squares or plazas are, but a modest investment turned a space that would usually be a liability into a more pleasing and interesting one. When I happened unexpectedly on this space, it surprised me and created a lasting impression of how a little creativity and financial investment can improve even the most basic ways we experience place.

Montreal is well known for its history, culture, and urban design so it’s hardly a surprise to find great examples of planning and urban design. Montreal’s public art and public realm reflect the diversity of the City. Within this diversity, consistent principles are maintained. For example, while the individual style of street light fixtures may differ, they follow the same pattern of having an overhead street-light and a lower sidewalk light. The result is an interesting and diverse experience for a pedestrian.

Real Estate 101

Sat, 02 May 2020 00:26:33 GMT

Understanding the Capital Stack

Students in the Real Estate Copowerment Class Photo Courtesy of Neighborhood Allies

One of the most interesting things I get to do is teach the basics of real estate finance to folks that have little or no background in the subject but are motivated by a strong desire to learn. Neighborhood Allies and Omicelo Cares launched the Real Estate Copowerment Series in 2017. Some participate because they want to learn to invest on their own, and others attend because of a desire to learn about the forces reshaping the neighborhoods they live in. When we start, I explain that the math is relatively simple, but the language and terms are often unfamiliar. So let’s start with the basics.

Understanding Leverage

The first concept in real estate development is the use of leverage, or more simply stated the use of borrowed money. Rental real estate generates income that can be used to cover loan payments. Banks and other financial institutions make these loans based in part on a rental property’s expected net operating income (NOI). Net operating income is just the collected rents less a property’s operating expenses (insurance, utilities, maintenance, etc). Banks play a much greater role in financing real estate than they do in financing other types of investments. Here’s a simple example.

If I buy the four-unit property, I have leveraged the $100,000 into ownership of $400,000 in real estate assets.

Banks are generally willing to lend more for each dollar of value for a real estate asset than for other types of assets or operating businesses. This is because real estate tends to produce more predictable and stable cash flows when compared to other types of investments and operating businesses. Real estate is not insulated from market downturns, and the most highly leveraged properties are particularly susceptible to these downturns.

Components to the Capital Stack

The capital stack refers to the different sources of funds used to finance a real estate project. Real estate is costly to purchase and maintain. Developers and real estate investors raise money from multiple sources. The largest component of the capital stack is typically a bank loan. Banks go through an extensive process to determine if and how much they will lend to a real estate project. One underlying principal is that they lend only a fraction of the appraised value of the project—typically a maximum of 65% - 75% of that appraised value. That is known as the loan to value ratio.

With my four-unit apartment acquisition, I am going to have to come up with the other 25% of the project’s value with my cash contribution known as equity. My bank is only willing to lend to me if I have some of my own money at-risk in this project. The bank wants to be sure I have some “skin in the game” and that I have a financial interest in the success of the project. For a market rate development project, the typical capital stack may consist of only two sources – bank debt and owner’s equity.

The Difference Between Appraised Value and Cost

A fundamental real estate concept, particularly for community development, is understanding that a real estate project’s appraised value can be different than its cost. This is best illustrated by an example. Let’s say I am building a 25-unit apartment building in the area of town where rents are high. Once completed, I project I will collect $400,000 in annual net operating income (collected rents – operating expenses). If I try to build that same building in a part of town that is less developed, where rents are lower, I might generate only 75% of that amount in net operating income. But it would cost me roughly the same amount to build that building. My land cost is lower in the less developed neighborhood—but the bulk of my costs are construction costs which are roughly the same regardless of which neighborhood I am building in.

So, if the cost of building two of the same apartment buildings in different neighborhoods is roughly the same, what are the market values of these two buildings? Determining market value in real estate could be the subject of another post or entire class, but for now we are going to simplify. Let’s take the net operating income of each of the buildings divided by the market’s expected rate of return in each of these neighborhoods (this rate of return is called a capitalization rate or cap rate for short). This calculation will give us an estimate of fair market value. See the example below.

What is the “Financial Gap”?

The financial gap is the difference between my project’s cost and the amount of bank debt and equity I can raise. As we went over earlier, the bank is only willing to lend a fraction of the project’s appraised value. As developer, I will put in some money as equity but only to the extent I can earn a reasonable return on that money. The formula for the financial gap is simply: Financial Gap = Project Cost – Debt – Equity. Using the example above the financial gap of the apartment building in the weak market neighborhood is calculated as $6M (my project’s cost) - $4M (my project’s estimated as completed market value. This results in a financial gap of $2M.

For a purely private sector potential project, we would stop at this point and say the project is not viable or that it doesn’t “pencil out”. With a community development lens, if this project fulfills an important public policy objective (i.e. affordable housing, community facility, etc.) we may wish to work to fill the financial gap using financial resources from our community development toolkit.

Addressing the Financial Gap

Neighborhoods where real estate prices are increasing rapidly make frequent headlines. A few miles from where I write this is Pittsburgh’s Lawrenceville neighborhood which has seen median prices nearly triple in less than twenty years. While these “hot” neighborhoods get plenty of press, this obscures the fact that there are many neighborhoods in both big cities and small cities that have seen prices stagnate or even decline. These are neighborhoods with high rates of vacancy and blight and have seen little or no new development in decades. In order to work with local neighborhood stakeholders to facilitate real estate development in these neighborhoods we need to work together to bridge the gap between what the private sector provides (debt & owner equity) and the total amount of financing needed to complete a project.

Sources of Gap Financing

Gap financing typically comes from three sources: public sector, tax credit equity, and the non-profit sector through Community Development Financial Institutions (CDFI’s) and philanthropy. Public sector funds vary based on the type of project, but community development block grants (CDBG) are are often directed to development in low-income neighborhoods. State governments typically have competitive gap financing dollars that they will invest in project. One example in Pennsylvania are housing trust fund dollars that are administered through the Pennsylvania Housing Finance Agency (PHFA). Local governments sometimes will invest capital budget dollars as gap funds for projects. These gap financing investments typically take the form of grants or deferred loans.

There are several prominent tax credit programs that allow private investors to take credits on their federal income tax liability for investing in qualified projects. The most prominent of these tax credit programs include the Low-Income Housing Tax Credit (LIHTC), New Markets Tax Credit (NMTC), and Historic Tax Credit (HTC). Transaction costs with these credits are significant, so most projects that utilize them have total project costs of more than $5M. Some states have enacted state tax credit programs. For example, Pennsylvania has a historic tax credit program that offers credit against state tax liabilities and as of this writing is considering a low-income housing tax credit program.

Before and after pictures of the Mercantile Building in Erie that we were involved with. Project utilized a number of gap financing tools.

Community Development Financial Institutions are private financial institutions that focus on serving low-income communities. CDFI’s invest in a wide range of activities including small business development and strategic real estate projects. In Western Pennsylvania, we work regularly with Bridgeway Capital a CDFI with a thirty-year history of successfully connecting capital with opportunity. Philanthropy will sometimes play a role in helping to finance real estate projects that are mission driven. Many larger cities are home to corporate and family foundations, and smaller cities and towns may be served by local community foundations. These investments typically come in the form of long-term, low interest loans known as program related investments (PRI). In Pittsburgh’s Hazelwood community we are working with the Hazelwood Initiative , Bridgeway Capital , and the Heinz Endowments on revitalizing the neighborhood’s business district.

Gap financing has helped bring a bakery and coffee shop to 2nd Avenue in Pittsburgh's Hazelwood neighborhood.

Why Gap Financing Matters

Only projects with complete capital stacks can move forward. This is an all or nothing proposition. Having 90% of a project’s capital stack does not get you 90% of a project. In this scenario, if we can assemble gap financing covering 10% of the project’s cost, we can unlock the other 90% of the project’s financing. Gap financing leverages other private dollars. Used strategically, gap financing is a critical development tool that neighborhoods can use to facilitate development.