1. Good morning. This is my first time attending the Growth & Infrastructure Consortium and I am delighted to be here. 2. I am Larry Burrows and I will be talking about how a builder/developer thinks about entitlements and impact fees. 3. This comes from my perspective as a builder/developer. A builder/developer that has focused on single family FOR SALE HOUSING. I have had the good fortune of running a regional homebuilding company (Winchester Homes— MD/VA region); CEO of a top 20 national/public l homebuilder WRECO; and now I sit on the Board of TPH— which is a top 10 national/public homebuilder in terms of it’s market cap. 4. My comments today are mine—as they say do not reflect these associations. 1 1. Take a minute to take stock of where I think we are in the housing cycle. 2. These are a sampling of the readings that have shown up in my in‐box of over the past couple of weeks. 3. They certainly are entertaining. 1. Homeownership collapsing—true not really sure that high 60’s rate was/is sustainable my sense is that we are headed back to trend in the low 60’s. 2. Younger adults opting to rent—again true and there are numerous reasons for this: 1. Witnessing what may have happened to their parents—a little reluctant 2. Tough qualifying environment 3. Kids have bunch of debt—student loans 4. Mobility—job mobility (in the context of them having a job and creating a hhld), home can be illiquid. 5. Big piece, I think, is where they are in their life cycle. Coming out of school, having a job, forming a household—I wasn’t looking to buy either—there are some of the same elements here. 3. Kids living with their parents—I’m sure there are some in the audience that have first hand experience with this. Unfortunately, this was a headline 5‐6 years ago, and it will continue to be one until we advance further in the recovery—where our kids get jobs that allow them to be self‐sufficient and form a household. 4. The Next Downturn—let’s get through this one first. 2 1.The fact remains, 5 years after the technical end of the great recession, we are still climbing out—continue to be a grind. 2.We also need to see evidence of first time buyers coming back into the market in more substantial numbers. 3 1. We do have encouraging underlying demographics. And they will eventually manifest themselves. 2. This is information from Harvard’s Joint Center for Housing Studies—their annual State of The Nation’s Housing.” 3. See Avg Annual Household Growth Rates for the various periods. The horizontal lines are their household forecasts for the 2015‐2025 period. 1. Their low is 11.6 MM for that 10 year period or 1.16 MM annually 2. Their high is 13.2 MM or 1.32 annually 3. The big difference is IMMIGRATION. 4. And as they say, hhld growth has yet to fully manifest itself. As the economy strengthens, millennials will come into the market place and at the same time, boomers will also have housing choices to make. 4 1.As you well know, we have been, we are, and we will likely continue to significantly under invested in our infrastructure. 2.You are more conversant with this than I am—the ASCE’s annual report card gives us this D+ grade and illustrates that we need to invest 3.6 TRILLION the balance of this decade. 5 1.There is a gap today with adequate public facilities and what concerns me is it will likely get worse as the market recovers and we return to trend housing starts— another 300‐400K starts. 6 1. This gap between the need for these facilities and services and the ability to provide them has partially been bridged by the development community through a variety of mechanisms. 2. While each one is distinguishable and has it’s own legal base most of us do not distinguish among these payments—we see them as steps we have to navigate through and pay for to entitle our developments. 3. Coincidentally, recently having lunch with a friend of mine—a land developer. He is a planner by training and in his 30+ years of experience has worked for small, big, private and public companies—he’s thoughtful and has good perspective. 4. I told him about this talk and asked him how do you think about this? His response: 1. Not being able to entitle a property due to lack of adequate public facilities is troublesome. 2. Under the right circumstances PAY and GO or PROVIDE AND GO can work if it is fair/equitable/transparent. 5. That’s my view also. 7 1. BUT the development community does not like these payments. 2. Question of fairness: 1. Solutions tied to the impacts 2. Quantified properly 3. Applied consistently. For example: 1. Mandatory dedication imposed at the end of the entitlement process after we were told we were done. 2. Paid school impact fees for large development for several years only to see them collected but not spent on improving the condition 3. Asked to pay for off‐site road improvements that were part of a broader system plan—I get that—but found out that partial funding for the system improvement was removed from the CIP during our application process 3. Increase in direct costs 4. Limited ability to pass through to customers 5. Limited ability to price back into the land 6. Increase in risk and uncertainty 8 1. Let’s take a look at an illustrative residential for sale pro forma 2. Components of cost 1. Land and LD 2. Hard costs—which include direct construction costs, buyer option costs, permits/fees 3. Soft costs—which include A&E, consultants and studies 4. Sales & Marketing 5. G&A 6. Carry—interest, taxes and insurance 7. Profit 3. Again, this is illustrative, generally 1. About 75% of your costs are for land, LD and hard costs 2. THESE ARE EXPRESSED AS A % OF HOUSE PRICE 3. The remaining 25% for the other buckets 9 Central: Texas‐ north including CO East: FL‐MA including Mid‐ Atlantic SW: AZ and Nevada West: WA south to CA 1. This represents a basket of pro formas from different regions in the country 2. Start with the Central region: 1. Land, LD & hard costs in that 75% range. 2. AGAIN EXPRESSED AS A % OF HOME PRICE 3. For the remaining 25%, you can see how they break down. 4. See the profit in the 7‐8% range‐‐so the margins are tight. 3. Repeating this for other regions: 1. There is not a lot of variation except on the composition of the land/LD and hard costs. That’s due to the how land is sourced and priced in different regions in the country 2. Again, profit margin is in the mid‐to‐high single digits. 10 1. Zero in on the fees. 2. THESE TOO ARE THESE ARE EXPRESSED AS A % OF HOME PRICE 3. The fees include all processing, inspection as well as impact or ADF costs 4. See the range and variability among the regions. 5. In the Central—2‐7%, TX being lower, places like CO being higher 6. Southwest 4‐5% 7. East 5‐8% 8. West 7‐9% 9. SOME OF THE DEALS WITHIN THIS BASKET ARE FINISHED LOT DEALS—SO THERE MAY BE SOME ADDITIONAL FEES THAT ARE PRICED INTO THE LAND AND NOT REFLECTED AS A FEE 10.In many cases, the cost of the fees are equivalent to the profit margin. 11 1. Looking at the composition of the fees, this is a western example. 2. THE PERCENTAGES ARE EXPRESSED AS A % OF FEES. 3. IN THIS BASKET, ABOUT 50% ARE CHARACTERIZED IMPACT FEES OTHER ARE FOR SPECIFIC MEASURES 4. The amount and complexity of these fee can be daunting—quite a maize to navigate. 12 1. Think about these costs—they do impact mortgage qualification. 2. Assume at $400,000 home and look at the range of fees from 2% to 9%, the fees add: 1. $8,000‐$36,000 to the cost of the home 2. Customer, needs additional $2,400‐$10,800 in income to qualify 3. That translates into $34 to $154 more in their monthly mortgage payment. 3. These are NOT inconsequential amounts 13 1. In pricing land, part of the calculus is to price risk and uncertainty. 2. Risk/reward return for something fully entitled 15‐18% range. Meaning, if I am looking at developing something entitled, I want to earn that 15‐18%. 3. As risk and uncertainty increase, so does the expected return. 1. Zoned but not entitled 20‐22% range 2. Comp Planned but not zoned or entitled—increases 300 basis points 4. Obviously, majority your risk analysis devoted to the market— can I sell, at what price, how quickly. 5. Another part is knowing your development costs. 6. As part of that cost—having insight and some certainty into the entitlement process affects your pricing and return expectations. 14 1. Conclude. 2. I’m sure most of you own equities. What are you looking for from your equities? Growth for sure but Consistency, predictability. 3. My background is with public builders. Our shareholders are looking for the same thing. 4. So builders/developers (some) are willing to pay for this predictability and timeliness. BUT 5. Thanks and I look forward to your questions. 15