It’s not an uncommon story in Madison: a developer proposes to build an apartment building. Neighbors have concerns about the height, size or density of the project. The developer scales the building back, maybe scrapping a few corner units, or even an entire floor.
That’s part of the give-and-take involved in the approval process. But it’s not without costs, developers say.
In January, Urban Land Interests' proposed development on Monroe Street was stalled by the city's Plan Commission, which found the mixed-use project too large for the site. The neighborhood voiced concern about the five-story height, but ULI said a shorter building wasn’t financially viable. ULI is now making changes to the project. Additions to Hotel Red and a proposal on East Johnson Street follow the same, shrinking pattern.
Cutting apartment units can significantly increase costs for developers, which can even be passed on to future tenants as higher rents. Other developers say criticism is part of the process, and neighborhood pushback helps refine their projects to be better. City plans and zoning code are pretty clear about height restrictions, they say.
When developers lose apartment units, “costs actually can skyrocket,” said Terrence Wall, president and CEO of T. Wall Enterprises. He’s been an outspoken critic of Madison’s development approval process and regulatory environment.
He gave an example: if plans call for 100 units over four floors, losing one floor means the developer is down to 75 units. Fixed costs like land, foundation and landscape architecture services are spread out across 75 units, instead of 100.
Do the math, Wall said, and in this example, each unit’s portion of the fixed cost will increase by 33 percent. If a unit originally cost $125,000, a 33 percent increase means it will cost about $160,000 now.
Even losing a few units for a step-back, “may be aesthetically pleasing and good for the neighborhood,” said Matt Wachter, Madison’s manager of the office of real estate services, but “the farther you get from a square box, the less efficient your construction might be.”
That leaves the developer with two options: hike up the rent or stomach a lower return on investment. In the above example, increased costs could mean rent has to increase by almost $200 a month, Wall said.
“You can see how building less than anticipated is going to make them have to charge more rent,” Wachter said.
And if the neighborhood or city is asking for too much, a developer may have to walk away from the project.
“If you don’t have enough units to spread those costs across, then something's got to give,” said Mike Thorson, a partner at Inventure Capital LLC, the company leading the proposed apartment development at 131 S. Fair Oaks Ave. slated to break ground in early March.
That project originally proposed around 170 units and neighbors pushed back about the five-story height and density of the project. The project now has 161 units, but remains five stories.
If the city had asked for major unit cutbacks, the project “likely would not have gone forward,” Thorson said. As it is, the complex will be able to offer rents about 25 percent lower than downtown apartments, he said. Thorson believes there’s a misconception that developers are just trying to make as much money as possible.
“(Developers are) worried about putting a high-quality project together that’s going to rent up nicely,” Thorson said. “It’s not just about dollars and cents.”
Wall said he’s walked away from projects that got too pricey.
Heather Stouder, planning director for the city of Madison, said developers abandoning projects “is rare, but it certainly does occur” a few times a year. Staff tries their best to work with developers very early in the process and “red flag” any concerns, Stouder said.
The counter argument to mounting costs is that developers should know if what they’re asking for is unreasonable.
Zoning code often specifies a max building height and how dense a property should be, Watcher said. Neighbors care about those aspects because they affect shadows, traffic and neighborhood aesthetics.
The city’s 2013 zoning code put height limits in the downtown area and there are codified height limits in some Urban Design Districts around the city. Other areas don’t have codified height limits, Stouder said, but the city will “lean heavily” on adopted plans’ maximum height recommendations.
“I think the zoning is pretty clear on what’s allowed,” said Mike Mezger, director of development at McGrath Property Group.
Projects are more likely to be rejected, or go through a drawn-out approval process if they’re asking for something far out of compliance with adopted plans.
“I will say that in my experience, our zoning code does make it pretty clear what’s possible,” Wachter said. “There are surprises, I guess.”
NEIGHBORS WEIGH IN
Just because zoning allows it, doesn’t mean the neighborhood will like it. One of Wall’s more painful experiences with the city’s approval process was his proposed Peloton Residences, an apartment complex slated for 1004 - 1032 S. Park St. A city plan allowed up to seven stories on the site at the corner of Fish Hatchery Road and Park Street.
T-Wall Enterprises proposed a five-story, mixed-use development for the site that was approved by the city in 2015. Nearby residents wanted a cap of four stories.
The approval process brought so many changes and tweaks that by the end, Wall said, “We had to stop and say, ‘Oh my God, this is way too expensive.'”
That meant they had to start “from scratch and go back to the approval process over again,” he said. He came back with a three- and four-story version. The city’s Planning Division didn’t like the reduced size.
That brought T. Wall to the latest iteration, which ranges from three to five stories and received land use approvals last August.
Wall said he recently turned down two development projects in Madison.
“I told the seller, 'You know what? It’s not worth it,'” he said. “I could do two projects for those resources and time.”
Wall believes part of the problem is Madison neighborhoods are powerful, and often loath to compromise.
Wachter acknowledged that compared to most municipalities, Madison “has a more robust public input process,” where developers have to go through multiple rounds of city committees and neighborhood meetings.
“In Madison there’s a very significant demand for and allowance for residents input in processes,” Stouder said. “I think other cities may have residents who are less involved in development, for better or for worse.”
The “better,” some developers say, is that critique can improve a project. In the case of Thorson’s Fair Oaks project, cutting out a few units made the project better, and the whole process made the building more aesthetically pleasing, he said.
“It’s definitely not an easy process, but usually we end up with some pretty successful and well-liked projects,” McGrath said.