As part of our series on housing in Wisconsin, The Wheeler Report sat down with Otto Gebhardt, founder and owner of Gebhardt Development in Madison. Gebhardt was founded in 1995 by Otto Gebhardt, who has been recognized by city leaders for his efforts to create projects that can bridge communities and generations through different forms of housing and commercial spaces in and around Dane County.
The interview began with a discussion of the factors that impact a development project. Gebhardt said, “Generally the first step is to find where there’s a demand and determine what that demand is. In this case, we’re talking about housing, but in a lot of cases it’s a mix of use.” He said the next part of the project involves identifying potential sites. Next comes doing some studies to determine what you can put on that site and what it’s going to look like. At that point, Gebhardt said you run financials, and once that whole process is complete then they start to approach the municipality and begin the entitlement process. Gebhardt said, “The first step is usually meeting with the planning director and running your ideas past them and seeing if you have buy-in from them or if they say absolutely not, this isn’t what we want here or envision here.”
Entitlements are specific permissions granted to a property that relate to how the property may be used. Entitlements are granted by a governing agency, using the planning department of a given municipality. Entitlements are generally part of a city’s general plan which establishes land use and development requirements. Those general plans set aside specific areas for residential, commercial and open spaces and can be specific regarding zoning and land use regulations. While the entitlement process varies by jurisdiction, in general the process requires a developer to submit a formal proposal, concept design package, and environmental and technical studies to the local planning department. The entitlement process then allows the municipality or local governing entity to formally review the project with respect to zoning, planning, environmental impacts, review by various agencies within the local government (utility providers, parks and recreation departments, local transportation, fire and ems services, etc.), and social feedback from the community. The last part, social feedback, can be the hardest sometimes. While a developer may think a project is good for a community, if the community does not want a project they can be the deciding factor since the individuals they elect to a city council or board of supervisors is the final vote to approve or not approve a project.
Gebhardt was asked to discuss the timeline for projects, and said, “Just to determine if there’s a project worth pursuing would take anywhere between six months and a year. To get everything in line and then the process starts as far as entitlements to get a shovel in the ground, conservatively, is probably a year to 18 months, and up to possibly two to three years. Depending on the size of the building, but if you take say a hundred thousand square foot project, you could get up in a year. You try to start at a time where you’re up and running and still hit the rental season the following year. The rental season, at least in the Midwest, is more in the spring and summer months…You don’t want to have the product come online and completed at Christmas because your holding costs and carry over costs are much higher.”
The interview then turned to the discussion of regulations and how they impacted a developer. Gebhardt started by explaining that in the real estate development business financial investors are generally looking to get a 10% return on their equity, so increased regulations and additional costs during the process can impede that ability. He explained people don’t understand that adding costs through the development process can’t just be “rolled in” without those costs impacting the final rent prices for future occupants. When asked what types of costs the ‘average’ person does not know about in a development project he said, “Park fees are a fee you pay for every new multifamily unit you build. You’re paying a fee of multiple thousands of dollars per unit which goes to the parks department for future park upgrades. Sewer and water fee is one that sticks out. There are water and sewer connection fees. To be honest, there’s a lot of them, and it just adds to the bottom line. You’re talking about millions of dollars in the case of an average size development.” In the City of Madison, the New Housing Fee Report for calendar year 2018 showed the City collected $12,160,868 in fees; approved 1,583 dwelling units, resulting in about $7,682 per dwelling unit. (From the report: Many fees reported here are not applicable to all development or construction projects. Some fees are applicable to new development, some to redevelopment, and some to all projects. Some fees are applicable only to very specific situations. While certain fees are applicable to only residential development, some are applicable to only non-residential development, and still others are applicable to all types of development.) In the City of Green Bay, the Current Permit Fee Schedule is eight pages long.
Gebhardt also emphasized, “With this economy, construction has been booming. Construction costs have been up easily 30-35% in the last few years. So construction costs being up, land acquisition costs being up, then you throw on extra entitlements and rising entitlement costs on top of that, and it’s really hard to get anything to pencil out. That’s what we’ve been finding in the last couple years, which is why we’ve been on hold right now.” He went on to say, “Just about everything’s been going up right now, so that’s obviously driving rent. I mean the property taxes keep going up, and the water and sewer keeps going up, and labor keeps going up, so rents need to keep going up as well. A lot of people don’t know why we are raising rent again. I comment, if everyone froze my costs, I’d be happy to freeze a rent cost. We’re really only raising costs to keep up with inflation, and that’s hopefully keeping up with inflation. Most people don’t know that 15-20% of the entire rent is going to property taxes. 5% of my gross income goes to water and sewer bills, which have been going up astronomically and probably will continue to. We’re paying for our own garbage removal, and if the sidewalk falls apart we pay for it.” Gebhardt was sympathetic to the fact that property taxes go to help fund the schools, but emphasized the continued increase in taxation and fees is helping drive the increased rents.
Gebhardt said some communities are more willing to work with developers than others, saying, “A significant difference in demand and costs and your ability to start project can determine municipalities. Janesville is much more aggressive at trying to get development because of some of the things they’ve gone through in the past and they are trying to play catch up…Housing demand, whether it’s homes or apartments, are really very high around here and everywhere and if we make it too difficult to get that done supply doesn’t keep up with demand. That’s one reason you get quickly escalating rents, which is a problem we’re having right now. Supply is not right and then you put all the other facts as far as cost, whether it’s the municipalities entitlement process or the fundamentals of the financials, and you’re not going to get a lot coming on the supply chain.”
Gebhardt was asked if he ever walked away from a project, he said, “Yeah. We don’t want to do a project that isn’t embraced by the majority of the residents in a municipality. We’ve had cases where we’ve come in with what we thought was a great project and we though it fit well and had a lot of pushback from residents who say they don’t want this.” He went on to explain that redeveloping existing properties can be difficult because developers are working within the given footprint of a building and that doesn’t always work for a conversion. He said sometimes it’s easier and cheaper to build new than convert something that already exists.
When asked what he would change about the process, Gebhardt said, ‘It’s just the whole process. If it was just cleaned up and made simpler I think that’s been talked about. Let’s come up with a planning director and lets get this where people can get a yes or no because for a developer like us to go in and do a project it’s very costly. It’s incredibly costly and that’s the most frustrating thing that we’ve gone through when we go through a project we ended up not doing is how far down that road you are. I mean, you may be a million dollars into a project then it gets very costly. The length of the process is one thing, but then there are huge costs to the process as well.
Gebhardt concluded the interview by saying, “Municipalities across the board have to look at these situations and say it isn’t necessarily the developer’s fault. They need to look at themselves and think if they made the process clearer, a little bit faster. That doesn’t mean you shouldn’t have oversight. You should have complete oversight. You only want to do good projects, and you only want to do them where they fit in. But at the end of the day if you’re not getting product to the market, prices are going to continue to go up. The homeless problem in San Francisco and LA, that problem started years ago because they curtailed development harshly. If you don’t have stuff coming on the market, you’re going to end up with more of a homeless problem if there’s not affordable housing. As you’re building new units, the older stock becomes more affordable. It’s a natural cycle.”