New communities have embodied the principles and policies of ULI since its founding in 1936. The Woodlands, Texas, and Columbia, Maryland, are two such iconic projects that were pioneered in the 1960s by ULI legends John Turner and James Rouse who envisioned complete communities in what were then cornfields. Their farsighted practices—such as comprehensive planning, unified organizations, portfolio economics, and public/private partnerships—are now being adapted to 21st-century conditions.
As business and government decision makers seek empirical data and creative insights to meet the massive challenges of global urbanization, deep understanding of new communities and their contributions to real estate theory and practice is essential for developers, policy makers, and planners.
In 2014, ULI joined with the Royal Institution of Chartered Surveyors (RICS) in a program of research and discovery about ways that new communities have transformed the built environment and the processes for financing, developing, and managing them. This collaboration entailed a survey of more than 700 American and British property professionals, interviews with some 30 thought leaders in both countries, workshops for key ULI and RICS staff, and an advisory group of former ULI chairmen. The resulting guide, Placemaking: Innovations in New Communities, distills five innovations and five initiatives from this program.
Starved for Cash
This essay focuses on one of the program’s main findings: the acute need for patient capital to fund early-stage investments for land acquisition, site infrastructure, and initial building development that new communities require before they achieve stabilized cash flows from sales and operations. In the past, U.S. financial institutions provided such funds to private sponsors, and the U.K. government underwrote the New Town corporations with public funding. In both countries, financiers envisioned long time horizons to incubate increased land values, capitalize on unit sales, and generate operating profits as the communities matured.
However, those traditional sources of financing all but disappeared during the Great Recession. Private development loans are now limited to conventional three- to seven-year building cycles, which do not allow for recovery of capital expenditures in sitewide infrastructure (streets, sewers, and utilities) that support the multiple land uses in a new community, its end-use structures (including those serving residential, commercial, and public services functions), and the operations that generate the ultimate values. Similarly, public funding for infrastructure has been severely restricted. More than half of the survey respondents listed “adequate, flexible financing” as the most important factor in successful new communities, while more than three-fourths cited “insufficient initial financing” as the most important factor in failed projects.
Today, the new-communities industry of private and public developers is on the cusp of compelling changes that could attract long-term institutional investors. Two market forces are driving demand for new communities. First, housing production in the United States and the United Kingdom was severely restricted during the recession while household formation continued to grow. Second, two large, growing U.S. customer segments—the 75 million millennials and the 76 million baby boomers—have demonstrated their preferences for the mix of people, housing, commercial uses, and amenities that new communities offer.
At the same time, the development of new communities is limited to a handful of experienced, well-funded teams that can meet the new communities’ significant capital requirements for land assembly, infrastructure, and initial construction; manage the complex interplay of entrepreneurial ingenuity, megaproject organization, and political maneuvering; and master the technical innovations of sustainable design. As the U.S. and U.K. economies recover, industry leaders who absorbed writedowns and recapitalized landholdings during the recession, or acquired discounted portfolios from local developers and lenders, are well positioned to pursue the development of new communities.
A New Fund
This dearth of patient capital presents an opportunity to develop a privately financed, internationally marketed “new communities innovation fund” that would be sponsored by sovereign wealth investors, large pension funds, urban-oriented philanthropies, public venture funds, and other opportunistic institutional sources.
Such a fund would have seven main roles: 1) providing new sources of private capital that ordinarily are not available to new-community developers; 2) building an international portfolio of privately funded new communities to improve overall credit availability for the new-community industry; 3) establishing rigorous project selection standards to increase private resource allocation for new communities; 4) facilitating one-stop underwriting and loan approvals, saving developers valuable time; 5) reducing high fees that accompany single-project real estate funds; 6) establishing a revolving fund, multiplying its reach by supporting additional new-community projects; and 7) underwriting affordable housing to complement the new communities’ market-rate projects.
In addition, such a fund would serve as a vehicle for attracting and training a cadre of emerging leaders to extend the legacies of Charles Fraser, James Rouse, and other new-community pioneers.
By making multidecade commitments, long-term investors could take risks to create new communities that other investors cannot. These institutional sources are not immune to short-term economic and market fluctuations, but they could align their expectations with the new communities’ 30- to 50-year time horizons and monetize specific assets in five- to seven-year cycles, consistent with the unit sales and income property programs in most new-community portfolio plans. New-community investors with long time horizons, creative portfolio strategies, flexible standards, and partnership spirits could fuel developer innovations by relaxing initial requirements, such as the pace of development and sales, and reinterpreting conventional risks, such as the levels of debt and liquidity.
Such a fund would combine the disciplines of real estate and investment banking. Its principals would have the flexibility to negotiate and close deals—similar to the acknowledged efficiencies of the former U.S. Resolution Trust Corporation (the liquidator of insolvent thrift institutions following the savings-and-loan crisis) and U.K. New Town corporations (which develop and manage government-sponsored projects). The fund would follow rigorous but sensible underwriting standards, and would pursue innovative products such as multifunction buildings, calibrating the value of each use and various combinations to spread the costs and risks. Citigroup’s recent $100 billion commitment to projects that lead to sustainable growth is a harbinger of financial innovations in affordable housing, infrastructure, and environmental development that support new community goals.
As the traditional public/private partnership model shows, an assured stream of prospective buyers and tenants, generated by nimble, customer-driven developers, can yield significant long-term, risk-adjusted profits for both developers and investors. For opportunistic but patient capital sources that routinely invest in high-risk business startups, one proposition might be that new communities house the hard and soft assets that help support new ventures. While some of those new ventures likely will fail, the underlying property values and future development opportunities in the communities will remain.
A new-communities innovation fund’s main economic lever would be its partial interests in properties that, over time, would allow fund investors to monetize portions of their assets and to redeploy new tranches for more new-community projects. As a private initiative, such a fund would encourage new investment in new communities without government appropriations. Thus, it would avoid the political obstacles that have plagued new-community-related programs in the United States. It could complement the U.K. government’s commitment to a new generation of garden cities, providing the private stimulus to new-community innovations.
The basic fact is that private partners, properly motivated and overseen, excel at building, operating, and maintaining new communities—and at using those skills to manage capital when it is available.
Sandy Apgar advises senior executives and board members on real estate strategy and management. He is a ULI Foundation governor and has been the chair of three ULI product councils. This essay is adapted from his report, Placemaking: Innovations in New Communities, which is available at ULI.org/newcommunities.
