Institutional-Level Development Strategy and Case Study: Navigating Small Site Complexities in Columbus, Ohio (Franklinton Submarket)

Introduction

Navigating the complexities of small site development presents a series of challenges that institutional investors often prefer to avoid. In our experience, the optimal path for institutional-level development requires thoughtful site selection, appropriate project sizing, and strategic financial structuring. Our most recent project in Columbus, Ohio's Franklinton submarket provides a critical case study illustrating these lessons and outlines key recommendations for developers and investors seeking to operate in this space.

Key Recommendations for Institutional-Level Projects

1. Site Selection and Size:

• Purchasing small sites introduces significant complexities. Our recent project, located in a 60-foot height district with favorable zoning, faced major constraints due to the site's limited footprint. Parking became a major hurdle, and the inability to efficiently park vehicles jeopardized the project's viability.
• To mitigate these risks, we recommend purchasing sites that are at least 18,000 square feet to ensure sufficient parking can be accommodated or arranging parking solutions prior to closing.

2. Project Size and Institutional Appeal:

• Institutional equity investors typically prefer projects requiring a minimum $3 million equity check. However, achieving this threshold is challenging for smaller developments.
• For developers seeking non-recourse debt, we have observed that construction values need to exceed $10 million to secure favorable financing terms. A 30% equity contribution would typically require a $3 million check, aligning with institutional expectations.
• Projects valued at $25 million or more post-construction are ideal, ensuring sufficient scale to attract institutional interest.

3. Recommended Building Footprint:

• A gross building area of approximately 93,000 to 100,000 square feet offers optimal efficiency at construction costs around $160 per square foot.
• To effectively incorporate parking in dense urban environments, we recommend targeting sites that can support at least 35,000 square feet of parking area, which translates to roughly 0.8 acres. Ideally, a full acre provides better flexibility.

4. Targeted Project Type:

• While extended stay hotels and boutique assets can be viable, we believe larger mixed-use or multi-family developments provide the best return potential for institutional partners.
• The minimum threshold should be 100 units, whether apartments, hotel rooms, or parking spaces, to align with institutional underwriting standards.

5. Capital Structure and Financial Targets:

• For optimal funding structure, we advise projects requiring a minimum $5 million equity check, ensuring total project costs exceed $17.5 million to qualify for favorable non-recourse debt.
• At a 30% equity position, construction costs should target the $12.5 million range to ensure appropriate leverage while maintaining institutional appeal.

Case Study: Navigating a Small Site Development in Franklinton

Our most recent project highlights the inherent challenges of small site development. The project involved a 36-room boutique hotel combined with 36 parking spaces on a constrained site. Initially planned as a four-story parking structure supporting 56 spaces, the project encountered numerous obstacles, including zoning disputes, neighborhood opposition, and city staff disapproval.

Key Issues Faced:

• Parking Constraints: Due to limited site size, maneuvering space became a significant challenge. Our team explored automated parking structures and valet-only solutions to address these issues.
• Variance and Zoning Battles: City staff cited the introduction of a parking structure in a historically residential neighborhood as an adverse impact on community character. We countered by emphasizing the evolving zoning framework under UG1 guidelines, demonstrating that our automated parking system minimized congestion and enhanced efficiency.
• Legal Justification: Through strategic application of legal precedents such as Duncan v. Middlefield, we successfully argued that practical difficulties justified the variance request, emphasizing that the automated structure reduced congestion and mitigated environmental impacts.

Outcome:

• The project will now proceed with 36 rooms and 36 parking spaces, incorporating an automated parking system that significantly improved site efficiency. We adjusted the building layout, moving core elements like stairwells and elevators to accommodate the new parking design while maintaining optimal unit layouts and functionality.

Conclusion

Our experience reinforces that smaller sites introduce disproportionate complexity for institutional-level investors. To mitigate these risks, we strongly advise focusing on projects exceeding $20 million in total value, ensuring post-construction stabilized appraisals exceed $25 million. A targeted gross building area of 100,000 square feet and site footprints exceeding 0.8 acres provide the flexibility required to achieve these outcomes. By adhering to these principles, developers can position themselves to attract institutional capital, secure non-recourse debt, and ultimately deliver successful large-scale projects with strong returns.

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