Budgeting for Development: Finding the Balance between Hope and Caution

Having worked for cohousing groups over the years, creating budgets and schedules and cash flow plans, I have often been asked, “Why does our project have to cost so much? Why is our budget so high?” Recently the question was asked of me again in Brooklyn, so I thought it might be good to address this issue in writing and share it with the greater cohousing community.

An Artful Process

Budgeting for expected costs and revenues is an artful process, full of subjective interpretation of objective facts. It requires a careful balancing of wishful thinking and optimism, with caution and worst-case planning. So budgeting is balancing – what could happen, what might happen, and what should happen.

Sure, it would be easy to cut everything to the bone while budgeting, keeping budgeted costs extremely low and hoping for the best. To some this budget would look wonderful, including home prices you can really afford. But is it realistic? The artfulness is in finding the balance between what you wish the project would cost, and what it might actually cost.

Patterns and Probabilities

In my work planning projects, I think about budgeting in patterns and probabilities. I don't use rules per se. For instance, in the world of housing development, land will account for about 15 percent of the purchase price of a completed unit (or home, as marketing types would have us call it). This is not a rule, but a pattern, and it varies a great deal by location. In rural settings, land can account for less than 15 percent of the cost, especially if the developer achieves high unit counts (more units) during the approval process; land has been as little as 10 percent of the cost in some cases I've seen. In urban, high demand and prestigious areas, the cost of land can be as high as 40 or even 50 percent of the unit’s purchase price, especially if the housing units are very small, as they often are in big-city locations.

Another pattern that can be hard to grasp is the actual cost of construction, the so-called “hard costs,” that vary greatly from one location to another, but still have certain identifiable patterns. One generally recognized pattern is that hard construction costs should run just under half of the total project value.

The general pattern then looks like this:

45% Hard construction cost: concrete, sticks and bricks

40% Soft costs and profit: architects, lawyers, interest, fees & profit

15% Land costs: actual cost of land, including clean-up

The ratios do vary, of course: when land costs are higher, when profits are higher, or when soft costs get out of control. It seems difficult for some to understand why hard costs can vary so widely, but it’s true that what can cost $85 per square foot to build in Ithaca, NY can cost $225 per square foot to build in New York City. The cost of living and the cost of labor and materials can vary from one location to another.

The Issue of Value

Then there is the issue of value - market value, perceived value and the willingness of a buyer to pay whatever is considered "normal" in the local area. Cohousing groups willing to self-develop always have the opportunity to save a great deal of money by not paying the profit margin a developer would command. That profit can run 15 to 35 percent, depending on local market conditions and the state of the economy.

Many other cohousing groups believe they can only be successful by partnering with a developer and paying them a profit, but this is not always the case. Not-for-profit self-development continues to be possible. However it is difficult and requires discipline and self-control. Seeking professional assistance is wise.

Choosing to Spend More

Given this opportunity to save significantly by doing self-development, most cohousing groups will choose to spend amounts comparable to the developers’ profit and often even more, on three things:

1. Added project scope - improvements in the project, like a better heating system, better windows or a better roof. These are things a developer will not choose to spend money on, and therefore these are rare in other non-custom housing products in the market.
2. Additional services such as inefficient and expensive architectural services and multiple interactive iterations in the design process (not the fault of the architect). Again, these are things a developer will avoid spending money on.
3. Wasted time and delay - thinking, evaluating, considering and reconsidering all take time. A slow decision process will cost money.

All these factors cause added carry costs such as interest payments and other monthly overhead.

The bad news: Nationally, it seems, the average cohousing project actually costs a little more than the local production-built market rate housing. This will continue to be true unless costs are very carefully controlled. In many cohousing projects, this increase in end cost results in higher purchase prices for completed units of 105 to 115 percent of local market conditions. That’s 5 to 15 percent more than local production housing in the same local market.

I advise groups to keep these cost numbers lower if they can, and certainly below the 115 percent level if at all possible. If you don’t, appraisals can come in too low and final mortgages will become very difficult to obtain. The end costs of private units can be lower, as the group at JP Cohousing (Boston, MA) chose to do. But costs can also be much higher if you choose, as the cohousing group chose to do in Peterborough, NH in order to create a very lovely project built to high environmental and aesthetic standards. Normally this is simply because the cohousers made choices that added to the cost of their new homes.

Choice and Self-Control

The process of budgeting and controlling costs is driven by incremental choices made by the cohousing group. An upwards cost creep is most often the result. So this brings us to the issue of choice and self-control. Cohousers as self-developers have the opportunity to control costs and therefore the end unit sale prices that result. You can make the private units smaller, so they will cost less to build and therefore can be priced lower. You can choose modest levels of quality. You certainly don’t need to be spending your money on the “the packaging,” the things normally used by developers to sell a finished housing product: that fashionable kitchen nook, or the Jenn Aire range.

If you’re in the development process now, the single biggest thing you can do to save money on the final unit prices is to move forward quickly and efficiently, acting in a businesslike way, making quick and decisive decisions.

Hire Professional Help

Hire professional help and use their wisdom to your benefit. As strange as it might sound, waiting until everyone and everything seems to be ready is a luxury that will only cost you money. Sometimes you must act to allow the magic of community to happen.

So budgeting is a balancing act. In my work I guess at costs from many years of development and cohousing budgeting experience: What should local costs be? What might happen? How long will it take? What is the cohousing group going to choose in the end? How will each of these factors affect costs?

Sound budgeting is finding a balance between hope and caution.