Alexis Rivas opens his Mac laptop and zooms in on a 3D rendering of a house in Echo Park, a hip neighborhood in Los Angeles. Set off from the main house, there’s a small, modern structure that his company, Cover Technologies Inc., hopes to build. “You’ve got the kitchen here, a little stovetop, fridge,” Rivas says as he navigates around the 502-square-foot unit with his cursor. “And then we can take a walk around and go into the bedroom.”
It’s the kind of design that would typically cost a few thousand dollars in architecture fees, says Rivas, who co-founded Cover Technologies in 2014. The Los Angeles outfit can put together a proposal for just $250, using software to determine whether a specific property meets local and state requirements for adding a backyard unit. If building is allowed, the company designs one of its modular, factory-built structures to fit the plot. Homeowners often hesitate to take on a project like this, Rivas says over the whir of a drill in his company’s workshop, because “they’re expected to put a lot of time or money into the process without really getting a clear picture of what they can build.”
The housing crunch in many West Coast cities has revived interest in an old idea: the granny flat. Often called “accessory dwelling units,” or ADUs, the free-standing structures can be manufactured off-site and plunked in a backyard for about $150,000, including permits and site work. Some housing experts are promoting ADUs as a small way to address the affordability crisis in high-cost places such as Seattle, the Bay Area, and Los Angeles.
Lawmakers are warming to the concept, approving legislation to make it easier and cheaper to install ADUs. And unlike some other efforts to increase housing density, these measures generally haven’t been met with fierce opposition from antidevelopment groups. Perhaps that’s because ADUs can blend into single-family neighborhoods and let homeowners profit by owning rental units. “They might be the single most promising means of upping the housing supply that is also politically feasible,” says Issi Romem, chief economist at BuildZoom, a company that mines building permit data to help homeowners find contractors.
Seattle, Vancouver, and Portland, Ore., have all seen applications for ADU permits climb after issuing rules relating to their construction. California is playing catch-up: The state’s legislature passed laws in 2016 and 2017 removing parking requirements for ADUs, eliminating some utility connection fees, and streamlining the approval process. Los Angeles issued 721 permits for ADUs last year, a fivefold increase from 2016, according to Attom Data Solutions. San Jose, San Francisco, Santa Barbara, and Oakland also saw upticks last year.
While that interest is notable, ADUs aren’t a panacea for a state that for years has failed to keep pace with housing demand. California’s economy added 2.3 million jobs over the past five years. But the state issued permits for fewer than 480,000 new residential units over the same period, or about one home for every five additional workers.
Building enough backyard units to narrow the gap between supply and demand in any noticeable way will be challenging. An ADU is “a construction project that needs to go through zoning, regulation, financing,” says David Garcia, policy director at the University of California at Berkeley’s Terner Center for Housing Innovation. “The typical homeowner’s not prepared for that.” Many who are considering a backyard unit, he says, will want a “one-stop shop.”
A Portland-based startup offers a turnkey solution. Dweller Inc. covers the upfront costs of installing an ADU in return for a 25-year ground lease on the land where it sits. The company is responsible for finding a tenant and captures 70 percent of rental income. “We have the potential for this to be a very commonplace thing,” says Chief Executive Officer Patrick Quinton.
Dweller’s business model is untested—the company won’t install its first company-financed unit until June—as are those of several startups targeting the market. Seattle’s CityBldr started a service in March that streamlines the design and permitting process for ADUs. Cover, which has raised $1.6 million from Khosla Ventures, General Catalyst, and Fifty Years, has built only one of its backyard units, though Rivas says it has several in the pipeline.
As these businesses ramp up, they’re likely to run into a problem vexing more experienced builders: competition for materials and labor. Steve Vallejos, whose Valley Home Development has been installing prefabricated units in the Bay Area for more than a decade, is building his own factory after his manufacturing partners got busy with bigger projects. Studio Shed, a Boulder, Colo., company that’s installed more than 1,000 backyard units, including dwellings and workspaces, is concentrating on developing a network of builders, electricians, and plumbers to install ADUs. “There’s almost no upper limit in terms of the available places where people could put them,” says Jeremy Nova, the company’s co-founder. “That’s an opportunity for our business, but it’s very hard to find contractors right now.”Read More
In a six-floor retail space near Times Square, the Guy Fieri restaurant has closed and construction hasn’t begun on celebrity chef Todd English’s food hall. A tourist attraction featuring a 1/87th scale model of New York City was behind on rent for two months as of December, according to loan documents.
It wasn’t supposed to be this way.
When Kushner Cos. bought the property for $296 million in 2015, then-Chief Executive Officer Jared Kushner had big plans to capitalize on the tens of millions of tourists who visit the area every year. Deutsche Bank AG financed the endeavor before selling most of the debt to investors across Wall Street a year ago. Those investors were shown disclosures describing the retail space as 100 percent occupied and estimating it would throw off $24 million of rent annually.
But Fieri, English and Gulliver’s Gate, the operator of the miniature Manhattan, account for $9.9 million of that rent estimate, which underpinned a market-defying appraisal boost and helped justify $370 million of loans, the disclosures show. Problems with these spaces could make the economics challenging.
Last year, New York prosecutors requested documents from Deutsche Bank related to the property, where the Kushners used the debt to take out $59 million in cash. It isn’t clear what prosecutors are looking for. But mortgages granted under generous financial assumptions then sold to others who will bear the risk have piqued their interest in other cases. A spokesman for the Brooklyn U.S. Attorney declined to comment, as did a spokesman for Deutsche Bank.
Despite the turbulence, Kushner Cos. says it isn’t worried.
“We are very happy with this investment and continue to meet all our financial obligations and will continue to do so in the future,” Christine Taylor, a spokeswoman, said in an email.
Gulliver’s Gate was cited due to a technicality and payments were only a few days late, she said. The company has a letter of intent for the Fieri space from a prestigious tenant at a higher rent, and the operator of the food hall is making final adjustments to its plan, she added, saying the changes are increasing the value of the property and will attract more visitors.
A spokeswoman for Gulliver’s Gate said that it “is up to date on their rent and paid in full on their lease” and there are “no concerns” about its future there.
Kushner, President Donald Trump’s son-in-law and senior adviser, left his role in the family company when he joined the administration a year ago and divested from some assets. He says that, to avoid conflict of interest, he’s no longer involved in the business.
New managers of the loans bought from Deutsche Bank have taken notice of the property’s issues. Even if they were brief, the missed payments by Gulliver’s Gate, the second most lucrative tenant, triggered a clause in the Kushners’ loan documents allowing creditors to demand any excess cash from the property until the problem was resolved, according to reports from debt servicers. Managers also put the retail space on watch lists for potentially troubled debt because it lost money for nine months through September 2017 after accounting for interest payments, the reports show. That’s because new tenants were given millions in free rent, a common tactic used to fill store spaces. Kushner Cos. set aside $11 million of the loans for the free rent. Disclosures don’t describe that figure as including funds for vacancies.
Bumps in the road are common when repositioning buildings, which can take years to reach full earning potential. But the retail tenants at the former New York Times building at 229 West 43rd Street posed special risks. Disclosures for potential lenders show that none had a credit rating from Fitch, Moody’s Investors Service or S&P Global Inc., unlike many large retail properties that tend to be anchored by stores with known credit profiles.
In truth, maintaining full occupancy looked tough from the start. When the debt was sold to investors, the 500-seat Guy’s American Kitchen & Bar had been beset by negative reviews, and Todd English and his partners hadn’t yet taken possession of the space for his food hall. The chef, who has pulled out of another project, was scheduled to open for business there last April. Gulliver’s Gate, reportedly a $40 million endeavor, had not yet opened and was an untried competitor amid the glitz of Times Square.
On a recent Monday afternoon, the area reserved for Todd English was empty and unfinished with no sign of construction. Banners hung outside read “AFI Retail,” the name of a subsidiary of the building’s previous owner.
“We continue to work towards delivering this project,” Richard A. Chinsammy, executive vice president of Outstanding Hospitality Management Group, English’s partner for the food hall, wrote in an email. A spokeswoman for English said the restaurant is now scheduled to open in December.
Logos for Fieri’s restaurant had been ripped from windows, though a large metal sign remained above the doorway. A spokeswoman for Fieri declined to comment.
Upstairs, about 50 people were visiting Gulliver’s Gate. Two attendants said it was busier on weekends. Tickets for the 49,000-square-foot space filled with miniature buildings are $36 for adults and $27 for children and seniors. Tickets are also included with purchases of nearby hotel rooms, according to online reviews.
When Kushner Cos. bought the property in 2015 from Africa-Israel, the distressed firm of Russian diamond magnate Lev Leviev, online retailers were ascendant, and the future of brick-and-mortar stores was uncertain. So filling the property with tenants offering experiences seemed smart.
In addition to Todd English and Gulliver’s Gate, Kushner signed National Geographic, whose “Encounter: Ocean Odyssey” promises an “incredible underwater journey” without any danger of getting wet. Bowlmor Lanes — with bowling, an arcade and party spaces — was already there. Neither tenant has been reported to have any problems.
The expected surge in income preceded a new appraisal in October 2016 at $445 million plus additional cash in accounts, indicating a stunning growth in value that far outstripped the broader Manhattan retail market, which had suffered a slowdown. Against that valuation, the $370 million of loans represented only 83 percent of the value, the investor disclosures showed. But Moody’s and Kroll, the risk-assessment firm, found in independent calculations that the loans exceeded the value.
Deutsche Bank’s $285 million loan to Kushner Cos. was divided into four trusts with pieces of other loans to be sold to investors as commercial mortgage-backed securities. All told there are 163 loan pieces in the trusts, but only seven have been flagged on watch lists — including the four Kushner chunks. The Kushners received another $85 million in high-interest loans from SL Green Realty Corp. and Paramount Group.
In determining how much in interest payments the property could handle, underwriters estimated that costs to manage it would run about $4 million, disclosures show. If it achieved full rent of $24 million, that would indicate a modest cushion after making interest payments: about $18 million annually, according to data compiled by Bloomberg. But any loss of tenants with no immediate replacements could change those numbers quickly.
The situation might get worse before it gets better. In an October legal complaint against the Plaza Hotel, which contains a Todd English restaurant, the chef is accused of sexual harassment. In November, S&P downgraded the debt of another tenant, Guitar Center, saying it thought a potential debt restructuring could occur in the next six months, “a transaction that we would view as tantamount to a default.” A Guitar Center spokeswoman declined to comment.
Entertainment venues are more likely to experience money crunches in an economic slump than traditional retailers, Kroll said in its March report on the property and its debts. “This may subject the loan to increased risk of default and loss,” the firm said.
Still, there are worse venues to hunt for new tenants than Times Square, which commands the highest retail rents in the city after Fifth Avenue.