Market analysis has identified gaps in the local market that could be successful as part of a rehabilitation project. A specific retail gap analysis found several potential retail uses that were not currently captured in the market, including a full-service restaurant. Additionally, though Milliganton has many affordable multifamily establishments in town, there are virtually no market-rate apartments. As a unique product in the residential market, loft-style apartments on the Parker Building’s second floor could be marketed to those working in the town’s many healthcare and education jobs. The local community college has also expressed interest in leasing classroom and/or office space on the site.

A preliminary development budget for the building estimates that redeveloping the building into a mix of ground-floor commercial space (retail or office) and second-floor residential loft units would cost $1.2 million.

The Parker Building was listed on the National Register of Historic Places, and therefore could be eligible to receive federal and state tax credits for historic rehabilitation. Since historic rehabilitation projects typically have high construction costs, these tax credits, which essentially reduce a project’s equity requirements by providing tax credits equal to 40 percent of certain rehabilitation expenses, help to make projects more financially feasible for investors. North Carolina’s historic tax credit program was recently renewed–after a brief lapse—with new rules for 2015.

Based on the project’s likely “qualified rehabilitation expenses,” historic tax credit equity could contribute more than a quarter of the total $1.2 million development cost.

Typically, the rest of the development costs would then have to be funded through debt and equity sources. Given the low market rents that the project would probably support, a traditional bank might only be willing to loan $350,000 (or 29 percent of project costs) based on a potential income valuation of the property. This would result in an cash requirement of $462,000, or 38 percent of project costs, with  an equity multiple of 2 (in this scenario, an additional 8 percent of project costs are provided as equity in the form of a deferred developer fee). An equity multiple of 2 simply means that investors should expect to receive twice as much cash as they originally invested. This would not be an attractive investment for most investors: the share of cash to total project costs is much too high and the returns are not attractive for a project in a smaller market like Milliganton. Here’s a breakdown of this base case scenario:

Yet by providing a mezzanine loan, the Town or another public institution could help make this investment more attractive by simultaneously decreasing the equity requirement and increasing returns. A mezzanine loan is subordinated debt with a higher interest-rate, meaning that the Town’s loan would only be repaid after the project first repaid the loan from the bank (a higher-risk position for the local government).

In the case of Milliganton’s Parker Building, a $150,000 interest-only mezzanine loan would increase the project’s leverage. By increasing leverage, or the amount of borrowed funds, the developer does not have to raise as much cash to fund the project. This is a good thing for investors who want to limit the amount of their own cash in a project and raise the equity multiple while maintaining a reasonable debt service coverage ratio, or income to debt ratio. In addition, the local government would earn an annual return from the project in the form of interest and would see its initial investment paid back upon sale of the building in year 6, which would net the Town $54,000. Here’s how the case changes with the mezzanine loan:

The use of mezzanine financing is not appropriate in all scenarios. It shifts risk onto the mezzanine lender, and therefore typically entails interest rates significantly higher than primary loans. Yet in certain cases, a local government or other lender that seeks to make a redevelopment project successful can do so through a carefully-designed mezzanine loan.

For another example of how a local government can make a redevelopment project possible through the use of a mezzanine loan, take a look at this past blog post. A graduate student team performed the financial feasibility analysis in this post and presented it to local government officials as part of their graduate degree course work. Does your local government have a project like this for a graduate student team? If so, complete the webform here.

Tim J. Quinn is a former Community Revitalization Fellow with the Development Finance Initiative (DFI) and a graduate of the Master of City and Regional Planning program at UNC Chapel Hill. Andrew Trump, DFI Project Manager, and Omar Kashef, current Community Revitalization Fellow with DFI, also contributed content to this post. 

New rules affect residential property only

Local government inspection departments have long conducted periodic inspections of commercial and residential buildings pursuant to G.S. 153A-364 and G.S. 160A-424 (the statutes were originally enacted in 1969). Recent revisions to those statutes enacted by the General Assembly have changed the rules for residential property only. Local governments retain the authority to inspect nonresidential buildings as they have for decades. The rules described below apply only to residential properties.

Need for “reasonable cause” before conducting inspections of residential property

Prior to inspecting residential property, reasonable cause must first be established by the inspector. The reasonable cause thresholds are described in Table 1 below. Once any of the listed thresholds has been reached, the inspector may conduct one or more inspections as determined by local policy. For example, local policy could state that any time a complaint has been received, the inspection department will institute the following program of inspections: one inspection immediately in response to the complaint, as many additional inspections as necessary to verify repairs, another inspection six months following the first inspection, and a final inspection twelve months later.

Table 1: Conduct Inspection or Place Residential Property into a Program of
Periodic Inspections (G.S. 153A-364(a) and (b); G.S. 160A-424(a) and (b))

Notice that the scope of inspections is different depending on the type of reasonable cause. For example, if reasonable cause is established by a complaint, the inspector has reasonable cause to place the entire building into a program of inspections. If violations of local ordinances or codes are visible from outside the property, all buildings on the property are subject to periodic inspections as locally determined.

Definition of verified violation

A single “verified violation” is the “aggregate of all violations of housing ordinances or codes found in an individual residential rental unit during a 72-hour period” that “have not been corrected by the owner or manager within 21 days of receipt of written notice” from the local government. The 21-day grace period may be withdrawn by the local government if the same violation occurs more than two times in a 12-month period, in which case the repeat violation immediately becomes a verified violation. Violations resulting from tenant behavior shall be deemed corrected if the landlord brings an eviction action against the tenant within 30 days.

The process for determining verified violations, withdrawing the grace period for repeat violations, and curing violations through correction or eviction, is quite complex. Community and Economic Development bulletin #9 sets forth a step-by-step process for determining how violations become “verified violations.” Fortunately, as Table 1 above illustrates, there are other means of establishing reasonable cause that do not involve verified violations.

No reasonable cause required in a targeted area for inspections

A local government may designate a “targeted area” in which reasonable cause is not required for periodic inspections. The targeted area may not exceed one square mile or five percent of the area in the jurisdiction, whichever is greater. In order to establish a targeted area, the jurisdiction must do all of the following:

1. Ensure the targeted area reflects the jurisdiction’s “stated revitalization strategy.”
2. Determine that the targeted area is “blighted” as that term is defined in Urban Redevelopment Law.
3. Hold a public hearing about the targeted area.
4. Develop a plan to address the ability of low-income residential property owners to comply with minimum housing code standards.

Permit and registration programs for residential rental property

The statutes impose limits on local government permit programs and registration programs. A permit program (sometimes called a certificate program) requires an owner or property manager to obtain a permit or other form of permission from the local government prior to renting or leasing units. In other words, a unit cannot be rented to a tenant until a permit has been obtained. A registration program requires only that the units be registered with the local government. Registration typically involves providing information about the owner’s rental units, such as address, owner’s name, and property manager’s 24-hour contact information. Only residential rental properties with problems may be placed in a permit or registration program. Eligible rental properties (or rental units) are described in Table 2 below.

Table 2: Require Landlord to Register or Obtain Permit Prior to Renting Residential Units

(G.S. 153A-364(c); G.S. 160A-424(c))

Properties with crime or disorder problems

The top 10% of properties with crime and disorder problems is a subset of all properties that have experienced at least one crime and disorder problem during the relevant period (usually annual). The process for determining the top 10% is left to the discretion of the local government, but the process must be set forth in a local ordinance. A landlord must be notified of crime or disorder problems being counted against a property and be given an opportunity to correct the problems. When a tenant has been charged with a crime, law enforcement personnel from the jurisdiction must testify in eviction proceedings against that tenant; otherwise the tenant’s behavior cannot be counted against the property.

Fees on residential rental properties

A fee may be levied on residential rental property when the fee is also levied against other commercial and residential properties, unless some other general law expressly authorizes a special fee on residential rental property. In addition, a fee may be levied against a residential rental unit or property that meets one of the thresholds summarized in Table 2 above for placing the unit or property in a registration or permit program. The situations in which a fee may be levied against a residential rental property are described in Table 3 below. See Community and Economic Development bulletin #9 for an explanation of the $500 limit in a 12 month period.

Table 3: Levy a Special Fee or Tax on Residential Rental Property (G.S. 153A-364(c); G.S. 160A-424(c))

Business registration programs may include landlords

The purpose of a business registration program is to give local governments awareness of businesses operating within their jurisdictional boundaries. Business registration programs typically require businesses to provide basic information to the local government (type of business, addresses of office and places of business, registered agent, etc.) and to pay a nominal fee for administration of the registration program (see my colleague Trey Allen’s blog post on business registration programs).

A business registration program that includes landlords among several categories of businesses is arguably permissible. The prohibitions in the IPR statutes pertain to actions on property—either a “special fee or tax on residential rental property” or an attempt to register “rental property.” However, a business registration program is not applied to property at all. It applies to the business of being a landlord, not to the residential rental properties themselves. Nonetheless, care must be exercised: a business registration program could run afoul of the IPR statutes if (1) it were applied solely to landlords or (2) it collected a fee based on the number of residential rental properties, which would begin to look like a prohibited fee on residential rental property.

No guidance on business registration of short term vacation rentals

Some jurisdictions have imposed business registration requirements on owners of short term vacation rentals. These jurisdictions argue that short term vacation rentals should not be classified as residential rental properties; rather, they assert that a short term vacation rental is used for hospitality, not as a residence, during the vacation rental season. Under that reasoning, the IPR statutes’ prohibition on residential rental property registration would not apply to short term vacation rentals. The recent revisions to the IPR statutes do not clarify how a short term vacation rental should be characterized.

Vacant property registration authorized

A vacant property registration program has three primary components: (1) it requires vacant buildings or properties of any kind to be registered with the local government; (2) it directs inspectors to periodically examine the exterior of registered properties and, as required, conduct interior inspections for fire code compliance and when violations are observable from outside the property; and (3) it assesses a fee on registered properties to cover the costs of inspections and administration of the program. A vacant property registration program does not run afoul of the IPR statutes because it does not target residential rental property (if properly designed). See Question 33 in Community and Economic Development bulletin #9 for further explanation.

New appeal procedure

A limited right of appeal was added in the most recent revision to the IPR statutes. An appeal of a local government “decision” to take “action against an individual rental unit” may be made to a designated local government board. The board sits as a quasi-judicial body when hearing the appeal. See Question 37 in Community and Economic Development bulletin #9 for more detail.

Mother Earth Brewing in Kinston, NC: Gold LEED certified & Historic Preservation

Carl Elefante, AIA, LEED AP, a prominent proponent of sustainable historic preservation, states, “The greenest building is the one that has already been built.”  Elefante’s declaration revolutionized the commonly-accepted theory that newer is better, both for society and for the environment. Elefante meant to dissuade public and private sectors from new construction and development, and to revalue existing and irreplaceable building stock. The preservation of historic structures has proven to be an effective tool towards economic, environmental, and social sustainability. However, the green movement, as it exists currently, stresses new construction rather than the preservation of existing resources, leading to implied preferences towards the touted sustainability of “green design.” 

Rating systems, such as the United States Green Building Council’s Leadership in Energy or Environmental Design (LEED), have overlooked historic structures in their evaluation of green architecture, leading to the demolition of these existing structures in favor of new construction. This rating system was created in the hope of promoting “green” architecture and encouraging a rubric that such architecture can be measured against. It exists today as the most recognized and implemented rating system in the green building industry. However, the least valued point system within LEED is that of existing buildings, which leads to the promotion of new construction rather than the renovation of older structures.

Sustainability, as defined by economist Robert Solow, is the ability of a society to “leave for the future the option or the capacity to be well off as we are” in natural resources, landscapes and cultural heritage. The concept of sustainability is an umbrella term that is both casually and formally applied to multiple disciplines. Sustainability has become intertwined with the field of historic preservation, becoming prevalent in the rehabilitation and maintenance of the built environment. When evaluating preservation projects within the context of sustainability, it is crucial to understand and denote the motivation behind such developments and rehabilitations.

Developers, architects, and other key players should be on the same page when it comes to the overall goals and proposed result of the preservation or construction of historical sites and landscapes in regards to sustainability. By providing developers and homeowners with tangible economic, environmental and social benefits, it becomes difficult for them to overlook the profits associated with historic preservation. As Donovan Rypkema and Caroline Cheong of PlaceEconomics, state, “historic preservation emerges [today] as an economically sound, fiscally responsible, and cost-effective response to the challenges of today’s economic environment.”

Per Amy Webb, Director of Heritage Tourism Program of the National Trust for Historic Preservation, “there is no form of economic development that is more cost effective [in leveraging] scarce public resources than…preservation-based commercial revitalization.” As historic preservationists, it is often commonplace to overlook promoting the economic benefits of preserving an existing structure for the more obvious educational, environmental, social, historical, and cultural benefits. Nevertheless, it is often the economic arguments that win the battle against the proposed demolition, actively or by neglect, of a historic building or district. The rehabilitation and restoration of historic buildings can impact the economics of a historic district in many ways. Rypkema denotes three categories of such economic impact: jobs created, increase in household income, and demand created in other industries. These economic lines of reasoning can offer substantial proof to the benefits of historic preservation in today’s city management and planning, both on an individual and collective level.

Swift Building Lofts, High Plain Architects, 2009, Billings, Montana. Project Highlights: LEED Platinum; National Register; Historic Tax Credits; MT Preservation Alliance; Yellowstone Historic Preservation Board; Seattle AIA WMIG 2012, USGBC Montana Sustainable Building Award.

The economic benefits of historic preservation can include, but are not limited to: longer life spans (100 years) of historic structures versus life spans of new buildings (30 to 40 years); creation of jobs; increase in property values, natural resource conservation and end of landfill increase; use of existing public investments and infrastructure; support of small businesses; and revitalization of Main Street and commercial core; investment attraction; tourism attraction, sprawl prevention; establishment of affordable housing; and viable economic development. Per the Forum Journal, preservation has grown to be increasingly superior economic alternative to new construction and other investments. Within New Jersey alone, over $1 million in non-residential historic preservation created 38.3 national jobs and 19.3 state jobs; new construction created 36.1 national jobs and 16.7 state jobs.

Per Rypkema, community benefits of such a promotion and investment of preservation include the formation of new business; private investment and tourism stimulation; increase of property values; enhancement of quality of life, sense of neighborhood, and community pride; creation of new jobs; compatible land-use patterns; increase of property and sales taxes; and dilution of pockets of deterioration and poverty. Financial incentives, such as tax credits and abatements, allow for economic safeguarding and development and provide investors and homeowners with even greater motivation to establish historic preservation practices within their existing structures. In addition to the economic benefits of historic preservation, sustainability can afford economic benefits through its implicit environmental design.

Through the reduction of waste and energy costs and the preservation of social and historical infrastructure of individual buildings and larger neighborhoods, sustainable preservation and construction aids in the diminution of our carbon footprint. With over 40 percent of yearly carbon emissions attributed to building construction and maintenance, it is necessary to reevaluate building practices within the realm of minimal to zero-impact sustainability. This neutral or positive environmental impact of structures is reliant upon the reduction of greenhouse gas emissions, energy savings, water efficiency, indoor air quality, and resource stewardship.

The environmental effectiveness of historic structures is a continued debate within the world of architecture, construction, design, and sustainability. Key findings of a study conducted by the National Trust for Preservation, The Greenest Building: Quantifying the Environmental Value of Building Reuse, ascertained that “savings from reuse are between 4 and 46 percent over new construction when comparing buildings with the same energy performance level.” The study ultimately concluded that “when comparing buildings of equivalent size and function, building reuse almost always offers environmental savings over demolition and new construction.”

The popularity of sustainable and “green” building necessitates further exploration of the social, economic, and environmental sustainability inherent in the preservation of historic structures. The examination of tools such as Life Cycle Analysis (LCA), Life Cycle Cost Analysis (LCCA), embodied energy, energy consumption analysis, and other metrics will further demonstrate the relationship between preservation and the environment, particularly the contribution of historic preservation to sustainable development and Smart Growth.

Kaley Huston is a Master’s candidate in the University of North Carolina at Chapel Hill Department of City and Regional Planning specializing in Land Use and Environmental Planning and a Community Revitalization Fellow with the Development Finance Initiative. She is also pursuing a Natural Hazards Resilience Certificate in partnership with the Coastal Resilience Center of Excellence at UNC. She holds a Bachelor of Arts in Historic Preservation from the University of Mary Washington.

As a result of the in-pouring of money the event brings, hosting it is highly sought after; competition between cities is fierce, with many footing the bill for major arena and infrastructure improvements to entice the committee’s selection. The 2015 selection for the 2017 location was no different. After agreeing to $40 million worth of improvements to their arena ($33.5 million of public investment) Charlotte, NC was selected. If Charlotte could achieve the average economic impact of the event, the investment into the arena would deliver a 293% return on investment.

Enter North Carolina House Bill 2. The controversial bathroom law which bans individuals from using restrooms and changing facilities that do not correspond to the sex on their birth certificates, found many opponents, including the NBA. Upon the bill’s passing, the NBA pulled All-Star Weekend from North Carolina, relocating it to New Orleans, LA; a move which turned a potentially 293% return on investment for the city of Charlotte to zero. To add insult to injury, the NCAA and ACC soon followed suit, removing numerous longstanding championships and tournament locations from the state. All accounted for, 7 NCAA championships, 7 NCAA tournament games and regionals, and 10 ACC Championships have been relocated. As Ford Porter (a spokesman for Roy Cooper, the now current Governor) expressed at the time, “these tournaments pump money into our economy and give our communities and fans a chance to showcase our incredible tradition of college sports.”

In a separate but similar public-private investment, Atlanta is currently wrapping up construction on a new stadium to replace the Georgia Dome. As mentioned earlier, due to the stringent requirements of the organizations putting on these events, cities often shell out millions of dollars on improvements in hopes to attract major events. As such, the city of Atlanta’s decision to invest $700 million of public money to aid in the construction of the $1.6 billion Mercedes-Benz Stadium brought about a degree of controversy in and of itself. However, as a testament to the decision’s success thus far, the stadium has not only retained the major events currently held at the Georgia Dome such as the Chick-Fil-A Kickoff Classics, the Peach Bowl, and the SEC football championship, it has been successful in attracting the 2018 College Football Championship game, Super Bowl LIII (2019), and the Final Four (2020). These three additional events combined are capable of generating approximately $809 million of economic impact if they each manage to achieve the numbers achieved in some of their more recent occurrences and projections – $273.6 million (2016), $400 million (2020 Projection) and $135 million (2012), respectively. With the stadium being a much more financially intensive undertaking, it would be beneficial to the city of Atlanta to do all it can to ensure its $700 million investment pans out.

Shelton Whitley is a first-year business student at the UNC Kenan-Flagler Business School and is currently a Fellow with the Development Finance Initiative.

As defined in the statute, “[h]istoric districts established pursuant to this [law] shall consist of areas which are deemed to be of special significance in terms of their history, prehistory, architecture, and/or culture, and to possess integrity of design, setting, materials, feeling, and association.” G.S. § 160A-400.3.  Cities and counties can establish historic districts and historic landmarks for defined areas and properties.  Once a local government has designated a property as a historic district or landmark, the property owner must seek a certificate of appropriateness (COA) from the local historic preservation commission in order to make certain changes to the property.  A COA is required for any construction, alteration, moving, or demolition of any exterior feature of a designated property.

The preservation commission’s authority for COAs is limited: The commission shall take no action under the preservation authority except to prevent development that “would be incongruous with the special character of the landmark or district.” G.S. § 160A-400.9.

Special Character

The character of the district or landmark is not left to speculation or guessing.  It is not conjured up at the time of COA review.  State law requires the local government to distill and clarify the character and context of the historic district or landmark at the time of designation and to establish “principles and guidelines” for COAs.

Before the local governing board may establish a historic district the local government must draft and submit to the State Historic Preservation Officer (SHPO) “[a]n investigation and report describing the significance of the buildings, structures, features, sites or surroundings included in any such proposed district, and a description of the boundaries of such district.” G.S. § 160A-400.4. For historic landmarks, the local government must draft and submit to the SHPO a similar document.  Additionally, the ordinance designating the landmark “shall describe each property designated in the ordinance, the name or names of the owner or owners of the property, those elements of the property that are integral to its historical, architectural, or prehistorical value, including the land area of the property so designated.” G.S. § 160A-400.5.

Separately the preservation commission must “prepare and adopt principles and guidelines . . . for new construction, alterations, additions, moving and demolition.” G.S. § 160A-400.9.  These principles and guidelines commonly are adopted as design guidelines for the district.

With these procedural requirements, local governments must investigate and report on the elements justifying the designation of a historic district and/or landmark and establish design principles and guidelines to guide the commission in determining if a change is incongruous with the district.

Incongruity Standard

The incongruity standard is a subjective standard requiring judgment.  In other words, it is a quasi-judicial standard.  The commission must hold an evidentiary hearing to take in evidence and evaluate that evidence against the standards for incongruity.

The North Carolina Supreme Court explains the incongruity standard to be “a contextual standard.”

A contextual standard is one which derives its meaning from the objectively determinable, interrelated conditions and characteristics of the subject to which the standard is to be applied. In this instance the standard of “incongruity” must derive its meaning, if any, from the total physical environment of the Historic District. That is to say, the conditions and characteristics of the Historic District’s physical environment must be sufficiently distinctive and identifiable to provide reasonable guidance to the Historic District Commission in applying the “incongruity” standard.

A-S-P Associates v. City of Raleigh, 298 N.C. 207, 222, 258 S.E.2d 444, 454 (1979)(citation omitted).

Evidence

As with any quasi-judicial decision, a decision on a certificate of appropriateness must be based upon competent, relevant, substantial evidence in the record.  The record is composed of the application, any staff analysis or reports, testimony and documents presented at the evidentiary hearing, and other related documents.  Additionally, the preservation statutes specifically highlight the role and usefulness of site visits and expert opinion in the decision-making process.  “As part of its review procedure, the commission may view the premises and seek the advice of the Division of Archives and History or such other expert advice as it may deem necessary under the circumstances.” G.S. § 160A-400.9(d).

Limited Discretion

The incongruity standard does not grant the preservation commission “untrammeled authority to compel individual property owners in the Historic District to comply with whatever arbitrary or subjective views the members of the Commission might have as to how property in the district should be maintained or developed.” A-S-P Associates v. City of Raleigh, 298 N.C. 207, 221, 258 S.E.2d 444, 453 (1979).  A decision to grant or deny a COA must be framed within the character of the district and based on evidence in the record.

North Carolina courts have ruled that when a preservation commission decision departs from the framework of historic standards and guidelines, that decision is arbitrary and will not stand.  In Sanchez v. Town of Beaufort, for example, the court disapprovingly noted that the “height requirement was not reached on the basis of any particular determining principle. Rather, each [commission] member reached what he or she considered an appropriate height based on their own personal preferences.” 211 N.C. App. 574, 581, 710 S.E.2d 350, 355 (2011).

The Court of Appeals quoted commissioners discussing the height requirement in loose terms, unmoored from the applicable standards. One commissioner argued that the project could be redesigned to reduce five feet in height. When the chair asked for the basis for the five feet, the commissioner offered:

Well five feet (5′) would be if you had a . . . This is his determination, with a ten foot (10′) ceiling downstairs, and a nine foot (9′) ceiling upstairs, if you had eight foot (8′) ceilings, that’s three feet (3′). . . .  And then, if the duct work was to be relocated, that’s two more feet. So that would be five feet (5′) without a lot of material changes. Now it could be a different number, but I’m just throwing that out.

211 N.C. App. 574, 581, 710 S.E.2d 350, 355 (2011)(emphasis added by court).

Another commissioner made his own calculations for how the project could be redesigned.  A third commissioner stated simply that “twenty five feet (25’) is a reasonable height.” When the commission voted on the height limit one commissioner “explicitly admitted that none of the [commission] guidelines were used to determine that height.”

The court was clear: “Since the twenty-four foot height requirement was established by each member of the [commission] without the use of any determining principle from the [design] guidelines, it was clearly arbitrary.” Sanchez v. Town of Beaufort, 211 N.C. App. 574, 582, 710 S.E.2d 350, 355 (2011).

Conclusion

To be sure, determinations about certificates of appropriateness are not simple, objective determinations—they require judgment from the decision-makers.  That is why COA decisions require quasi-judicial procedures.

That said, the establishment of the historic district and the evidence in the record guide the decision.  At the time of establishing a historic district, the local government must submit a report to the SHPO.  For historic landmarks, the ordinance must describe, among other things, the integral elements of the landmark. Before it acts on a COA application, the preservation commission must adopt principles and guidelines—design guidelines.  Additionally, when a property owner seeks a COA, the preservation commission must base its decision on the standards establishing the special character and on evidence in the record—the application, the testimony, and other information obtained through the evidentiary hearing.  If a decision veers from those standards and evidentiary record, it may be overturned as arbitrary and capricious.

Adam Lovelady is a School of Government faculty member.

Infrastructure Resilience and Vulnerability. The most obvious and immediate impacts of a disaster are often the damage done to roads and bridges, and the failure of facilities such as dams and levees. From an engineering standpoint, resilience is an expectation that physical infrastructure can be quickly restored to normal functioning based on acceptable standards of design, construction, and maintenance. There are also human and institutional factors that play into consideration of a more broadly-defined idea of infrastructure resilience and vulnerability. Thus, infrastructure resilience, in addition to adequacy of roadways, includes medical capacity, meaning ready access to a hospital with emergency facilities, availability of first responders, and the level of investment in the emergency response systems. It also includes convenient access to food as measured by proximity to a grocery store.

Infrastructure vulnerability refers to those physical conditions and characteristics of the community which may put the population at a higher risk during and after a disaster. Four are particularly important. At-risk housing specifically a high percentage of housing units that are mobile homes or were built before 1960, and evacuation challenges where there are people living in group quarters or in homes with no vehicle available. The latter factor also includes a count of the number of bridges that either carry high levels of traffic or if damaged would involve long detours. Two other factors relate to physical infrastructure: high potential loss facilities estimating the population close to a dam or a nuclear facility, and water system quality where a system has been subject to health violations.

In North Carolina, there are 36 counties that can be classified as having low infrastructure resilience and high infrastructure vulnerability. These are spread across rural North Carolina, along the Virginia border, the coastal plain, especially to the south, and parts of the mountain west.

Environmental Resilience and Vulnerability. The fourth dimension focuses on the ability of the landscape to bounce back, absorb, or adapt to disasters, and on the range and severity of natural disaster risks faced by a community. Environmental resilience is a function of landscape diversity – the more diverse an area is in terms of climate, rock formations, land cover, and land-form, the more resilient it is. It is measured through an index derived from a complex international climate and land use database.

Environmental vulnerability encompasses five main types of risk: the severity of storms, and the range of storm types that have impacted a community over the past 15 years, and the numbers of people at risk of flooding, earthquake, and drought.

 Based on national comparisons, 75 counties are classified as having high environmental resilience and low environmental vulnerability. Just five counties are classified as having low resilience and high vulnerability and these are clustered in the south of the coastal plain – Bladen, Brunswick, Columbus, Robeson, and Pender.

Community Resilience and Vulnerability. When all four dimensions – social, economic, infrastructure, and environment – are combined, what does this tell us about the overall community resilience of North Carolina’s counties?

Rather than attempt to create a composite of the four dimensions, the approach taken has been to count those counties that are in each of the four quadrant classifications and to highlight those counties that either have two or more dimensions with high resilience and low vulnerability, or with low resilience and high vulnerability. There are three North Carolina counties that are classified as high resilience and low vulnerability across all four dimensions: Cabarrus and Iredale in the Charlotte Metropolitan Area and Chatham in the Durham-Chapel Hill Metropolitan Area.  There also a further 13 counties that are so classified on three dimensions to be found within or adjacent to the Metropolitan Areas of Asheville, Charlotte, Hickory, Winston-Salem, Durham-Chapel Hill, and Raleigh.

At the other end of the spectrum, there are three counties that are classified as having low resilience and high vulnerability across the four dimensions: Bladen, Columbus, and Robeson, a cluster of rural counties at the southern end of the inner coastal plain. There are another 12 counties that are similarly classified on three dimensions.  Nine of these are on the inner coastal plain, with two in the southern Piedmont, and one in the far west. The map shows those counties nationwide with low resilience and high vulnerability across one or more dimensions, with the darkest red across all four.

The obvious next questions to be explored in future blogs are: Do these indexes and classifications have any meaning on the ground? What practical steps can governments and communities take to improve their resilience? What makes some counties highly resilient and others highly vulnerable?

While air rights in New York and Chicago have made headlines for years, air rights also play an important role in economic development in North Carolina. In particular, as communities of all sizes see value in creating a mix of uses in their downtown environments developers have sought to maximize value and lower risk through increasingly complex vertical ownership structures. Key reasons for separate ownership of a mixed use building from include:

• The part is often greater than the sum: separate ownership means that developers may be able to charge a premium on a use that is fetching high prices without having to saddle the buyer with use that is underperforming or they may not be familiar with managing.
• More available of financing: Few banks are able to underwrite a complex mixed-use project, separating uses vertically into separate projects opens the development up to a wider pool of capital more comfortable with single-use developments.
• Public Private Partnerships: Municipalities often prefer to be treated differently than the private portion of a P3, as well as wishing to capitalize on public investments by integrating a wholly private use above or surrounding a public building, increasing revenue and subsidizing public dollars.

Once a developer seeks to divide ownership of a vertical development, what options are available to structure the division of air rights, and what may they consider when deciding?

Considerations When Using Air Rights

Air rights transfers are complex legal transactions. Three of the most common types of transactions that allow development are leasing air rights, and condominium-ize and vertical subdivision of air.

Air right leases, much like ground leases, do not transfer ownership of the developable area, but the structures built in that space are owned by the grantee while the lease is in force. Sale structures of air rights offer the benefits of ownership to the developer, but at the cost of increased complexity, legal expenditures, and possible unintended consequences.

Going Condo

Condominium statutes passed by most states, including North Carolina, enable an owner to make a “declaration,” formally dividing the air into separate units, often according to use while the “common elements” (shared facilities such as garages, roofs, and hallways) owned, undivided, by the all owners of individual units. The regulated nature of a condominium declaration may make it easier to secure financing for this unique type of development.

However, the process’ highly regulated nature imposes burdens as well. It must meet all statutory requirements of the enabling legislation to be legal. Because legislation in many states is designed to protect consumers of residential condos, the process is often cumbersome for commercial development, for example requiring extensive bylaws and governance structures written with multiple residential owners in mind. Moreover, shared ownership of common elements may not be in the interest of owners who do not want to be liable for common elements.

Despite these limitations, condominium structuring of air rights has a long history and is gaining acceptance across the country. One new trend is the formation of large “mega units” that contain whole portions of a building that are granted the power to further subdivide into more finite uses and owners. Similarly, other states, such as Colorado, Nevada, and Minnesota have laws like the Uniform Common Interest Ownership Act which offer an alternative to the condominium. By allowing the Planned Unit Development process in vertical space, the spaces are dividing with documentation much like a condominium declaration, but with common elements are owned by an association, rather than the separate owners of spaces, alleviating some of the issues of condominium treatment of air rights.

Vertical Subdivision

Platted air space subdivision offers another vehicle to transfer ownership of air rights. Similarly conceived as two dimensional subdivision, this approach to conveyance usually requires detailed plats referenced to a parcel of ground below or city datum as set out in local subdivision ordinances.

In contrast to the common elements in condominium structure, vertical subdivisions are independent and self-contained, meaning that engineering and access requirements must be separately negotiated with great care. These agreements are often included in reciprocal easement agreements (REA) between the owners which may contain provisions similar to a condominium declaration, but, as a result of negotiation rather than statute, are less stringently regulated. Solutions range from separate support, access, and utilities, to a more shared arrangements.

Other Considerations

While structuring the conveyance of air rights is a fundamental step in realizing air right development, it is only a piece of the issues that arise in these complex deals. Assigning fair value in areas with no comparable transactions, the use of air rights as tax preferred conservation easements, and issues with title insurance are all nuances in air right development finance that must be the subject of future blog posts.

Peter Gorman is a Master’s candidate in the UNC-Chapel Hill Department of City and Regional Planning specializing in Economic Development and a Community Revitalization Fellow with the Development Finance Initiative.

The following are articles and reports on the web that the Community and Economic Development Program at the UNC School of Government shared through social media over the past month. 

Items of interest related to CED in North Carolina:

Why hasn’t North Carolina’s “largest, shovel-ready industrial site” landed a major company yet? ‪http://bit.ly/2kuvAYC 

Over 377,000 North Carolina renter households experienced severe cost burdens and other housing-related issues in 2013, says report. http://unc.live/2mpl2vK

School of Government faculty member Tyler Mulligan proposes a framework for judicial scrutiny of government subsidies for private development in the Harvard Law & Policy Review: ‪http://bit.ly/2lMmeb5 

Other CED items:

Thought manufacturing job losses were bad? Harvard Business School asks: could future service sector job losses be worse? http://hbs.me/2mpjZvS

Federal Reserve Bank post examines how where you live impacts the availability and accessibility of good paying jobs that don’t require bachelor’s degree: http://bit.ly/2mplQ3w

Research finds large corporate landlords more likely to evict tenants than small landlords in Atlanta: http://bit.ly/2m8YsGX

Report asks: Are there enough building code inspectors to keep development safe and on pace? https://t.co/h9CPZOuiGr

Op-ed explains the technical reasons why cellular technology (like 4G and next generation 5G) can’t reach rural areas without fiber backbone. ‪http://bit.ly/2l4iPBu 

Last month’s edition of “What @sog_ced is reading….” http://ced.sog.unc.edu/what-sog_ced-is-reading-on-the-web-january-2017/

Compiled by Marcia Perritt

Ranging in size, but averaging roughly 550 square feet, ADUs are large enough to be self-contained (equipped with bathroom, kitchen, etc.), but small enough to remain subordinate to the main house.  An ADU can be attached to the main dwelling with a separate exterior entrance or detached on a residential lot that is separate from the main dwelling—but either way smaller than the main unit; by  definition, an “accessory” to the home. (The Accessory Dwellings website includes a breadth of information on designs, costs and local permitting.) 

Due to the size and subordinate nature of ADUs, they tend to rent at low prices, creating affordable housing options at no or very little cost to the public. That’s why many urban designers, planners and smart growth advocates are embracing pro-ADU policies as a way to meet the challenges of an aging baby boomer generation and skyrocketing housing prices.

Under President Barack Obama, the White House released a Housing Development Toolkit in September of 2016 which recommended ADUs as a way to address the increasing demand for intergenerational living arrangements. The report cites the decreasing rate at which young adults reach financial independence and found that:

” …while the number of Americans caring for both an aging parent and a child has increased only marginally, the costs associated with caring for multiple generations has increased significantly as a greater share of parents support their children beyond age 18 […] In addressing the temporary needs of families that are stretched thin, accessory dwelling units can create a permanent increase in affordable housing stock.”

ADUs are also praised for creating invisible or gentle density, a concept that refers to an increase in the number of residents per area without the construction of large structures that can alter a neighborhood’s aesthetic.  By expanding the available rental housing stock in areas zoned largely for single-family housing, the marginal increase in density reduces the costs associated with extending utilities to new homes, without overextending infrastructure in any one area. Municipalities can, in theory, plan more efficiently for existing infrastructure, including transit routes.

The impact is also environmental. Faculty and staff at NC State’s Affordable Housing and Sustainable Communities Initiative recently completed the Mordecai Backyard Cottage Project, where they worked with residents to promote a series of ADU designs for the Raleigh, NC neighborhood. As part of the project, researchers studied the potential benefits of ADUs, highlighting not only affordability and adaptability as discussed above, but also sustainability due to the smaller carbon footprints created by smaller living spaces.  With a 2,000 square foot home creating an estimated 8,000 pounds of waste, the relative impact of building homes a quarter of the size is staggering.

The potential benefits of ADUs, however, are still limited by the small scale in which they are executed, in most part because municipalities concerned with ADUs typically adopt a passive planning approach that regulates instead of encourages their construction. There are significant financial and regulatory barriers to building ADUs, and cities attempting to scale up ADU programs are often met by community resistance rooted in legitimate neighborhood concerns.  These concerns revolve around unanswered questions about how the units would disrupt the “feeling” of the neighborhood, whether by increasing traffic, bringing in short-term renters, or infringing on backyard privacy.

Understanding the benefits but respecting their community’s concerns, municipalities across the country are testing various approaches to permitting and/or encouraging ADUs. Public officials are assessing how permitting ADUs will work with existing regulations that relate to parking, density, use, etc. (The UNC School of Government’s Coates Canon’s blog describes NC’s regulatory environment here.)

The median cost to build an ADU can range from $45,500 for attached units to $90,000 for detached units. The cost and risks of construction can put the extension out of range for many households. Additionally, any improvements to the property will likely result in an increase in property taxes, which although likely to be offset by rental income is still an additional burden on the homeowner.  At a still higher level there is uncertainty about how ADUs would actually affect housing prices – would they fill a gap on one end but increase pressure elsewhere? “A dramatic increase in property value, due in part to the advantage ADUs can provide in offsetting an owner’s mortgage” would be a boon to sellers but may further erode housing affordability long-term.

Municipal officials interested in incentivizing the development of ADUs while curbing unintended consequences may find they can be more effective by taking a more aggressive approach.  Santa Cruz, CA is one of the least affordable cities in the United States – just 6.9% of residents earn enough to afford a median-priced home. The ADU Development Program was created to supplement the city’s larger efforts to combat the housing crunch by encouraging the “development of small-scale neighborhood compatible housing and to discourage the proliferation of poorly-constructed illegal ADUs.” To minimize the impact of ADUs on the “feeling” of the neighborhoods, the program ordinance implemented zoning standards and limits new construction to seven prototypes designed by local architects.  To address the cost limitations, the program streamlined the permitting process, reduced requirements that created cost premiums, provides technical support, and manages a small loan program. The city expects ADUs to make up 20% of the new affordable housing units over the next six years.

Sarah Odio is a Master’s candidate specializing in Economic Development in the UNC-Chapel Hill Department of City and Regional Planning. She is a Community Revitalization Fellow with the Development Finance Initiative.

The tech sector has been remarkably robust of late and has been a boon for the North Carolina economy. Not only was the average salary per tech worker $110,000 in 2015, it was almost twice the average salary for all industries in NC. The tech industry is estimated to make up approximately 20 percent of North Carolina’s economy in terms of employees, earnings, and sales. Another staggering figure to wrap your mind around is for every job created in the technology industry, another two jobs are supported across all industries are supported in NC, at least according to the North Carolina Technology Association (NCTA). The short- and long-term trends for North Carolina highlight the tremendous opportunity and growth that North Carolina has in store if the trends continue.

Source: 2017 State of the Technology Industry Report

Four sub-sectors make up the tech sector: energy, environmental, life sciences, and information technology (IT). IT by far dominates the tech industry in terms of employment, establishments, and sales making up over 50 percent of the almost 240,000 tech employees. What is tech though more specifically? That last sentence included the 14^th use of the word tech in this blog post so far (15 now), but the following table will hopefully illuminate this nebulous category of tech.

Comparison to other states

Despite higher growth in the tech sector across the United States, the proportion of tech to non-tech employees in North Carolina (6:94) is lower than other states studied in the report including California, Texas, and Virginia that are all at 8 percent or above. This potentially indicates that North Carolina’s economy is more diverse, yet even that tech proportion is still expected to grow indicating future job growth. Not only is that expected to grow, median hourly earnings for tech jobs adjusted for purchasing power ranks 7^th in the country!

Room for Growth

Where there is room for growth in comparison to other states is research and development, patents, and the amount of venture capital funding providing financing for additional growth and start-ups in North Carolina. However, with North Carolina’s strength in higher education institutions, lower average in-state tuition, and high-speed broadband, there is room for optimism and continued growth rates. Even if the NCTA’s growth trends are too optimistic, the tech industry is likely here to stay as it has clearly grown and is still growing in North Carolina. 

Omar Kashef is a third-year graduate student seeking a dual-degree in Public Administration and Information Science and is currently a Fellow with the Development Finance Initiative.