Homebuilding companies all over the country include the word innovation in their their company's name or in a company slogan describing the work they do. In fact, innovation, or some derivation of it, might be the most popular word that home builders use to describe themselves. Embracing and demonstrating innovation, however, is a lot harder than claiming it. In this special feature, BUILDER profiles four companies—three builders and a developer—that over the years have made innovation the driving force of their business models. They have been willing to take chances, try new things, lead rather than follow, and are making money doing it. Their areas of focus—workforce housing, energy-efficient construction, customer satisfaction, and community development—also give them a decided edge at a time when all builders are struggling to find customers.
Mix and Match
Frank Spadea was still fuming a week after the city council of Virginia Beach, Va., on Aug. 28, rejected a proposal from his company, Franciscus Homes, to develop a patch of farmland into a residential community to be called Village Bend, with 150 tenplexes and 106 single-family detached homes. The rebuff was ironic, given that on that same day Virginia Beach passed its first workforce housing ordinance, the requirements of which Village Bend met fully. The statute provides a 30 percent density bonus for builders that set aside 17 percent of homes within a neighborhood for buyers whose incomes fall between 80 percent and 120 percent of Virginia Beach's $64,600 area median income.
But in May, Virginia Beach had already restricted construction on all land zoned R10 to R40 (that is, zoned for 10,000- to 40,000-square-foot lots). The land Franciscus wanted is zoned R15. “Frank was asking for an A12 zoning [12 homes to the acre], which was a 300 percent increase in density,” explains Sharon Prescott, development administrator for the city's Department of Housing. “Village Bend is a wonderful plan,” she concedes, but it was in “direct conflict” with the city's comprehensive plan, which prohibits “spot rezoning.”
The 71-year-old Spadea, who started Franciscus Homes in 1976, disputes Prescott's characterization of his plan and has choice words for planners and politicians who “are just winking at affordable housing” but “cave in” at the first clang of NIMBY noise. Spadea admits, though, that he didn't do a good-enough job explaining the benefits and concessions of his proposal. “We needed to set up a workforce workshop for the council members,” says this former schoolteacher, “because they didn't understand what our proposal was about.”
His setback in Virginia Beach didn't leave Spadea wracked with self-doubt about the potential of workforce housing or the processes Franciscus employs to build these homes profitably. In fact, he's taking this formula on the road through licensing and possibly franchising agreements that provide other builders with detailed, Web-supported starter kits.
“What Frank wants to do is unique, different, and powerful,” says Mitch Rouda, BUILDER's former editor and once an executive with Trophy Homes. Rouda is now a principal, along with Spadea and NVR's former CFO Jim Martell, in Workforce Housing Partners (WHP), a Washington-based entity they created to sign up builders as licensees. Rouda says the appeal of Franciscus' workforce model is that the homes produced “are affordable, some are hyper-affordable, and the whole [community] looks good.”
The Power of 10 Spadea's affinity for workforce housing is a natural outgrowth of Franciscus Homes' product and pricing evolution. Franciscus is on track this year to build 89 homes, almost all of them condos averaging 1,650 square feet and $267,000. (The company will also build another 90 houses through joint ventures with other builders, including its longtime partner Napolitano Builders, a local competitor.) Its core product and bestseller in many communities is a tenplex with stacked flats that allows Franciscus to get up to 16 units per acre. The tenplex's quasi-modular design and floor plans are adaptable to three-, four-, and fiveplexes, as well as single-family homes with rear- and entry-loaded garages. “We only really have four products,” says Spadea, which have been in his playbook, with only minor changes, for 10 years.
Over the years, Franciscus Homes has moved toward having three components in all of its communities: attached and detached homes with rear- and entry-loaded garages that retail for between $270,000 and $300,000; and the tenplex, which is Franciscus' workforce product. (The workforce component, in fact, is now part of the builder's entitlement process.) Product diversity gives Franciscus the density it needs to offer some affordable homes that don't skimp on quality, but still achieve a community-wide gross margin of 32 percent (and a net profit of between 9 percent and 11 percent) on projects it typically budgets at $10 million each. To hit that profit mark, Franciscus' fundamental metric is that its land, materials, and labor costs don't exceed 65 percent of a home's selling price. “It's all about ratio management,” Spadea says.
Learn more about markets featured in this article: Virginia Beach, VA.