Steve La Terra started TerraLane Communities in 2019, aiming to build detached one-story one- and two-bedroom apartments. The one-bedrooms are paired within one structure, as are the two-bedroom units. These are not designed for family renters; TerraLane is renting to apartment dwellers that fall primarily into two categories: the Millennial renter, and the moved-out empty nester.
Steve La Terra – Chief Executive Officer of TerraLane Communities
The Learning Process
(2:40) – La Terra came from the analytical side of things.
“What I’ve learned most is that this product that we’ve become a part of and was created by others has generated a spark in the market that no one anticipated – including me,” said La Terra.
He was doing analytics for people involved in this business and saw an opportunity. He jumped on board as a developer and operator.
“In the last two years, what I’ve seen has been remarkable,” said La Terra. “The interest, not just from the investor community, but more specifically from the renter community, has been absolutely surprising to me. Pleasant, of course.”
(3:45) – La Terra calls the people going after his apartments “premium renters.” He explained, they aren’t going after luxury places, but they do have a little more income. All of the units have their own private, fenced yard. They all come with dog doors. It’s meant to feel like a single-family home, but it’s an apartment in reality.
“It looks like single-family and it builds like single-family,” said La Terra. “It’s very efficient to build these units, but they operate and are capitalized like an apartment.”
Another thing that plays into the feel of the community is that they have comparatively very few units within each community. They tend to look at suburban areas. They look for transportation quarters nearby with quick access to highways; a good job market within a ten-minute radius; and proximity to restaurants and bars and the like.
“What we don’t care about is schools,” said La Terra. “And I don’t mean that flippantly – we’d love to be in a great school district, it’s just not one of our primary underwriting concerns. Because again, we have very few children in our communities.”
(7:00) – Finding investors is a chore. These communities take up a lot of space and thus are very expensive, often clocking in around $50 million per deal. That means a lot of that money has to come from partners and equity.
“The way we did it initially is, we had some quasi-institutional partners that were interested in doing this business. But their partners – the true limited partners that have the big checkbooks – didn’t want to do it.”
The institutional markets when they first started up were confused by the projects, so they would over-price the risk of the development.
Because of all that, La Terra brought in someone with a high net worth. Investors like that can go off their gut. He was open to extrapolating. He believed in the project when they first started, invested heavily in the first three communities, and is still a partner now.
(10:23) – It isn’t necessarily too early to tell how things might evolve. TerraLane collecting data every single week to make adjustments.
“Generally speaking, what we’re finding our renters love is having their own space. They do not want a neighbor above them or below them or to the side. If you’ve ever lived in an apartment – and most of us have – we’ve all had that neighbor that maybe smokes too much pot or they’re too loud and they like to play Led Zepplin at 3:00 a.m. That’s probably not ideal if you have to get up at 6:00 a.m. for a conference call. Our units provide that privacy.”
Most of the renters have a dog. That type of community makes it easy.
TerraLane has discovered that most of their renters don’t care much about the shared amenities like the pool and spa. The real amenity is that they have their own four walls. That’s especially important right now with people working from home.
(12:30) – TerraLane learned a lot during the pandemic. For instance, people aren’t a huge fan of common touch-points like elevator buttons and common hallways. With TerraLane’s communities, there aren’t as many common areas that could cause friction.
(13:18) – Undersupply is a problem for all apartments right now, and La Terra is not concerned about over-supply for his type of community.
“Looking forward, I think we have a long runway in this sort of space, because, quite frankly, the tenants are gravitating towards it.”
The Exit Strategy
(14:30) – Because the investors involved in this community are in such a high tax bracket, they aren’t particularly interested in selling the community and getting a huge check that gets hit with enormous tax fees. They’d rather have a consistent check each month.
(15:55) – Right now, all 5 of TerraLane’s communities are in Phoenix, Arizona. La Terra thinks they could build another 20 of them and be fine. However, price of land has skyrocketed.
“My big concern is that there are going to operators that haven’t done this before that would pay these elevated prices, thinking, ‘Well, the market is just going to just continue doing what it’s done,’ and there’s going to be some high-profile mistakes made. Unfortunately, when that happens – and I do believe it will – it will affect all of us.”
La Terra worries there will be an impact to reputation in his asset class.
(17:25) – La Terra jumped into this full-force with a huge initial project. But for a more reasonable approach, you may want to also create some homes. That way, you can start renting the homes out and phase into things. The groundwork for La Terra’s horizontal apartment plans can’t be phased.
(20:00) – “Literally every day, I’m learning something new,” said La Terra. “That’s probably the biggest thing. You think you know something and then you don’t. The scariest part is knowing that you don’t know something, because you think you do.”
La Terra says the incredible demand shift in his direction has been incredible. He attributes a lot of that to good fortune in a strong demand in the market right now.
(21:25) – People love that when they close the door, the apartment feels like their own house. They don’t have to put down the payment for a house, and La Terra takes care of everything inside, but they have privacy and their own space, backyard and all.
(23:21) – The product is so new, there are still a lot of factors that people haven’t predicted. As for building, it’s extremely efficient because they’re all the same.
“The problem is, home builders aren’t used to burying underwater storm water tanks. They don’t understand the concept of infrastructure that looks like this,” said La Terra, making a flat surface with his hands stacked together. “Traditional infrastructure for a single-family subdivision is very different from what we’re doing. That alone was a great learning experience.”
La Terra points out that he’s been able to learn from others’ mistakes. He says he can’t develop for the consumer in a vacuum.
(25:40) – La Terra feels it’s important to get an operating partner involved as soon as they close on the land, or even before in some cases. They’re involved in the underwriting and get more involved about six months out.
(26:43) – Smart home technology is very important to TerraLane. La Terra views it as one of the differentiating factors for his communities. That includes access controls, doorbell cameras, and apps that can control lights and thermostats.
“Before we even built these communities, we installed fiber optic cable to every single unit,” said La Terra. He explained, most multifamily builds have fiber optic to the community itself and then strung to the units from there. At TerraLane, they’re immediately built straight to the door. “Internet speeds go from one gig to ten gigs, you can benefit from that in an individual unit. Working from home in one of our units is future-proofed, as we say. That’s one of the things we spent a lot of time and money doing. But that was an upfront investment. To retrofit something that’s already been built would be nearly impossible.”
(28:43) – “There’s absolutely no question in my mind that there’s a better way to build houses and these apartments. There is absolutely a better way.”
La Terra says his partner created a company that completely revamped manufacturing processes. He effectively became the largest provider of cabinets in the U.S. and potentially the world. So both La Terra and his partner believe that there is a better way to construct things; they just don’t know what it is.
(30:00) – Patrick Antrim, CEO of Multifamily Leadership, brings up Elon Musk’s idea of First Principles Thinking.
“What Elon talks about for First Principles Thinking is not thinking from analogy. That means, what everyone else has done before you, how it’s been done, that herd effect. ‘They did it like this, let’s make it a little better, a little incremental design.’ He’s talking about how if you really want to get the customer of tomorrow, it’s got to be wildly different. It’s got to be really something that stands out.”
Antrim says people think in analogies because it would be taxing for our brains otherwise. Antrim’s example is Air BnB, changing up the thinking process for hotels. You could think about the solution to the problem separate from the problem itself.
(32:45) – Final thoughts: the built-for-rent asset class is here to stay. But one of the biggest hurdles in the space is changing the government’s understanding of what they are.
“All we’re trying to do is create a better living environment for the tenants,” said La Terra. One of the great advantages of the product is that it doesn’t create traffic or a high density. Cities have to come to understand what TerraLane is all about so they can expand to other cities.