Arbor Homes Goes to Court

When the discussion turns to the rapidly rising prices of new homes, builders often bear the brunt of the criticism. Detractors charge that they’re too focused on the upper end of the housing market, putting profitability ahead of unlocking the American dream.

And sometimes that may be true.

But, as a recent case in the town of Greenwood, Ind., shows, local governments share the blame in rising home prices. In the middle-class Indianapolis suburb, the city council dictated that new housing contain more brick, bigger garages, and steeper, multi-tiered roofs. The cost of meeting those mandates could add an extra $12,000 to building a home.

Anyone who has pulled building permits knows that a locality padding the cost of construction is, in and of itself, part of doing business. The difference here is that the town wants builders, or one, specifically, to apply the new standards in developments under construction. That has the industry up in arms.

“You can’t change the rules in the middle of the game,” says Steve Lains, CEO of the Builders Association of Greater Indianapolis. “No business can succeed that way.”

One builder, Arbor Homes, decided enough was enough, and, backed by the local and state housing associations, filed suit against Greenwood. In the process Arbor isn’t just challenging Greenwood’s decision to mandate its standards immediately, but it is questioning the town’s authority to enact them at all. If it prevails, entry-level buyers in Greenwood could be the ultimate winners.

Left Out

While the city has negotiated exemptions with some of the larger national builders, there was no discussion with one prominent company—Indianapolis’ No. 2 builder, Arbor Homes. Greenwood says other builders approached the city, but Arbor, an entry-level builder that produces vinyl sided homes among other offerings, never did. “We came to settlement with every other builder who had an objection to the ordinance. Arbor was the only one who didn’t attempt to sit down and negotiate with us,” says Mark Richards, director of community development services and city engineer for Greenwood.

But Lains contends that the city never wanted to negotiate with Arbor because of the prices of the homes it builds.

“They’re trying to regulate house price,” Lains says. “They’re trying to regulate look of house.”

Richards says consumer protection motivated the adoption of the architectural standards, though he admits the city never received complaints about Arbor homes until after the regulations were enacted. “We’re trying to ensure that the residents of Greenwood have a good quality product and nice homes to live in,” he says. “I do feel like the added costs are something that is a good investment for the homeowner and it would increase the value of their home and decrease the maintenance cost of the home.”

Arbor, which has built in the area for more than two decades and carries a good reputation in the market, also happened to be the builder most exposed to the new requirements. It was about halfway through a six-section, 275-lot community called Briarstone.

“We’re not quite halfway through, and they’re trying to impose the new standards on sections four, five, and six, which is kind of unprecedented,” says Steve Hatchel, vice president of sales and marketing for Arbor Homes. “No builder would go into a new community and say at the end of every section, ‘We’re going to renegotiate.’”

Arbor may not have bought the land for Briarstone, which it started in 2013, if it knew these costly standards were on the horizon. “Builders do a pro forma on a piece of ground, and they figure out what the market will bear as far as a price point,” says Rick Wajda, CEO of the Indiana Builders Association (IBA). “Then they see if they can make it work and they can sell homes under the rules and regulations in place at the time they’re moving forward with their project.”

Legally, Arbor and the associations are arguing that architectural standards can’t be changed after the filing the primary plat, which it submitted in December 2012, assuming the builder is moving along in the time frame agreed upon.

“In 21 years, we have never had guidelines change in the middle of a community once primary plat and zoning were agreed upon and recorded,” Hatchel says.

But Richards contends Greenwood has a right to mandate that the new architectural standards be applied to any new building permit. “We think it would be appropriate to apply those standards to new sections of subdivisions,” he says. “They had not received permits or approvals for sections four, five, and six. So we felt that was a good breaking point between primary and secondary platting.”

If the town prevails, the standards could force deeper changes within Arbor’s operation. “Some of the new standards that would be applied would eliminate a few of our plans,” Hatchel says. “They just couldn’t be built anymore because of the standards they’re applying to garage widths.”

The Architectural Standards Question

Many builders have wondered about the legality of architectural standards. Sure, they make sense in historic areas. But what about in a new development well outside of the city center?

“The architectural guidelines in the state laws we believe were written to protect and preserve historical places,” Hatchel says. “So if you go into a part of downtown, you can’t be putting up anything. You have to develop to the standards in place. If you’re developing a brand new community, there’s no history. It’s a cornfield.”

Arbor and the local and state building associations are using this suit as a way to challenge standards.

“We have seen architectural standards and/or building requirements in other municipalities similar to what Greenwood imposed,” the IBA’s Wajda says. “We felt this was the right time to challenge those.”

Greenwood’s Richards argues that building standards are necessary. “We want to make sure there is character and not a lot of the same product,” he says.

Entry-Level Blues

Arbor, which Hatchel says is the “800-pound gorilla in the entry-level market,” has an average sales price in the mid $170,000s to $180,000.

“They have a good reputation in the marketplace of really being one of only two or three builders who are still trying to provide that entry-level product,” Lains says.

Mind you, those homes aren’t “cheap” homes, but they do serve moderate-income buyers.

“We don’t want to come in and build an 800-square-foot vinyl box,” Hatchel says. “We wouldn’t do that if we were allowed to. We don’t sell $50,000 homes.”

Beyond the question of where and when a locality can impose architectural standards lies a bigger, more important question—can it impose these standards if it pushes the price of homes out of reach for moderate-income buyers?

“The average assessed values of homes in Greenwood according the town is $100,000,” says Hatchel, who thinks the law may also have Fair Housing implications. “Our average sales price today is right around $171,000. This new regulation would increase our prices by $20,000 to $25,000, and 87% of all homes in Greenwood are under $200,000.”

In real terms, it could keep some of the city’s most vital employees out of new homes. “This would be putting out those police officers, nurses, and firefighters,” Hatchel says. “It will make it tougher for them to find a place in Greenwood.”

Beyond just raising the cost of the home, Greenwood’s standards could eliminate workforce buyers in other ways. “Appraisers will say this one has a little brick but it’s not worth $25,000 more,” he says. “You have appraisal gaps that a buyer will have to overcome by bringing cash or else the builder will have to fill in the gap.”

Richards argues the area’s affordability means that homes will remain affordable. “Fischer [Homes] had much higher priced homes in the Hamilton city area on the north side of Indiana, and that is certainly not pricing teachers and firefighters out of homes,” he says.

For now, it’s a waiting game. The case went before a judge in early August, but a decision had not been reached as of press time. With the far-reaching implications of the suit and the more immediate ramifications on Arbor’s Briarstone development, the suit could have a huge effect on Indiana builders.

“We would like to see it resolved sooner rather than later,” Wajda says.