Bricks and Mortar? The Costs of Affordable Housing

Bricks and Mortar

It is very difficult to find a clear and empirical comparison of the costs to bring an affordable housing development (here defined as a development with significant subsidy for construction either in the form of government grants or tax credits) and a market rate housing development. Affordable housing projects have many unique costs, and often cost more because of financing, construction, and labor requirements. Affordable housing projects can be more expensive than market-rate due to some of these unique costs, although the gap between the two can vary widely.  Variation in the factors like construction type, location, and funding sources, can offset or enlarge the expenditure gap between affordable housing and market rate projects. These differences along with varying typologies, organizational structures, and funding sources also makes  a cost comparison between an affordable and market rate project to the end user difficult.

However, both State’s 2009 Affordable Housing Cost Analysis and Keyser Marston Associates’ 2011 Construction Cost Comparison Analysis in San Diego found that it often the case that affordable housing projects are more expensive. This is especially true for projects that contain a lot of supportive services, since the cost per unit also includes the service fees for childcare, treatment facilities and other co-located services [2014 California Affordable Housing Cost Study]. While subsidized housing is generally more expensive, those additional costs have to be weighed against the public benefit of producing affordable housing for poorer families. Any financed housing project—subsidized or not—must generate enough funds from rents to cover operation and debt service. Because some families simply can’t pay the rents to generate this revenue, government responds by subsidizing this gap.

It is important to understand why affordable housing projects often have higher costs and find ways to lower those costs. Additionally, to ameliorate the current rising rents, local communities have to decide at what levels of income are low enough to require newly constructed units versus adopting  other interventions like vouchers or tax exemptions to privately funded projects that help  lower housing costs.    Building affordable units isn’t the single answer, especially when those units are expensive to build. For example, vouchers and tax exemption programs like Seattle’s Multifamily Tax Exemption (MFTE) program, allow the leveraging of private capital; these programs allow the private sector to take the risks and absorb the costs of building new housing and limit the costs of restricting rents simply to the amount of difference between what a family earns and lowered rent.

Deeper research and analysis is needed to find the tipping point: when should we fully subsidize the construction of a new, expensive unit instead of simply making cash payments or transfer payments to lower the rent burden of an individual or family. Intuitively, it would seem that poorer, larger families would benefit the most from the construction of new fully subsidized units, since their residual costs are higher and their needs for space are greater as well while their incomes cannot support the needed rents to offset operating costs and debt service.

What follows is a review of the different costs and financing structures impacting housing development. Bolded in the table are differences in costs between affordable housing projects and market rate projects, followed by how these differences affect the final outcome. Besides, discussion of other factors that can influence the cost of both market rate development and affordable housing projects comes at the end. Some specific cost comparison figures are highlighted in the Appendix. This review is only a start, but in the end, the best thing policy makers could do is to reduce regulatory costs of all housing including the unique costs associated with affordable housing, while also reviewing the normative standard of when direct cash payments are warranted versus construction of new units. Current discussions in Seattle seem to be assuming that any cost burdened household need a new unit; this assumption needs a deeper review.

1. Total Residential Cost

Cost Category

Main Components

Acquisition Cost

Cost of land, existing building, improvements on the site

Construction Cost (60%-70%)

Construction fee (material & labor cost), contingency cost, infrastructure cost, Sales Tax

Development Cost

Developer fees, project management fees, architect fee

Other Cost

Financing & legal fees, carrying costs, permitting & impact fees, bridge loans.

 

2. Differences between affordable housing project and market rate development, and how the differences influence the cost.

The term “affordable housing” can refer to housing units developed in whole or in part with public subsidies and reserved for low-income residents. Main difference between the two lies in the variation of financing and regulation with respect to benefit policies (unique to affordable housing projects).

Financing

Housing Trust Fund & Federal Low-income Housing Tax Credit Financing

LIHTC Program reduces the tax liability of property owners and investors who agree to provide low-income housing. Housing Trust Fund authorizes trust to fund proposals for new construction, acquisition, rehabilitation and etc.

  • To be eligible for these programs, projects would generate costs associated with higher legal, development, and financing fees to meet various state and federal regulations about tax laws and other requirements.

Finance Complexities – diversified funding sources

Funding for affordable housing projects comes from a diverse array of sources ranging from federal grants to local grants and capital campaigns, such as LIHTC, Housing trust fund, local funds, federal funds, equity investment, permanent loan and etc.

  • Diversified funding sources take longer time, even twice as long as market rate development does, (according to 2009 WA Affordable housing cost study) to go through funding processes. Time-consuming process contributes to more legal and transaction costs.

Bridge Loans

A bridge loan is a type of short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing. Unlike market rate projects, developers of affordable housing need to use bridge loans as interim financing before they secure the permanent funding.

  • Bridge loans require projects maintain certain levels of operating reserves to pay for the loan. For the market rate developments, they may not have this concern to keep higher levels of reserves.

Benefit Policies & Regulations

Durability and contingency

All federal, state, and local affordable housing programs require a very long time frame for receiving public funds, usually from 30 to 55 years.

  • Thus, developers would use durable materials for construction and focus more on quality to meet regulatory requirements. Better materials and quality lead to more construction cost (material cost).
  • Good quality also means excellent ability to deal with potential risks during the long period, which contributes to higher contingency costs and higher project management expenditures.

Prevailing Wage

Most affordable housing projects should pay prevailing wages in accordance with state and federal prevailing wage regulations since they receive public funding.

  • Higher labor cost than market rate developments

Evergreen standard and Apprenticeship program

These two programs are associated with Housing Trust Fund. Affordable housing projects, which receive funding from Housing Trust Fund, must meet the environmental standard and employ enough employees from apprenticeship programs.

  • There is additional development cost to target subcontractors that can meet the apprenticeship requirement and to observe sustainable building practices.

Source: 2009 Affordable Housing Cost Study, Department of Commerce, WA

3. Other factors influencing cost of developments

Project type and unit size: Different types of unit have different cost. smaller units would cost less per unit, but more per square foot compared to the larger units. Four stories and taller building would cost ten percent more to build.

Developers: Larger developers and developers that employ general contractors can build projects less expensively. Developers can decide which type of projects to build and how to manage the projects. Brilliant decisions can save the cost and manage the projects well.

Community Opposition: Local force can influence the cost of construction. Community opposition can delay the project. And even worse, developers may cost a lot to make changes to original projects just to mollify the opposition.

Location: Location determines the cost of land acquisition. Even though we exclude the cost of land out of development cost, location still plays a role in affecting the total construction cost. When developer purchases an expensive land, he would prefer to construct a higher building and more units. Different type of projects would need different design, materials, labors and etc. Costs are varied this way.

 

Appendix

Tianyi 1

Source: 2014 California Affordable Housing Cost Study

This study collects cost data of 400 developments in California. However, only 22 developments report their market-rate price. Thus the above statistics is based upon the sample of 22.

 

Tianyi2

Source: 2009 Affordable Housing Cost Study, Department of Commerce, WA

The chart is from a case study in 2009. Thus, the statistics might not be appropriate to use for reference.

Neighborhood Planning: Sunshine, Lollipops, and Rainbows!

Back in the old days when I worked for the Department of Neighborhoods (yes, it’s true!) as a Neighborhood Development Manager implementing 8 neighborhood plans, I had a very simple rule when it came to working with neighborhoods: never say the word, “no.” My rule was that all things are possible with enough thought, planning, engineering and funding. A City employee telling a neighborhood group that their dream project isn’t possible would simply make the City part of the problem, not the solution. I worked hard to get numbers for every proposal neighbors pushed for, scoured every public and private source for funding, and pushed departments to stretch their thinking to find ways to make projects happen. Those days are gone, and and a recent meeting of neighbors about planning, and a reorganization of the City’s planning efforts are reminder that we need to look back to move forward.

Today, however, we have stories like this one from KIRO TV about the rainbow crosswalks painted on Capitol Hill to celebrate the city’s LGBTQ community and the recent Supreme Court Decision upholding marriage equality:

The idea has been discussed for some time, but was delayed by logistics and cost. It was initially said that the colorful crosswalks cost about $6,000 for a total of $66,000 for all 11. The money comes from fee that developers pay when they block streets and sidewalks to build projects, not other safety money.

Great! An example of how development “pays its fair share right?”  That’s not how the rainbow crosswalks are being pitched. Here’s what a City staff person said about the crosswalks:

The crosswalks were a huge priority for the community after all the hate crimes on Capitol Hill and came out of a recommendation from the LGBTQ taskforce the Mayor stood up a few months ago. The same community members have been experiencing huge construction fatigue due to the larger projects in the Pike Pine corridor . . . and how the new influx of development and people is changing the character of the neighborhood.

He cited a Crosscut article about the pace of growth and how upset many people are in the neighborhood about what they perceive as change that is ruining the neighborhood. The article featured a local upset about new construction. 

It’s hardly a secret that construction is a nuisance for business, especially retailers. But to hear the owners speak, this period goes beyond nuisance. Sweatbox Yoga owner Laura Culberg has been in business for 14 years. Her sales peaked at $323,000 in 2011, just as the economy was finding stronger footing. But since construction surrounded her business, that number fell to $268,000 in 2014. Culberg is convinced this loss is a direct result of construction, saying the noise and smells are a huge deterrent to customers. “It should be growing,” she says of her business, pointing to the other yoga successes around the city. “That’s the trend for our business.” But, she says, if she were the sole breadwinner in her home, she’d have to close up shop.

I feel for Culberg. She’s a small business owner. But so are most of the builders and contractors that are building housing on Capitol Hill. Even large projects by larger developers employ dozens of small contractors that are of the same scale as Culberg. And they pay the street use fees that funded the rainbow crosswalks. 

Here’s my hope. I hope we can return to the days when I worked at the Department of Neighborhoods and the City, developers, and neighborhoods worked together to create and recognize the public benefit that comes from private development. Instead of seeing the rainbow crosswalks as a kind a reparation from wrongs done, it should be seen for what it really is, the benefit of the value created when we build more housing that creates tax revenue, fee revenue, jobs, and, in the end, more customers for local businesses.

One practical thing that the City could do is recreate the Neighborhood Development Manager position. We had six people who’s entire scope of work was facilitating progress on neighborhood plan implementation and that meant working to take advantage of the benefits of new growth by helping departments communicate better with each other, neighborhoods, and private builders. The gold at the end of the rainbow can be there for all neighborhoods if we can find a way to work together rather than seeing each other as enemies. Reinvesting in the neighborhood planning process could help move us toward positive results instead of trying to tax and stop a good thing, more new housing.

 

Density is People

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Every once in awhile I get writers block; what else is there to say about growth? It’s pretty simple, we are a growing city and we need more housing. Let’s get moving on increasing housing supply, choice and opportunity. How many different ways can we say that? Then sometimes I read someone else write something today I said a long time ago. 

Let’s stop thinking of “growth” as a monster threatening to swallow our city, and instead think of it as new people we should welcome. Let’s stop talking about “bearing the burden” of those new people and start figuring out how we can accommodate all of us without resorting to market-distortions like rules that make transit-oriented development impractical.

This is from a recent post by Erica Barnett who’s been writing about land use and housing for a long time. I don’t want to take away from her thought, but here’s what I said back in 2012 in a post called Density is People

What’s true is that the apocalyptic, dystopia foretold in old 70s sci-fi films like Solyent Green is more likely without density not because of it. When a NIMBY in Maple Leaf squashes 25 units of housing those people who might have lived in those units have fewer and more expensive options, including living further and driving longer to make their lives work. That means more pollution, more resource consumption, and environmental degradation.

Right now we all argue about buildings: height, bulk, and scale. One of the strangest things about the Roosevelt debate was that if revolved, in the end, around 25 feet, the height of a building rather than the principle that land use patterns around transit should accommodate people that aren’t here yet to advocate for themselves.

Making the density argument about people rather than buildings must be the strategy we use, even if the way to get there is increasing the height, bulk, and scale of buildings around light rail. But when we make our arguments they should always be about the new people coming to the neighborhood. It’s easy to fold one’s arms and stand firm against a big, imposing building—even if that isn’t what’s proposed; It’s a lot harder to say, “We don’t care about all those people.”

What I’ve found over the years is that as we’ve staked out the high ground on growth and housing, more and more people are finding their way to the realization that there isn’t much to argue about; either you support more housing to accommodate more people coming to our city or you don’t want them to come. I’d revise my last thought a bit: neighbors are now being more explicit in their denunciations of new people (see comments from neighbors about microhousing and the low rise zone). 

I also said this on The Stranger’s SLOG:

More supply and choice in the housing market will make our city accessible and affordable to more and different kinds of people. We are an open-minded people, aren’t we? Didn’t we get all excited at the hope and change offered by Obama? What happened to that? We are going to be fine. We need to relax and welcome change. It won’t hurt a bit. I promise.

Yes, density isn’t about buildings, or developers, or even jobs; density is how we efficiently and sustainably grow as city and community. Maybe someday we’ll stop treating growth as something that has to be “taken” and start welcoming new people. Do we have the courage to do that? 

$85,000 and the Sad Town House Lady

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A great post at The Stranger’s Slog has been making the rounds on Facebook and social media. The post, To the Sad Owner of a Capitol Hill Town House, by Dan Savage challenges one of the most maudlin displays at a hearing about low-rise legislation a few weeks ago. 

You’ll remember I mentioned the emotional display when I wrote about the hearing. I mentioned the crying lady and some people took me to task over it. But Savage takes down the whole display with even greater detail and thorough way than I could have ever hoped. 

Was your town house built after 2008? Then you live in a town house that some of your neighbors—people who in 2008 could say, “It shouldn’t always be about the people who are coming! What about the people who are here?!?”—didn’t want to see built. But no one is breaking the windows of town houses today. All those new town houses all over Capitol Hill eventually came to be accepted as just another type of neighborhood housing stock. They’ve blended in and the controversy over town houses has been nearly forgotten.

And the new apartments you went to City Hall to complain about? They’ll eventually blend into the neighborhood, too. Maybe you’ll still be living on Harvard when that day comes, Sad Town House Lady, and maybe you won’t. But growth and density are here to stay. You, on the other hand, are free to go.

Yes, you are free to go. And the crying lady isn’t a poor, victim of circumstance. Her neighbors spent $85,000 to sue a microhousing developer. The subsequent decision resulted in lots of extra costs and higher rents because builders had to move sinks into the bathrooms of new microhousing units. 

Here’s what her neighbors have to say about new people moving to their neighborhood:

These unnecessary, atrocious properties are moving forward without a design review and environmental impact study all over Capitol Hill is shameless. Are you spending time in the community to witness the increases in height allowances are disproportionate to the look and feel of entire blocks. Our lovely community is losing the appeal, charm and attraction for steady income, responsible, professional homeowners all for the ugly box and transient renter. Has there been a study to satisfy we have reached density capacity already? What are your facts and when do you define enough already? Why would you diminish the value the current homeowner and idea revenue infused in the community over the transient renters?

I am one of the victims of support for a five story building on Harvard Avenue East and I am going to continue to be extremely vocal until my neighbors and I are fully heard. The fact that we continue to be ignored and the council fails to conduct an official review of building height and environmental study for the planned Harvard Avenue East is unconscionable. The amount of garbage that will accumulate, the contribution to the drug use already thriving on Capitol Hill.

So please don’t feel sorry for the town house lady and her sad act. It’s an act. Feel sorry for our city that such theatrics are taken seriously enough to make life harder for new people wanting to live in Seattle. 

Neighborhood Activists Gather this Weekend

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Neighbors gathering together to ponder the future of the city should be a good thing. After all, some of the greatest leaps in welcoming growth happened in the 1990s through neighborhood planning. This weekend neighbors will gather on Saturday, June 27 from 9 am to 12:30 pm for something called The Phoenix Project: Reviving Seattle’s Neighborhood Plans. The meeting is at the Bertha Knight Landes Room at City Hall. 

I was a neighborhood planner in the 1990s and later went to work with Jim Diers at the Department of Neighborhoods as a Neighborhood Development Manager implementing plans for the City. This period was a renaissance for growth and neighborhood activism; neighbors saw growth as an opportunity to get great things (the traffic circle became emblematic of the small but important investments neighbors wrangled from the City) for their neighborhoods. 

But today? Here’s part of a missive from Seattle Speaks Up, the group pushing for reduction of housing capacity in the city’s low-rise zones. It describes the comments of Councilmemeber Burgess at the last Planning, Land Use and Sustsinabilty (PLUS) Committee: 

Close behind Mike O’Brien was Council President Tim Burgess. His remarks leave no doubt that he considers Seattle a city divided between two classes of citizens: first-class citizens in heavily protected single family neighborhoods, and second-class citizens in the multifamily zones. As Seattle shudders under the burden of being the nation’s fastest growing city, Councilmember Burgess reiterated his firm belief that those of us who occupy less than 10% of the city’s land should be the hewers of wood and carriers of water for those who live in the affluent neighborhoods where he, the Mayor, and the majority of Councilmembers live. The claim that our elected officials are progressive is becoming more doubtful by the moment.

You can see why I don’t think neighborhood activism is what it used to be. Neighbors are angry and hostile. They feel entitled and they want growth to stop or they want to control it in their own interest. So I’ll be there Saturday. You should too. We need pro growth voices. 

The meeting announcement and schedule is copied below.

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Hello Neighborhood Planner,

The Phoenix Project, where “Neighborhood Planning Meets Comp Plan 2035” is less than 2 weeks away. We hope you are planning to join us, and to help with room and coffee logistics, we request that you please RSVP by Tuesday, June 23. If you had previously contacted us to ask if you could bring a guest, please RSVP with the total attending with you. Attached as a pdf & Microsoft word format and written below is the agenda. If there is any additional material, it will be emailed right before the event.

Please send your RSVP to mdiaz92@uw.edu by June 23.

Thank you and we look forward to meeting you!

Marisol 

 

The Phoenix Project Agenda

June 27, 2015 9:00 am – 12:30 pm (doors open at 8:30 am)

Bertha Knight Landes Room, Seattle City Hall

20 min Welcome, Introductions, kick off by Council Member Sally Bagshaw, and setting the stage by Jim Diers.

25 min Networking at tables, sharing stories

20 min Comp Plan 2035 Update, process and schedule 

20 min Comp Plan Jeopardy – EIS Edition

15 min Break

25 min Relationship between the Comp Plan and Neighborhood Plans, the role of the DEIS and upcoming Draft Comp Plan recommendation.

20 min Table discussion, compile top 3 questions from each table for the Panel

35 min Panel discussion and Q&A

§ Kathy Nyland – interim Director, Department of Neighborhoods

§ Susan McLain – Dept of Planning and Development, Deputy Planning Director

§ Tom Hauger/Patrice Carroll – Dept of Planning and Development, Comprehensive Plan 2035 Update Project Team

§ Jim Diers – Community Builder

§ Tba – SDOT

15 min Collaborating – tools to make it easier, a demo of Google Docs by Marisol Diaz and Gennevi Lu.     

10 min Close up, thank you, go forth and do good.