Design Review: Stealing From the Future

As I have already pointed out, the Department of Planning and Development has proposed design review for new microhousing projects as a way to assuage anger and fear of a band of neighbors opposed to the product.  But why, in a city where it is liturgical for politicians to state their commitment to ‘affordable housing,’ would DPD and the City Council be considering a response that would raise the price of microhousing? That’s a difficult question to answer, but here’s how the imposition of design review would end up being paid for by the very people the Council claims it wants to help.

Design Review is Expensive

Here’s what design view costs look like for a 41 unit project forced into design review.

Item Amount
Architectural Costs $45,000
Consultant Premium $15,000
Add’l Design Costs $45,000
Increased Land Costs $35,000
Extension Payments $30,000
Permit Costs from DPD $15,000
Management/Overhead $40,000
Total   $225,000

Anyone who has attended a design review board meeting will agree that it is as just as drawn out as any other public process. The difference between design review and a town hall meeting is that the developer is paying for the process in fees and in billable hours charged by lawyers and architects. The longer the process, the more costly it becomes for the project.

The Cost of Money

“So what,” the NIMBY asks, “why shouldn’t the developer pay all these costs?” After all, they’d argue, it’s the developer’s desire to make money that has created the impact on the neighborhood. They should pay for all the additional costs.

All development projects, just like a new home or remodel, are financed. That means costs generate an obligation to create a return for a bank or investor. There is no set price to design review, but the costs associated with can climb based on the length and complexity of the process. Design review is what we’d call a “soft cost,” which means it isn’t a cost associated with materials or labor but other things related to the project that don’t necessarily have to do with bricks and mortar.

It’s kind of like getting ready to close on the purchase of new home and finding out that the title company finds a transaction fee of $25,000 owed by the buyer. Who pays? Where does that money come from? It’s too late to fold the cost into the mortgage. That bill would have to be paid from somewhere like an unsecured loan, maybe a credit card.

That kind of money for soft costs is very expensive and comes at price of up to 20 percent of the principle. And how does the developer pay back this big return? There is no pixie dust in a development project, the only income generated comes from rent. Here’s what the sticker shock of the extended design review process looks like for tenants.

Total Cost Cost Per Room
Design Review $225,000 $5,488
Yearly payback at 20% $44,999.96 $1,097.56
Monthly payback at 20% $3,749.99 $91.46

Think 20 percent is too high? So do builders. But just like that emergency cash advance on your credit card, unsecured money is expensive. The charge on unsecured credit card debt can range as high as 24 percent,and late investor equity is just as expesive. Builders would love a lower priced source of money, and sometimes they can find it but there still is no way to pay that soft cost money back except from rents.

And why don’t microhousing builders just “eat” that $91 per room? They can’t. Just like the bank won’t let you borrow for a new house or car for a loan payment that equals your income. Lenders and investors expect to see coverage for borrowed money that exceeds the loan payment. That’s how our financial system works. Lenders and investors want to be sure there is money for other expenses so they don’t have to compete for their payment if things get tight.

A Minimum Wage Worker in Microhousing 

Along with their continual genuflection at the altar of affordability, City Councilmembers (and those who want to be) all say they want a higher minimum wage. The Chair of the land use committee said this about the proposed $15 minimum wage:

So yes, I am standing with these workers to call for a raise to $15 to give them a better chance to provide for their families, to save enough to go back to school, and to be able to afford to live in Seattle. We cannot continue to push poverty to the suburbs, and I think raising the minimum wage is an important part of keeping Seattle affordable.

Let’s say we achieve consensus and Seattle becomes a worker’s paradise with a mandated $15 minimum wage. What would the imposition of design review do to the rent of minimum wage worker looking at microhousing?

That worker, let’s call her Cassandra, would earn, if she worked full time, about $31,200 a year, about half the city’s median income. Based on standards set by the Department of Housing and Urban Development and monitored by the City, Cassandra can afford to pay 30 percent of her monthly income on housing or about $780 per month.

Let’s say Cassandra liked microhousing and was willing to move into our 41 unit building and pay $900 a month (about 34 percent of her monthly income), something easier to do since she doesn’t own a car and her new place would be a quick bus ride to work. Cassandra’s new job covers bus fare. Spending a little extra won’t hurt considering other expenses she’s saving.

And Cassandra wants to get ahead. She’s planning to take 12 credits at Seattle Central Community College which is right down the street from her new home. After work her plan is to take classes there so she can get a promotion or even better a job with a company she’s heard is moving to town that is hiring people in her field. Education will cost her about $1,174.38 over the year for tuition. Cassandra’s life in Seattle is looking up.

Design Review: What does $1,097.52 buy?

Let’s say the Seattle City Council passes a design review requirement on microhousing to, as Councilmember O’Brien put it in a recent e-mail, “strike a balance . . . to see that development [is] done in scale with the existing neighborhood.”

While $90 a month might not seem a lot to an angry neighbor worried about their property value, to Cassandra it’s the difference between being able to take those credits at SCC or having to wait. To pay to keep the neighbors happy, Cassandra will be paying an extra $1,097.52 in rent costs annually.

That great microhousing unit she had her eyes on will now consume 38 percent of her monthly income, and that means she’ll have to take fewer credits at the college. And this is assuming she’s getting the $15 minimum wage at one full time job. What is more likely is that Cassandra is working two jobs and making less in real wages than $15 an hour, even if that minimum wage legislation did pass and she was able to get enough hours.

So much for Councilmember O’Brien’s vision of people being able to live and Seattle an go back to school. Cassandra might have to work  extra hours to cover tuition, or maybe get a third job. Or maybe she’ll move to Northgate, save extra on rent, and put her extra money into buying a car.

Microhousing: “Give them a better chance.”

The choice is now up to the City Council. It can impose a meaningless, expensive, time consuming process that will lead to no public benefits, will be paid for by renters, and reduce the supply of available microhousing units when developers build fewer units or have to raise rents. And where would all that extra money go? It would wind up in the City Treasury to pay for more plan reviewers at DPD and  architects and lawyers. And remember, design review doesn’t impact any of the red herrings advanced by neighbors as reasons to slow down or stop microhousing development. Design review takes money out of the pockets of hard working people and puts it into the pockets of banks, lenders, bureaucrats, architects, and attorneys for little or no public benefit. 

The City Council can make life easier for people like Cassandra who are trying to improve their circumstances and use microhousing as a launching pad for a whole new life. They can see microhousing as incubators for the future, places where people of all ages find a place to live sustainably and affordably and they can allow it to continue without the addition of any major changes. Or they can listen to angry neighbors and squeeze working people to the suburbs, out of a new career and into an expensive car and commute. Who will the City Council listen to, Cassandra or the NIMBYs that are crying wolf?










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