Most new multifamily developments in the United States are being built for renters at the high end of the economic spectrum, which represents only a small percentage of tenants. It is estimated that 85 percent of all new rental housing is being built for only 15 percent of the renter cohort. This is due in large part to the increasing costs associated with today’s regulatory environment, land acquisition, capital, and construction that make it difficult to deliver high-quality housing for the masses and still make it pencil out for the developer.
Take for example, my hometown, Los Angeles, which is one of the most rent-burdened cities in the United States. According to a study by University of Southern California’s Sol Price Center for Social Innovation, 73 percent of all Los Angeles households are rent burdened, spending more than 30 percent of household income on rent and utilities. Of those, 48 percent chart as severely rent-burdened, spending more than 50 percent of household income on rent and utilities.
However, we have learned that, with a little creativity and a lot of hard work, building attainable housing which is within reach of most renters is not only possible but extremely doable. But it requires rolling up your sleeves.
Take, for example, four new multifamily housing communities that we are building at Alliant Strategic Development. These projects will add more than 700 attainable and affordable rental units to the Los Angeles’ San Fernando Valley. Sync on Canoga has 220 one-bedroom apartment homes, Pendant on Topanga offers 149 studio, one- and two-bedrooms, Vose features 332 studio, one- and two-bedroom in Van Nuys, and Cadence at Noho, has 26 one- and two-bedroom apartment homes in North Hollywood.
Each unit will cater to a contemporary lifestyle complete with energy-efficient stainless steel kitchen appliances, in-unit washer/dryer, and stone countertops. Community amenities will include on-site fitness centers, rooftop decks, electric vehicle charging stations, resort-style pools (space determining), outdoor lounge areas, and dog parks with washing stations.
When delivered at the end of 2024, each unit will be priced to households throughout the affordable spectrum with an average of 90 percent of the Area’s Median Income (AMI) for 80 percent of the units and for 20 percent of the units the rents will be rent restricted for those making as little as 30 percent of the AMI.
Making It Work
How can this be done in today’s challenging environment of rising costs and interest rates?
These four new developments are being partially financed with tax-exempt bonds issued by the California Municipal Finance Authority (CMFA) and the California Housing Finance Agency (Cal HFA). The housing authority issues the bonds, intuitional investors looking for tax-exempt instruments buy the paper, and Alliant Strategic secures a key element in the capital stack to build the units. The bonds don’t carry an official environmental, social, governance (ESG) label but Alliant Strategic does lean into the social impact angle of the public-private partnership. Accessing bond financing offers a risk-adjusted, low-interest investment vehicle with the potential to make a major impact on the affordable housing crisis.
California State Treasurer Fiona Ma stated that Alliant Strategic’s new developments “demonstrate that with a little creativity we can build high-quality housing that doesn’t price out the majority of California renters” and serve as a great example of how the public and private sectors can successfully work together.
Having state agencies as the issuers triggers the opportunity to develop communities in which 20 percent are truly affordable, rent-restricted units. That means Alliant Strategic can deliver studios going for as little as $450 per month.
The remaining 80 percent of the apartment homes will serve those individuals and working families who earn between 60 percent and 120 percent of their area’s median income, or the “missing middle.” The missing middle is comprised of people who make too much to qualify for housing assistance and too little to pay rent for the luxury rental housing being built today. The missing middle includes veterans, healthcare workers, teachers, first responders, and other critical service and trade workers.
Opportunity Zones
In addition to the low-cost bond financing, each project is being developed on sites in Opportunity Zones within walking distance to mass transit. This includes the Metrolink Sherman Way Orange Bus Line station and multiple stops along the future Metrolink East San Fernando Valley Light Rail line.
Opportunity Zones were created by the Tax Cuts and Jobs Act of 2017. The law offers investors capital gains tax incentives to invest in any of the 8,764 eligible Census tracts, which comprises about 12 percent of all census tracts in the U.S. Although the effects of Opportunity Zones on real estate development are still being debated we’ve found them to be a valuable tool for some projects including our efforts in the San Fernando Valley.
According to research from Brookings, $47 billion flowed into Opportunity Zones funds from 2018 through 2020, with the bulk of the money going into real estate. The states with the largest share of OZs that received funding include Arizona, Colorado, Oregon, Utah, and the District of Columbia.
Combining the bond financing, Opportunity Zones, and Transit-Oriented Communities (TOC) incentives we are able to build a desirable product with a social impact in a market starved for attainable housing.
Keeping Construction Costs Down
We’re also using some innovative techniques to keep construction costs in line. The communities use limited parking at grade level, which negates the need for expensive excavation. The LEED-certified buildings also have bike racks and sharing and car sharing to further shrink our parking footprint and reduce development costs.
The units have a smaller footprint that’s perfect for younger workforce families. We employ Type III construction standards, another cost-saving measure.
Using these and other techniques, Alliant Strategic is also working with school districts in Southern California to provide affordable campus housing for students and faculty. We access Low Income Housing Tax Credits (LIHTCs) whenever possible and we’re hoping that Congress takes another look at expanding the program as efforts in the last session failed.
Tapping into a supply of soft money is another key to making some types of affordable housing deals pencil out. These include private sources, foundations or wealthy individuals who can help fill the gap. The financial lessons Alliant Strategic has been learning on the four projects could bear fruit in other markets beyond Los Angeles. There’s a housing shortage everywhere and we all must get creative to build a capital stack to help those that otherwise would not be housed.
Eddie Lorin is co-founder of Alliant Strategic, CEO & co-founder of Alliant Strategic Development, and CEO of Strategic Realty Holdings LLC.
