Experts on affordable housing and members of ULI’s Affordable/Workforce Housing Council discuss how to make affordable housing less costly to build and more supportive for residents.
What are some of the best strategies for lowering the cost of providing affordable housing?
James Feild: A lot of state agencies that allocate low-income housing tax credits have gone through their qualified allocation plans and tried to weed out incentives to build bigger, better, and more-expensive housing. It’s a very competitive process to get credits, so if there were points available for more building features, developers felt they had to build them or they wouldn’t be competitive. Now developers are able to make much more thoughtful decisions about what they put in properties.
Stephen Whyte: For certain locations, such as New York and San Francisco, and perhaps Chicago and Seattle, it makes sense to consider smaller units. The compactness of the unit and the smart design of common space create cost savings. Also, at the ULI Fall Meeting, we looked at New York City’s successful use of 80/20 projects—mixed-income developments that are 80 percent market rate, 20 percent affordable. The economic success of the market-rate element pulls along the affordable element. That’s a great model.
Vince Bennett: For developers, it’s about trying to forecast the project’s hard costs and lock in the price of materials with the contractor wherever possible. Building strong relationships with contractors is key, and working with contractors to confirm that they and their subcontractors have access to working capital is also important. On the financing side, using debt products from the U.S. Department of Housing and Urban Development [HUD] and the Federal Housing Administration [FHA] with more advantageous interest rates helps from a project underwriting perspective.
Richard Gerwitz: One of the most expensive parts of building an affordable housing project is the cost of parking. A lot of residents don’t have cars, particularly in urban areas. You walk into these parking garages and there’s a sea of empty spaces, and yet you spent a tremendous amount of the cost of developing the project on parking. So it would clearly be a benefit to the affordable housing industry for municipalities to lower the parking requirements or, in certain cases, eliminate them.
Kimberly McKay: One important consideration is to ensure that units are designed to be efficient in their use of square footage. Poorly laid-out units can create additional costs without improving [their] livability and function. Creative partnerships also are a great strategy. Certainly there are times when finding your own property or responding to an RFP [request for proposals] makes sense, but I think increasingly developers need to look for partnerships with organizations that have land they can contribute. Some examples might be school districts, transit agencies, churches, and even housing authorities.
What kinds of changes at the local, state, or federal level would best encourage more affordable housing development?
Whyte: The federal subsidies for affordable housing are fairly fixed. In today’s political environment, that’s not likely to change. The action is on the state and local front. We work a lot on the West Coast, where there are property tax exemptions or abatement programs, and that provides a fairly meaningful subsidy for affordable housing. When the subsidy provider, whether a city or state, creates a property tax exemption as a permanent housing finance tool, that gives lenders and investors confidence to come in and fill the gap. It’s not enough to just provide the benefit; the developer has to be able to turn that expense benefit into a capital sum to then allow for construction of the project. It would be great to see that tax exemption become more available throughout the United States.
Bennett: There need to be more discussions with state housing finance agencies about how they underwrite developments. Some housing finance agencies have a firmer view on the total development cost calculation, and they give developers the ability to bring in federal subsidies or local subsidies to try to help finance affordable housing. That’s a good strategy. In other states, agencies are underwriting toward a total development cost limit that doesn’t necessarily factor in the high costs of development, particularly in urban areas or areas that have a high prevailing wage. An ongoing dialogue with the affordable housing community and state housing finance agencies is important.
Feild: The Affordable/Workforce Housing Council did a study that took a large portfolio of tax-credit developments and analyzed the drivers of high costs. The largest driver was prevailing wage. You can save a little money at the margin with expedited permitting and fee reductions or waivers or things of that nature, but the states where the costs of building affordable housing are the highest are all states where the prevailing wage needed to be paid to construct it. There’s not a lot that can be done about that.
What trends in design or construction are proving useful?
Gerwitz: We’re working on a project in San Francisco using modular construction. It may not cost less, but it does allow us to build a project in a very efficient manner. Materials aren’t left out on the work site, there’s more control over the process, and it speeds construction. Another trend is that in a lot of situations for young people these days, multiple people are living in the same apartment. So designing units specifically for that type of an arrangement makes sense.
Whyte: The use of panelized construction and modular construction allows for high quality control and can shorten the time it takes to build a project. Even though the actual construction components themselves aren’t necessarily less expensive, the overall cost of the project is kept a little bit more reasonable because the construction period is shorter. That can save money for the project by reducing construction-loan interest.
Feild: In the early years of the affordable housing industry, the housing could be very utilitarian, and there was not much emphasis placed on good design. Now, even interior design and colors and the overall look and feel of a property are important to think about or a development won’t be competitive. For a long time, affordable housing competed on price, and now it’s a combination of price, location, and design. People try to build something that is attractive and that the community accepts.
What are some promising or exemplary strategies for financing affordable housing?
McKay: I can’t think of any silver bullets. The elimination of redevelopment agencies in California was a dire outcome for the affordable housing industry, and the industry here is still recovering. On the innovation front, the state of California’s introduction of a greenhouse gas cap-and-trade program is promising and is going to be a source of money for affordable housing projects. We also expect there will be a modified form of redevelopment tax increment financing in the midterm, and there are some smaller pots of remaining state money—Proposition 1C and the Multifamily Housing Program, for example—and a repurposing of some veteran bond financing that will be made available for affordable housing for veterans.
Feild: For a long time it’s been very difficult to make tax-exempt bond financing feasible outside of the very large markets, which have subordinate financing available. Now, as tax credit pricing has gone up and some of the costs have been pushed down a little, we’re starting to see a lot more activity in the tax-exempt space in other parts of the country, which is great. Federal Housing Authority financing has become a huge player in our industry because rates are so affordable and terms are so attractive. It may not be a painless process, but the reemergence of FHA financing as a dominant player in the affordable spaces is probably the biggest news out there.
Gerwitz: Tax-exempt bonds are usually the low-cost debt option for affordable housing. But in the last few years, the taxable market has been a lot more efficient than the tax-exempt market. Yet you can’t get 4 percent low-income housing tax credits [LIHTCs] without issuing tax-exempt bonds. So one interesting structure has been to issue tax-exempt bonds, retire them after construction, and then change over to FHA, Fannie Mae, or Freddie Mac fixed-rate, long-term conventional debt financing, which has had lower interest costs than the tax-exempt market. Another interesting trend over the last few years has involved the Department of Housing and Urban Development’s Rental Assistance Demonstration [RAD] program. Under RAD, projects that previously had been owned by housing authorities and supported by annual contribution contracts exchange those contracts for long-term Section 8 contracts and are “privatized” using bonds and 4 percent LIHTCs. Although the housing authority may remain the general partner, the structure has allowed substantial renovation to take place that otherwise couldn’t have been carried out. Some variation of that structure is being done right now in San Francisco, San Antonio, Cambridge, and elsewhere.
Bennett: Historically, we’ve combined unrestricted [market-rate] units with restricted units such as LIHTC or Section 8 units. But as LIHTC financing becomes increasingly more competitive and difficult to secure, we’re focusing on mixed-income projects that combine unrestricted workforce housing units with market-rate units. We’re looking at projects that rely less on LIHTCs as a source.
What are some best practices for providing services to tenants who need them?
Bennett: Organizations such as Enterprise Community Partners and Urban Strategies are doing work around the country that offers great examples of creative ways to leverage resources to support families. Both organizations are using data to show stakeholders, developers, and property owners that the services they’re providing have a double- and triple-bottom-line benefit. There are new ways of calculating direct and indirect benefits that will be very important in informing the industry about the benefits of investing in services and human capital.
McKay: Housing is part of the solution, but it’s not the whole solution to providing people with opportunities and improving their lives. It is important to determine what services tenants really need and what’s going to make a difference in their lives as opposed to just checking off boxes to satisfy a financing requirement. We also believe in metrics. What is your anticipated result, and how do you measure that? This has become increasingly important because resources are so limited, and we are working with service providers to ensure meaningful measured results are achieved. Lastly, it’s important to be realistic about how sustainable the programs are. We take the trust our residents place in us seriously, and it doesn’t serve them well when you bring in a program for a year or two and then have to cancel it because policy has changed or money [has run] out.
What are some other trends or innovations?
Whyte: Inclusionary zoning requirements are often successful, requiring developers of projects such as an office building, a hotel, or market-rate apartments to include development of affordable housing. Sometimes, the affordable housing has to be built on the same site; other times, the developer can export that obligation to a nearby site. I think that kind of flexibility is a good thing when it comes to inclusionary requirements, allowing developers to find different ways to trade among themselves the rights to develop the affordable piece and receive the zoning benefit. Developing what might be called a marketplace in rights and obligations can be successful, and I think more communities could explore that idea to generate more affordable housing.
Bennett: Many in the industry are looking at the implications of HUD’s proposed changes to the Affirmatively Furthering Fair Housing regulation. HUD is looking at consolidated plans and where federal policy and local policy are going to encourage the development of affordable housing. Also, the Texas case that’s in front of the Supreme Court, addressing whether people who are suing for housing discrimination must prove that they were victims of intentional bias, may have a significant impact on policies that affect the awarding of tax credits. We are closely following those two decisions.
Gerwitz: A significant number of affordable housing projects started to come on line in 2000, and these projects typically rely on tax credits that have a 15-year compliance period. As we go into 2015, a lot of those projects are coming up toward the end of their compliance period, and like any other multifamily project, they are probably due for some sort of renovation. So there’s an opportunity for the owners to exercise their option to buy out the tax credits, recapitalize the whole transaction, and use a portion of the money to rehab the project.
Ron Nyren is a freelance architecture and urban planning writer based in the San Francisco Bay area.