Updated: Oct 13, 2020
We continued our journey to find affordable housing solutions for students experiencing homelessness this week by exploring the realm of development. Reflecting on our recent discussion on Equitable Design, we identify a common struggle designers face when trying to imbue social purpose into a project, our framework. Relegated to serving a developer, architects are limited in their ability to influence lasting impact. They do not own the projects they design and cannot control their fate long term. We became more intimate with the day to day struggle faced by students and the loss of potential intellectual capital. We explored the advantage of building a broader team and the importance of engaging and empowering the key benefactors of project. Lastly, we explored the potential of developing an open sourced model to share project success and peer review insights. This model would be a foundation to help future problem solvers build increasingly more effective solutions.
Building on this conversation and the goal of our journey, we welcomed Brent Little with Fountain Residential and Flora Brewer with Paulo Properties / PF Residential to lead our conversation for the evening. Together, we took a deep dive to examine the challenges developers face when building affordable housing projects and search for solutions to this pressing challenge.
Exploring the Topic
Immediately, we realize that there is more to a building than just design and construction. The process of developing property is a multi-year, multi-discipline process with multiple influencing factors. The developer functions as a visionary and task master to facilitate this process of conceiving, marketing, funding, and capitalizing a project. It is a job that requires multiple hats and abundant patience. We started by examining the differences and similarities between market rate and affordable housing projects. To our surprise we discover that both project types share many things in common. NIMBYism, which has been discuss in detail at previous forums, comes to a grand trifecta as neighborhoods regularly despise student housing, apartments, and any project aimed at serving impoverished and homeless individuals. Both projects require adequate funding and struggle to capture the necessary incentives to make their projects economically viable. Projects usually require multiple funding sources, some of which come with debt payments. Both require generating profits, which can spill over into the operating cost to repay investors or the added cost of reporting for serving at risk communities. And both require routine cost to cover operations and taxes.
Some unique differences to existing though with affordable housing projects. Government funding programs for example come with restrictions that can increase cost and limit the capacity of certain projects. Wages for example are often dictated in through The Davis Bacon Act which can add 15% or more to the cost of an affordable housing project. Interesting, this was enacted to protect organized labor from competition by African Americans who often were excluded from union membership and where successfully competing for jobs by working for lower wages. While no longer explicitly racially motivated, Davis-Bacon can make it difficult for smaller and less connected firms unfamiliar with the process to be competitive or can increase cost due to added cost of wages. This can also play true for Section 3 and MWBE requirements depending on the amount of reporting that can be required. While these programs may not necessarily have ill intent today, careful examination of the barriers they create and the value they bring is warranted.
Accessibility specifically related to the Americans with Disabilities Act, can also bring additional cost and restrictions. For a project utilizing private funding, units are required to meet Fair Housing Act and must be constructed so they can be easily converted to fully accessible unites without having to move walls or go through major reconfiguration. As shared, when utilizing Federal assistance for affordable housing projects, 5% of the units must be built with full accessibility requirements, including specialized fixtures and accessories to accommodate mobility disabilities. An additional 2% of the units must also be provided to accommodate individuals with visual and hearing impairments. Again, these programs are not inherently bad, they do promote more equitable spaces, but there are cost for consultants, materials, and equipment required to meet regulation. Though not discussed at our forum, parking minimums can also restrict the capacity and increase the cost of housing projects.
Taxes as we learn contribute to 30% of the reoccurring cost of a project. There are measures developers can take to reduce or avoid the burden, however some come with lengthy requirements. One measure is using a quasi-governmental organization like a local housing authority to develop the project. Developers can also pursue public private partnerships with local universities to utilize tax exempted land. In this structure the university would own the land and lease it to the developer for a reduce rate. Grand Marc, a local project adjacent to Texas Christian University used this model. Tax Exempt Bonds provide developers with a low interest loan to construct affordable housing and allow investors to collect a return without paying taxes. However, we learn that the requirements of complex reporting and underwriting come with additional cost that cancel out the benefits the lower interest would provide. With Tax Credits, developers can offset a portion of their federal tax obligations by building or rehabbing affordable housing projects. These programs can be highly competitive and carry high marketing and transaction cost. Historic Tax Credits offer another avenue to reduce a property taxes but come with mandated Federal Interior Standards that can drastically increase the cost of a project. Most of these limitations can severely limit the viability of small projects and the participation of small firms.
As we understand developments carry substantial cost. One of the first primary cost is land acquisition. Fort Worth like many cities has seen a staggering increase of land prices, even in the midst of the pandemic and a looming recession. In a project shared by Brent in Clemson, South Carolina, a 5.1-acre site sold for $8,000,000. Additionally, not all land is zoned to accommodate multi-family projects which limits supply and can influence higher prices. Changing the zoning can be a lengthy process and comes at an additional cost, with limited guarantee.
Construction cost have also been increasing on a steady basis of 10% to 25% depending on the city and the materials needed. Lumber for instance has reached an all-time high. As one of the primary materials for building multi-family projects, this can have a substantial effect on the cost of a project and ultimately the price of the rent. Design services (architects, engineers, interior design) are controllable to some extent. For non-profit projects, you can sometime recruit pro-bono services, but ultimately funds need to be allocated to help with managing the complex aspects of the project.
To recoup these substantial costs, taxes, and cover ongoing operations developer rely primarily on rent. On a large-scale project (400 units +) a property could collect up to $5,000,000 in revenue per year. Once expenses are factored, $2,000,000 is captured to repay investments and the property manager. This creates a valued asset the developer can sell. For affordable housing projects, the revenue is primarily collected through rental subsidies. Without them, the projects cannot function as intended.
In part 02 we will take a deper dive into the challenges developers face when trying to take on more socially oriented projects.