How much is too much to spend on building affordable housing?
$100,000 per unit? $200,000? $300,000? $400,000?
The cost of sheltering a community’s neediest residents has been rising and so has the heat surrounding the hefty price tags.
From California to Maine, the amount being spent on low-income housing tax credit (LIHTC) and other affordable housing properties is under growing political and public scrutiny.
“Certainly affordable housing costs are perceivedto be out of hand by people who are not in the industry,” said David Smith, chairman of Recap Real Estate Advisors, a Boston-based firm that works with multifamily property developers. “They see foreclosed homes in the Central Valley of California selling for $175,000 or less, and there are thousands of them, when new affordable housing in San Diego can cost $450,000 per unit. To them, that doesn’t add up.”
It’s a major political problem, and Smith is surprised more people don’t see it.
“With state and federal budgets under pressure, anything can be cut or zeroed out, it’s very difficult to explain crisply the reasons for LIHTC’s high costs,” he said. “Normal people say, ‘Instead of building new properties, why not just buy vacant homes and rent them to poor people?’ That the existing stock may not be where the jobs are located, or is in some other way unsuitable, is a potential answer, but not a snappy comeback.”
“There’s no question in my mind that cost containment or the perceived above-market costs for LIHTC projects represents a significant political issue and political risk for the program,” Smith says.
In California, where some recent projects have hit the eye-popping $450,000-per-unit mark, a group of state agencies is commissioning a study to find out what’s behind the high costs.
And, in Maine, the issue has taken on such a divisive tone that the state’s top housing official recently resigned after being caught in a storm of criticism over the costs of affordable housing developments.
Few projects will face as much scrutiny as Elm Terrace in Portland, Maine.
The repurposing of a former children’s hospital into affordable housing, the $10.1 million development became the subject of a contentious debate between board members and the former executive director of the Maine State Housing Authority.
State Treasurer Bruce Poliquin, who became a member of the agency’s board last year, latched onto the project, holding it up as an example of excessive spending.
“How can Maine taxpayers be expected to pay for $314,000 ‘low-income’ apartments when the median single-family home sells for $159,000? Why should our fellow Mainers be asked to subsidize housing which they themselves cannot afford to live in?” he said in his blog last November.
He made the point that “doing good doesn’t mean doing it at any cost.”
While developers and others deny that Elm Terrace’s costs ever reached $314,000 per unit, they eventually reduced the price tag to $265,000 to secure a LIHTC award.
The lower cost came at a price. The nonprofit developer Community Housing of Maine was hoping to provide three-bedroom units for families, but had to change its plans to feature smaller one-bedroom apartments and increase the unit count to 38 units. The apartments will serve households earning no more than 50 percent and 60 percent of the area median income.
Work has gotten under way to redevelop the property, which had been largely sitting empty. “We’re creating affordable housing,” said Cullen Ryan, executive director of Community Housing. “It’s a building that would have fallen into decline. Now, it will continue to be a landmark.”
Several key factors got lost in the dispute, he said, pointing out that Portland is one of the state’s most expensive areas to build in, and historic rehabilitation projects are also often more costly than building a new construction development.
Elm Terrace’s costs were right in line with similar developments, Ryan said.
Dale McCormick, the MaineHousing executive who came under fire for the project, resigned her post in March. A Democrat, she had had been appointed to lead the agency in 2005 by then Gov. John Baldacci and was scheduled to serve until 2014.
The past year was tumultuous as she battled with new board members, including Poliquin, a Republican. “MaineHousing has a number of commissioners with different policy perspectives,” she said in a statement announcing her resignation. “These differences have led to substantial disagreement about how MaineHousing can best serve the interests of its clients and the people of Maine.”
Cost containment has been no less an issue in California, where four agencies (California Housing Finance Agency, Department of Housing and Community Development, Tax Credit Allocation Committee, and the Debt Limit Allocation Committee) are working together to examine if there is a problem.
The hefty price tags have drawn criticisms from observers and created perceptions that developers are wasting precious taxpayer money to build Taj Mahals for the poor.
Just one more thing
Overall, the high costs are being driven by the “just one more thing” phenomenon, explained Smith.
“Affordable housing is financed with soft capital–either LIHTCs or soft loans–that is given out by government bodies,” he said. “And these government bodies then push the property to be more green, more accessible, more deeply affordable, more socially responsive. All these are ‘just one more thing.’ These mandates are embedded into qualified allocation plans (QAPs), which in some places, like California, have become so competitive that things intended as optional become mandatory.”
The federal LIHTC is the nation’s main program to build affordable housing, financing approximately 120,000 units each year, and each state’s QAP lays out the guidelines for awarding the tax credits.
These cost increases are multiplicative, Smith said. “Let’s says that a QAP has 25 ‘just one more thing’ elements, each of which adds 2 percent to the cost. Multiply that out, and the housing is 64 percent more expensive.”
Some states have imposed restrictions on development costs. For example, the New Jersey Housing and Mortgage Finance Authority said total development costs should not exceed $250,000 per unit. Others think it is too restrictive to have a set maximum figure.
There are many competing public priorities that get played out in the affordable housing arena, said Jane Graf, COO of Mercy Housing, a nonprofit that has developed, preserved, or helped financed approximately 42,000 affordable units.
“Those competing priories include pushing and enhancing the whole question of green building and sustainability,” she said. “That’s great. It is a wonderful public purpose and priority. There are also local hiring requirements, prevailing wage costs, and design requirements. Each one requires a level of compliance. Don’t get me wrong: They are good and desirable, but they have a cost impact.”
There’s nothing simple about affordable housing, Graf said.
And, in many cases, there is resistance to affordable housing, so developments serving low- and moderate-income households are being pushed by reticent neighbors and city officials to have the best designs and features or risk not being built at all, said one developer.
The issue is that many families cannot afford the rents that are dictated by a straight, private real estate transaction, Graf said. “People’s incomes have not kept pace with the rising cost of housing.”
The National Low Income Housing Coalition shows in its annual “Out of Reach” report that across the country there are renters working full time who are not able to afford the market rents where they live. The number of extremely low-income renters, those earning 30 percent or less of the area median income, jumped by nearly 900,000 between 2007 and 2010, making the need for affordable housing greater than ever.
Still, the huge demand isn’t a defense for developments that may cost too much.
Builders and advocates stressed that the recent criticisms have painted an unfair picture of their work because the costs are not being accurately measured or erroneous comparisons are being made.
In the case of Elm Terrace in Maine, it would have made more sense to look at the cost per square amount and compare it with other recent historic rehab projects, said Ryan. “The costs were right in the mean.”
McCormick agreed that it was misleading to hold up the project to the statewide average of an existing single-family home. First, Elm Terrace is in Portland, one of the state’s most expensive markets. Second, it is restoring a significant building in the community. Also, multifamily developments often have unique costs, such as including a fire sprinkler system and meeting the requirements of the Americans with Disabilities Act.
“It’s so easy to attack and criticize one number that is inaccurate, and it is so hard and it takes a long time to make clear a complex program like the LIHTC,” McCormick said in an interview prior to her departure from MaineHousing. “It’s worth it, but it’s hard.”
Quantifying project costs
The problem is there is no good standard for determining what a project should cost “because affordable housing pursues multiple objectives, and everybody uses a different version of the ‘but for’ test,” Smith said, meaning “but for” this housing what would happen?
The price tag fails to tell the whole story.
A number of studies have shown that supportive housing for chronically homeless individuals has saved communities enormous amounts of money because residents are no longer using emergency rooms, jails, shelters, and other costly services.
A study showed that 1811 Eastlake, a development that has been housing Seattle’s chronic street alcoholics, saved taypayers more than $4 million over the first year of operation. The residents had accrued more than $8.2 million in costs in the year prior to intervention. The group cut its costs by half in the first year after entering housing.
There are other benefits, but they are difficult to quantify. For example, many affordable housing developments are located in infill locations close to services, jobs, and public transportation. These locations are often critical to low-income families, but they are also more expensive to develop on these sites than on the far edges of a community.
Studies have also shown stable, affordable housing can help support children’s success in school. In some cases, affordable housing can provide opportunities for families to move to better, stronger school districts.
That leaves the question of how should development costs be measured.
One way is cost versus other successful affordable housing, said Smith. “My best argument, which I can back up but we need more statistics to demonstrate, is you need to measure the per-unit costs over 20 years,” he said. “The failure rate in LIHTC developments is enormously low, much lower than any other federal affordable housing program ever.”
One study that Smith did suggests that the standard LIHTC project is between 13 percent and 32 percent cheaper all in.
Another has been to compare the costs with foreclosed homes, which is what happened in Maine. Many LIHTC developers believe it is unfair because of location, configuration, and other factors. “But all of those are technical defenses, not sound bites,” Smith said. “We’re politically vulnerable here.”
Ultimately, the industry needs to show that the LIHTC program is better than the alternative and as efficient as it can be, including scrutinizing every cost item, he said.
It has always bothered policymakers that $1 of LIHTC often raises less than $1 of net equity. Investors may pay $0.90 per dollar of credit. “People naturally enough presume that this discount is money lost,” Smith said. “It isn’t–it’s risk transfer–but we don’t say that … Then too, when you tell people that it is banks buying the LIHTCs, they get even more suspicious because right now people don’t much like banks. The burden is on us to prove that our process is optimally efficient, and we are not doing so.”
Instead of bashing affordable housing and calling it inefficient, people are going to have to start looking at what can be given up or what can be changed to make the development process more cost effective, said Mercy Housing’s Graf. “It won’t come without a certain amount of angst.”
Graf is sure that the wrong answer is to stop developing in high-cost areas. “That’s not a good solution,” she said. “I can’t think of a worse situation that saying everyone with incomes of X must move to place Y. That’s a ridiculous social construct. High-cost areas have lots of low-paying jobs where people must be able to live in.”