The message coming out of the Social Services Commission two weeks ago was clear – but at the same time extremely flawed. As one commissioner put it: “I want affordable units built in this town. There’s a crisis.”
As another put it: “We have really prioritized the building of units and the need for housing.”
But there is a problem and a lot of people in this community simply do not understand the economics of building affordable units.
The first problem is the difficulty of getting housing in Davis to pencil out. It is a view most people do not want to take. They see plenty of proposals for housing and assume that there is a lot of money there. The reality is that, while there is money to be made, the margins are razor thin.
Staff in the Affordable Housing item scheduled for this evening notes the economic analysis as prepared by Plescia and Gruen, whereby “under current conditions even without inclusion of any affordable housing requirements, ‘construction of the Large Traditional prototype may have the potential to be feasible, however, may not have sufficient net project value to support land acquisition costs in Davis.’”
Add in affordable housing requirements, and this prototype “was determined to be infeasible under the scenarios reviewed.”
There is a second problem – the cost of building affordable housing is sky-high in California.
Last fall, the Wall Street Journal reported on a new report from the Government Accountability Office which highlights “stark disparities in the cost to build affordable housing that qualifies for tax credits between states like California, which has more land-use regulations, and Texas, where it is much easier to get approval to build.”
The result is that in California affordable units start at $325,000 per unit, go up to $400,000 in San Francisco and LA, and could cost nearly $750,000 to build.
The WSJ notes: “High construction costs limit the number of projects that can be built, by requiring states to allocate more tax credits to individual projects or to find other sources of funding to make projects work.”
The result is that Chuck Cunningham told the Planning Commission he estimated that he could build about 3.5 percent affordable units. That’s about 8 units or so. Whereas, if he got it to 15 percent, it would be about 34 units.
He explained the difference between having affordable units, and having affordability by the bed, which allows the total rent generated by the unit to offset the costs. For a project like his, there is no possibility of such subsidy.
This is a problem in places like Davis, where we are going to have limited ability to utilize things like land dedication, whereby the non-profit affordable developers can cobble together grant funds and other money to build affordable units.
But the proposal put forward by the developers here actually solves most of these problems.
On the surface a 1.65 percent revenue stream of gross rent doesn’t sound like a lot. It is expected to generate around $125,000 per year to start, though it could get close to $300,000 as rents increase over the next 15 years or so.
One response would be to state that that’s not even enough to subsidize one home.
But, as I pointed out previously, if the city starts to use this as a model, we could quickly start looking at real money.
Not only do we have the Chiles Roads apartments, but we also have proposed projects so far at 2555 Research Park, the URP (University Research Park) mixed-use project, and the University Mall redevelopment. With just those four projects, we are looking at perhaps $600,000 to $1 million per year in a revenue stream.
That’s starting to become real money. That is half of the replacement for RDA (Redevelopment Agency funding) right there and doesn’t take into account the state funding that could come for affordable housing and perhaps a replacement increment tax.
One of the things we could do would be to create a city-level affordable housing voucher. Five hundred dollars a month for a voucher could bridge the gap between a market rate unit and an affordable one. That’s $6000 per year. Just at $125,000 generated, you are looking at 20 people that could receive affordable housing.
Think about that, instead of building new housing with this revenue stream, we can use it to essentially convert market rate into affordable. Instead of one-third of one house, the revenue stream from the Chiles Road apartments alone could generate, for starters, about 20 affordable units.
Unlike with RDA, we can also use the revenue generated to rehabilitate existing homes. So while it would be quite costly to build one unit, we can renovate and rehabilitate existing units far more cheaply.
Planning Commissioner Greg Rowe pointed out that the city with a steady revenue stream could actually get that money up front through bonding, and use the stream as their means to pay it back.
Therefore – in short – the idea that a revenue stream cannot produce actual affordable units is quite false. There are many practical uses for such money that we could take advantage of.
The best part is that the money stream exists in perpetuity, it is gross revenue, so it is not dependent on costs or revenue, and it’s scalable, meaning that with more unit approvals in the future, we could go from $125,000 and quickly top a few million.
It is also scalable in the sense that projects that might be more cheap to make – such as projects which do not have demolition costs added on could generate more than 1.65 percent per gross unit.
Some have suggested that this is not a good model to replicate into the future. I couldn’t disagree more. This is the model that could help solve our affordable housing shortage.
—David M. Greenwald reporting
In the meantime join us on Thursday from 7 to 9 at Repower Yolo (located at 909 5th Street – the Indigo Building where the old Dairy Queen was located) for the first of a three part discussion on affordable housing.