By David M. Greenwald
Davis, CA – The analysis by Cascadia Partners largely bears out what we have believed for some time – it is challenging to build inclusionary housing in Davis in the current environment.
It has always been a tricky thing to quantify since the city and developers are not eager to chare calculations of expected return on investments. But the analysis by Cascadia illustrates the real challenge here – most market rate development scenarios “do not meet target internal rate of returns (IRR).”
The target rate in both the downtown and outside the core is about 12% IRR. In the downtown, the rate is 9.4 percent and outside the core it’s 10.2 percent.
So for all the people who are arguing that we need a higher percentage of our housing to be “affordable.” These numbers show that to be almost impossible. In fact, just getting to the 15 percent level is challenging.
A big culprit: construction costs.
“With historically high construction costs, today’s development environment is challenging,” Cascadia found.
They note, “Hard construction costs in California were averaging at $222 per square foot in 2018. Costs have increased significantly since then. Between 2020 and 2021, costs increased over 10%, exceeding the historical annual average increase of 2-4%”
Thus, “Given today’s realities, project costs are outweighing project revenue. Making it even more challenging for inclusionary zoning policies to be effective.”
Cascadia focuses on relaxing regulations and waiving fees. Neither of which actually solve the problem.
The council needs to figure out some ways to solve the problem.
One big problem has been the loss of RDA money. A few years ago, Assemblymember Cecilia Aguiar-Curry attempted to introduce legislation that would restore the increment tax to generate money for affordable housing – it went nowhere.
The state has put in some affordable housing money into the budget. The current budget calls for 2.5 million new units including 1 million affordable units by 2030.
Some estimates suggest to solve the problem of homelessness will take about $8.1 billion annually over the next 12 years. The current budget calls for about $3.4 billion for the upcoming fiscal year.
“The question is whether $3.4 billion is enough to turn the corner on homelessness,” the LA Times wrote in a recent editorial. “Several nonprofit organizations that work on issues of housing and homelessness say it’s not.”
The Times noted, “just as cities and counties need to be held accountable, the state needs to understand the reality of this colossal problem that has been decades in the making and cannot be solved in a few budget cycles.”
They add, “As a result, there is not enough affordable housing for low-income people, who can fall into homelessness…”
The take home message here – the state is probably going to need to fund a lot of the affordable housing programs and right now, what it is funding is simply not enough.
So what can the city do given the insufficient money from the state and local land use limitations?
I think what the Cascadia analysis shows is that we are probably not going to solve our affordable housing needs only through bootstrapping it to market rate housing.
That leaves us with two plausible solutions.
One is that the city look at its own land and find non-profits willing to raise the funds and put housing there. The city has land for example along Fifth Street that could go for this purpose.
The other is to find ways to incentivize affordable housing projects on the periphery by easing the Measure J restrictions on affordable housing.
Former Councilmember Dan Carson in 2021 proposed a modification to Measure J to allow for more subsidized, inclusionary housing projects to be Measure J-exempt.
“The exemptions written by the original drafters of J/R/D were fine in concept, but have so many strings attached that they are unusable–and have never been used. We could fix this by removing the problematic language,” said Dan Carson in June.
“For example, in order to use the affordable housing exception, an applicant would have to prove that no other site anywhere in the city is available for affordable housing—a daunting if not impossible barrier,” he pointed out.
Any change to Measure J figures to be tricky, even something involving affordable housing.
Another possibility would be for a group of non-profits to raise money to purchase land and then raise money to build affordable housing.
We have seen that strategy work in places like Sacramento. And on a small scale that could potentially put developments into place like New Harmony. But that figures to be a very slow, very arduous process.
At the end of the day, without considerably more help from the state and potentially the federal government, local communities like Davis are going to struggle to build sufficient affordable housing.