By David M. Greenwald
Most Californians agree on one key point—we do not have enough affordable housing.
In an op-ed in CalMatters, Cynthia Strathmann, the executive director of Strategic Actions for a Just Economy, acknowledged many different, at times overlapping, explanations for why this is the case—and while she acknowledges, “Each of these explanations is more or less true,” at the end of the day, she finds that “the private market has failed to provide us with the housing we need.”
While some of that might be structural, she points out, “The market’s failure to adequately supply a public good is neither surprising nor unprecedented. If the point of building homes is to generate profits, unmet demand will inevitably exist in places where money cannot be made.”
Moreover, the Urban Institute found “that building homes for low-income households is not sufficiently profitable for the majority of developers, who need to charge market-rate rents to cover construction and operating costs.”
As they argue, “It turns out building affordable housing is not particularly affordable. In fact, there is a huge gap between what these buildings cost to construct and maintain and the rents most people can pay. Without the help of too-scarce government subsidies for creating, preserving, and operating affordable apartments, building these homes is often impossible.”
This seems to be one of the most important sticking points in local debate. Most people, even those generally distrustful of developers and new developments, acknowledge that housing costs are unaffordable, and that we need more housing for low-income people. (Of course, as you well know, building that low-income housing next door presents all sorts of problems).
The Urban Institute’s tool is helpful.
“Development costs a lot of money,” they write. “Developers rely on loans and other sources to fund construction before people move in and start paying rent. But developers can only get those loans and equity sources if the development will produce enough revenue to pay back the loans and pay returns to investors.
“The gap between the amount a building is expected to produce from rents and the amount developers will need to pay lenders and investors can stop affordable housing development before it even begins, leaving few options for the millions of low-income families looking for safe, affordable homes.”
The basic problem, for low-income housing, is that in many locations “the rent the poorest families can pay is too little to cover the costs of operating an apartment building, even if developers could build that building for free.”
The Urban Institute has a nice tool here to that examines the problem looking at data from Denver.
They note, “To illustrate this problem, we examined data from the Denver metro area, which is experiencing a growth in rental housing demand but is not a traditionally high-cost city. The rental housing conditions in Denver are largely representative of other US cities.”
Take a look here.
The tool shows the impact of three major costs—first, land acquisition; second, construction; and third, the developer fee.
As they note, in some cases “developers are able to use public land to develop affordable housing. But when that option is not available, there is little a developer can do to lower the land cost.”
Developers then fund development through loans, tax credits and grants.
As noted, “federal, state, and local governments have limited amounts for tax credits and grants, so even if a development qualifies, funding is not guaranteed.”
They note, “if there aren’t enough grants or tax credits out there, why don’t developers just take out bigger loans to get the building off the ground?”
The answer: “The lenders won’t (and shouldn’t) let them. In short, “The size of the loan a bank will make depends on the project’s net operating income (NOI), or the amount of money it expects to bring in from rent after accounting for operating expenses.”
Moreover, “if the rent is set at rates that a working family can afford, that NOI is going to be quite low. It might even be less than zero if operating costs exceed revenue. The lower the NOI, the lower the size of the loan.”
They might be able to fill the gaps through more apartments.
But the Urban Institute warns that “adding more apartments is only useful if developers can fill them, which might be possible in larger cities but harder as you move farther away from dense urban areas. Additionally, creating large communities of affordable housing has its social and economic downsides, particularly if it unintentionally segregates low-income families from the rest of a community. It all depends on the scale and shape of the particular place.”
There is also the possibility of higher rent, but, “when does affordable housing stop being affordable?”
For a building to qualify for tax credits, “the apartments must be affordable to families earning no more than 60 percent of the area median income (AMI). Additionally, many rent subsidies are targeted to extremely low-income families, or those earning less than 30 percent of AMI.”
In short, “The current standard is that a family should pay no more than 30 percent of its household income on rent. Anything more is no longer affordable.”
You can see the problem here fairly easily. There is a reason why the state of California is looking at projects that have between 15 and 20 percent affordable housing. You might be able to get to a higher level with more in the way of subsidies and by lowering other costs.
But, for the most part, affordable housing is going to be leveraged from market rate housing.