Roadblocks on the way to building affordable housing

Development is expensive: Acquisition cost (the cost of the land) + construction + developer fee (operational cost for the developer + design fees + construction loan interest + permanent financing fees + reserves + project management fees) + taxes = a ton of money.

Acquisition costs can mount very quickly. How much does it cost to buy land? If you are in Brooklyn, scarcity is an issue, the closer you are to Manhattan, transportation hubs, how close you are to the major avenues, like Atlantic or Flatbush, the higher the price - even for odd shaped lots.

Once you have the land, but before the excavation happens there are a number of costs associated with the planning, design and management of the project.

What’s probably the biggest outlay of funds will be construction costs. There’s really only so much that you can save without reconfiguring the standard for what a livable apartment is, but a number of developers tend to pull the opposite direction and add a number of amenities that mid and low income families do not want or need, to make their overpriced development "worth" the asking price.

“From suburban to urban builders, it’s become increasingly costly to build any new residential units," says Stockton Williams, executive director of the Terwilliger Center for Housing at the Urban Land Institute. "Declining subsidies, land and labor costs, everything has come together. All the overarching factors are making this far from a fully functioning market."

If developers can make money on it, they would be racing to build the housing. The challenge is when you want to build for someone that makes $20,000 a year, then you are looking at collecting something like $500 to $600 a month in rent for each apartment.

Then consider how much money can borrowed against that kind of rent flow, you wind up with a large gap between how much money you have to build new apartments and how much it actually costs to build them in the real world.

In the last few years there has been a decline in the number of lenders who will back developments as well. "There's a huge void in the market," said Josh Zegen, a managing principal and co-founder of Madison Realty, who is backing Developer Yoel Goldman’s building in Brooklyn at the old Rheingold brewery "There are other specialty lenders who we compete against, but it's few and far between.” [Crains]

Developers can pull from a number of different entities for funding: Banks + Investors + self investment + incentives/subsidies + tax credits + housing trust funds/grants = enough to build?

The banks hold a great deal of the capital when it comes to real estate development, but they won’t cover it all. They use Net Operating Income (NOI) to calculate how much debt a developer will reasonably be able to pay off, accounting for interest and various operational costs, thus making sure the NOI will cover the debt.

Net operating income is the annual income generated by an income-producing property after taking into account all income collected from operations AFTER deducting all operational expenses. The lower the NOI, the lower the size of the loan.

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.

New York City has a cadre of subsidies and tax incentives they offer to developers to keep them coming back.

Subsidies come in various forms, like vouchers or rental assistance. Tax credits, HOME funds, Community Development Block Grants, and housing trust funds help pay the costs of construction, development, or major repairs.

New York City has a few tax incentives that make development a little more digestible. Like the J-51 or 421-A exemptions, see this link from Brownstoner for more on 421-A.

New affordable housing programs are typically financed with Low Income Housing Tax Credits (LIHTCs) or are part of market-rate developments in programs such as 80/20 or inclusionary zoning.

But like anything in government, things tend to trickle down. Cuts in HUD funding will impact subsidies. "What I’m hearing from everybody else in the affordable housing community, from across the country, is that it’s just getting harder," says Gina Ciganik CEO of Healthy Building Network (HBN)

"Money is getting more scarce, disparities are getting worse, and the cuts are making everyone crazy.”

No one subsidy can solve the affordable housing problem. Rather, a combination of programs including federal tax credits, state housing trust funds, local zoning decisions and public land contributions can help affordable housing get built.

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