By Margot Carmichael Lester When it comes to affordable housing, there is perception and then there is reality. Affordable-housing projects are saddled with the image of being poorly built, financial headaches that become blights on the neighborhood and a drain on the owner's pocket. "Most people's vision of low-income rental housing is a dilapidated project where the design and property management are horrible," said Robin Hughes, executive director of the Los Angeles Community Design Center, a nonprofit developer of 2,000 affordable-housing units in Los Angeles County. But that's not the reality. "We still have slumlords," said Bea Hsu, deputy in charge of housing for Los Angeles City Councilman Eric Garcetti. "But most owners are doing the right thing, and that keeps low-end housing stock in better condition." When done right, low-income housing not only blends into the community but it also makes sense financially. Tax credits, low-interest loans, grants and other subsidies make affordable projects pencil out where high land prices, entitlement complications and other development costs can bar all but the most upscale housing projects. Affordable housing also calls for creative design and planning by mixing uses or income levels, which can help a new project stabilize faster. Moreover, the high community demands necessary to get affordable projects through the permitting process mean builders don't skimp on quality. Chasing the Dough "The paradox of affordable housing is that it's the most expensive housing in the neighborhood," said John Huskey, president of Los Angeles-based Meta Housing Corp., a developer and operator of about 700 affordable family and senior apartment units in Los Angeles and Orange counties. "Once you announce an affordable-housing project, it triggers not-in-my-backyard fears of traffic, crime and density," he said. "So your project has to be better than average and built to the top level of standards. The nonaffordable housing is in the middle or low end." As a result, a recently developed affordable rental housing project - whether all-new construction or reuse - has a cleaner design, nicer facades, better construction, improved pedestrian and traffic control than many market-rate housing projects. And that drives up costs. Hughes estimates the design center spends about $200,000 on each unit it develops. "But 'better' doesn't translate to anything you can get additional funds for," Huskey lamented. Developers cobble together a range of subsidies and tax breaks from city, county, state and federal programs to make affordable projects pencil. "Your basic low-income family in-fill development will have about 12 sources of financing," explained Sam Mistrano, deputy director of the Southern California Association for Nonprofit Housing. "That includes pre-development money, short-term construction loans and permanent loans." Developers can receive additional funding if they design for special-needs populations, such as the elderly, people with physical disabilities and people with HIV/AIDS. They also can include revenue-generating resident services like child-care centers or retail. The design center, for example, has its own financial strategy. "You start with rents at low-income level - 35 [percent], 40 [percent] or 50 percent of median income - and subsidies to cover operating expenses, then forgive debt up to 10 [percent], 15 [percent] or 20 percent of total project costs," Hughes said. The largest new source of funding comes from Proposition 46: the $2.1 billion housing bond approved by voters last year to create more than 130,000 new housing units. To date, more than $150 million in grant and loan funds to produce more than 5,500 affordable housing units has been distributed through various state Department of Housing and Community Development programs. The Los Angeles and Bay Area regions have received more than $50 million in housing bond funds each with the majority of that money going toward the production of multifamily housing. The Multifamily Housing Program is a deferred-payment loan program in which recipients pay 3 percent simple interest for 55 years. New deadlines to apply for the state funding programs are coming up this fall. The most important subsidy for developers of affordable housing is the low-income-housing tax credit, which can cover up to 60 percent to 70 percent of project cost. The most valuable catalyst for increasing the affordable-housing inventory, the program currently gives states $5 billion annually to support the purchase, renovation or new construction of affordable rental housing. That translates to $1.75 per capita nationally. Created in 1986 as part of the Tax Reform Act, the tax credit is calculated based on development costs. To use all the credits available to the project owner, most developers form partnerships to get around IRS regulations and restrictions. Most credits are sold to investors through public or private syndication, which provides investors credit against their tax liability over a 10-year period while developers can finance 30 percent to 60 percent of their capital costs for construction. Administered through the California Tax Credit Allocation Committee, projects are evaluated based on the number of affordable units. At least 20 percent must be allocated for residents at 50 percent of area median income or 40 units for those at 60 percent or less of median income. Other bases for evaluation are transit orientation, retail amenities such as a grocery store and even Internet connections. In March, the state tax credit allocation committee made a few minor changes to the regulations to ensure that at least one project is funded per round in each of the state's major geographic areas. The break is significant enough that competition is high. Mistrano estimates that only about one in four projects are awarded the benefit. "The low-income housing credits are great," Huskey said. "It has become so sought after that there are some projects we have filed for six or seven times and still not gotten the credits despite the fact that we max out on points." Mixed Incomes While affordable-housing projects specifically target low-income residents, many new multifamily projects must have affordable-housing components. Dozens of cities throughout the state have inclusionary ordinances requiring that a certain percentage of housing units are affordable, and others, such as the city of Los Angeles, are exploring similar measures. Though residential developers are dragged kicking and screaming into setting aside affordable units, when done right mixed-income housing projects can be seamless. In an 80 percent market rate, 20 percent affordable project Meta built in the San Fernando Valley, the market rents average about $1,100 a month for one-bedroom units, excluding utilities. Meanwhile, affordable units go for $370, $528 and $634 a month, including utilities, for tenants who are earning 35 percent, 50 percent and 60 percent of median income, respectively. To make projects pencil out, Huskey combines low-interest loans with tax credits to compensate for loss of revenue. The added benefit of combining incomes is the high demand for affordable units. "We have to lease market units one at a time," Huskey said. "While for the affordable units we might have 15 tenants for every one unit." For example, in a 100-unit, 80-20 apartment project, a developer is assured that the first 20 units will be leased and begin generating income automatically. This sometimes makes the market-rate units a little harder to lease up, Huskey said. "The 21st person may take a little bit on faith," he said. "You basically have to tell them they will have lower-income neighbors. I don't think there is a law requiring us to inform market tenants, but it would be poor business if we didn't," he said. Huskey said that it becomes easier to lease mixed-income units to market-rate tenants in areas where more similar projects are built. His firm also provides extra amenities, such as extracurricular programs in senior housing, to attract market-rate tenants. "You can't tell any difference between the way they walk, talk or rent," he said. The Cost of Living The factors that make all real estate development costly also apply to affordable rental housing development. The first big-ticket item is land. "There's not a significant amount of vacant land left in L.A.," said John McCoy, deputy administrator for housing of the Community Redevelopment Agency. And what's available is expensive. Numbers from a 2002 housing report by the Little Hoover Commission, however, show land costs in Los Angeles County that are almost half as much as construction costs. According to the report, land in the county prices at $40 per square foot, while construction costs run $95 per square foot. That's why most affordable rental projects look at new mixed-use or adaptive reuse of existing buildings. "Mixed-use and adaptive reuse are the best ways to increase density," McCoy said. "If you can get twice the housing on a piece of land, it effectively cuts the cost of land in half." Consider downtown Hermosa Beach, where land goes for a million dollars an acre, according to Randy Jackson, president of the Planning Center, a city planning consulting firm. "Land is what costs you the money," Jackson said. "So if you put 20 units on that acre, it starts to make sense. You've cut the cost to $50,000 per unit and the breaks start to happen." He cautioned against too much density, however. "The answer to affordable housing isn't 40 to 50 units per acre," Jackson said. "It's somewhere in the high teens to low 20s. You can do those developments inexpensively, yet make them socially exciting." Adding retail and office space also adds to the bottom line, according to Raphael Bostic, associate professor at the USC School of Policy, Planning and Development and director of the Casden Real Estate Forecast. "Mixed-use allows developers to use the revenue stream from commercial square footage to subsidize the housing and make the entire project pencil," he said. Go Wide Between tax advantages and revenue streams, mixed-use is an integral part of affordable-housing development. But some disagree about the form the projects should take - vertical or horizontal. "We have attempted to build residential over retail, and the economics have not penciled to the degree everyone thought they would," said Mark Schurgin, president of the Festival Cos., a major retail developer. "Doing multiple uses on a vertical basis costs more than side-by-side." Schurgin attributes the higher price of verticality to the additional cost of underground parking and vertical venting and exhaust. That distance, he said, costs more not only in construction but also in operations. "In the end you've got air-conditioning units significantly above the areas they're serving and that's inefficient," he said. In downtown Los Angeles, MJW Investments is taking a vertical approach, stacking residential over retail. At Santee Court, an adaptive-reuse project, 10 industrial buildings in the Fashion District are being converted into a $120 million mixed-use, mixed-income development. The company paid $19 million for the properties between 7th and 8th streets. The transit-oriented development will be done in three phases. Phase 1, which will go online next year, features 165 rental lofts in three buildings and 40,000 square feet of retail. Twenty residential units will be reserved for low-income residents. The remainder will be work-force affordable, priced at $1,200 to $1,800 per month for a 700- to 1,000-square-foot apartment. Amenities include high-end appliances, oversized bathrooms and a rooftop fitness center with a pool, driving range, putting green and basketball court. The final two phases also will be mixed-use, including condominiums, and will open in 2005. Mark Weinstein, MJW's founder and chairman, said the project wouldn't pencil out without the commercial space. "Downtown is a hot, vibrant, no-vacancy retail market," Weinstein said. That robust retail market helped Weinstein secure funding from banks and other lenders. He has received little city assistance for the project. "The more you're making on retail, the better," he said. It's a different story for less active commercial areas, according to Huskey. "If we're required to do mixed-use in less commercial cities, we can't find lenders who think we'll make the commercial numbers," he said. If existing retail in the market is experiencing high turnover or low foot traffic, even the increased numbers of residents won't convince lenders to fund retail. Usually, though, the commercial woes are due to oversaturation or the wrong kind of retail, Jackson noted. "The challenge is to maximize commercial development by putting in shops that satisfy the community, not regional draws," he said. Jackson explained how the horizontal model works. Take a 20-acre site, and start with four acres of retail development. That's about 60,000 to 80,000 square feet for grocery stores or chain stores. Then have two acres of live-work space such as walk-ups or town houses over niche commercial-like accounting firms or MailBoxes Etc. Finally, take the remaining 14 acres for mixed-income rental and for-sale housing at 20 to 30 units per acre. Los Angeles real estate veteran Jerry Snyder, managing partner of the J.H. Snyder Co., is using this model in North Hollywood. His 16.7-acre, $218 million Community Redevelopment Agency-backed project, called NoHo Commons, will break ground this fall. The development features 450 multifamily residential units, many at work-force affordable rates, and 500,000 square feet of retail and office space. The project includes a child-care center, a community clinic and an MTA Red Line terminal. But even with a campus setting, Snyder has had to cut back 300 residential units to make the project pencil. Many municipalities would rather see commercial development than residential. "Cities look at housing as a tax revenue user," said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. "If they have a choice between retail and residential, they choose retail because of the perceived tax advantage. But what about the local customer base with income?" This myopia on the part of investors and government officials is a short-term view that could hamper community development. Recent U.S. Census figures showed 1 million residents migrated out of the state than migrated into the state in the last five years in part because of the lack of affordably priced housing. "Cities and investors have to wake up. Housing is a benefit to the city," Jackson said. "It brings people together, spurs social change and improves the infrastructure. You want to create residents that spend in the community. And that takes a balanced system of housing, jobs and commercial development. If you don't have that, it's devastating."
September 2, 2003