Two weekends ago, when I was visiting friends in Los Angeles, I got a tour of two affordable housing developments, both of which are currently under construction, both developed by the same developer, the Little Tokyo Service Center Community Development Corporation (LTSC CDC). My tour guide was Takao Suzuki, LTSC CDC Director of Community Development. Full disclosure: I used to work at LTSC CDC, and when I say “visiting friends in Los Angeles,” I was staying at Tak’s house and hanging out with him the whole time I was there (though we also hung out with other friends across the weekend). So, shout out to Tak and Akemi (two neat, orderly people) for putting up with me (a slobster) for the weekend.
At any rate, both of these developments are interesting and innovative in their own right, but for the purpose of this column, I am going to focus on the difference in their development costs and what the cost difference says about affordable housing development costs more broadly and how much of the public handwringing around the high cost of producing affordable housing is overblown. Bottom line, much of why affordable housing costs more is worth it because:
- Affordable housing is a superior product,
- Affordable housing has more amenities,
- Affordable housing employs higher labor standards.
But, there is a fourth cost factor that is NOT worth it:
- Affordable housing has high transaction costs due to multiple, complex funding sources.
Fortunately, some of these high transaction costs are fixable if we have the creativity and political will to do so.
Affordable Housing Development Costs vs. Non-Affordable Housing Development Costs: A Primer
A little bit of background data before I get into my main arguments. To understand whether or not affordable housing is expensive to build, we need a valid point of comparison – i.e., affordable housing is expensive (or not) relative to what? I’d argue that a newly constructed affordable housing apartment’s closest comparable is a newly constructed market-rate apartment. At the bricks and sticks level, they are almost exactly the same, except that affordable housing is generally built to higher construction standards and is generally more likely to be environmentally sustainable. In urban California, practically all affordable housing is Type III construction, which means 5 stories of wood frame construction on top of a concrete and steel podium1 that is typically 1-3 stories (for a total of 6-8 stories). So, the best cost comparable for a newly constructed affordable apartment in a Type III building would be a newly constructed market-rate apartment in a Type III building.
In a City of San José commissioned study, Type III affordable housing in San Jose was found to cost $708 per square foot vs. $623 per square foot for Type III market-rate housing – or a difference of $85 per square foot, which would translate to a cost differential of $85,000 for a hypothetical 1,000 square foot unit in San Jose. A statewide analysis by the California Housing Partnership, looking at cost per unit rather than cost per square foot, found a roughly $68,000 per unit cost differential for affordable vs. market rate units built in Santa Clara County. [Side promo note: SV@Home will be soon coming out with our own cost analysis! Be on the lookout!]
So, the data says that affordable housing costs on the order of $70,000 to $85,000 per unit more than market-rate housing in our region. Our questions should then be, what are we buying with this extra money? And, is it worth it?
A Tale of Two Developments
Santa Monica/Vermont
The first site in my tale of two developments currently under construction is Santa Monica/Vermont, a 187-unit affordable housing development at the western edge of the Historic Filipinotown (aka HiFi) neighborhood and directly adjacent to/on top of the Santa Monica/Vermont LA Metro station. It is permanent supportive housing (PSH), with approximately 50% of the units dedicated to formerly unhoused folks and on-site office and service space for a homeless services provider. In many ways, it is a fairly typical affordable housing/permanent supportive housing development. But it has some notable differences. One is the sheer amount of commercial/non-housing space – which includes a Filipino supermarket plus additional retail and office/service space for what will likely be an additional 3-4 nonprofit organizations. Another thing to note is the complexity of the financing, which includes both 9% and 4% tax credits and the building being condo-ized into 2 separate phases that are being constructed concurrently. Currently, the total development costs are projected to be $123 million, or almost $660,000 per unit.
823 Cleveland Apartments
The second site is 823 Cleveland Apartments, a 53-unit infill affordable housing development on a residential street in Los Angeles’s Chinatown. The biggest, innovative/notable thing about this development is that it is almost entirely privately financed – there is virtually no direct public funding source that is paying for this building. It is a prototype, part of an ongoing struggle for nonprofit developers to find ways to finance affordable housing that can provide alternatives to public financing, especially the low-income housing tax credit (which is drastically oversubscribed). The building is financed through a handful of philanthropic grants as well as a way-way-way-below market rate perm loan (so much so that the lender doesn’t want the rate or its identity disclosed). Compared to Santa Monica/Vermont, this building is fairly bare bones – there is no ground floor commercial and very minimal on-site service space. The current projected total development costs are $16.3 million, or almost $310,000 per unit.
These 2 Buildings Have the Same Developer and are being Built at the Same Time
I want to emphasize here what I said at the outset of this column – these two developments are both under construction right now and by the same developer, LTSC CDC. The reasons why, on a per unit basis, the first costs over twice as much as the second have very little to do with who or what type of entity is developing the building and, similarly, have very little to do with the current high-cost environment for development and, instead, have everything to do with the public hoops and the bells and whistles that we require of affordable housing.
Affordable Housing is a Superior Product
This argument is less about the cost difference between Santa Monica/Vermont and 823 Cleveland Apartments and, instead, is more about the cost difference between affordable and market-rate development more broadly. As mentioned above, affordable housing is generally required to meet higher standards of construction and green building than market-rate housing. Also, the facades of affordable housing and the overall design of affordable housing are generally nicer and use higher quality materials. This is an approach honed by decades and decades of dealing with NIMBYs and hostile local governments. People stigmatize affordable housing and inappropriately conflate it with their misconceptions of public housing. So, nonprofit developers and other affordable housers are always pushed and pushing themselves to make our developments more durable, efficient, and beautiful. And I believe this has led to good outcomes. We should want everyone to live in nice, well-designed, and well-constructed housing made from high-quality, durable materials. We just need to be aware that this adds costs to the development of affordable housing relative to market-rate housing, which is not built to the same standards.
Affordable Housing has More Amenities
As mentioned above, as compared to Santa Monica/Vermont, 823 Cleveland is lacking on the amenities side. This is a big reason why the Cleveland apartments are cheaper. Likewise, affordable housing has proportionately more amenities (more service space, larger community rooms, more playgrounds and open space, etc.) than market-rate housing.
And, for Santa Monica/Vermont, the amenities are good and appropriate. Because the building is directly above a subway station, it is good urbanism for the development to have lots of ground-floor commercial space—to activate pedestrian activity around the station, make the streets more lively and walkable, encourage more people to use public transit, etc. Similarly, as the building includes PSH, it is appropriate (and necessary) that the building would have lots of on-site service space.
But if we require or incentivize affordable housing to have ground-floor commercial or amenities (such as social service space or clinics or childcare centers), we have to understand that this adds project costs to affordable housing developments (even if the additional space is delivered as a cold shell) without increasing the number of units. And the added costs aren’t simply the costs to build the space itself but also any parking (which can cost tens of thousands of dollars per space) that may be associated with the commercial uses.
Affordable Housing has Higher Labor Standards
In 2016, the voters of the City of Los Angeles passed Measure HHH, a $1.2 billion housing bond for PSH. HHH requires that any affordable housing development that is more than 65 units or receives more than $5 million in funding should have a Project Labor Agreement (PLA), a set of labor-related requirements that are in addition to the prevailing wage requirements that typically apply to most publicly-funded affordable housing. In this tale of two developments, Santa Monica/Vermont is subject to a PLA, and 823 Cleveland is not (i.e., 823 Cleveland is under 65 units and under $5 million in public investment). A 2020 study by the Terner Center estimates that prevailing wages add approximately 13% to a development’s total costs (per the schematic costs per unit in the “primer” section above, this works out to approximately $10,000 per unit in additional costs). PLAs likely add more than that.
But, again, I’d argue that these additional costs are worth it. As with increased construction quality and more amenities, higher labor standards—especially for developments with the economies of scale to be able to pay higher labor costs—are an appropriate project cost for publicly subsidized investments. The workers who build affordable housing should not have to live in affordable housing, and by building affordable housing, we should not be increasing the need for affordable housing.
Affordable Housing has Complex, Layered Financing
In our tale of two developments, the financing for 823 Cleveland Apartments is simple and straightforward, while the financing for Santa Monica/Vermont is, like most affordable housing, arcane and densely complicated. For financing a typical affordable housing development, a developer will have a first-position loan (typically from a traditional bank), tax credit equity, and subsidized funding from multiple public sources – including a mix of subsidized loans from the local city, from the local county, from various State of CA programs, and/or from various federal sources. Each funding source has its own set of regulatory requirements and added time for review and approvals. The complex layering of funding sources requires more legal costs, more expert financial consulting costs, and longer holding periods (which means more holding costs). The California Housing Partnership estimates that these complex financing structures add on the order of $50,000 per unit in additional project costs.
As opposed to building standards, amenities, and labor standards, these transaction costs are where there is fat to be trimmed. And there are proposals to simplify and streamline affordable housing finance, including creating one-stop shops where multiple funding sources could be awarded as a single package. Alternatively, individual funders could give more on a per-unit basis such that fewer funding sources would be necessary. I might need a separate column to talk more about some of these options.
The Bottom Line
This tale of two developments shows that, if released from the current requirements of affordable housing, nonprofit developers and affordable housers would develop housing at substantially lower costs per unit. There is nothing inherent about affordable housing that makes it more expensive than market-rate housing. The higher costs are all from requirements that we – through our public policy decisions – have elected to impose on affordable housing developers. If we want to produce affordable housing more cheaply, we need to change our public policy requirements. However, most of these requirements (building standards, amenities, labor standards) serve an important purpose and are costs that we should pay.
1 Side note about LTSC CDC and how this org has historically been an innovative, cutting-edge developer: the first ever Type III residential building in the US is LTSC CDC’s development, Casa Heiwa, in Little Tokyo. See for e.g., https://www.bloomberg.com/news/features/2019-02-13/why-america-s-new-apartment-buildings-all-look-the-same?srnd=businessweek-v2 And now these buildings are ubiquitous.