Last week I walked along MLK Jr. Boulevard to go from my house 
off Piney Mountain Road to Harrington Bank. Schools had a delayed opening that day, and I passed several groups of high school students waiting along MLK for the school bus. Presumably they lived in the modest rentals and mobile homes in the area. All but one student had skin browner than mine.
We will lose that diversity in the process of turning affordable housing options into high-rent districts. Yes, yes, we all know minorities who make more money than us, but the fact remains that many of the most affordable sections of town are home to a preponderance of minorities. Yet another casualty of Chapel Hill transitioning from a village to an enclave.
The problem isn’t unique to Chapel Hill. Across the country, we are losing our middle class, making it increasingly difficult for residents to move from the modest-income jobs many of us started in to the comfortable income we have later on. I got on my soapbox about this to someone not long ago, and he said, “You’d be a lot happier if you didn’t pay attention.”
Sadly, that attitude might be why only 15 percent of town residents vote. And why so many people, including some Town Council members, think workforce housing is a good idea in theory but too much trouble in practice.
Demographically we are a highly educated, relatively wealthy lot. We could be leaders in social justice causes, and at one time we were. But of late, we seem content to be a bedroom community to Raleigh and Research Triangle Park, sending our kids to good quality public schools, picking up a latte as we drive our SUVs to the library and leaving the prepaid buses to UNC students, all the while grumbling about our high taxes and the lack of convenient parking.
Those of us who own property in Chapel Hill are lucky. Through no planning on our part, we were born to the right parents, blessed with resilience and have access to other resources that afford many freedoms. We can pass those advantages on to our children and to other people’s children. Or we can price out all those kids waiting for the bus along MLK, force them to move out of an excellent school district, deny them the advantages that our children have.
Council members have the power to shape development and decide whom to make room for. Their decisions incentivize their vision. They can make the approval process easy for developers who commit to preserving some workforce housing and tell those whose proposals don’t contribute to the community to try again. They can determine whether our rainbow in Chapel Hill has more than one stripe and whether we’ll share our advantages with those not quite so lucky.
– Nancy Oates
Name Withheld By Request
/ May 6, 2013“…Presumably they lived in the modest rentals and mobile homes in the area. All but one student had skin browner than mine.”
‘Presuming’ someone is of modest means and lives in a trailer simply because of the color of their skin? Come on.
I guess that’s why you also claim we need neighborhood conservation districts in our town like Greenwood and Coker Hills – to make sure we get to live in those big fancy houses on those one acre lots – and keep ourselves separated from people like “them”.
George C
/ May 6, 2013Name Withheld By Request,
You need to read a bit more carefully. Nancy didn’t presume they lived where they do because of the color of the kids’ skin – she did so because of where they were waiting for the bus.
Cheap shots so early in the morning. Maybe you need to have your coffee (or latte) first.
Fred Black
/ May 6, 2013Nancy, you write:
“Council members have the power to shape development and decide whom to make room for. Their decisions incentivize their vision. They can make the approval process easy for developers who commit to preserving some workforce housing and tell those whose proposals don’t contribute to the community to try again.”
Are you concerned about if the Council can legally do what you propose? Have we not already had lawsuits over this? I think we need a better set of tools than the do it and see if anyone sues. You seem to be in the Nike camp, “Just Do It!”
Terri Buckner
/ May 6, 2013“They can make the approval process easy for developers who commit to preserving some workforce housing and tell those whose proposals don’t contribute to the community to try again.”
I really don’t see how adding “workforce” to “affordable” housing requirements imposed upon developers is going to change anything. Why wouldn’t it have the same effect we’re currently seeing–the ‘non-designated’ homes becoming more expensive? It’s a supply side solution to a demand problem.
We have (at least) two factors that create the demand problem for us: the reputation of our schools and our attractiveness to retirees. We’re a bedroom community because so many parents want their kids to go to school here and are willing to deal with the commute to Duke, RTP and beyond to make it possible. Until I-40 was built we didn’t have this problem in any significant way. But I-40 let RTP grow into what it is today and many of those researchers, consultants, and executives feel like this is the best place to live, especially for their children.
We’ve been a haven for retirees since the 1970s/80s. They support the arts with both their attendance and their capital which makes it great for the rest of us, but it also attracts other retirees who want to live out the remainder of their lives in a (relatively) small, centrally located community with plenty of volunteer activities to keep them busy and engaged.
For anyone who supports the additional school tax and continues to want the BOCC to allocate more and more of the county’s budget to the schools, the discussion over inclusionary zoning is an exercise in futility as far as I’m concerned.
DOM
/ May 6, 2013Fred Black for Town Council.
Nancy
/ May 6, 2013Fred — Why couldn’t the town make it easier for developers who present proposals that fit with council’s vision? What is illegal about that?
And DOM — I’ll join you in putting up campaign signs for Fred.
Deborah Fulghieri
/ May 6, 2013A third demand factor to add to Terri’s two are the 20,000 UNC students who live off-campus but need to live nearby.
Fred Black
/ May 6, 2013Are you sure Deborah that the number is 20,000 UNC students who live off campus?
Terri Buckner
/ May 6, 201320,000 might be a little high but it’s close. The headcount for 2013 (September 2012) was 29,278. According to estimates, about 46% of undergrads (18,503) live off campus. I think we can assume the majority of graduate and professional students live off campus.
My question is whether that demand bears any responsibility for pushing up the average home price to around $350,000. I know they contribute to the high rents, but I don’t see how they have any influence on the price of single-family homes outside of those in Northside/PineKnolls.
Nancy
/ May 6, 2013Terri — A subtle reframing of your comment: The onus for the high rents is on the developers who are exploiting students who need to use public transportation to get to & from campus. Students aren’t demanding luxury accommodations. In fact, when landlords charge high rents, students double up be able to afford them, causing some of the problems you see in neighborhoods around campus in apartment complexes that charge unreasonably high rent.
Don Evans
/ May 6, 2013Fred
A town legal staff that has the time to deal with misguided cell phone bans can deal with a disgruntled developer who didn’t get his R4 rezoning bumped to R5.
It amazes me that the council becomes almost giddy with anticipation at every developer (except Carol Ann Zinn) who brings a project before them that needs up-zoning. Can anyone remember the council rejecting an up-zoning request besides Zinn’s?
The council seems to be in the business of enriching developers more than looking after the welfare of its residents. Instead of requiring that developers make a meaningful contribution to the community, the council is a guaranteed OK for any developer who puts in covered bike racks or will let the town pay for parking spaces or will donate a few thousand dollars to so-called “affordable housing.”
As long as the developers don’t have to pay for the long-term impact of their projects, as long as the council gives them carte blanche on what they can build despite zoning laws, the council policy will remain the same: ignoring its continually dwindling less well-off residents.
DOM
/ May 6, 2013I agree with George that Name Withheld (above) missed the mark on his/her “presumption” thesis, but I do believe he/she is accurate in pointing out the hypocrisy of a community that, on one hand advocates for more affordable work-force housing, but on the other hand is so supportive of protecting pricey neighborhoods from any lesser-affordable housing being built anywhere near their particular area.
Limiting land use this way only encourages the developers to make as much money as they can on the few areas left for any development.
Scott
/ May 6, 2013Comment to Don Evans – I would say your view of this or past council’s of 20 years about giving developers anything they want is without question 100% inaccurate – the closest might be East 54, and even that development is below the density originally proposed – and volunteered to provide a substantial amount of price restricted (developer subsidized) affordable housing. As a Planning Board member for several terms and a follower of development proposals for 20+ years, I can say that I do not recall any developments that were approved since the late 90’s that have not made a major contribution via on-site affordable housing or a major payment-in-lieu. And of course substantial roadway improvements and on-site and payment in-lieu for recreation and open space components. The internal subsidies that most developments carry is precisely the reason that the housing is so expensive at the end. I am going to assume that you could reproduce some of the numbers I will cite, if not I will send them to you if you need them. For an affordable housing commitment of 15% of the total new units in a development, the loss per unit to the developer will run someplace between $150,000 – $200,000. In good times, a $500,000 new home (including lot, public improvements, open space and recreation, etc.) might generate a profit of 15%. So for each affordable housing unit, it will take 2 to 3 market rate units to subsidize the 15% affordable housing units. Using a total of 100 units for a development (condo or a subdivision) 15 affordable units might take 30-45 units to subsidize Thus a developer might have 40-50 units on which to make any return on investment in money and time. Therefore another good question is why wouldn’t someone just start with 50 units (half of the 100 unit example)? Well, 15% of 50 (we will still want the affordable units) gives us 8 affordable units and 2-3 times that for the subsidy provides a total of about 25 market rate units. If you would prefer to have less density and new housing in smaller absolute numbers and get some of it to be affordable to those making between 80% and 120% of average median income, you personally and others can make that happen – tell the council to repeal all affordable housing policies and ordinances and only approve housing that will be 1,500 SF or less and cost less than $300,000. Doesn’t that sound radical? Well, that is just about exactly what we have done with the policies for Northside – does anyone think that is a rational solution? The current and recent past councils have worked hard to find a balance between providing housing that is varied by price and type and located to meet other needs. And they have been engaged in many rhetorical attacks every step of the way by those that want less development and those that would seek more development. They are not, however, a rubber stamp for every proposal – nor for any proposal. They are individually and collectively our friends and neighbors and listen well to what “we” want. In my view, your belief that developers get whatever they want and that the council is not listening to you is held by many residents and in fact perpetuates the process of confrontation rather than solution.
Deborah Fulghieri
/ May 6, 2013Terri:’
The rental pressure translates to higher prices because investors are buying and renovating old houses. That has driven the price up, from the investors’ point of view as well as the tax assessors’ point of view, to at least cost+renovation. The Planning Board often sees investors who come to request increased front-yard parking, or approval for renovation/rebuilding plans or lot subdivision. (Interestingly, since there is a Chapel Hill rule against more than 4 unrelated persons domiciled together in a house, the renovations usually have a “family room” with a door and bathroom, which looks an awful lot like a 5th bedroom. At $500-600 per bedroom per month, you can see the incentive.)
Many
/ May 6, 2013Income Needed to Afford a Two-Bedroom Apartment, 2012; North Carolina: $28,351 Orange County: $31,160 Housing Wage, 2012 (Hourly Wage Needed to Afford a Two-Bedroom Apartment); North Carolina: $13.63 Orange County: $14.98
The mean renter wage in Carrboro is $9.67 per hour and the fair market rent for a two-bedroom apartment in Carrboro and Chapel Hill is $864 according to the Carrboro document linked below.
The Chapel Hill town budget contains less than 1 percent for “Affordable Housing” and the part of “Affordable” that can be controlled is the doing of elected officials whose land-use and fiscal policies are helping to drive the costs of housing up.
As pointed out above; It is not clear if Chapel Hill Inclusionary Zoning law (the Robin Hood on the developer approach) is even legal. It has not yet been challenged, but that day will come. As I pointed out earlier, the cost of the Robin Hood law is driving up the cost of other property and ends up making the loss of more affordable housing a self fulfilling prophecy.
Carrboro’s voluntary of subsidizing affordable housing has essentially the same (albeit lesser) effect of driving taxes and costs up while minimizing the stock of affordable housing.
Carrboro has had some very creative discussions on the topic: http://www.ci.carrboro.nc.us/PZI/PDFs/AffordableHousingDialogues/AffordableHousingDialogueSessionsResultsRecommendations2-2013.pdf Again, land use (density) and transportation are identified as enablers, but also tend to drive the cost/rents up. How many developers will build without dedicated parking?
So whats the solution? Fred for Town Council? Count me in. Give some signs, I’ll put them up too. 🙂
Don Evans
/ May 6, 2013Scott
In essence, what you’re saying is that the developers pass on the cost of affordable housing to the consumer. So the developers aren’t doing anyone any favors except themselves. And they leave the community to pay for the extra costs of their very profitable projects while they go on to the next project. Nice!
As for 54 East, if that’s an example of a “good” project, god help us!
And while you were on the Planning Board, how many projects did the panel recommend be up-zoned?
We really need to get beyond this glorification of development and developers. These folks are just trying to make a buck, or in the case of Chapel Hill, as many bucks as the council will let them. In the end, it’s a con job perpetrated by some slick, greedy folks who will say anything to get their project approved, with the council as the rubes.
Terri Buckner
/ May 6, 2013One thing that would help us move the discussion forward is for everyone to agree on what the problem is and leave all the accusations and finger pointing to those conversations that are more interested in blaming rather than finding a solution.
I stated earlier that I think we have a demand problem while all of the current solutions are supply-side. I will add to that by saying that I really, really dislike the terms “affordable” and “workforce” housing. So the other aspect to the problem as I see it is that we don’t have a range of housing types and prices. We need housing for singles (including students), for small families, growing families, older adults, and those who want to downsize. None of those groups may need what we currently call “affordable” or “workforce”.
Nancy
/ May 6, 2013Terri — I’m a strong proponent of having housing options for people who work in modest-income jobs, like server staff of our many nice restaurants, lab techs and nurse’ aides at the hospital, grounds keepers and security guards at the university, town bus drivers, grocery store staff, teachers and police officers. I don’t know a neutral term, but my vision goes beyond family size to recognize what these folks contribute to our town and make room for them to send their children to our excellent schools and be able to use the prepaid mass transit to get to and from work.
Terri Buckner
/ May 6, 2013That’s fine Nancy, but I see no future in convincing council to force developers to build more “workforce” housing for all the reasons I’ve already stated. Inclusionary zoning just isn’t working. Good problem solvers don’t just try the same solution over and over again when it isn’t working. They back up and identify alternative approaches until they find something that moves their goal(s) forward.
Nancy
/ May 6, 2013Terri — Inclusionary zoning hasn’t solved the problem, for sure. But it’s a step in the right direction. Think Larkspur, East 54 (which I don’t view as negatively as my husband does), Meadowmont and Greenbridge. The modest-income housing was snapped up immediately. Now we need to retain — maybe not create from scratch, but preserve at least some of what we already have — affordable rentals. That will be much tougher because of state law. But if Town Council acts from a conviction that it is necessary to have affordable rentals, we will begin to make inroads in that, too.
Terri Buckner
/ May 6, 2013Nancy–I suggest you talk to Robert Dowling to learn more about the state of affordable housing and inclusionary zoning.
Chris Jones
/ May 6, 2013“In the end, it’s a con job perpetrated by some slick, greedy folks who will say anything to get their project approved, with the council as the rubes.”
Don, take this for what its worth. I consider myself a reasonable, though sometimes passionate, individual. I think it is important to educate myself about both (or more) sides of a position, prior to incorporating that knowledge into my own belief (economic, social, political) base and, then, formulating my position.
A sentence such as the one I quoted above causes me to, rather abruptly, tune out any reason or logic that the writer could have brought to the table, and view them as narrow-minded rants by an individual uninterested in having a meaningful debate based upon fact and reality.
I remember the early days of this blog, and being impressed with yours and Nancy’s contributions. While I don’t know you, and doubt you’ll care, I’ve lost that feeling about your writing. I hope that you’ll re-engage on a more meaningful level in the discussions, rather than continuing your recent streak of insults and name-calling. While it is absolutely your venue (and Nancy’s), and, therefore, your right to act in anyway that you like, I don’t feel like your comment added anything to an important conversation other than spite and bile.
Frank
/ May 7, 2013Nancy and Don: You have found a problem, but you haven’t offered any solutions. Building cheap housing doesn’t work, because as soon as it’s sold, it’s back at market prices. The only way for the town to have “workplace housing” as you so describe it is for the town to sieze private land, and become landlords.
The only real solution to this problem is for the supply of housing of any kind to increase. We need much more high density developments, not less.
Nancy
/ May 7, 2013Frank — That is a sad conundrum that the people who are dedicated to affordable housing don’t have the money to make it happen, and the people who have the money to do something about it are only interested in making a killing for themselves. Increased density didn’t work for Manhattan, so I doubt it will work here. Rather than more density, we need some developers who have the best interests of the community at heart, and so far, no one is stepping up.
DOM
/ May 7, 2013Chris Jones made a great point (above) – In the past, I’ve enjoyed a rabble-rouser role on this site because I’d always felt Nancy and and Don were objective moderators when it came to refereeing both sides of whatever argument was going on. Of late, they’ve resorted to becoming rabble themselves: and it’s not nearly as fun or informative.
Deborah Fulghieri
/ May 7, 2013They may not want to tilt at windmills. The town could also ask landlords to voluntarily rent only to families working locally earning 80% or less of median wage, rather than rent to students. What would that lead to?
(Off-topic question: does measurement of median earnings in Chapel Hill include students in the population? Grad students are certainly among the below-median earners.)
Many
/ May 7, 2013Deborah. Good question. I do not know the answer.
I want to point to the fact that Mark Marcoplos hit on something important in the other thread (it’s only a slice). The widening of the gap between haves & have nots and the simultaneous reduction of the number of people than can be called “middle class” is really the root of the problem here.
Placing the blame and burden only on the shoulders of the developers and investors is probably not a sustainable solution.
If we want to solve the problems for the long term, we need to look at ourselves and how we weigh the value of the services we use, including police, fire, teachers, trash pickup, nurses and other very valuable members of society. We need to value the people that make things as much as we [seem to] value the people that make deals.
We should be smarter and less selfish when it comes to density, infrastructure and land use. We need to decide collectively to put things where they make the most sense and socialize those decisions giving people ample advance notice so they can make their decisions, and for those in the affected areas we need to have a plan to buy them out at a fair market value. We need to plan for the society we want and help everyone “buy in”.
I know….Kum Ba Ya…. 🙂
Scott Maitland
/ May 7, 2013“Those of us who own property in Chapel Hill are lucky. Through no planning on our part, we were born to the right parents, blessed with resilience and have access to other resources that afford many freedoms. ”
Huh? I’ll just put that up there with the “you didn’t build that” misstatement……this new strain of thought needs to be revealed for what it is…..nonsense.
Chris Jones
/ May 7, 2013I’d like to take just a brief moment to give some color to the evil developers (I think I might know a little about this topic):
Some of the comments here, and in other forums, are employing a way too simplistic analysis of the potential profit (or “killing”) a developer may be making. So here’s some real estate development 101 for critical thinking purposes.
1) you need to remember that many of these “developers” aren’t buying the property out of their bank account. They may be the manager of an LLC, with multiple/many investors who are the members that have invested capital.
2) I choose the word “investor” and “invested” deliberately . . . these members have decided to make an investment decision based upon the prospectus provided to them. This prospectus, naturally, assumes a return on their investment.
3) It is easy to say that a developer should be willing to take less profit (“killing”) in order to provide a product to a lower paying tenant. However, this is where points 1 & 2 come in to play: can the developer raise the capital necessary with providing a lower return on investment? Is the investor willing to accept a return on “work-force” housing in lieu of a return on “market rate” housing?
4) Funding: many of these developers then turn to commercial banks to fund the project. Well, guess what, now they’re in the equation: most of the time, a project such as an apartment acquisition and redevelopment is going to include a loan covenant requiring a minimum debt service coverage . . . meaning, the income generated from the property (discounted for expenses and stressed at a higher rate) must adequately and then some cover the debt service. Therefore, lower income (from lower rents) = no loan. before anyone tells me that all banks are bad, please bear ion mind that many of these performance standards are goverened by your friends in Washington, DC.
5) Sorry Nancy, but I reject most of the following: “That is a sad conundrum that the people who are dedicated to affordable housing don’t have the money to make it happen, and the people who have the money to do something about it are only interested in making a killing for themselves. Increased density didn’t work for Manhattan, so I doubt it will work here. Rather than more density, we need some developers who have the best interests of the community at heart, and so far, no one is stepping up.”
Kickstarter is maybe the most amazing concept I’ve seen lately as microfunding on steroids. I’d be willing to bet a hefty amount that, were you to choose to do so, you could develop an attractive capital base with dozens if not hundreds if “people dedicated to affordable housing”. Then you could apply with a bank for your construction funding, and begin the thrilling process the fun of developing in Chapel Hill: prohibitive land cost, slow and burdensome review process, rapidly mounting soft costs before ground is even broken, let alone before a single rent payment is captured, then the vaunted SUP process: where a developer gets nickel and dimed some more. HELLO HIGHER RENTS due to higher than expected (or should be necessary) soft costs in Chapel Hill real estate development.
Make no mistakes: I’m not saying all developers are good hearted community folk. However, I’ll argue til my last breath that they, as a group, have been unfairly characterized and generalized as some form of economic leech on this community. Many of them deserve much better than this description.
Last thoughts: you’ve missed two other elements that clearly play into the RE situation here. First and foremost, the rural buffer. I’m not advocating here (now) for doing away with it in its current form, but, like it or not, it creates a bubble here that directly impacts and contributes to a rising cost of developable land/parcels in general.
Two, you can’t analyze the rental market for students without taking into consideration the cost of campus living. You will find that student rental houses aren’t the bastion of trust-fund-kids . . . they’re paying the same thing that they would pay on campus.
Nancy
/ May 7, 2013Sorry, Chris. I did not mean to slam all developers. I am generally pro-development. But I wrote that having just read through the pile of horsefeathers that is Ron Strom’s Affordable Housing Plan, which he is submitting to Town Council. So instead of all developers, let’s use Ron Strom as an example.
You’re right about the investors: which means in addition to the profit Strom will make on the units, he receives an investment management fee; conservatively, that is 2% of the $12 million purchase price and the additional $18 million he plans to invest in adding density and converting existing units to luxury living. Timber Hollow has a history of near 100% occupancy, so without investing in any improvements nor raising the rent, he brings in close to $2 million annually in rent. The improvements he has made so far have been heavily subsidized by WISE. He incurs no development costs unless he wants to increase density. He can raise the rents by 50% (his expected increase, according to his proposal) without having to get anyone’s permission.
I will try Kickstarter. And once I have my pool of backers, I’ll come see you. That sounds like a better plan than my current one of buying a lottery ticket every week that the pot is over $100 million.
Deborah Fulghieri
/ May 9, 2013Another issue to consider are the 335 dwelling units listed as public housing on the Town of Chapel Hill website: http://www.ci.chapel-hill.nc.us/index.aspx?page=211
Chapel Hill receives Federal grants for housing assistance, but the amounts are now 40% of what they were 8 years ago, a national political decision.
REO
/ May 13, 2013I was glad to see Chris’ comments about the nature of development, and I appreciate Nancy’s perspective of Ron Strom. I’m recently relocated from Arlington, Virginia, where as a citizen and affordable housing financier, I wrestled with these problems constantly.
First, what developers receive as their “promote” varies with the deal, so I wouldn’t necessarily assume that 2% of $12 million is the structure. If it is, however, that’s $240,000 for X years of work involving Y numbers of employees. There’s not a direct line of sight between an investment fee and the developer’s wallet. Being a developer is not for the faint-hearted and from their perspective, regulatory layers are just as capricious and unpredictable.
More broadly, $2 million in rent is not $2 million in profit. Indeed, I’d expect that at best, net revenues are 40% of that $2 million in rent. Again, people have to be paid of out that, whether they are employees, lenders, or investors. Plus capital improvements like roofs, air conditioners, carpets, kitchens, and fitness rooms.
Chris mentioned the Debt Service Coverage Ratio (DSCR), which in today’s environment is still about 1.25 for market rate, slightly higher for affordable deals. Take the Net Operating Income (Total Rents minus Operating Expenses but excluding capital expenditures) and you’ll have the NOI. Banks divide the NOI by the DSCR to find that maximum amount of funds available on an annual basis for debt service (the mortgage).
In residential real estate, there are four fixed costs that drive most of your operating expenses: real estate taxes, insurance, personnel, and utilities. Where utilities are resident-paid, you can drop that, but it puts a limit on the rent amounts and increases that the owner can seek. Two of the expenses, personnel and insurance, are immune to any reduction due to affordable housing. 100 units of housing require the same insurance and the same number of people (or more, if there’s a low income housing tax credit component) whether they are affordable or market rate.
If you plan to build new units, the land costs the same whether the end use is affordable or not. You can save somewhat on finishes, but without a density bonus, the cost to build the structure is the same. While the Town could subsidize that purchase, I can only imagine the outcry that would generate. Another alternative would be to provide second mortgages, to bridge the gap between the cost to acquire and develop and what a lender is willing to lend based on affordable rate rents. The second mortgage may or may not be a “soft second”, which is a nice way of saying that you may not have to pay the whole thing back. Again, outcry would probably result.
Among Chapel Hill’s biggest challenges is the dearth of older development. Most non-tax credit affordable housing is apartments that were built in the 1960s and 1970s. Chapel Hill doesn’t have many of those communities, and they make equally good housing for students.
Personally, I like density bonuses; they make more intensive use of the land, typically on existing infrastructure, and they provide a greater concentration of people, supporting ancillary activities and small businesses. The problem is that the bonus amounts required to make the math work give many pause.
Short of building it yourself (by you I mean altruisitc individuals, non-profits, or governments), there are few easy options.
Nancy
/ May 13, 2013REO — Thanks for giving me and perhaps others an understandable breakdown of the costs of owning and operating multifamily housing. This is good information to have as the town considers the challenge of preserving some affordable housing amid more proposals for new construction.
Ron Strom’s situation is different. He purchased a complex that makes money as is. He wants to build new units on the land in order to maximize his return, and in order to do that, he has to jack up the rents on the existing units to pay for his new construction. My objection is that by doing this, he erases a dwindling supply of affordable housing. Certainly his plan makes money for him and his investors, but it comes at the cost of what’s best for a vulnerable segment of the community and those of us who care about that segment.
REO
/ May 14, 2013Nancy: Glad that I could provide some additional information, I hope that others find it useful. (I apologize in advance for the length of this, but since I don’t know enough about the land planning history in CH, I’ll try to contribute where I can.)
I did not see the “offering memorandum” for Timberwood, which is what we call the information packet in commercial real estate. I don’t know what the historic occupancy or rents are, but I can provide a rough back of the envelope evaluation of a property.
Start with the top line number, gross potential rent. That’s the current market rent multiplied by the number of units, and assumes full occupancy. In the best markets, NYC excepted, banks will never underwrite to better than 95% occupancy. This is generally because there’s always some structural vacancy as people move in and out, units are taken off line for renovation, or for seasonal fluctuations. So you take off 5% for market vacancy, an additional 2-3% because not everyone signed their lease at today’s market rents, and another 2% for delinquent rents. At best, you’re look at 91-92% economic occupancy and in most places you are probably a few points below that. Add back 10% of that number for ancillary income (pet fees, laundry, application fees, etc.) and you’ve got the total income amount.
Subtract from that $250 per unit for maintenance (if in good condition, $350/unit if not), $1000/unit for personnel (salary, benefits, workman’s comp), $250/unit for general and administrative expenses, $75-150/unit for marketing (Craigslist is ‘free’ if you aren’t paying anyone to post ads), and $250/unit for insurance. Landscaping will run $20-35,000/year, security may be a cost, trash pickup, and a dozen other small things. Then there’s real estate tax, which you can look up online. There’s also turnover cost, which is what it costs to paint, recarpet, fix drywall, and update each unit after a resident leaves. Not all units require the same work, but figure that 40-50% of residents move out every year (it’s less in affordable housing, around 35-40%). If the property allows pets, the costs are a little higher, but allow $800 per turn. If 40-50% of the residents move each year, that’s about $350-400/unit in your annual budget. Much higher if it’s a student property where closer to 70% of your residents turn over each year. A management fee of between 4-5% of the total revenue is also charged. If it’s “owner managed”, that’s the way that the owner actually makes money until they’ve met the return requirements of the investors.
Finally, the bank will require a “replacement reserve” that provides a capital expense fund for large systems like roofs, air conditioners, exteriors, etc. You’ll be paying at least $300/unit every year into that fund, and many banks require at least one year’s worth of funds at all times. The reason is that if the bank has to take the property back, they don’t want to spend their money until they have to.
Since my specialty is distressed multifamily and manufactured housing, I can say that not all properties make money. In the current multifamily market, many properties are trading at very aggressive prices. As a result, a buyer (owner plus investors) may “make” a modest pre-tax 6-7% on their investment, but the investment is actually made on the presumption that they can make more by spending more efficiently, raising rents, or repositioning a property. All of those are investment risks that require elevated returns. Just because someone bought something doesn’t mean that they actually make money on it immediately. The beater 1965 Mustang I bought in high school took time and money to run smoothly. A new appliance package is $800-1200, a new countertop is $4-500, new cabinets are $1000-1300, a three fixture bathroom is $500-700. A new blacktop for the community parking lot may run $50-100,000, roofs could be $300,000, repainting is $100,000. Not everyday costs, but most buyers assume they’ll have to spend at least $2-3000/unit in upgrades and repairs plus whatever large capital items are required.
All of which may also show why it’s so hard for non-profit entities to compete in a market like today’s. The real estate values are so high that they would spend all of their equity on the purchase and have none left over for capital repairs and improvements. I worked for an affordable housing lender and repossessed properties across the country from non-profit entities that were in over their head or could not maintain the property to sufficient standards. It’s a hard business with expense, stress, and risk just on the property itself, never mind the market and regulatory risk of new development.
REO
/ May 14, 2013A shorter note on alternatives:
I’m not familiar enough with NC statute to know what is and isn’t possible, so please excuse any suggestions that aren’t feasible. Also, this is limited to multifamily housing (apartments and condos, manufactured housing to a lesser extent) not single family homes.
1. Chapel Hill could provide meaningful density bonuses to encourage affordable housing. Where 100 market-rate units were permitted, 110-130 market + affordable or all affordable could be permitted.
2. Expedited permitting or reduced-fee permitting process. Portland uses a version of this to promote sustainable construction. Time, not fees, are the big driver in costs, so this is probably not meaningful enough to spur development.
3. Adjust real estate tax assessments to favor affordable development. This could be a reduced millage, a fixed-period abatement, or some other type of structure.
4. Direct support of non-profits through second mortgages to bridge the gap between conventional financing and actual costs. This may distort costs and fees and the borrower may not be in a position to repay the mortgage.
5. Credit support of non-profits and others committed to affordable housing. In this case, the Town acts as a “co-signor” on a loan to repay or take over the deal if the sponsor falters. It requires the Town to perform due diligence on the sponsor and be able to competently take on their obligations in exchange for a small 1-2% fee.
6. Improve services in areas where affordable housing is otherwise feasible. Downtown CH is an expensive place to own property and it may not be worthwhile, at this point, to try and maintain an affordable, multi-family housing option. Instead, focus on areas that have an existing concentration or could handle additional development that includes an affordability component.
7. My current firm is heavily involved in manufactured housing. It has a different cost basis and has a higher initial capital commitment, but lower ongoing costs. Manufactured homes pay personal property tax instead of real estate tax, but with an average new home cost of $35-50,000, are much more affordable to folks making up to 80% of the median income. There are several of these communities within the Chapelboro limits, and additional focus on those or expanding the areas open to MH could provide another option.
DOM
/ May 14, 2013Nancy,
“Ron Strom’s situation is different. He purchased a complex that makes money as is. He wants to build new units on the land in order to maximize his return…”
So capitalism is now frowned on here in Chapel Hill? Good to know. If you’re so eager to deprive someone of making $, I suggest you agree to pledge any post-tax earnings to the town’s affordable housing program.
Nancy
/ May 14, 2013DOM — Greed is frowned upon, at least by me, especially when it preys on people who do not have the advantages that some of us, including Ron Strom, do.
As for post-tax earnings — what are those? I’m self-employed and pay property taxes in Chapel Hill. And Boss Stancil has recommended a tax hike to make housing even less affordable.
DOM
/ May 14, 2013“Greed is frowned upon…”
Ah, NOW I see. Mea culpa.
PH
/ May 15, 2013Don Evans,
It seems to me that the Town purposely doesn’t have its zoning match its land use plan so that developers are forced to have to go through a rezoning whereby exactions can happen.
So to say that the Town doesn’t deny rezoning applications ignores the fact that property was never rezoned to match the “vision” of the land use plan in the first place.
Many
/ May 16, 2013PH: Bingo! It’s called “walking the walk”