On September 25th, MHP held an Investors' Council event featuring reflections from national and Minnesota housing experts charged with sharing research and recommendations for containing costs in the development of affordable rental housing. Joining as panelists were Michael Spotts, Senior Policy Analyst at Enterprise Community Partners in Washington, DC, John Patterson, Director of Planning, Analysis & Evaluation at Minnesota Housing, and Minnesota Housing Commissioner Mary Tingerthal.
The panelists spoke to balancing the imperative for top quality affordable housing that works well for communities and residents, with that of investing increasingly scarce dollars wisely, in a climate of serious need for affordable housing.
Michael Spotts reviewed preliminary findings of national research he's conducted at Enterprise with the Urban Land Institute to understand cost drivers and best practices in lowering the cost of developing and preserving affordable rental housing. Spotts and fellow researchers held focus groups, and conducted site visitsand interviews across more than 20 cities. What he found is that cost drivers can be grouped into five broad categories, each described briefly below.
- Project scale. Developers often cannot develop at a scale that could reduce per unit cost. Inadequate funding and specific needs of target populations also limit project scale.
- Project design and construction. Site selection, community opposition, and regulations preventing innovative techniques (such as using prefab or modular components) can play a role in driving up costs. Labor and wage requirements, which have other policy goal tradeoffs, were cited by some.
- Finance and underwriting. Not surprisingly, greater complexity in financing is related to higher cost, with greater demands on time and money. Requirements imposed by capital dictate what gets built, and this structure does not always lead to the most cost effective projects. With high-cost requirements of obtaining financing, the result is less competition and therefore reduced incentive to cut costs.
- Program requirements. Add-ons to design and construction standards, as well as requirements like rehab minimums, make lower-cost turnkey projects more difficult to do. Methods and timelines for funding awards can change frequently, and most places don't coordinate funding cycles (though Minnesota is an exception). But most importantly, requirements to meet other social/policy goals by incorporating, for example, green features, commercial space, community engagement all increase costs, even if other goals they achieve are also desirable.
- State and local regulations and fees. Poor design of state and local regulations can lead to unnecessary costs. The unpredictability and uncertainty of what local regulations will cost or entail is cited by developers as the biggest challenge because they make planning difficult.
Asked to speak to the best innovations outside of Minnesota for reducing inefficiencies and containing costs, Spotts mentioned two key innovations.
- In Massachusetts, the MassDocs program establishes a single set of loan documents for projects using a variety of state and local funds. This means that there's only one attorney, one set of fees, and one process to apply for loans.
- Secondly, he touted incentives to experimentation, such as holding competitions for creative solutions. For example, in New York developers have been able to try out micro-unit developments. In Maine, prefab modular materials have been tried for multi-family housing. In other locations, accessory dwelling units make it possible to add small units on single family properties.
Panelist John Patterson followed Spotts, with a discussion of cost drivers in Minnesota, and how Minnesota Housing has aimed to limit costs by developing new scoring methods for awarding low income housing tax credits.
Minnesota Housing's uses a predictive cost model which incorporates 18 factors, such as location, size, number of units, financing sources, population served, and new vs. rehab, to help the Agency assess the appropriateness of costs in proposed developments. When the cost of a proposed project is more than 25% higher than predicted by the model, the project is flagged and reviewed to see if or how the higher costs might be justified.
Last year for the first time, regular low income housing tax credit properties could earn extra points in their tax credit application scoring (QAP) for coming in in the bottom half of applications based on per unit cost, compared to projects in the same category type. The idea has been to reward cost effectiveness. At the same time, the Agency has sought to retain quality in developments by adding only a few points for low costs.
To assess the impact of the new cost containment measures, Minnesota Housing, with MHP's assistance, surveyed tax credit applicants specifically how about the new QAP scoring impacted their approach to development. Twelve responses were returned from the 26 surveys sent out.
- Of the 12 surveys returned, only 4 took special measures to contain costs that they would not have otherwise.
- Of these 4, cost savings were reported at between 2 and 14%, but most were closer to 2%.
Many developers did not take additional cost containment measures because they felt they were already doing so, and did not want to impact the quality of housing. One survey respondent suggested that the Agency consider costs of the entire life of a project (lifecycle costs) rather than just development costs.
Finally, Patterson shared findings from an intern project on cost trends. Looking at 400 rental housing projects funded by Minnesota Housing over ten years, overall costs have been flat over the decade (after adjusting for inflation) and showed a small decline in 2010-12. This was found to be driven in part by more emphasis on rehab projects and projects that don't use tax credits. New construction costs, on the other hand, have increased. At least one audience member noted that the recession may also have contributed to flat costs, but that more recent project costs appear to be rising.
Patterson concluded that cost containment is working relatively well, considering the need to balance this with other objectives/priorities. Most developers are holding off on additional cost containment measures, but the scoring structure is still capable of promoting creativity in this area. Several recommendations coming from the study, such as including lifecycle costs in this analysis and collaborating in addressing unnecessary costs, will be considered by Agency staff, Patterson reported.
Finally, Minnesota Housing Commissioner Mary Tingerthal praised Enterprise for its leadership and national advocacy around the Low Income Housing Tax Credit and for doing this type of research so we can better tell the story of housing costs. She reiterated several of Patterson's points, and expressed some frustration around not knowing how best to control project "soft costs," such as attorney and other fees. She posed two questions to the audience, which included many developers and industry professionals:
- Can we build a better feedback loop after each project has been completed to see how it could be done more efficiently?
- Can the Agency meet with a project's finance team before final documents are drafted to expedite negotiations and minimize time and expense?
Several audience members, such as John Duffy of Duffy Development, responded positively to the idea of meeting and praised the Agency for responding quickly with necessary paperwork in order to get projects underway. Others cited cases in which projects were held up due to slow responses by the Agency, or by other lender processes and regulations. All appreciated the exchange of ideas and seemed interested in creative solutions to improve development efficiencies and outcomes.
To view the PowerPoint presentations of presenters or learn more about the Investors Council click here, or contact Dawn Goldschmitz at 651-925-5544.