By Joshua Ayers, Senior Editor
Washington—The Urban Land Institute’s (ULI) Terwilliger Center for Housing and Enterprise Community Partners have released a new report, Bending the Cost Curve: Solutions to Expand the Supply of Affordable Rentals, that takes aim at addressing the availability affordable rental housing, as well as costs and other challenges associated with the development of such housing.
“Bending the Cost Curve is the most comprehensive and extensive assessment of cost issues in affordable housing development published to date,” Lynn Ross, executive director of the Terwilliger Center for Housing, tells MHN.
Ross highlights three major takeaway lessons from the report: the drivers of costs associated with development; the collaboration between developers, public officials, and non-profit organizations; and addressing the necessity of having adequate leadership that will commit time and creativity to implementing the report’s recommendations.
The report’s findings were based on a 16-month series of interviews with more than 200 developers, financiers and policy makers in 10 major U.S. markets—Chicago, Denver, Los Angeles, New York City, San Francisco, Boston, Houston, Minneapolis, Pittsburgh, and Seattle.
According to the report, in 2011 there were only 6.9 million rentals affordable to 11.8 million extremely low-income renters nationally, and between 2001 and 2011, the supply gap for the renters grew by three million.
“The cost of developing affordable housing is driven by several factors that vary by market, project type and funding source and these drivers of costs are often intertwined,” Ross says. “While some of these cost drivers are unique to the affordable housing sector (using Low Income Housing Tax Credit), others are experienced by all developers trying to work in a given jurisdiction.”
While the economic conditions and demographics of the markets cited in the report differ immensely, it did identify several overarching cost drivers. The first is project scale. The cost of land, legal expenses and funding application fees make smaller projects less economical on a per-unit basis. Project design and construction is up next. That includes site selections, construction and labor costs. Finally there is financing and underwriting, which can be a major drawback in attracting investors that are primarily yield driven. Complex deal structures that involve project fees, timing of tax credit use, higher risk and other associated factors also drive up costs.
“Drivers of cost come at all points in the development process and are deeply intertwined, but the need for more affordable rentals compels us to take on the challenge of understanding the drivers and work to mitigate them,” Ross says.
The report offers several recommendations in helping to overcome cost drivers. The recommendations include: promoting cost-effectiveness through consolidation, coordination, and simplification; removing barriers to reducing construction costs and delays; facilitating a more efficient deal assembly and development timeline; improving and aligning incentives; improving the flexibility of existing sources of financing and create new financial products to better meet needs; and support the development and dissemination of information and best practices.
Ali Solis, senior vice president of public policy and external affairs at Enterprise intends to use the report’s findings to help educate players in affordable housing development.
“Enterprise and ULI will use the joint research to spark federal, state and local conversations that lead to policy change and financial innovation, ultimately stretching limited resources for affordable housing,” Solis says.