Controlling Development Cost While Creating Quality Affordable Rental Housing is a Balancing Act

Published by Mark Shelburne on Monday, June 6, 2016 - 12:00am

Controlling development costs can and should be balanced with the goals of building quality affordable rental housing and meeting fair housing requirements, reports Enterprise Community Partners. “Giving Due Credit: Balancing Priorities in State Low-Income Housing Tax Credit Allocation Policies,” a report issued today, discusses the ever-hot topic of development costs. The report joins the growing library of other recent qualified allocation plan (QAP) reviews including CSH’s report about low-income housing tax credit (LIHTC) policies on supportive housing and Novogradac’s evaluation of concerted community revitalization plans.

Issues and questions surrounding development costs play a significant role in local news stories about affordable rental housing development. The subject will also be the focus of the last report in a series by the U.S. Government Accountability Office (GAO) requested by Sen. Charles Grassley, R-Iowa. And obviously, development costs are a significant consideration for LIHTC program administration, which is the focus of Enterprise’s discussion.

Report Overview

The authors begin by recognizing the need to “look beyond the simple presence (or absence) of any given priority, provision or incentive when designing policies or analyzing effectiveness.” The consequence on outcomes is impossible to know without more information.

The report “identifies leading practices in balancing cost control” and describes its findings in five categories: processes, evaluation methods, soft costs, hard costs and economies of scale. The following excerpts are highlights from each category:

Development Process

“While there may be case-by-case opportunities … there are few individual actions that will dramatically bend the cost curve. Instead, there must be a comprehensive approach that identifies multiple opportunities for small but significant cost savings.”

Evaluation Methods

“Agencies may utilize reasonableness reviews (in which expert staff review plans and specifications to determine whether costs are in an acceptable range), threshold standards, point-based incentives, or a combination of these approaches.”

Soft Costs

“Indiana has adopted developer fee standards based on a set amount per-unit, removing any incentives related to total development costs.”

Hard Costs

“Focusing on hard costs … can eliminate ‘deadweight losses’ (costs resulting from inefficiencies that do not add value). Conversely, achieving upfront hard cost reductions can be a pyrrhic victory if a subsequent reduction in durability leads to increased operational costs and/or necessitates earlier recapitalization.”

Economies of Scale

“Heavily weighted community support requirements can give extra power to local stakeholders who oppose dense multifamily housing and/or affordable housing. Many developers must already clear these or similar hurdles at the local level and are further restricted by subsidy limitations, generally making state-level requirements and restrictions redundant and unnecessary.”

The report balances its findings with considerations for building quality and resident opportunity. Of particular consequence is how criteria relate to fair housing considerations and mandates.

Enterprise makes seven recommendations:

  • Agencies should consider the cumulative impact of QAP provisions on costs and quality.
  • Point-based incentives and weighting should be structured so that no single provision is effectively mandatory.
  • Cost and subsidy limits should reflect differences in development type and location.
  • Cost, design and construction standards should account for and encourage long-term savings.
  • Funding sources and regulatory compliance should be coordinated and streamlined.
  • Agencies should encourage innovation through the use of pilot initiatives.
  • Progress toward agency goals should be measured and the results disseminated.

Conclusion

The cost of building LIHTC properties is a longstanding concern. The “wrong” headline on an article poses political risks, as has happened with other affordable housing programs. And the topic will certainly continue to be a concern as the GAO reports mentioned earlier are released: the second in the series will address state LIHTC administration, which will likely touch on development costs; and the third will focus specifically on the issue.

Novogradac & Company can help LIHTC allocating agencies evaluate costs and related policies, such as affirmatively further fair housing. In 2014, the firm conducted a comprehensive evaluation of development costs for the New Mexico Mortgage Finance Authority, and in 2015 Novogradac evaluated 10 states’ QAPs for Oregon Housing and Community Services (see pages 106-113). For more information please contact a Novogradac professional.