It's not as simple as mandating more affordable units, said Stan Sloter, president of Paradigm Development Company. Sloter walked attendees through the challenges of inclusionary zoning by illustrating the financial repercussions of building a new 250-unit apartment community in which 10 percent of the units were deemed affordable as a percentage of area median income (AMI).
It penciled out that the 10 percent mandate would reduce the project's return on cost by 51 basis points. To offset that return erosion, Sloter said the only thing a developer could really do is pay less for the land. According to his calculations, the land value would have to drop 36 percent to restore the return on costs.
While it was a theoretical exercise, it illustrated the point that there is a real per unit cost to producing an affordable housing unit-and that added cost can affect the viability of a new project. "When you raise the cost of housing with the burden of providing more affordable units, you are going to just produce less housing," Sloter said. "There are a lot of choices for land use."
Daryl Carter, NMHC chairman and CEO of Avanath Capital Management, agreed that developing new affordable housing communities is challenging, particularly because capital providers still expect the same returns on an affordable property as a market-rate one. For these reasons his company mainly goes for acquisitions rather than ground-up development.
For example, he said his company typically rents at 60 percent of AMI. To hit that tranche of the market, he said he has to look for C properties that can be turned into Bs and target acquiring properties at a price of approximately $105,000 per unit.
"It costs between $300,000 and $400,000 a unit to build new," Carter explained. "That makes it difficult to make it [rents] work as a percentage of AMI."
Albert Berriz, CEO of McKinley, said to get the kind of affordable housing deals that will work, his company focuses on distressed deals and smaller metro markets. "We like tertiary markets," he said. "Orlando is a great example. ... Markets like that are markets that we love because there's a basis that is affordable. ... They produce real return. In fact, we've doubled returns every decade since 1982."
Robert Hart, president and CEO of TruAmerica Multifamily, added, "We're finding that we can't compete as much in auctions. We need to find things off market. And we need to find deals we can rehab."
Given the difficulties of making the math work on new affordable developments, many executives in the space stressed that the government and the industry need to be focused on preservation policies and opportunities. Not only is the nation's apartment stock aging, but between 100,000 and 125,000 units a year are lost from the overall apartment stock due to a variety of factors, including obsolescence. And most of that lost stock is at the bottom end of the multifamily housing spectrum, exacerbating the shortage of affordable product.
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