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When Regulations Fail: Smart Growth versus Affordable Workforce Housing

Feature Photo (above): James Schloemer, CEO, Continental Properties, speaks to a Congressional committee as fellow panelist, Erika Poethig, chief innovation officer at The Urban Institute, looks on.

Posted: 12-11-2018

Updated: 12-12-2018

by Edmond Ortiz and Adolfo Pesquera

Decades of wage stagnation magnified the gap between family income and housing costs and, as with cities nationwide, Texas municipalities face ever steeper challenges in meeting the need for affordable workforce rental housing.

The demands on multifamily project developers appear to have reached a crisis point. There are headlines nearly every month that point to issues straining the multifamily market.

Apartment builders cannot fix the wage gap but when government policy makers work with them, there are solutions that can alleviate this market.

During a September 5 Congressional hearing of the Financial Services Committee, a panel of multifamily housing experts expounded on the conclusion of a joint NAHB/NMHC study on the increasing regulatory burdens their industry faces.

James Schloemer, CEO of Continental Properties Company Inc., said his firm built more than 3,000 units per year in the under-served suburban and second-tier markets, providing 51 percent of the units to families earning 80 percent of the area median income.

“A 5 percent reduction in development costs would allow us to offer 62 percent of the apartments to households of 80 percent AMI,” Schloemer said.

“These are not subsidized units,” he added. “Nearly all are financed with mortgages issued through government sponsored enterprises. But over the past five years, development costs have increased drastically, dramatically faster than rent increases in all 24 states in which we do business. This trend cannot be sustained.”

Source: June 2018 joint report of the National Association of Home Builders and National Multifamily Housing Council.

Source: June 2018 joint report of the National Association of Home Builders and National Multifamily Housing Council.

The trend of which Schloemer speaks is tied to a “smart growth” concept that gained traction among municipalities. Smart growth put new pressures on developers by adding requirements such as apartment size, height restrictions, increased landscaping, streetscapes, land donations, improvements to off-site infrastructure such as adjacent streets. The City of Austin now requires most new buildings to have enough roof space to support solar panels.

The entitlement process is often structured against multifamily housing, rarely permitting by-right development, he said.

“Municipalities employ arbitrary code interpretation and impose open-ended community demands. It’s not uncommon for jurisdictions to deny rezoning requests for multifamily development despite documented substantiated housing needs in those communities. In one case, contradictory decision making added eight months to our approval process and increased our total project cost by over 3.5 percent,” Schloemer said.

U.S. Census calculations on the growing income to rent cost gap, as presented in the Aug. 2018 Housing Policy Framework of the San Antonio Mayor's Housing Policy Task Force.

U.S. Census calculations on the growing income to rent cost gap, as presented in the Aug. 2018 Housing Policy Framework of the San Antonio Mayor’s Housing Policy Task Force.

Steven Lawson of The Lawson Companies, a third-generation multifamily builder speaking to the committee on behalf of the National Association of Home Builders, emphasized how regulatory reforms—should they even occur—are no substitute for programs like the Low Income Housing Tax Credit, Section 8 vouchers or Community Development Block Grants.

Most of the expert panel’s complaint addressed municipal regulatory hurdles. However, they noted that many landlords avoid Section 8 because the red tape required to verify applicants is too bothersome and forces units to stay vacant too long.

Every Texas city comes up with its unique set of solutions. Austin, unfortunately, has earned a reputation as the most regulated and gentrification-prone of the Lone Star state’s metropolises. As the Forbes 2016 article explains (above), Houston, Dallas-Fort Worth and San Antonio managed to stay near the national median of $187,300 on housing cost while Austin spiked to $254,500, increasing by $80,000 over five years.

Megan Shannon put her finger on the difference in a 2015 University of Texas-Austin master’s thesis on the city’s Impacts of Regulatory Delay, concluding that (1) they generate unexpected development costs; (2) stifle innovation and decrease quality of development; (3) promote exurban growth.

Shannon’s work presciently affirmed what Schloemer would say three years later: “If regulatory delays are eliminated and developers receive approvals for multifamily projects within the 120-day mandate instead of the 223-day average, renters could see relief of 4 to 5 percent on their rent, or an average of $60 per month … in Central Austin.”

In 2017, state Rep. Paul Workman claimed apartment development fees were 10 times higher in Austin than in Dallas. That sounded like an exaggeration, so Politifact investigated and rated the claim Mostly True.” Austin fees for building an apartment could exceed Dallas fees “by eight times or more.”

The City of Austin spent six years and $8.5 million on its CodeNEXT project, a completely retooled land development code that was intended in part to resolve the worst of the city’s regulatory hurdles. Three years of public meetings and stakeholder sessions took place before it all ignominiously ended in August when City Council, figuratively speaking, stabbed it through the heart with a wooden stake.

There’s a long list of reasons why the Austin plan failed–the NIMBY syndrome, an unwillingness to put local tax revenue in the formula to name a few. In recognizing the effort had gone off track, Mayor Steve Adler did some soul searching, “Maybe we pushed too hard and too fast? Maybe we took too long? Regardless, our challenges remain and they are getting worse every day.”

What’s Luxury Got to Do With It?

San Antonio has provided developers its own special bag of regulatory headaches, but the direction of progress has been substantially more productive on the workforce housing front.

For the past decade, City Council has banked on high density, upscale downtown development. Incentive packages provided multifamily developers infrastructure fee waivers and, tax abatements. But as the urban center matured, city leaders questioned the lopsided disparity in luxury versus workforce housing. A moratorium was instituted last year on the incentive program known as Center City Housing Incentive Policy (CCHIP) and a Housing Policy Task Force  was created to reassess incentives.

The city is looking to expand or modify some incentives and jettison others to encourage developers to build more affordable housing. Proposals here include making requests for fee waivers based on need, and not on geographic place.

Source: San Antonio Mayor's Housing Policy Task Force.

Source: San Antonio Mayor’s Housing Policy Task Force.

The Task Force’s August report, Housing Policy Framework, also proposes that fee waivers apply to only four categories: affordable housing, owner-occupied rehabilitation, historic rehabilitation, and improving legacy small businesses. Luxury apartment developers would be on their own.

If the new policy is approved, the city would no longer offer development and mixed-use forgivable loans. Tax reimbursement grants would no longer be 100 percent, but rather 25 percent would be dedicated to an affordable housing fund.

David Adelman, principal of AREA Real Estate LLC and market rate developer, told the City Council on Nov. 14 that even a 75 percent rebate could discourage new development.

“The further the rebate goes, from 75 percent to 50 percent, if that goes to that, you’ll push projects that are on the margin to won’t happen at all,” Adelman said.

Adelman said rising land and construction costs have tempered developers’ confidence in recent months. He explained it’s not easy to incentivize affordable housing in the center city, where inexpensive available land is scarce, and where land use and zoning regulations tend to be cumbersome.

“Part of this is conflating the issue of incentivizing and driving market-rate housing to the urban core and trying to solve for affordability,” he added.

Task Force Chair Lourdes Castro Ramirez said some developers have expressed worry that there is an apparent rush to overhaul the incentives programs.

“There’s a lot of questions and concerns and misinformation about the fee waivers,” she said. “A lot of people feel not enough information on this has been presented.”

According to the city’s proposal, by early December a revised CCHIP would redefine affordable housing as rental units set aside for households making up to 80 percent of the area median income. In some instances, developers would have to allocate affordable rental units for people making up to 60 percent of the median income, or $36,750 annually, per the policy task force’s final recommendations.

“That’s where the need is,” Ramirez said about the 60 percent.

City Council will reconvene Dec. 12 to debate the policy and consider adopting it on Dec. 13.

Non-Profits: The  Other Developer

East Meadows Apartments, a four-block affordable housing and urban renewal project in San Antonio's East Side that was constructed with government subsidies. Image: Google Streets-Dec. 2017.

East Meadows Apartments, a four-block affordable housing and urban renewal project in San Antonio’s East Side that was constructed with government subsidies. Image: Google Streets-Dec. 2017.

Sue Flynt Yip, director of communications and fund development for San Antonio’s Merced Housing Texas, said non-profits have their own challenges.

“As non-profit developers, who are creatively financing projects through tax credits and HUD (Section) 202, we find that state and local requirements don’t always match up,” Yip said.

Yip added requirements often change midstream, so the developer must spend more time and money ensuring a project under-construction complies with the changes. Also, Land Use Restrictive Agreements (LURA), where the property owner gives up some land use rights for future tax credits, tend to be burdensome.

Merced President Susan Sheeran said the bureaucracy involved with the administration of grants compounds challenges for non-profit developers.

Kristin Davila, Merced’s corporate operations director, said one thing that can help matters is talking with policymakers before new development regulations or changes are implemented.

“Non-profit housing providers meet monthly with city staff,” Davila said. “We’re working to be more intentional about seeing policy before it goes to City Council.”

Ramirez, the Task Force chair, echoed the comments of the panelists that went before the Congressional committee. Some regulations are duplicative or inefficient, and some incentive programs lack resources to keep up with demand.

“We on federal, state and local levels haven’t done a good job simplifying or streamlining regulator requirements,” Ramirez said, but with the pending revisions, at least for San Antonio, “We envision a housing system where you have the opportunity to innovate and tackle problems such as burdensome regulations.”

San Antonio deserves credit for having confronted this issue head-on for years. Dallas, by comparison, has relied too heavily on the market. Big D  under-utilized the state’s Low Income Housing Tax Credit program for multifamily development–eleven tax credit projects were done in the last five years compared to 41 in El Paso, 36 in Houston and 26 in San Antonio, according the D Magazine report.

Dallas only just adopted a Comprehensive Housing Policy in Spring 2018, with the goal of building 20,000 single family houses and apartment units in three years. Dallas appears to be years behind San Antonio. For instance, it proposed establishing a city housing trust fund, TIF districts and neighborhood empowerment zones, and incentive subsidies for developers–all tools the Alamo City has had in place for at least a decade. Critics of the policy are already presuming it will not help the most needy.

Sandy Rollins, executive director of Texas Tenants Union, told CBS DFW the Dallas policy is a giveaway for wealthy developers. It offers zero home-buying assistance for anyone earning less than $50,000 a year. With an $1,000 average rent rate for an efficiency apartment in Dallas, Rollins sees that plan bypassing the people who need it.

“There are plenty of units being developed for people who can afford to pay $1,500 a month and more. There is not housing for people who can afford to pay $700 a month or less,” Rollins told CBW DFW.

In the 2016 round of 9% housing income tax credits, the Palladium USA project in Garland was the only project recommended for Dallas County by the Texas Department of Housing and Community Affairs. No projects were even submitted within the City of Dallas. Construction at Palladium Garland did not begin until Summer 2018 and it is expected to begin opening in 2019.

In the 2016 round of 9% multifamily housing tax credits, the Palladium USA project in Garland was the only project awarded in Dallas County by the Texas Department of Housing and Community Affairs. No projects were even submitted within the City of Dallas. Construction at Palladium Garland did not begin until Summer 2018 and it is expected to begin opening in 2019. The image above is for illustrative purposes, used by Palladium to market the development.


EOrtiz@journalism.com

Edmond Ortiz is a San Antonio-based freelance reporter and editor. He has worked for the San Antonio Express-News and Prime Time Newspapers. He is a contributor to Virtual Builders Exchange and the Rivard Report. His Twitter handle is @satscribe.

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By |2018-12-12T09:53:57+00:00December 11th, 2018|Feature Story, Industry News|

About the Author:

Adolfo Pesquera (Reporter/Editor) is a veteran news journalist. He has worked for Hearst Corp., American Lawyer Media, News Corp and Freedom Communications. His work has been published in newspapers and magazines across the USA. He is a journalism graduate of UT-RGV. He writes, edits and creates digital pages for VBX.

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