Why is affordable housing so expensive to build?

BetsyHunter

Plymouth Housing Group’s Betsy Hunter says affordable housing is not gold-plated. (Plymouth Housing Group)

Complicated finance methods and commitments to labor and greens all contribute to costs

by George Howland Jr

The current debate over the cost of developing affordable housing has come to Washington state. While the issue is not new, the political and social conditions have changed since the subject was last debated. Will the outcome be different this time around?

Last month, the Republican-controlled Washington state Senate passed a two-year, $43 billion budget proposal including $500,000 for a performance audit comparing the development costs of market-rate housing and publicly subsidized affordable housing.

Washington state Senate’s performance-audit proposal was put into the budget by State Sen. John Braun (R.-Centralia), chair of the powerful Ways and Means Committee. The Democratically-controlled state House of Representatives also passed its own budget last month and didn’t include a performance audit. The two chambers of the state legislature are now engaged in negotiations on a final budget deal.

In past years, concern about the cost of affordable-housing development has been a Republican issue. This year, however, west-coast Democratic politicians have also taken up the issue.

In January, California’s Gov. Jerry Brown announced he will not put any new state resources into subsidizing affordable housing until state and local governments find a way to bring the costs down.

The same month, Portland’s new mayor, Ted Wheeler, also a Democrat, announced he had frozen spending from the Rose City’s $258 million housing bond. Previously, Portland City Hall had agreed to pay $460,000 a unit for its first affordable housing project using the bond’s cash. Meanwhile, Portland’s Robert Justus, a homeless advocate and a developer, says he can build Portland affordable housing for $100,000 a door.

In Seattle, market conditions are, of course, different. For example,  Seattle’s Office of Housing provided four recent affordable housing projects: 1. Plymouth Housing Group built 65 studios downtown for $266,000 a unit; 2. Low Income Housing Institute developed 49 apartments in the University District for $307,000 a door; 3. InterIm Community Development Association built 96 units in the International District for $262,000 each; and 4. El Centro del la Raza constructed 112 apartments on Beacon Hill for $282,000 per unit. (I have corrected these figures from an earlier version of the article. I apologize for the error.)

These projects vary by neighborhood, targeted income level and the size of the apartments—square footage differs as does the mix of units: studios, one-bedrooms, two-bedrooms and three-bedrooms.

In addition to the high cost of construction, the social conditions on the streets of Seattle have forced changes of their own. The most recent estimate of Seattle’s homeless population is around 6,000: half are living outside, half are in shelters and transitional housing. In 2015, Seattle Mayor Ed Murray and King County Executive Dow Constantine declared the homelessness crisis a state of emergency.

Moreover, Seattle’s urbanist movement has raised its political profile in recent years, influencing Mayors McGinn and Murray and the Seattle City Council. Many urbanists believe the free market should be used to solve our housing crisis and that includes bringing down the costs of affordable housing. One urbanist is, in fact, responsible for the state Senate’s performance-audit idea.

Valdez: “The non-profit industrial complex” is inefficient

Smart Growth Seattle’s Roger Valdez, a developer advocate, initiated the performance-audit proposal and worked very closely with Sen. Braun on its language. (Admittedly, Valdez is not Seattle City Hall’s favorite urbanist.)

Valdez explains the Republicans’ reasons for supporting the audit. “The Republicans look at it from a fiscally conservative point-of-view,” he says. They are unhappy about the amount of money that government spends on public housing in general. In particular, Republicans would like to slow the flow of affordable-housing money to Seattle City Hall and the city’s many non-profit housing developers.

Valdez has a different goal. “The ‘non-profit industrial complex’ wants to feed an inefficient system,” he says. “If you gave the same amount of money to our people, they could build housing more effectively and more inexpensively than the non-profits.” He adds, “The whole point of the study is the find out why it’s so expensive. Non-profits don’t want anyone to know that.”

Betsy Hunter, Deputy Director of the Plymouth Housing Group, has heard all this before. In 1999, she entered the industry when she started working for Seattle’s Capitol Hill Housing. “As long as I’ve been in this business, legislators have been concerned about the cost of developing affordable housing,” she says.

Hunter quickly and readily acknowledges that government-subsidized, non-profit development is more expensive than market-rate development. And she claims to know why.

Higher costs: union wages and green buildings

Hunter says there are four main issues.

First, “any development that we do needs to strictly abide by [prevailing] wage guidelines,” she says.

In Washington, state law says prevailing wages must be paid on any construction involving public monies. Prevailing wages are set by state government and are based on surveys and collective-bargaining agreements. Payment of prevailing wages is a fundamental tenant of the labor movement. Since Washington is dominated by Democratic politicians, union leaders have considerable clout and use it to keep the prevailing-wage requirements mandatory.

This requirement is more than a handshake agreement. In public projects, construction companies actually have to track the wages paid to their workers and report it to the non-profit developer, Hunter says.

Market-rate developers do not have to pay or track prevailing wages. Therefore, their labor costs can be lower. Valdez cites a study that shows prevailing wages add nine to 37 percent to the cost of affordable housing.

Second, “we have a mandate to build green,” says Hunter.

“The Evergreen Sustainable Development Standard is a building performance standard required of all affordable housing projects or programs receiving capital funds from” the state of Washington, explains the Washington Department of Commerce’s website.

Green standards mean higher upfront costs, although these investments should translate into lower operating costs.

Valdez comments, “Energy efficiency generally is good business.”

“These things are principles of Democratically leaning governments. They address a lot of social goods,” says Hunter.

Seattle City Hall wants the taxpayers’ money to create family-wage jobs and reduce energy use and carbon emissions to slow global warming. These requirements are political choices. They do result, however, in fewer units of affordable housing.

Other cost drivers: durability and arcane government financing

Third, Hunter says, “We are also building more durably. If you are a market-rate developer, you are not always thinking about the long-term.” The affordable housing developers are not building their projects and then selling them. They want to own and operate them for decades to come. Hunter says flatly, “We spend more money upfront.”

Valdez believes market-rate developers’ construction is just as durable. “We’re building for the long term as well,” he says.

Finally, the method of financing housing using government funds is incredibly complicated. “I’ve done deals myself that had 14 sources of capital,” says Hunter.

Most affordable-housing projects do not involve that many sources of financing, but nearly all of them get money from multiple governments including city, county, state or federal governments.

Hunter explains that this funding method is incredibly complicated and time-consuming. “It’s complex, it’s expensive and there are lots of lawyers involved,” she says.

Valdez comments, “All that capital assembly takes time and money.”

While Valdez agrees with much of Hunter’s analysis, he still wants a more objective and detailed look at Washington’s non-profit housing industry. He acknowledges that even the state Senate’s proposed performance audit has an uphill battle. “The non-profit housing people have a lot of political clout,” he says. The Speaker of the state House of Representatives “Frank Chopp is the Grand Poohbah of all non-profit housing developers.”

Hunter thinks the proposed $500,000 for an audit could be much better spent on services for poor people. At the same time, she is not threatened by it. “There seems to be a suspicion that non-profit developers are gold-plating these buildings,” she notes. Yet “a lot of cities around the country look at Seattle as a model. We have a good bunch of non-profit developers in Seattle.”

Questions, tips, comments: georgehowlandjr@gmail.com

Award winning journalist George Howland Jr has been hired by Seattle Displacement Coalition to write for Outside City Hall about city politics, housing, homelessness and land use. He is not a member of Seattle Displacement Coalition and no part of his writing serves as a statement of the Coalition’s views. He works under his own editorial direction. The Coalition plays no role in choosing his specific subjects or editing his copy. He even refuses to drink beer with the Coalition’s John Fox.

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About George Howland Jr

For many years, George Howland Jr has been a Seattle-based journalist.
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