There was a good discussion at the Social Services Commission on Affordable Housing. Affordable Housing is in no danger of going away in Davis anytime soon. Not with the rising costs of housing and concern about how families, teachers, and others can afford to live in Davis.
In the most recent Measure R campaign for WDAAC (West Davis Active Adult Community), Affordable Housing played a vital role. Many believe that the 150 Affordable Housing units were a key reason the measure cruised to victory. The opposition’s complaint was not that there was too much, but rather that there were not enough units.
On Tuesday, the commissioners reluctantly conceded that, in these days of post-RDA (Redevelopment Agency funding), 35 percent was out of the question. The problem going forward is that 15 percent might be too high as well. As Greg Rowe, a planning commissioner speaking as a private citizen, put it during a public comment, “The 35 percent goal is not feasible without RDA.”
He went so far as to say that “15 percent is going to be really hard to achieve unless it’s a student rent” and that the Interim Ordinance number of 5-5-5 “may not work.”
While the discussion was good, there were several points that were raised that I simply disagree with. The continued pushback against student housing is disappointing. The city faced a real crisis with the student housing shortfall, but for the most part we have probably run our course with strictly student-oriented housing, or so-called mega-dorms with large numbers of rooms, private 
bathrooms, and bed rentals.
For the commission, they saw affordable housing by the bed or bedroom as a perpetuation of the problem of mega-dorm designs.
Eileen Samitz, a chief opponent of such housing, said during public comment, “We are not producing housing that is applicable to our workforce and families, which is our desperate need.”
It is hard to disagree that we need housing for workforce and families, but, as we saw later on Monday, there are such housing projects coming forward. But to pretend like we didn’t need student housing was an exercise in folly.
Claire Goldstene stated, “I don’t like it and I don’t like the kinds of projects that it had encouraged in Davis. We see a lot of that.” She said, “I think having this in the ordinance has promoted – along with other factors – has promoted a certain orientation in housing proposals that has come to the city.”
Meanwhile, Commissioner Donald Kalman had the classic line: “We have too many bathrooms.”
But here’s my problem and it was echoed by Georgina Valencia – if we eliminate by-the-bed or bedroom affordability as the commission recommended by a 3-1 vote, one result will likely mean that we simply no longer have student affordable housing.
Without affordability by the bed or bedroom, Nishi probably goes the Sterling route with a land dedication site. There is nothing wrong with land dedication in my view, but that would have precluded affordable housing for students – just like Sterling does not have affordable housing for students.
Lincoln40 without affordability by the bedroom would have simply gone the in-lieu route. Ironically, the commission expressed their preference for on-site, integrated affordable units, but then pushed forward on opposition to by-the-bed affordability – which would effectively preclude such affordable housing in future projects and effectively preclude student affordable housing.
My second objection was the unanimous support for eliminating the vertical mixed-use exemption.
Toward this end, Commissioner Georgina Valencia does make some good points here.
She stated, “I think any exemption from affordable housing is a bad exemption.”
From her perspective, “If there’s going to be residential, there has to be some requirement for affordable.”
The problem is – how is that going to be financed? The Plescia & Co. and BAE reports, both on Affordable Housing, and the fiscal analysis for the downtown question whether such development is 
fiscally viable – even without affordable housing requirements.
They conclude that “under current economic conditions – the Downtown Core Mixed-Use and Large Urban Mixed-Use are unlikely to be feasible, even without inclusion of any affordable housing requirements.” They continue: “The inclusion of on-site affordable housing obligations under the standard requirement renders all development scenarios infeasible.”
The irony is that the one way that apartment developments have made affordable housing work has been with the bed rental and not with unit rentals.
While I think the commissioners have a point that the heavy future emphasis on mixed-use and redevelopment means we might have to re-think this exemption, the removal of it flies in the face of probably four economic studies in the last two years, all of which basically conclude the same thing – that with the high cost of construction, our demand for things like sustainability, and other impact fees, we have pushed such development to the margins of viability.
Chuck Cunningham basically admitted that their margin is actually far below the recommended return on investment, and that is for a standard apartment complex.
Where I think the commission did well is, even though I think they ignore these fiscal realities in moving against bed affordability and against the vertical mixed-use exemption, they also recognize that if this community wants affordability, we cannot simply put it on the demonized developer class.
Georgina Valencia argued, “We have to start looking at creative and affordable ways to do affordable housing.” She would add, “It’s not just the responsibility of the developer – it’s a responsibility of the community as a whole.”
At another point, she also defended the notion that developers might make money on these projects. So, while I was dismayed that the commission seemed to ignore the fiscal analysis on the hardships of affordable housing, they did push the notion that if we are going to move forward, this can’t all be on the backs of the developers.
Part of the problem with putting it all on developers is that if they don’t have a fiscal incentive to develop, we get no new affordable housing. The other problem is that we end up passing costs onto the renters.
But I think the commission did well here looking at creative solutions, subsidies, and the possibility again of taxes and other funding streams as potential solutions.
Punting on affordable housing was never an option for this commission and it is not an option at the state level either. The question is going to be how we can cobble together resources to make it practical. Can we consider a parcel tax? Will state money start kicking in? Will a Governor Gavin Newsom look at reinstating the tax increment?
One point that was not raised by the Social Services Commission is that, under Measure R, strictly affordable housing projects are exempt from the voting requirements. Why not look at extending that exemption and allowing projects that are part market rate but a large part affordable to be exempt – that might make it far more practical to see larger dedication sites on the periphery. It is at least something to consider.
In conclusion, I think the commission was mistaken to go after by- the-bed affordable housing, I don’t know how we get vertical mixed-use to be viable without a lot of other changes, but at least the commission is seemingly willing to start looking outside of the box.
—David M. Greenwald reporting
coddle, cobble.
Jim, I have been editing this article, and that was one of the edits. Computer is slow this morn,
cathy
Hang in there, Highbeam/Cathy… your efforts are appreciated… am sending a check to David to go towards (ear-marked for) a end-of year “bonus” for you… spend it to treat you and yours during this holiday season… and in case I forget later, best to you and yours for the season, and all of 2019!
Thank you for your wonderful words and support, Howard! Wishing you and yours the best also! Sure hoping for a better year, for all of us …
cathy
Just wondering – what is that “recommended return”? And, is this over-and-above costs? (In other words, net profit?) Does the net profit generally begin in the first year, or, does it occur at some later point?
How soon before such developments are generally paid off?
What business is it of yours? What do you expect for a ROI on your investments? How much have you “gained” on any property you own? None of my business, “just wondering”…
How soon after you bought property when it was paid off?
Looking forward to Jan 1… Anonygeddon…
Howard: It isn’t a “personal” question, nor is it directed at any particular development. The “recommended return” is mentioned in the article, itself. I’m not entirely sure what it means, or if it changes as the development is paid off over time.
Presumably, this is one of the factors to consider, when establishing standards for Affordable housing. Especially when it’s brought up by development interests.
Yes – I’m looking forward to January 1st, as well.
Ron – Projects require financing, from investors or from a bank (or similar entity), often both. Those financiers expect a projected rate of return from the project to justify their investment. The expected ROI will be different for different investors, and for different developers. There is no one number, and there should be no expectation that a specific target value will ever be made public as it is no ones business except those who are risking their money on the venture.
If he made the statement it is reasonable to question it.
According to the BAE Pro Forma:
Feasibility Targets
To determine if prototype projects are financially feasible, it is necessary to establish an assumption about the level of project profitability that will be necessary to attract interest from developers and their investors and lenders. Based on consultation with developers and lenders in conjunction with this study and experience with other projects, BAE established feasibility targets as follows:
• 8.5% yield on cost for income-producing projects
• 10.0% return on cost for for-sale projects
For an income-producing project, yield on cost is defined as net operating income divided by total project cost. For a for-sale project, return on cost is defined as net sales proceeds divided by total project cost. For a mixed-use project that includes a combination of for-sale residential units and rental commercial space, a hybrid measure is used, which involves estimating the total project return on cost considering net residential sales proceeds plus a capitalized value of the rental space, divided by the total project cost. The capitalized value of the rental space is defined as the net operating income divided by a market-based capitalization rate, which is assumed to be 6.0 percent for rental apartments and 7.0 percent for retail and office space. For this hybrid approach, the targeted feasibility threshold is 10.0 percent return on cost.
David: Thank you.
Could you provide a link to that document?
https://cityofdavis.org/home/showdocument?id=10509
Thanks for this. I was going to respond 8 – 10% ROI for most RE development projects.
But the other factor is risk.
If you want to take more loss-risk investing then you will require a higher potential ROI. Investors in Davis development projects have the risk of it being killed by NIMBYs; hence the ROI expectation will be higher than say a community that is more supportive of development and without tools of tyranny for the majority.
Also time is a factor. ROI is generally a per-year figure. This is an area where the standard Davis pursuit of perfection impacts ROI. With more delays and uncertainty related to Measure J/R, lawsuits and general non-business-savvy people demanding to have a say in every design feature of the development… this all causes the final ROI demand to escalate as the developer has investments that are stalled and delayed.
In other words, if investment capital is tied up for a year longer than it otherwise could or should be, then the subsequent years where the project will actually start delivering returns will be required to deliver higher returns.
Despite the Democrat political memes of the Obama era, rich people do not horde money, and they actually do build things themselves with their capital. That capital is always active making a return, otherwise it is losing to inflation. And it will gravitate toward investment that maximize returns.
This is another consideration with respect to investment decisions and RIO expectations… it is relative to the alternatives.
Lastly, interest rates for lending are on the rise. So debt service costs will increase and thus the projects that are funded with debt will see their expected ROI increase.
Jeff: I haven’t yet looked over the document that David provided, but plan to do so.
However, in response to your comment, the “returns” (in the form of rent or sale) are also higher in Davis than some surrounding communities. For those able to negotiate the process, it seems like a “sure thing” that a given development will make money over time.
It should also be noted that there have been virtually no “denials” of housing proposals, lately. Every single one has been approved, either by the council or the voters. However, you’d never know that, by looking at some of the complaints of the development activists on here.
I don’t know of any developers that are just scraping by. In general, they’re some of the wealthiest people in the region, state, and world. (And, they didn’t get that way from working at jobs.)
But, I digress – because that’s “none of our business”, even when they claim that they can’t include Affordable housing, it seems. (Which nevertheless still brings in rent.)
Was also wondering at what point a developer will seek outside funding. For example, do they wait for a given proposal to “clear” most hurdles, before seeking approval for such funding?
If so, then it seems that your statement would not apply.
Also, would a lender normally approve funding, for a proposal that’s still facing known/disclosed hurdles?
If you are working on getting a development approved, you would need to keep the capital in a state of liquidity. You would not be able, for example, to invest it in other long-term projects.
If you need to keep it liquid, you would be stuck with money-market type (savings) accounts and that would mean the money would make little to no returns while sitting there.
A lender would generally not fund a project without approval from the locality.
I need to affirm Jeff as he is spot on… am not familiar with loans “on the come”, but as to “construction loans”, am pretty cognizant of that… can be a chicken/egg thing… a developer has to have a fully executed subdivision agreement to secure funding (not just a DA)… the SA is dependent on the developer providing security (funding) to complete the public improvements… 100% FP, 50% L&M, in addition… never got into the lender’s requirements for the ‘private improvements’ on site, if not common to multiple owners…
Too many folk opining here, have no clue…
Am not inclined to spend more time educating them…
Thanks, Jeff.
I’m gathering from your post (as well as Howard’s) that developers need to have some liquid funds of their own ready to invest (in addition to rights to the property, itself) in order to get a loan for the remainder.
Makes sense – just like purchasing a house with a down payment, I guess.
So, I guess developers risk low returns (for the portion of funds that they invest), while waiting to see if a development is approved. (Earning low interest for awhile doesn’t seem like much of a risk. However, I understand that there’d be other costs on the path to approval.)
After approval, 8.5-10.0% ROI per year seems pretty good. (I wish I could get that.)
Ron… you are learning, grasshopper… (based on your 8:42 post)… this is good!
Jeff and I may differ in many ways, many views, but we know our “stuff”…
As to,
Many years have gotten that… many years “not” (2018 is classic)… but as Jeff points out, “risk” is a huge factor… spouse has low risk tolerance… her investments have never gotten to 8% in any given year… mine are more ‘risky’, yet not too risky…
The 8-10% ROI is a “goal” that needs to be somewhat realistic… lenders and developers set that as a baseline, knowing “your results may vary” … no guarantee… did you ever play poker? You make your informed bets, you take your risks… lenders and developers…
I’m ahead in that game, using dollar-cost averaging, and a mix of investments. Quite frankly (although I’m not), part luck, bigger part being informed and cognizant. And flexible…
I have another question, for anyone who is inclined to answer. I’ll start out with a theoretical example:
Let’s say that in the first year a developer invests $500,000 (total cost) in a small apartment complex. And, receives $40,000 in rent. (An 8% return.)
Then, let’s say that in the following year, the rent goes up to $50,000/year. (A 10% return.)
How does this compare with lenders’ “expected rate of return”, when considering a loan to a developer? In other words, doesn’t the expected rate of return increase, over time? Does the expected 8.5% return for rental properties only apply to the first couple of years, increasing each year after that?)
(Also wondering how would declining loan balance, and operating costs factor into this calculation. At some point, the loan would be paid off.)
It gets a bit more complicated with rental property investments. And of course there are differences between commercial vs residential. There are maintenance costs, there is depreciation expense that will provide some tax relief on the gains. If the rental is funded with any debt, then there is the interest on that debt.
On a commercial property lease it is common for a 3% per yer rent increase to be included.
If you take a situation where a small apartment complex is built for $1MM ($500M is probably unreasonable given current development costs and land value), the bank is likely to only go 65% LTV (requiring $350M from the borrower and lending $650M). I would not be unusual for this loan to be based on financial projections that only just cash flow to begin (break even), and then start making a net-positive return in subsequent years as rents can be increased. The other investment expectation for any real estate project is appreciation. That value of course would not be realized until the asset is liquidated except in the potential for leveraging the appreciated value for another bank loan. Say five years after building this apartment it now appraises at $1.25MM and the principle balance is paid to $600M. That leaves $650M in equity that can be leveraged for a bank loan (the bank would take a second position lien on the real estate for collateral). Assuming another 65% LTV the bank would lend $422.5 to the owner/developer, and she could build another project with another bank loan to supplement this amount plus personal capital that the developer contributes.
This is how a developer can continue to build a portfolio of assets that deliver returns. At some point in the future, if the developer does this well (minimizes bad bets in the projects she invests in), she should have more personal capital to invest and rely less on bank loans… and thus get to earn a larger return not having to pay any loan interest. However, my experience with developers is that they start going after larger and larger projects in pursuit of business growth. Also, with our historical low interest rates and relatively higher rates of return in equities and bonds, many developers would continue to use bank capital while investing their own capital in other things.
There are many risks facing developers that are uncontrollable. And those risks demand a higher expected rate of return or else the developer would gravitate to other investments.
The funny thing about Davis with respect to developers… they are demonized as enemies of the good. While in fact, developers are a primary source of everything that has been built and will be built. Builders and those that support them are the heroes of community infrastructure aesthetics and value. When we travel to other places, other than the culture of the community and the people that live there, and the landscape and weather, it is the physical architecture that we see and experience that defines the place as attractive and appealing. Without developers there would be nothing.
Thanks, Jeff.
Regarding the following quote from you, I understand that the expected ROI would increase, each year.
What I don’t understand is how this can be “simplified” (averaged over some period of time?) into a straight-line 8.5% expected annual return, as discussed in the BAE document that David cited.
We could end it.
I don’t think we could end it. I’m no expert, but it would appear that we could face all sorts of problems from HUD, Fair Housing, and probably the state as well if we tried to.
If you have a reasonable-paying job and work enough hours, then housing is generally affordable.
Working enough hours has the added benefit of no time for angry protesting.
. . . and not time for posting long rants on blogs.
HAHAHAHAHA.
Well I am proof that you can have it all!
Of course I say that from my office as I am just now packing up to go home for the day after getting in a 8 AM.
Soon you’ll be able to go home at 5:00pm like all good state workers.