By David M. Greenwald
Executive Editor
Davis, CA – The analysis by Cascadia Partners largely bears out what we have believed for some time – it is challenging to build inclusionary housing in Davis in the current environment.
It has always been a tricky thing to quantify since the city and developers are not eager to chare calculations of expected return on investments. But the analysis by Cascadia illustrates the real challenge here – most market rate development scenarios “do not meet target internal rate of returns (IRR).”
The target rate in both the downtown and outside the core is about 12% IRR. In the downtown, the rate is 9.4 percent and outside the core it’s 10.2 percent.
So for all the people who are arguing that we need a higher percentage of our housing to be “affordable.” These numbers show that to be almost impossible. In fact, just getting to the 15 percent level is challenging.
A big culprit: construction costs.
“With historically high construction costs, today’s development environment is challenging,” Cascadia found.
They note, “Hard construction costs in California were averaging at $222 per square foot in 2018. Costs have increased significantly since then. Between 2020 and 2021, costs increased over 10%, exceeding the historical annual average increase of 2-4%”
Thus, “Given today’s realities, project costs are outweighing project revenue. Making it even more challenging for inclusionary zoning policies to be effective.”
Cascadia focuses on relaxing regulations and waiving fees. Neither of which actually solve the problem.
The council needs to figure out some ways to solve the problem.
One big problem has been the loss of RDA money. A few years ago, Assemblymember Cecilia Aguiar-Curry attempted to introduce legislation that would restore the increment tax to generate money for affordable housing – it went nowhere.
The state has put in some affordable housing money into the budget. The current budget calls for 2.5 million new units including 1 million affordable units by 2030.
Some estimates suggest to solve the problem of homelessness will take about $8.1 billion annually over the next 12 years. The current budget calls for about $3.4 billion for the upcoming fiscal year.
“The question is whether $3.4 billion is enough to turn the corner on homelessness,” the LA Times wrote in a recent editorial. “Several nonprofit organizations that work on issues of housing and homelessness say it’s not.”
The Times noted, “just as cities and counties need to be held accountable, the state needs to understand the reality of this colossal problem that has been decades in the making and cannot be solved in a few budget cycles.”
They add, “As a result, there is not enough affordable housing for low-income people, who can fall into homelessness…”
The take home message here – the state is probably going to need to fund a lot of the affordable housing programs and right now, what it is funding is simply not enough.
So what can the city do given the insufficient money from the state and local land use limitations?
I think what the Cascadia analysis shows is that we are probably not going to solve our affordable housing needs only through bootstrapping it to market rate housing.
That leaves us with two plausible solutions.
One is that the city look at its own land and find non-profits willing to raise the funds and put housing there. The city has land for example along Fifth Street that could go for this purpose.
The other is to find ways to incentivize affordable housing projects on the periphery by easing the Measure J restrictions on affordable housing.
Former Councilmember Dan Carson in 2021 proposed a modification to Measure J to allow for more subsidized, inclusionary housing projects to be Measure J-exempt.
“The exemptions written by the original drafters of J/R/D were fine in concept, but have so many strings attached that they are unusable–and have never been used. We could fix this by removing the problematic language,” said Dan Carson in June.
“For example, in order to use the affordable housing exception, an applicant would have to prove that no other site anywhere in the city is available for affordable housing—a daunting if not impossible barrier,” he pointed out.
Any change to Measure J figures to be tricky, even something involving affordable housing.
Another possibility would be for a group of non-profits to raise money to purchase land and then raise money to build affordable housing.
We have seen that strategy work in places like Sacramento. And on a small scale that could potentially put developments into place like New Harmony. But that figures to be a very slow, very arduous process.
At the end of the day, without considerably more help from the state and potentially the federal government, local communities like Davis are going to struggle to build sufficient affordable housing.
So you agree that Measure J is a problem yet you support it. Another day another disengenuous lament.
I’ve pretty consistently stated that I believe there are things that can be improved about Measure J.
Where were you David when Measure J came up for renewal? I don’t recall you arguing to amend it before it was placed on the ballot. You never said vote against it and demand better. You supported renewal. Where were you when it mattered David? You supported it. Now own it.
I think you’re wrong on that…
In April 2019 I wrote: “While I come down clearly on the side of continuing Measure R, I really do not understand why people are not even willing to entertain the idea of revising it. Frankly, I have seen proposals put forward by both sides of the proverbial divide that might help improve the process.”
I strengthened that view the next year:
May 2020: https://www.davisvanguard.org/2020/05/monday-morning-thoughts-why-did-the-city-wait-so-long-before-discussing-measure-j-renewal/
May 2020: https://www.davisvanguard.org/2020/05/sunday-commentary-why-we-should-have-more-discussion-on-measure-j/
August 2020: https://www.davisvanguard.org/2020/08/commentary-it-wont-be-this-year-on-measure-j/
A most tepid hedge Even then you supported it and you still do so why not admit that you support a failed ordinance that has been shown in myriad ways to exacerbate our local housing problems, defends inequality, keeps people in rent servitude, increases carbon footprints, reduces home affordability and destroys research fields.
Ron, the same thing can be said about you … another day, another disingenuous lament.
You’ve consistently stated that you believe that David is a hypocritical fence sitter regarding Measure J … over and over and over and over and over and over again.
From Ron G’s perspective, he has a point.
That is, many of David’s articles attempt to “throw Measure J under the bus”, while he simultaneously states that he supports it (even as it currently exists).
It’s possible that David is trying to maintain “relevance”, by claiming that he supports a measure approved by 83% of voters, while simultaneously taking every opportunity to criticize it.
Personally, I prefer those who aren’t as well-trained in politics.
In what way am I being disingenuous Matt? Maybe doggedly consistent but not disingenuous.
Ddisingenuous means “not candid or sincere, typically by pretending that one knows less about something than one really does”
You pretend not to understand the political realities of Measure J’s passage and renewal, and consequently you are neither candid nor sincere in your confusing excoriation of David’s clearly stated explanations of those realities. You pretend to know less about those political realities than you really know about them.
Matt: I understand Ron G’s position to be that the popularity of Measure J shouldn’t matter in regard to David’s position.
But if one takes David’s statements at face value, he supports Measure J as is – compared to not having Measure J at all. Ultimately, no one other than David knows what his “internal truth” is regarding that.
But truth be told, I don’t think it matters what David thinks about it in regard to the political reality. As such, that’s where I don’t see how Ron G’s efforts would pay-off – regardless of what David thinks (or what others may suspect regarding that).
And as Ron G has noted, he (himself) has pretty-clearly made his thoughts known, as have a handful of others on here. And still, it ultimately doesn’t matter.
There’s plenty of cities that don’t have Measure J, though many have generous urban-limit lines. I’m not sure why others always want to change Davis into Woodland, for example. You’d think that THEY would be the ones to take up residency in those places, rather than continuing to try to change Davis.
Simply untrue Matt. I have been consistent for a long time and I am not in denial about the political realities. My reality is that I expect better of David and that until the citizens of Davis, David included, are willing to take a strong stand against Measure J’s failures (or successes if you are anti-growth) we can’t expect our leaders to take a hard political stand. I understand that change must come from below the local political class first. David’s unwillingness to take a strong position is a constant disappointment.
Ron, read your response …
I am not in denial about the political realities.
followed by …
My reality is that I expect
I will agree with you that your beliefs are sincere, but that pair of statements of yours perfectly illustrates the definition “not candid, typically by pretending that one knows less about something than one really does”
You would be on solid ground rather than disingenuous ground if you began your recurring snide attacks on David with a disclaimer acknowledging the political realities before launching in again for the umpteenth time, but you don’t do that … so you are being purposely disingenuous.
What you’re doing in this article is comparing market-rate returns, vs. Affordable (subsidized) housing returns – which you actually haven’t presented.
What is the IRR that Affordable housing developers expect – assuming that such a calculation is made in the first place? They’re getting “free money” from the government to build Affordable housing. Their costs are either partially or fully covered by the government, itself. Do construction costs (vs. expected rent) even factor into their “equation”, unless the government requires them to in some manner?
They’re going to use that government money, somewhere. If not Davis, then somewhere else.
As with many of your articles, you throw-around terms such as “affordable”, vs. “Affordable” (subsidized) with abandon.
“ What you’re doing in this article is comparing market-rate returns, vs. Affordable (subsidized) housing returns – which you actually haven’t presented.”
Basically the point of the study is to show that without a sufficient rate of return, there cannot be imposed the added costs of subsidized housing. They don’t get free money from the government to build affordable housing in this kind of project. In order to get that kind of funding, you would need a land dedication site with a specific carve out dedicated for affordable housing.
What “kind” of project are you referring to? And are you sure that you have your facts correct? (That’s an actual question.)
Well, how are places like San Francisco accomplishing this?
(Note that I also brought up the Hibbert’s site.) There’s also the former site of the former convalescent facility on Pole Line – too late for that one, and the very large Chiles Ranch site.)
Places like San Francisco are not even “fortunate enough” to have sites like those in the first place.
As far as privately-funded “Affordable” housing (e.g., “mixed-into” market-rate buildings), “who” even monitors those on a long-term basis to ensure that they remain “affordable”? Do these type of developments even exist, anywhere? (I assume that’s what you’re referring to.) This doesn’t sound feasible – anywhere.
In contrast, when government funds are involved, those agencies generally ensure that the housing remains “Affordable”. It takes ongoing funding just to monitor and enforce it.
Maybe you need to explain what you’re referring to (overall), here.
Measure J is at the core of the real problem–that land prices are too high. The barriers to entry of new housing on the borders effectively increases the price of land for infill inside the City. (This effect is so fundamental that it’s taught in introductory undergraduate microeconomic courses.) Reducing land prices by increasing land supply is an easier and more broadly effective policy than trying to control construction costs. For example, if there is a multi-family building that costs $2M with land cost $1M and can earn $200,000 a year, that provides a 10% return. If the cost of the land decreases to $700,000, the return increases to 11.8%. Note that housing prices in Davis are about 85% higher than the neighboring cities, and almost all of the price difference is captured in land values.
The other issue is that prior to 2012 Affordable housing was largely built using the incremental property tax revenues from redevelopment projects. The state has now diverted that incremental tax revenue to its own coffers. It’s time to ask our state legislators to create a housing incentive fund that returns those incremental revenues to local governments that build new housing. The formula could be adjusted for proportions of Affordable housing.
You seem to believe that land prices are the same outside of (other) cities, as it is inside of those (other) cities.
Your belief is factually-incorrect.
Again, factually/grossly incorrect.
But even if it were correct, THERE’s your local “affordable housing”.
For that matter, Davis (and the entire region) is “affordable housing” for just about anyone from the Bay Area – Measure J or not.
A “bargain”, at that!
And you don’t even need to attend “introductory microeconomic courses” to understand it.
The state housing department, per state law, is telling every community that it must provide for sites for their share of housing, at specified levels of income, within its own boundaries. Davis housing element isn’t affected by what other communities are doing.
To your previous question, San Francisco scrambled to find about 20,000 more potential sites (they had approx 60,000 and the ABAG distribution for SF was 82,000). Their planning commission approved their new plan in December and the SF board of supervisors will vote on that, I believe, on Jan 31 –literally the last day allowable. If they miss that, ‘builders remedy’ projects can go forward in February and evidently any number of builders are ready for that. The city planners worked with state housing officials, so it is likely their plan will be approved, subject to a mid-course review (SF is being investigated by the housing department for their extremely long delays in project permitting, so HCD wants some assurance that the plan being proposed will actually yield results).
So, why is anyone even discussing farmland outside of Davis’ boundaries?
The same laws/requirements apply to all communities – the majority of which aren’t expanding outward onto farmland.
That’s not what I asked David. I essentially asked “who” is funding that “affordable housing”? (While also noting that San Francisco has far fewer potential sites per capita than Davis does.) San Francisco is (already) a much denser city than Davis is. (Even as it’s lost more than 6% of its population, recently.)
I understand that even they (builders) are subject to “affordable housing” requirements, under such a scenario. But as mentioned previously, I’m actually looking forward to the state “expanding its war” on some cities, as it’s going to lead to an even bigger revolt. (A city like Davis won’t be at the forefront of that revolt.)
In any case, I say, “go for it” – and see what happens (in the long run). My guess is that the YIMBY/California Association of Realtors “wing” wins a few battles, but loses the war (badly).
Again, no details as to how “affordable housing” is getting funded, there.
And San Francisco is by no means alone, regarding that question.
Lack of funding for Affordable housing (combined with the housing and economic downturn, and declining population) is probably the biggest reason that the state is not going to be able to enforce its mandates – in terms of what actually gets built. I’ve previously posted an article which notes this, as well.
Yep Richard, basic economics. Its a pity so few get it.