A TERNER CENTER REPORT - MARCH 2020 The Costs Of Affordable Housing .

A TERNER CENTER REPORT - MARCH 2020General Trends inAffordable HousingDevelopment CostsIn this section, we present the results of thedescriptive analysis, discussing the major costdrivers that have led to significant increases inaverage LIHTC development costs over time.In all of these analyses, we adjust costs forinflation to 2019 dollars using the Bureau ofLabor Statistics’ national CPI index for urbanconsumers. We also present the costs adjustedby unit and by square feet, since these twometrics present slightly different results (asunits have generally gotten smaller over time).Total development costs have risendramatically since 2008.Several studies in recent years have pointedto the high and rising costs of LIHTCdevelopment in California; our analysis showsthat this trend continues unabated. Figure 1presents data on total development costs from2008 and 2019, adjusted for inflation andaveraged by the cost per unit and the cost persquare foot. Since 2008, the average cost perunit of 9% LIHTC new construction increasedfrom 411,000 to 480,000, an increase ofover 17 percent. The cost per square foot hasrisen even more dramatically, from 451 persquare foot in 2008 to 700 per square footin 2019, an increase of 55 percent. (In part,the difference in these two measures relate towhat is being developed: in recent years, thenumber of square feet per unit has gone down,as has the number of bedrooms per unit.)This increase in costs has material consequences for the supply of new affordablehousing—in broad terms, the same amountof public subsidy is now needed to build twounits at 1,000 square feet as was needed forthree units just 10 years ago.Figure 1: Total Development Costs, LIHTC 9% New Construction Projects, 2008 - 201983.2%600,000800Cost Per Unit ( ost Per Square Foot ( 2019)700500,0001002008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Cost Per Unit0Cost Per Square FootSource: Terner Center Analysis of TCAC 9% LIHTC Project Applications. All figures adjusted for inflation.6

A TERNER CENTER REPORT - MARCH 2020Total development costs vary substantially by region, and are most expensivein California’s San Francisco Bay Area.The statewide average in developmentcosts obscures significant regional variation(Figure 2). Projects in San Francisco costsignificantly more than in any other part ofthe state, averaging 1,100 per square foot forall projects built between 2008 and 2019. Incontrast, projects in the Central Valley costapproximately 330 per square foot. However,even in the Central Valley, development costsare still higher than the national average—while comparable data are hard to comeby, between 2013 and 2017, multifamilydevelopments nationally cost between 148and 233 per square foot to build.12In Figure 3, we present broader regionaltrends over time, grouping project awards into3-year intervals that follow broader economictrends.13 All the regions experienced a declinein total development costs during the 20112013 time period, reflecting the economicrecession and housing market slowdown inCalifornia. Since then, however, costs haveonly escalated. Statewide, developmentcosts per unit have increased 12.6 percentfrom 2008-2010 to 2017-2019. Projects inthe greater San Francisco Bay Area—whichincludes Oakland and San Jose—increasedby 22.4 percent to an average of almost 600,000 per unit in the past three years.While lower than the rest of the state, inlandareas (including the Central Valley, InlandEmpire, and rural TCAC regions) experiencedthe greatest percent increase in developmentcosts since the recession. Projects in thesegeographies saw a 30 percent increase from2008-2010 to 2017-2019.Figure 2: Average 9% LIHTC Development Costs Per Square Foot by TCAC Region, 2008-20191,4001,2001,000800600400200-Source: Terner Center Analysis of TCAC 9% LIHTC Project Applications. All figures adjusted for inflation. Data are presented by square foot in partto account for differences in unit size across regions.7

A TERNER CENTER REPORT - MARCH 2020Figure 3: Regional Differences in Total Development Costs Per Unit Over TimeTotal Development Costs Per Unit ( atewideBay Area2008-20102011-2013Inland2014-2016Southern California2017-2019Source: Terner Center Analysis of TCAC 9% LIHTC Project Applications. All figures adjusted for inflation.The main driver of these increases ishard construction costs.Total development costs are made up of alot of different line items, including landor property acquisition costs, constructioncosts, architectural/engineering costs, localdevelopment fees, as well as fees associatedwith the “soft” costs of development (e.g., legalfees, appraisals, and insurance). In Figure 4,we compare the change in land costs with thechange in hard construction costs over time.Although reporting of land costs can varyacross LIHTC projects (since some projectsrely on donated land and don’t always includethe full amount of what that land would costat market valuation), in general, the reportedcosts of land acquisition has remained largelyflat since the end of the recession.In contrast, hard construction costs haveincreased by 40 percent since 2012. Interviewsfurther emphasized the role of construction indriving the upward trend in costs; developersconsistently pointed to the bids coming fromtheir general contractors as the key factorcontributing to cost increases. One affordablehousing developer who works largely in theBay Area shared that “when I look at all thelines of a pro forma, what has changed mostdramatically is the pricing that is coming fromthe general contractor. Prices have increasednearly 50 percent in terms of the dollars persquare foot in the past few years. I don’t thinkthat we are designing buildings that look oroperate much differently. It’s the materialsand labor costs coming from the contractingend that have changed.”As we discuss in more detail in the report TheHard Costs of Construction: Recent Trends inLabor and Material Costs for Apartment Buildings in California, it is hard to disentangle therelative contribution of labor versus materialson hard construction costs. For example, acontractor will generally provide a bid sheetwith just the total amount it will cost to installthe drywall or electrical work on a project.This bid sheet rarely itemizes the share ofthe costs that are going to labor. Interviews8

A TERNER CENTER REPORT - MARCH 2020Figure 4: Trends in Hard Construction and Land Acquisition Costs, California 9% LIHTC Projects, 2008 - 2019300,000Cost Per Unit ( 1020112012Construction Costswith general contractors suggested that bothfactors play a role– with tariff battles contributing to increased material costs for lumberand metal—but emphasized that the bulk ofthe rising costs was coming from labor. Figure5 displays trends in general contractor wagesbetween 2008 and 2018 for Los Angeles, SanFrancisco, and California—while increaseshave been most dramatic in San Francisco,wages overall have increased faster than thecost of inflation.The role of wages in driving cost increases isnot unique to affordable housing development.Since the recession, there has been asignificant mismatch between the number ofpermitted units—increasing more than 430percent between 2009 and 2018—and thegrowth in the construction sector, where thenumber of workers has only expanded by 32percent.14 General contractors noted thatanti-immigration rhetoric, as well as a tightlabor market overall, has made it hard to findconstruction workers, let alone workers withmore multifamily construction experienceand/or those trained in the specific n CostsPrevailing wage requirements areassociated with higher averagedevelopment costs.In addition to the general labor marketshortage driving up wage costs, affordablehousing developments are also often requiredto pay prevailing wages. Prevailing wages aredetermined by the California Department ofIndustrial Relations, and are usually basedon rates specified in collective bargainingagreements. Although the LIHTC programdoes not trigger prevailing wage requirements,LIHTC projects often layer other forms ofpublic funding that do require either federalor state prevailing wage, or they may besubject to local project labor agreements fortheir construction contracting.15Approximately 60 percent of LIHTC projectsawarded funds between 2008 and 2019 weresubject to either prevailing wage or localproject labor agreements, or both. Prevailingwages tend to be higher than the “openshop” or non-union wages in local markets,though it can depend on the county and the9

A TERNER CENTER REPORT - MARCH 2020Figure 5: Average Annual Wages for Residential Multi-Family General Contractors, 2008 - 2018 160,000 140,000Annual Wages ( 2018) 120,000 100,000 80,000 60,000 40,000 20,000 -2008200920102011Statewide20122013Los Angeles20142015201620172018San FranciscoSource: U.S. Bureau of Labor Statistics, Quarterly Census of Employment and Wages, General Contractors, Multifamily Residential Construction,available online at https://www.bls.gov/cew/. Wages adjusted for inflation.Figure 6: Trends in Total Development Costs Per Unit in California, by Prevailing Wage, 2008 - 2019600,000Cost Per Unit ( 01020112012Prevailing Wage2013201420152016201720182019Not Prevailing Wage10

A TERNER CENTER REPORT - MARCH 2020specific trade classification. Because of thesehigher wage rates, the LIHTC program allowsdevelopers to claim a 20 percent increase ontheir development cost limits if the projectincludes prevailing wage requirements.Figure 6 shows that prevailing wage cost morethan non-prevailing wage projects, thoughthe difference between these two types ofprojects varies over time. For example, in2016 and 2017, the gap between prevailingand non-prevailing wage projects narrowed,in part because open shop construction wageshad risen substantially (in part due to theshortage of construction labor).The gap between market and prevailing wagesalso varies by region. In the Sacramentoregion, for example, prevailing wage projectsin our sample were 36.4% more expensivethan those without prevailing wage, and in theCentral Valley, the gap was 27.5%. In contrast,in cities like San Francisco, San Jose, and LosAngeles, which have a larger union presenceand higher open shop wages overall, the gapwas only around 10 percent.Prevailing wages increase the cost ofdevelopment for a number of reasons.Besides paying higher wage rates, prevailingwages trigger additional requirements suchas payroll certification that can add to costs.Interviews consistently highlighted that whilethe higher wages accounted for some of theincreased costs, the additional “paperworkand bureaucracy” associated with prevailingwage increases soft costs and may also preventcontractors from taking on a prevailing wageproject when demand for labor is strong. Forexample, contractors who want to take on astate prevailing wage job need to register withthe Department of Industrial Relations, whichexceeds the requirements under the federalrules set forward in the Davis-Bacon Act.Several developers noted that when “there isa shortage of workers with prevailing wage,you’re probably cutting your vendor pool in halfby having a prevailing wage project. Because iften guys would bid a project, you’re probablygoing to only get 5 that would bid a prevailingwage project.” Other developers similarlynoted that affordable housing developers areoften selecting from a “smaller pool of generaland subcontractors because of the prevailingwage or project labor agreement requirementsand all the ‘headache’ and paperwork thatcomes with that.”The challenges of finding constructionworkers in a tight labor market can beexacerbated when the project also includeslocal hiring requirements, such as recruitingfrom small or minority-owned businesses.These requirements are considered acondition of using public subsidy, but theyincrease developer costs. An affordablehousing developer that builds in multiplestates explained, “[Local hire] is what I meantwhen I said an affordable unit needs to satisfya lot of policy goals. And they are good goals.But on the implementation end, it does causethese unforeseen situations with limiting thelabor pool. Let’s say there’s 4 to 5 affordablehousing developers and we’ve all been fundedwith A1 measure funding,16 and we all breakground pretty much at the same time. So ifyou’re looking for framers, there are only somany small local framers, minority-owned it’s just very difficult to check all the boxes.”11

A TERNER CENTER REPORT - MARCH 2020General contractors also noted that they canalso run into difficulties on prevailing wageprojects when government agencies don’tapprove payments, which means that theyprefer to select non-prevailing wage jobs. Onesaid: “The city or county that is funding partof the project has labor compliance on staff,and they won’t approve the release of fundsfor that monthly pay application until all thelabor requirements are met. So what happensis that contractors end up going unpaid forweeks and weeks and weeks, while agencystaff are trying to sort out some problem withthe wage compliance or the labor compliancepaperwork, and so, often I just decide, I don’tneed this headache.”Rising construction costs alsocontributes to increased contingencyand construction financing costs,driving up total development costs.The rise in construction costs also leadsto higher costs related to the interest onconstruction loans (since the amount that thedeveloper needs to borrow goes up) as well asconstruction contingency costs. Contingencyfunds are a requirement of project funders,and refer to the capital a developer sets asidefor unexpected expenses during the development process. For example, contingency fundscan help to cover unexpected costs associatedwith land remediation or “a new fee imposedby the city that we hadn’t anticipated” as onedeveloper noted. However, rising constructioncosts are leading developers to turn to theircontingency funds more quickly. One developer who works in the LA region noted that:“In a different era, we wouldn’t have to dip intoour contingency funds and had funding leftover at the end of the development process.But in the last 3-4 years, we hardly have anycontingency left.” Across all the interviews,developers reported that they have neededto increase their contingencies because costescalations make it more difficult to accurately assess the final costs of development.Several developers also highlighted that utilitydelays have contributed to projects runningup against deadlines and eating into contingency costs. As one explained: “We run intoissues with the utilities. We had a project thatfinished not too long ago, and basically had a6-month delay based on PG&E not completingits work on time. So we are finding that a lotof our contingency costs are directly related toutilities.”Developers further noted that because of labormarket and general contractor shortages, theywere running into increased costs related tothe deadlines for occupancy imposed by theLIHTC program. The program requires thata project be completed in under two years.“That timing is rushed in a way that is not formarket-rate developers. We’re often gettingbids on plans that aren’t 100% finalized, whichleads to change orders that can increase costs.There’s a premium that you pay for bringingon a general contractor when it’s rushed.”Other developers noted that they will usecontingency funds to pay for overtime so theycan meet regulatory deadlines.Affordable projects face both politicaland funding constraints in achievingefficiencies of scale.On average, larger development projects canachieve efficiencies of scale, reducing per unitor per square foot costs. The relationship isn’texactly linear, because high-rise buildings(often referred to as Type I projects) requiremore steel and concrete than lower-risebuildings and therefore see higher materialcosts. However, in general, the more units andhigher density that is allowed on a parcel willreduce overall project costs for similar typesof buildings.12

A TERNER CENTER REPORT - MARCH 2020Figure 7: Examples of Average Density 9% LIHTC ProjectsThird Avenue Apartments,Walnut CreekPATH Villas Eucalyptus,InglewoodYet, with the exception of infill projects indowntown urban areas, LIHTC developmentsin California tend to be relatively low density.The average project size for a 9% LIHTC newconstruction project is less than 55 unitsand under 3 stories. Density is measured asthe number of units per acre of land; for theprojects for which these data were available,we found that the average density was 50 unitsper acre. However, nearly a third of projectswere less than 20 units per acre. Figure 7presents two photos of properties representingthe average density (50 units/acre) for LIHTCdevelopments to help visualize the relationshipbetween building density and land use.Developers pointed to two key reasons forwhy projects tend to be smaller and lowerdensity. The first factor is local city designrequirements and, in particular, ongoingresistance to larger, denser affordable housingdevelopments. As one developer aptly put it:“It is impossible to overstate the continuedresistance to new affordable development inmost cities in California.” Developers notedthat they often needed to make concessions todensity or design to get through the permittingprocess, and that this works to limit how manyunits they can build on the lot.The second reason has to do with the structureof tax credit financing. To ensure that creditsare broadly distributed across the state, TCACallocates a specific proportion of 9% credits todifferent regions (and establishes “set asides”for specific policy areas such as special needs13

A TERNER CENTER REPORT - MARCH 2020and supportive housing). TCAC also sets acap on the amount of funding that can beallocated to any one project. However, withdevelopment costs rising, the “cap” on fundingin the 9% credit program is often too low forlarger projects. Developers sometimes splitlarger projects into multiple phases, and/orpropose projects that are smaller than whatcould be built on the parcel. In Santa ClaraCounty, for example, one developer explainedthat “we have given up on doing a 9% projectthat is above 60 units. Because of the cap, wecan’t propose larger, more efficient projects.”Developers also shared that as a result, theyhave increasingly been turning to the 4%credit program for larger projects.Developers also noted that larger pro

affordable housing. Methodology This paper focuses on affordable housing built with Low-Income Housing Tax Credit (LIHTC) financing. Since 1986, the LIHTC program has been the most important source of funding for the construction of affordable housing. In California, more than 225,000 new units have been funded under the LIHTC