High Cost of Government Housing

December 4, 2017

In our recent study on the Low-Income Housing Tax Credit (LIHTC), Vanessa Brown Calder and I discussed how subsidized housing projects usually cost more than market-based ones. There is more bureaucracy, more delays, and more micromanagement of building requirements. As in education or health care, government intervention in housing undermines cost control.

This article discusses San Diego’s efforts to supply subsidized housing, and it focuses on the cost problem. The article discusses projects financed by a combo of the LIHTC and other programs, which is apparently called a “funding lasagna.” But a “subsidy lasagna” might be more accurate.

By any measure, the city government’s efforts to help low-income families are far behind the demand for subsidies, and losing ground.

High cost has been a major factor. In recent years the public has paid luxury price tags for a handful of subsidized construction projects, draining money to build more apartments.

“They are building Cadillacs,” said Alan Nevin, director of economic and market research at Xpera Group, a building-industry consulting group.

This outcome flows from a system that evolved over years to build projects whenever public money pops up, and isn’t necessarily focused on reducing costs or producing the maximum number of apartments.

The most extreme example of high-end cost is found in Barrio Logan, according to figures provided by the San Diego Housing Commission.

Operating under a city contract, developers spent $46.2 million from federal, state and local sources to build 92 apartments at the Estrella del Mercado on National Avenue, which was completed in 2012. That works out to $502,000 per apartment.

Setting aside the Mercado project, price tags of $400,000 per subsidized unit in new complexes are the rule lately, particularly downtown. This places public housing in the same league as luxury apartments downtown, and 35 percent higher than midrange private projects in other urban neighborhoods.

Higher costs in the public sector have multiple causes. Land prices play a role, because officials want to place subsidized projects in high-cost areas. This allows low-wage workers to live near jobs.

And developer fees are much higher. Unlike private apartment builders, who count on years of rising rent to recover their investments, developers of subsidized housing require the bulk of their profits up front, because they face 55 years or more of below-market rents.

These developers must submit bids to a state agency, but those who prevail typically are chosen based on added features rather than low cost.

A third factor is government requirements. Officials typically insist on solar energy features, meeting rooms and long-lasting exteriors that aren’t always included in private developments.

In 2011, the housing commission hired Keyser Marston Associates, an industry consultant, to compare three recent subsidized projects to the costs of nearly identical developments in the private sector. The study focused on construction and development — excluding land costs.

At the Mercado, Keyser projected costs totaling $388,300 per subsidized apartment, or 31 percent more than the $297,000 price tag for an equivalent complex built for the market.

The San Diego Union-Tribune article is here.

Our study is here.

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