Author: Steve Zurier
Under the right conditions, home builders will gladly work closely with communities to build affordable housing.
“Affordable housing is good for the community, good for the city, and good for us,” says David Weekley, chairman of David Weekley Homes, about his company being named to build the affordable housing component for the first phase of the Mueller redevelopment project near the old airport in Austin, Texas.
“It’s not just a successful business [practice],” Weekley says. “It’s the right thing to do, as well.”
Weekley was best-known during the boom years as a builder of second time move-up homes. Why has the company shifted gears so dramatically?
One answer is the proactive way the city of Austin went about wooing builders. Fees were reduced and building permits expedited. Another big motivator is that David Weekley Homes can also build roughly as many market-rate homes as affordable homes in the project’s first phase, 90 market rate and 71 affordable.
The builder is on the bleeding edge of what could well be an industry trend. A Builder survey conducted for this feature finds that while only 13 percent of builders queried participate in inclusionary zoning programs (mandated set asides), a full 66 percent said it would be “somewhat likely” or “extremely likely” that their companies would participate in an affordable housing project if the municipality has an innovative program that included incentives such as tax credits and streamlined permitting.
“Builders recognize that there’s a huge market for affordable housing,” Weekley says. “The challenge is how to reach that market.”
Weekley says his company identified the affordable market as underserved in Weekley’s seven-state trade area in the Southeast and Southwest about five or six years ago. It then came out with its Imagination Home series, a product that sells from the low $100,000s.
The Imagination homes are between 1,400 to 1,800 square feet, and usual standard items such as fireplaces and entertainment centers are offered as options. They also have standard-sized windows and uniform ceiling heights, which let the builder save money on framing materials. Weekley says the Imagination homes now account for about 35 percent of the builder’s total sales.
“I credit the company’s expertise in building an affordable product as a major factor in being named for the Mueller project,” he says.
The Mueller project is without question a pacesetting project, but there are other instances where builders are teaming up with local officials. One such partnership has teamed the city of Tallahassee, Fla., with K2 Urban Corp., which is building Evening Rose, a 138-unit traditional neighborhood development (TND). Twenty of the units will be affordable homes.
David Wamsley, K2’s CEO, says the city has waived fees, expedited permits, and created a TND code so the city’s regulations would permit features such as rear alleys and narrower streets. The city also agreed to pick up the lion’s share of road improvements near the site because it wanted to see more affordable housing built. Homeowners moved into the first few market-rate units that became available this spring, and Wamsley says the affordable units will be ready by year’s end.
“If you look at the more sophisticated master planned communities in larger markets, you won’t find one that doesn’t have an affordable component,” says Wamsley.
The Tallahassee project has grown in importance because, while K2 opted to partner with the city to build affordable units, the Florida HBA is challenging the constitutionality of Tallahassee’s mandatory inclusionary zoning law. The city’s law says that at least 10 percent of new homes in a development with 50 or more single family or multi family homes must be sold for $200,000 or less. The builder trade group is concerned that if Tallahassee’s ordinance stands up in court, several other communities across the state will pass similar laws.
The Florida HBA supports voluntary affordable housing projects with financial incentives and density bonuses, most notably the Community Workforce Housing Innovation Pilot (CWHIP) program. The Florida legislature funded it with $50 million last year, which was seed money for 11 projects statewide. One of the projects, The Preserve, a 122-unit multifamily rental development in the city of St. Cloud, is a great example of how affordable projects require intricate partnerships.
“You can’t solve the affordable housing problem with just one piece of financing,” says Jonathan Wolf, president of the Wendover Group in Heathrow, Fla., the developer on the project. “You have to piece together multiple elements.”
The package for The Preserve included the following: a $5 million CWHIP grant from the state: $1.9 million in grants and impact-fee waivers from Osceola County and the local school board; a $9 million construction loan from Florida Community Partners, a local consortium that funds affordable housing projects; and a tax credit to the seller for donating a portion of the land, which helped keep land costs down.
Rentals are $800 a month for a two-bedroom apartment and $1,000 for a three-bedroom apartment. The units are for essential service workers such as police, fire fighters, teachers, and retail workers. Some of these workers earn well above 100 percent of the area media income, but Wolf says, that’s part of the point.
“What’s happened is that many of these workers earn more than the normal tax credit will allow to build affordable housing, but less than what is affordable in the local market,” Wolf explains, adding that the politicians finally recognized something different had to be done to deliver housing for essential service workers.
THERE’S STILL HOPE
Federal programs providing affordable housing assistance, such as Hope VI, have been cut back from in excess of $570 million annually in the early 2000s to about $100 million. However, some Hope VI projects are still producing results. The Louisville (Ky.) metro Housing Authority used two Hope VI grants and a city grant to raise $230 million for Liverty Green, a mixed-income, mixed-use project that features 430 rental apartments and 220 for sale townhomes. The rental units will service families in the 30 percent to 80 percent AMI (area median income) range, while the for-sale homes will target families that exceed 80 percent AMI. The developer is Boston-based The Community Builders, which has managed numerous Hope VI projects around the country. Construction started this past spring.
And then there are projects that are much smaller in scale and aren’t necessarily profitable for the builder, but offer other rewards. About five years ago, the Santa Clara (Calif.) Unified School District built 40 rental units for school teachers in the Silicon Valley area by taking over two acres of school-owned property and issuing revenue bonds. Rents at Casa del Maestro, or House of the Teacher, are kept affordable since the school district’s main goal is to cover its costs and pay back the notes it issued to fund the initial construction. The developer, Thompson Dorfman Partners of Sausalito, Calif., best known for its luxury units, plans to build another 30 apartments in the next year.
“When we presented this concept years ago it was the first time I can ever remember receiving an ovation from a publicly elected board,” says company president Bruce Dorfman, adding that Thompson Dorfman basically covered its overhead on the job but did the project because it had built 3,000 units in the district over the past decade and wanted to give something back to the community. A project like this is clearly an excellent public relations move and endears the company to city officials, says Dorfman.
The 711-acre Mueller project is very high profile in Austin. The old airport is two miles from the University of Texas and three local builders, Saldana Homes, Streetman Homes, and The Muskin Co.
The first phase of the Mueller project calls for 348 for-sale units. David Weekley Homes will build all 71 of the affordable units in addition to 90 market-rate homes. The affordable homes include row houses and single-family homes sized from about 1,200 to 1,400 square feet, with prices ranging from $120,000 to about $160,000. These homes are targeted at families who earn 80 percent or less of the area’s median income.
Paul Hilgers, director of Austin’s department of neighborhood housing and community development, says although inclusionary zoning is not allowed in Texas, the city of Austin was able to specify that 25 percent of the units for Mueller be affordable because the city sold the land to Catellus Development Group, a business unit of Denver-based ProLogis, the project’s main developer. According to Hilgers, the city can specify an affordable component when a large tract of city land is sold to a developer.
“What we did was provide some cost benefit to the developer and created a process that defined the public benefits we were looking for right from the beginning,” says Hilgers. “A project will never work if you go in and tell the builders and developers ‘you have to do it this way.'”
Affordable housing used to conjure up images of poorly constructed housing that stuck out like a sore thumb in an otherwise desirable subdivision. One unifying feature of mixed-use and mixes-income developments is that the builders work very closely with the municipalities to blend in the affordable housing with the market-rate units. They also vie to keep the construction quality high.
“The last thing we want to do is stigmatize people and put them in old-style barracks-type housing,” says Tim Barry, executive director of the Louisville Metro Housing Authority.
John McIlwain, a senior resident fellow at the Urban Land Institute, says it’s unrealistic to expect that the free market alone will deliver the kind of affordable housing Barry describes.
“Housing is one of the most constricted, heavily regulated markets in the U.S. economy,” he says, which means builders have to strike a balance between local governments advocating for affordable housing and the company’s need to make money.
McIlwain says builders can agree to build a higher percentage of affordable housing on a project if the municipality does one or more of the following: reduces impact fees, speeds up permits, reduces parking requirements, or abates real estate taxes for new-home buyers.
Hammering out such deals is more important than ever as the industry works through the downturn. Most municipalities want and need a vibrant building market that can deliver its share of affordable housing. Builders tend to feel government makes their work more difficult, but city hall may be ready to negotiate this year to help get the market moving again and meet local affordable housing goals.