Affordable by Design

Meeting notes applied to the agenda

Feb 18, 2008

 

Key Conclusions from the Meeting

 

Who:

o         1800 DUs in the pipeline, all TOD within 2,500 feet of CalTrain/VTA LRT stations.  Mostly in SJ and Milpitas. Around 1998, built Whisman Park in MV at Whisman Station LRT. Proposal to  build next to San Mateo Caltrain station: http://www.sanmateodailynews.com/article/2007-1-5-sm-condos 

 

 

Annotated Agenda

 

0. Background

Palo Alto has been given a RHNA allocation of 2,860 housing units for 2007-2014 by ABAG.  About 50% of these units are moderate, low, or very low income.  Given 15% inclusionary zoning, how do we build these affordable units?  Palo Alto Housing Corp and other affordable builders struggle to build 100 subsidized DUs every 5 years in Palo Alto. Can we build a substantial portion of the affordable allocation using "affordable by design?" 

 

Other affluent Santa Clara County and San Mateo County cities have very similar challenges, so this challenge applies far beyond Palo Alto.  I met with ABAG and I was disappointed that they really didn't have any sort of a solution as to how affluent cities with high land costs could build large numbers of affordable DUs.  ABAG recommends looking at pre-fab housing, but does not share any insight about it. 

 

MEETING NOTE: I want to emphasize that ABAG and HCD are dropping the ball about figuring out how to build lots and lots of affordable housing. They truly are dumping an unfunded mandate on cities. In contrast, SPUR is making an important contribution towards solutions.   

 

1. The big question:

“What would it take for Santa Clara, Sunnyvale, Cupertino, Saratoga, Mountain View, Los Altos, Palo Alto, Menlo Park, San Mateo, Redwood City, San Carlos, Belmont, Foster City, East Palo Alto, Burlingame, San Bruno, Millbrae, and South San Francisco to build 7,000 standardized mid-rise affordable units in 7 years (at a substantial buyer cost savings compared to current costs)?"  Would sub-regional collaboration, standardization, and large economies of scale help? 

 

ANSWER: sub-regional collaboration would not be a silver bullet. 

 

2. Pre-fabrication / manufactured housing / panelization

 

MEETING NOTE: There are many costs that are apportioned to each DU: land costs, site improvements, podium parking, city fees.  Building a housing structure on the cheap is only a small part of the battle. 

 

LONG MEETING NOTE: Housing cost at different densities. 

PA builders typically obtain a 12% to 17% profit margin.  I’ll explain a table below that shows that the market rate units have a much higher profit margin, but 15% to 20% of DUs are BMR.  Builders lose money on BMR units.  So, really, builders don’t make exorbitant profits, despite what residents think.  

 

The builders’ overall South Bay cost is roughly $480 per sf.  This includes land acquisition, site improvements, construction, parking construction, fees, financing, carrying costs, etc. San Jose land costs less than PA land.  Intuitively, 60DU/acre should cost less per sf than 20DU/acre, but this is not the case.  Denser housing has more economies of scale, but this is offset by higher per unit parking costs and higher land costs.  Land enabled to be entitled for 60DU/acre in PA would sell for more than $6M/acre.  “High density multifamily (60DU/acre) is a relatively low-margin, high-volume business.”

 

Denser housing lowers the square footage, that’s why the buyer pays less per unit.  In PA, the condo buyer’s retail cost is $700+ per sf. 

 

Here is market price housing cost at 20 and 60 DU/acre. 

 

Density

sf per DU

Bldrs overall cost per sf

Bldrs overall cost per DU

Buyer's price

20 DU/acre

1,600

480

$768,000

$1,120,000

60 DU/acre

1,100

480

$528,000

$730,000

 

15% (20% if 5 acres or more) DUs are BMR.  BMR condos are sold for roughly $350,000, though price varies with sf and other considerations.   

 

More about builders’ margins.  Builders have to buy land on speculation, hold onto land with high carrying costs, go through bruising, lengthy public approval processes, and ride out industry downturns. Cost of sales (commissions, closing costs, fees, etc) take an additional 5% out of the buyer’s price, reducing builder margin further. Development is not a job for the faint-hearted.  Just look at the recently insolvent US Top 10 builder Lennar. 

 

PA has a “drawbridge mentality,” so housing is artificially scarce.  This increases builder profit margin compared to other cities.  Developers need a risk premium to justify doing business in as unpredictable and difficult a place as Palo Alto.  Comparatively, typical developer margin in more predictable cities like San Jose and Milpitas is 12% above cost.     

 

MEETING NOTE:

 

3. What would it take to build non-subsidized, market-rate moderate-income apartments in Palo Alto?

 

MEETING NOTE: can’t do it.  Lydia: SF needs lots more rental housing, but building rental doesn’t work anymore. 

 

Except for "luxury apartments," apartments generally have monthly rent that qualifies for moderate income designation.  Would for-profit developers build apartments in PA?  Says Scott: "No way.  It won't pencil.  For-sale market rate residential will pencil, apartments won't."

 

A related point, even if market rate developers could build product for a very low cost per sf, they have no incentive to keep buyer prices low.  IE, they'll just sell at $700/sf, no matter how much it costs them. IE it would be silly for for-profit developers to sell a unit for $500K when they could get $750K for it.   They wouldn't pass on the savings.  Hence, "not for too much profit" developers would be required.  Lydia Tan runs Bridge Housing’s BUILD division, one such example.  This almost argues for a "cost plus" model. 

 

4. Five-story stick over podium (SPUR’s Affordable-by-design Report)

 

MEETING NOTE:

 

4C. What is the state of the art of squeezing down square footage per person.  Can we eliminate bedrooms, replacing them with futons or Murphy beds?  It works in Japan

 

Berkeley's Gaia Building has been held up an example of nice Dan Solomon small sf design. 

Beds

Baths

Rent Range

Square Ft.

2

1

$2175 - $3560

600 - 790

3

1

$2890

865

 

 

 

 

 

4D. John Barton: We have to reduce parking requirements

The Opportunity Center has two stories of underground parking, mostly empty.  Each parking space is very expensive, so we have to reduce the number of required spaces.  20% of the Opportunity Center cost was in parking construction, much of it wasted. 

 

5. Other meeting notes