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Originally Posted by citywatch
I wonder how much of a profit margin devlprs of apts or condos in dtla have? The angel's Landing proj just posted some vids about their inclusion of affordable housing...looks like devlprs such as Macfarland have to jump through a lot of hoops in order to make their devlpmt pencil out.
They say each unit will cost them $1,000,000 to build. Even if that could be rented at mkt rate, they'd still have to charge $83,333 per month for a yr to cover that cost. If they spread it out over 10 yrs, they'd have to charge over $8,000 a month. If they tried to cover their costs over 20 years, they'd still have to charge over $4,000 a month. And that doesn't include any interest they'll have to pay & also any profit they'd want to make. My math may be wrong, however, or I'm possibly exaggerating the difficult of financing & its affect on their bottom line.
But if the proj is difficult to pencil out, that could be the reason that equity residential of chicago, which was also required to include affordable housing, decided to cancel their apt tower across the street....no less above an MTA subway station too.
[URL="https://youtu.be/07BCi3u1ld"]https://youtu.be/07BCi3u1ld
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You're on the right path here, but let me break this down as a development/deal person at a large development company you've heard of.
First of all, most people don't understand this, but aside from REITs (Avalon Bay, Essex, Camden, Equity Residential, etc.), developers don't use their own money to build projects, as they don't have that money. They go out looking for equity investors and then "co-invest" some percentage of the equity needed (5%-20%, skewing towards the low end depending on the development/developer). They then, together with their equity investor, secure a construction loan. So in order to get a project off the ground, you need to attract an equity investor.
In today's market, most equity investors are looking for a 5.5% "yield" or "return on cost" for multifamily construction, defined as the net operating income (all revenue less all expenses except for interest) divided by total costs to build the project. So let's take a $100 million, 182 unit, 7 story apartment project (that's around $550,000/unit in total costs, which is where the market is today for 7 story podium development). In order for that project to get the necessary "yield", the net operating income needed to satisfy investors would be $5.5 million. The profit margin (net operating income divided by revenue) for most big apartment projects is around 65%. So to get that $5.5 million in net operating income, you need around $8.5 million in revenue. So in order to make the project attractive to investors, each unit needs to produce around $46,500 in revenue per year, or $3,875 per month. Layering on top of that, you need to either build affordable units or pay big "linkage fees" in Los Angeles. Since the rent on affordable units is very low, the rest of the units need to charge more in order to average $3,875/month. So at the end of the day, you need $4,000 in monthly rent to attract investors! That's a big rent number that's difficult to get in most places in the city, which shows why it's tough to get things built right now.
Now a high rise costs WAY more to build - that $1 million per unit in costs quote is generally in line with what I'm hearing these days. In order to make that work, you need $6k-$7k in rent, which is obviously impossible to get in most areas of the city today.
Before interest rates went up, investors generally only needed a 5% "yield" or "return on cost", and construction costs used to be much lower. Combined, those things made the math a little easier so you didn't need as high of a rent (maybe $3k in rent instead of $4k for a 7 story project), but it was still difficult.
All of the above is why it's so important for the city to:
- OVERTURN MEAURE ULA or create an exception for new developments. Investors need a higher "yield" when they are taxed so much on the sale of their investment, which makes the math above way way harder. I recently learned that City Council has the power to amend the law, so they could make that exception if they wanted. Call your city council member!
- Make it easier and quicker to build, which decreases costs. That mean allowing for "administrative" approvals which require no votes or hearings. It also means making all the city departments (building and safety, fire, water and power, transportation, etc) that review construction drawings more accountable - you'd be shocked by the trouble we have getting through their reviews even though we're following all of the rules.
- Rezone to make more parcels available for development. This makes it easier to find sites and brings down the cost of development land.
- Reduce fees, public benefits, and all other burdens that are placed on projects. Prevailing wage and/or union requirements are also a huge deal killer that add tons of costs.
- This one may be a long shot, but reform our building code to make it cheaper to build. Our building code is way more extensive and onerous than what you see in places like Canada, and it drives up the cost by a huge amount.
Ok sorry, my rant is over!