Quote:
Originally Posted by Encolpius
So in your opinion not even a once-in-a-generation project in an important, central location, undertaken by a public agency, on public land, using $100m of public money, may consider any criterion (inclusion, diversity, making the Pearl more friendly to families, encouraging streetlife, community, public transit) which doesn't strictly 'pencil' according to the generic formulas of real estate finance? Depressing!
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This is not my opinion. My comment reflects the disconnect between feelings and math.
Let's do some quick back-of-the-napkin calculations.
Let's just assume for the sake of argument that this project will create 1,000 rental units. Now let's assume, given federal prevailing wage rates and/or BOLI wage requirements, that this will cost about $250 per square foot. Let's also assume the average unit size will be 800 sq. ft. (a mix of small and large units). 800,000 sq. ft. would then cost about $200,000,000 to build (construction contract alone).
Let's assume a generous 5% interest rate on the perm loan at the common term of 20 years. The monthly payment on this loan would be $1,319,911. Now, no bank is going to underwrite a project like this without a cushion. There needs to be a 20% cushion for a bank to even look at a project like this (prefereably more cushion). So let's add 20% for that. Now, where's the profit for the developer? What's a fair return? In affordable housing realms, it's 15%. So let's add 35% total to the cost of the project (and thus the rent). Now we're looking at $1781/mo average rent per month per unit in order for this to even begin to work out financially. Keep in mind this is not accounting for paying for expensive parking decks or commercial space.
HOWEVER, now we're talking about making a full half of the units affordable. How do the Feds define affordability? Well, the total cost of for housing (rent and utilities) should not be more than 30% of a family's income. So, Area Median Income (AMI) in the Portland Metro for a family of 4 is $81,400. However, most affordable housing projects are targeted at families earning AT MOST 60% AMI. Almost all housing funds are targeted to this income group or BELOW (including tax credits, federal funds, etc). So, the maximum gross income of a family in an affordable unit in this project could be, at 60% AMI, is $48,840. Max rent for this group would be about $1121 after subtracting $100/mo for utilities. But a typical affordable housing project will have units targeted at both 50% AMI and 30% AMI families as well. Perhaps 20% of the units will be each, conservatively. That's 100 units each. That means max rent could be about $917/mo for 100 units at 50% AMI and $510/mo for 100 units at 30% AMI after subtracting utilities.
So the total MAX rent that the affordable units could dream of taking in for this scenario would be $336,300 + $91,700 + $51,000 = $479,000 per month. Subtract this from the monthly loan payment of $1,319,911 and you're left with $840,911 per month. Divide that by the remaining units (500), which presumably are supposed to pick up the rest of the affordable units, and the minimum monthly average rent just to break even on the perm loan would be $1681. But then there's the 20% underwriting cushion and the 15% profit to think about (because why would a real estate developer even do a project without profit?). So add 35% to the rent PLUS make up the different in the lost profit and financing cushion on the affordable 500 units. You have to double it. So you either have to increase the rents on the regular units by 70% or you need a subsidy on the total construction costs. To cover the cost of the other units (in the GOOD years where everyone is paying max rent they can afford), the average cost of each of the market rate units would need to be $2857/mo before utilities. That's the avarage between studios, 1 bedrooms, 2 bedrooms, etc. This isn't even counting replacement reserves and operating reserves for repairs and down-year safety nets or turnover (units empty for a period of time until new tenants move back in) that a bank would require, and is just normal business practice.
Let's say they wanted to keep the rents in this project on par with the average. July rent in Portland averaged $1425 per month for all unit types. Subtract the average from the $2857 and you have the gap over the life of the loan, with profits and the cushion included. This totally imaginary project in a best-case rent scenario would have a financing gap of about $171 million after interest, conservatively. For 500 affordable units.
So my question is, who is going to pay for that and how?
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