Quick. When was the last time you saw an apartment house for moderate-income residents under construction? Not in a very long time. With land scarce and prices for it soaring, most developers will tell you that lower- and middle-income apartment housing just doesn’t make economic sense. But a Tarzana builder is defying that conventional wisdom. Montage Development has seven new multi-family projects, either under construction or just completed, and another three apartment complexes set for renovation throughout the San Fernando Valley, all designed for this much-neglected segment of the market. “I just think it’s demographics,” said Stephen C. Ross, president of Montage. “There’s a lot more people that can afford $950 for a two-bedroom unit than one that’s going to go for $1,700.” Demographics may be on the side of affordable housing, but economics are not. In many parts of L.A., development costs for an apartment complex can exceed $200,000 a unit, meaning that, at rents averaging $1,100 to $1,300 for a two-bedroom apartment (considered an affordable rental), it can takes years, if not decades, to recoup the cost. “It makes sense to build higher-end projects because there’s demand and the rents that you can achieve in these markets make the economics work,” said Michael Sanchez, director at Hanover Financial Co., an equity financing company that has recently purchased several apartment complexes in the Valley with real estate firm Kennedy-Wilson International. Montage, which will deliver about 100 affordable housing units in North Hollywood and Van Nuys this year, often makes deals that pencil out by taking the road less traveled, literally. Ross scours neighborhoods for underutilized parcels not listed for sale, and then makes a somewhat unusual pitch to owners: take less on the front end and share in the profits of the redeveloped parcel on the back end. “A lot of my purchases are grassroots efforts,” Ross said. “We’re in a joint venture and they’ll own half the building, so it’s not an outright land purchase.” A tight squeeze The federal government defines affordable housing with a formula based on median wages for an area and family size. A family of four earning no more than $46,000 in L.A. would be expected to pay $1,149 per month or less in rent. “It’s bananas,” said Alan Greenlee, a spokesman for Enterprise Foundation, a national organization providing loans and technical assistance to non-profit organizations that build affordable housing. “It’s a hard thing to do.” According to a just-released study by RealFacts, a Novato, Calif.-based multifamily database publisher, a two-bedroom, two-bath apartment in the San Fernando Valley averaged $1,259 to $1,354 per month in the first quarter of 2001, up about 12 percent from the comparable period last year. A three-bedroom, two-bath apartment averaged $1,545 to $1,600, about a 9-percent increase over the same period last year. Meanwhile, occupancy rates in the Valley have hovered between 97 percent and 98 percent for nearly two years, the RealFacts data reveals. “We’ve got a situation where the supply of housing relative to the demand of people here is getting worse,” said Greenlee, “so the bottom line is it’s only going to get more expensive for people to live here.” The population in the L.A. metropolitan area is growing at a rate of 200,000 to 300,000 people a year, and many of the newest residents are immigrants who tend to have larger families and need more space. Add to that the fact that, as home prices rise, folks live in apartments longer while they save for a down payment and, in many of the areas where shortages are most acute, the Los Angeles Unified School District is taking housing off the market in its effort to build schools, and many believe Los Angeles is facing an acute housing crisis. “L.A. had a 10-percent vacancy rate throughout the ’90s,” said Steve Renahan, a director in the city of Los Angeles Housing Authority. “That’s tightened to 3 percent and even tighter in some parts of the Valley. There just is not enough new construction of affordable units, or any units.” While government subsidies, the traditional solution to providing low- and moderate income housing, continue to be available, “there just isn’t enough money being allocated to produce enough housing,” Renahan added. Aware of the opportunities, some have begun to seek out properties that can be acquired below market value. Hanover, along with Kennedy-Wilson International, recently acquired an apartment complex in Canoga Park for a price that allows the companies to renovate, raise the rents and turn a profit. But, at about $800 per month for a one-bedroom unit, several hundred dollars more than the current rates at the building, officials concede the end result may be gentrification, not affordability. “There are some people who get priced out of the market, but you’ve got to remember it’s also a function of supply and demand,” said Sanchez, “and there are many people willing to pay higher rents to live in a project that has been substantially renovated.” Making Money When You Buy Aware that most developers have abandoned the middle market, Montage, in 1996, jumped in. The company, which delivered seven single-family houses in its first year of operation, will complete 100 homes this year, generating $12 million in revenues, along with its apartment projects. The trick, says Ross, lies in the acquisition of the properties. Instead of running after properties listed for sale, the company seeks out land or buildings not on the open market. “If it is listed for sale, it will be shopped around and it will get bid up in price,” said Ross. “One of the best ways to find a piece of property is to look at one that might be listed for sale and drive around the area. One of my secrets is getting lost.” Ross found two of the properties he is currently developing after he visited a listed property and then lost his way in the neighborhood. Once he identifies a site he thinks is underutilized, such as a property that may have one house but could accommodate a multi-family dwelling, he begins a letter-writing campaign. Landowners typically want to get the highest price possible for their property, but Ross is often able to convince them to settle for less money up front, in exchange for a partnership in the development. “Oftentimes sellers don’t understand or care about the cost associated with developing a building,” said Ross. “They’re just thinking, ‘I have a piece of land. It’s my opportunity to hit a home run.’ I explain that this is really a longer term savings account and you’re building up net worth and equity.” The process is time-consuming, Ross concedes. He is about to close escrow on a 42-unit property in Panorama City that he has been after for a year and a half. Once built or renovated, the Montage complexes rent for $1,100 to $1,300 for two- or three-bedroom units. They typically don’t have swimming pools or other amenities found in luxury buildings, but they are efficient, Ross said. “They all have central heating and air. They all have dishwashers. The layout of the space, the energy efficiency and the soundproofing is much greater even than buildings built 12 years ago,” he added. And they are leased up almost immediately. “Quite frankly, tenants don’t have many alternatives at that price,” Ross said.
