Costs Jeopardize Growth of Housing By SHELLY GARCIA Senior Reporter L.A. Family Housing has been building affordable housing for more than 20 years, but last month, David Grunwald, CEO of the not-for-profit company, had to do something he’s never had to do before go back to the well to get more financing on a project he had bid out just months before. “After we closed on the funding, our contractor came back and said costs are going up 20 percent, and we have to come up with an additional $700,000 to $800,000 in construction costs,” Grunwald said. “It was a 20 percent increase from December until April.” The same storm that caught Grunwald unaware as he planned a 30-unit, low-income apartment complex in Van Nuys is kicking up throughout the development community. The cost of construction materials from lumber to steel and reinforcing bar has soared anywhere from 20 percent to 60 percent in just months. Along with the cost of land, which is escalating at the same feverish pace as the price of single family homes, and the prospect of a spike in interest rates, the San Fernando Valley along with the rest of Los Angeles could be hit right where it lives, literally. “Increases like this can actually affect a project,” said Todd Shaw, president of PCS Development, which has built a number of luxury apartment communities in the Valley. “These aren’t numbers that can just be absorbed into your pro forma. These are real big increases that eat into if not eat away at your project.” The increases, which Engineering News-Record, a construction industry trade magazine, recently called “the most severe cost crisis in living memory,” are problem enough for those who build luxury apartments, but worse still, they stand to derail a number of efforts to build affordable housing at a time when the city is facing a shortage of critical proportion. “I think the inclusionary zoning issue is almost a red herring,” said Grunwald. “The issue is the real cost to develop any housing is just skyrocketing in Southern California. Just to say you’re going to do inclusionary zoning without addressing the cost increase makes no sense at all.” For months now, city officials have been crafting an inclusionary zoning ordinance in order to bolster the stock of affordable housing. As it stands now, the ordinance would require 12 percent of the units in new apartment or condominium complexes or single-family tracts for households with incomes that fall below median levels. Incentives requested Developers say the ordinance won’t fly without substantial incentives, more than are written into the current proposal. “If you had to do a project with 12 percent of units for 50 percent of the area median income, you wouldn’t be doing a lot of business in L.A.,” Lawrence A. Scott, vice president of development at AvalonBay Communities said flatly. “The L.A. County median income is $55,000. That would mean a two bedroom rents for $700 month.” Scott is one of a group of developers that has just asked for and received a 90-day grace period before the ordinance goes up for a vote so that they and others have time to present their views to city officials. But if the task of designing a model to add to the affordable housing stock was challenging before, it will likely be a veritable struggle now. Not-for-profits are locked into subsidy guidelines from federal and state funding sources that don’t take into account rising costs to build a development. Since rental rates for these types of developments are predetermined as well, there is no provision to cover rising costs. “If the tax credit allocation committee has a cap and the city housing trust fund has a cap but the costs are increasing, then you have a gap that nobody is addressing,” said Neelura Bell, program director for Local Initiative Support Corp. Los Angeles, a group that offers financial and technical assistance to a variety of not-for-profit developers. In the past six months, land costs have risen by 10 percent to 20 percent. With land costs rising by 10 percent to 20 percent in the past six months alone, Bell said lenders recently turned down an affordable housing developer’s request. There just was no way to fund the additional cost of the project given the projected revenue stream. “You can only pay so much,” she said. “If all the affordable housing developers get priced out because they can’t compete for the land, then it doesn’t matter if you say you’ve got a housing trust fund.” Luxury woes Even market rate developers could be affected if the surge in prices does not subside. Along with rising materials costs, a complex that could be built for about $150,000 a unit a year ago, now can run to $250,000 a unit or more. New developments have always targeted the top end of the market because of the cost of new construction, but as more luxury apartments have come on line, some areas have become overbuilt. And with vacancy rates running near to double digits for luxury units in some Valley neighborhoods, even market rate developers say they won’t be able to pass along the added costs. Instead they are giving away free rent and seeking ways to shave costs. “One of the things we’re doing right now, is we’re going to be taking out the cranes from the contract work,” said Craig Jones, president of JSM Construction Inc., which is building about 400 high-end units in North Hollywood. “That we’ll either price separately with another contractor or we might directly hire a crane subcontractor, (eliminating the middleman) so we can help reduce some of the cost.” Jones opted to include a few below-market rate units in his North Hollywood projects order to take advantage of some density bonuses back when he was planning the projects. Now, with the price hikes, which Jones says extends to the whole gamut of contracting work, from concrete to plumbing, he may have to absorb some of the increases and, if the prices don’t return to lower levels, he may not be as willing to add an affordable component to future projects. “It’s going to make us hesitate to do any others,” he said. City officials say they hope to find a solution that keeps developers even despite inclusionary housing requirements. “That’s why the incentive package that the city will be offering has to be worked out,” said Tony Perez, spokesman for Los Angeles City Councilman Ed Reyes, who heads up the city’s Planning and Land Use Committee (PLUM). “Developers have been at the table. I’m not saying that the costs haven’t gone up. I’m just saying there needs to be a balance. The fact is over 60 percent of the people in L.A. are renters. What about them?” But incentives, which generally involve allowing developers to build more units and require fewer parking spaces than current guidelines stipulate, have never been popular with those who already reside in the community. And if those packages have to be expanded in order to accommodate relentlessly escalating costs, the communities are not likely to stand idly by. Some council members, Perez said, have already indicated they will vote against an inclusionary housing ordinance, fearful of alienating their constituents. “It’s going to be an issue for the community,” Perez said. “It’s going to have to be an educational effort. I know it’s not going to be an easy sell.”
