Developers Take Aim At Red Tape For Affordable Housing As Economics Tighten
Developers of affordable housing in D.C. are gaining access to an unprecedented $500M in housing production funds from the District government in the next fiscal year, but in a tense economic environment, they say it’s time to clear regulatory hurdles to make the business of affordable housing simpler.
Rising interest rates and construction costs have made it harder for affordable housing deals to pencil, and developers say D.C. regulations that lengthen the time before the groundbreaking are exacerbating the uncertainty and putting projects at risk.
Every new hurdle adds "time, and therefore risk," to a multifamily deal today, MRP Realty principal Matthew Robinson said Thursday at Bisnow's Washington D.C. Affordable Housing Summit, located at the Marriott Courtyard Convention Center.
"Let’s just say you were going through the TOPA process now and interest rates just spiked, well you might have just lost your deal," Robinson said. "It might have collapsed and you didn't even know it yet because you're going through the TOPA process."
The Tenant Opportunity to Purchase Act, or TOPA, gives tenants in a multifamily building that’s being listed for sale the ability to organize and come up with financing to either buy their building outright or sell their TOPA rights to another housing provider for preservation.
The 40-year-old law has long been criticized by developers who say it can slow down the dealmaking process for multifamily buildings, given the months-long period tenants are legally given to organize.
But as some economists warn of a recession, and supply chain shortages continue to affect projects of all kinds, it’s become one of several policies in the crosshairs of developers who say they'll need any help they can get to address a simultaneous affordable housing shortage.
“I urge everyone ... to continue thinking of other solutions,” Fairstead Managing Partner of Development Brett Meringoff said. “I think the challenges are things we haven't faced in a long time, probably since 2008.”
Construction cost escalation has worsened, Meringoff said, and the uncertainty around inflation has made it harder to estimate project costs.
"It continues to be a very volatile time, so that means locking down pricing or getting pricing commitments from subcontractors is more challenging, they can’t hold it for as long," he said. "We’ve had some challenges with subs, particularly mid-job, just failing or running into major challenges on their side."
The lending environment has also become more difficult as rising interest rates have made deals harder to pencil, United Bank Managing Director Joseph LeMense said.
“The interest clock is ticking,” LeMense said. “You get to a point where you're 70% through a project and you're just out of money.”
That challenging environment continues to be compounded by TOPA, researchers familiar with the market say. During the second quarter of this year, Northern Virginia accounted for an outsized portion – more than 50% – of multifamily investment sales across the D.C. area in part because TOPA and right of first refusal programs in suburban Maryland made investors uneasy, according to the most recent multifamily market report from Newmark.
"While TOPA adherence is no longer an issue for investors, policies which cause uncertainty in closing timelines, such as TOPA and ROFR, are challenging investors given the unclear direction of future interest rate increase,” the report said.
TOPA emerged as a leading target of ire during the pandemic, when the District acted to effectively freeze the process in light of the difficulties of organizing tenants amid a public health crisis.
That frustrated market-rate developers, but nonprofit housing providers have increasingly argued that the law can also slow or even thwart their ability to acquire buildings that go up for sale, even when they have the intention of preserving affordability.
Kimberly Driggins, executive director of the Washington Housing Conservancy, said she's skeptical that TOPA is actually preserving housing affordability. In her view, the sale process is structured in a way that too often gives residents a one-time lump sum when their building ownership is transferred without preserving units’ affordability long-term.
What’s more, the extended timeline that residents can take in order to organize and find a buyer is treacherous for nonprofit housing providers, who often operate on tight margins, Driggins said.
“I don't see that across the board it actually creates housing affordability,” Driggins said. “The problem for TOPA is time and cost, and it's time and cost that kills deals. Oftentimes nonprofits are running on really thin funding and can't wait."
Housing affordability has garnered national attention just as the economic environment makes producing those units more difficult. Speaking at the event, Julia Gordon, assistant secretary for housing and federal housing commissioner at the U.S. Department of Housing and Urban Development, echoed earlier statements from President Joe Biden urging local governments to strengthen inclusionary zoning and remove barriers to affordability.
“Across the administration, we are looking for ways to incentivize localities to continue to make affordable housing development easier,” Gordon said. “I wish I had a silver bullet for this here at HUD.”
The recommendations include finding ways to change local land use and zoning laws to allow for more development and partnering more with the private sector to get housing built.
But since Biden's Housing Action Plan was released in May, the Federal Reserve Bank has raised interest rates by three-quarters of a point twice. After the most recent hike on July 27, developers said the economic environment was forcing deals for multifamily projects around the country to get repriced.
In D.C., TOPA isn’t the only process developers take issue with. A tax break currently on the books in D.C. for nonprofit developers creating Low-Income Housing Tax Credit-backed housing could — and should — be extended to for-profit developers building the same kind of housing, said Aimee McHale, vice president at WinnCos.
McHale said such a break would reduce pressure on operating budgets, decrease first trust debt and make it easier for WinnCos. to compete for resources.
“We’re all trying to create or preserve units of affordable housing,” McHale said. “I think this is something that there needs to be some momentum on.”
Some affordable housing nonprofits view the issue differently. Carmen Romero, CEO of the Arlington Partnership for Affordable Housing, said the majority of her staff isn’t engaged in the real estate business, but is instead focused on providing services to tenants, something that most for-profit developers aren’t doing.
“There is a difference between some of the nonprofits, where we're spending our time,” Romero said. “I think a real estate abatement for everybody that's building would be fine, but then we need tools that help us do the other work as well.”
Jim Knight, president and CEO of Jubilee Housing, praised the District’s consolidated request for proposals process, introduced in 2021, which emphasizes net new affordable units for households making below 30% area median income.
But he said D.C. needs to be more focused on wraparound services for low-income tenants to ensure that they get the support they need not just to stay up to date on rent but to achieve stability and financial independence in their own lives.
“For the first few decades, we celebrated renters moving from affordable housing to ownership on the regular,” Knight said. “That has slowed to a trickle. Jubilee hasn't changed anything, the market has changed.”
The task ahead for affordable housing is enormous. D.C. Mayor Muriel Bowser, who is all but certain to begin a third term as mayor next year, has a goal to build 12,000 affordable units between 2019 and 2025, but so far has reached about one-third of that goal. Meanwhile, the Metropolitan Washington Council of Governments called for an extra 75,000 housing units above what was planned in 2019 to address a shortage in the region, and it said 75% needed to be affordable in order to meet long-term needs.
“Housing seems to be the mayor's No. 1 priority,” said AJ Jackson, executive vice president of social impact investing at JBG Smith. “If that is the case, we need to make sure all policy oars are rowing in the same direction.”
For Driggins, the issue of affordable housing is central to the District’s overall competitiveness. She said without a focus on housing across all income bands, the region could lose workers to other locales, harming business and the region’s economic health.
“When I look at San Francisco, and I love that city, but it’s such a city that’s bifurcated in terms of the uber-rich and the very low to no income,” Driggins said. “We’re trending in that direction. I think we're at an inflection point and we have an opportunity at this point to make sure the region and the city stay diverse economically [and] racially.”