Developers, nonprofits and government entities are eager to provide more affordable housing, but rising costs, minimal available inventory and red tape create obstacles.
Western Affordable Housing Business
By Nellie Day | May 20, 2021
Los Angeles” and “affordable” aren’t words that typically go together. In fact, they’re practically opposite. That’s a problem, particularly for the 500,000 very low-income households whose needs are not being met by Los Angeles County’s supply. That number jumps to 700,000 if you count the households that only qualify as low income, according to California Housing Partnership Corp.
For reference, low-income households earn between 50 and 80 percent of the area median income(AMI). Very low-income households earn between 30 to 50 percent of AMI.
“It is undeniable that there is a lack of housing across the affordability spectrum, from ELI (extremely low-income) to moderate incomes,” says Rochelle Mills, president and CEO of Irvine, Calif.-based Innovative Housing. The organization assists the public and private sectors to address the low- to moderate-income housing shortage through development.
“The onerous requirements, red tape and competing regulations of the layered financing sources needed to fill gaps — along with competing timelines and fluid tiebreaker criteria — only exacerbate the problem,” explains Mills.
Something else exacerbating the problem has been COVID-19. Affordable housing advocates have found themselves competing for not only funding sources, but also public sentiment and labor at a time when most resources are worn thin.
“As an industry, we need to do a better job of telling the economic and social impact of housing, demonstrating the win-win-win of housing our neighbors, and managing expectations so that everyone understands that it is worth the investment in time and resources,” continues Mills. “In LA, it is easier to make a case to house our cars than it is to house our neighbors.”
Fortunately, there are organizations and public entities that are trying to make a difference. The City of Los Angeles is simplifying the zoning code, digitizing the permitting process and providing case management services to expedite high-priority projects, notes a November 2019 McKinsey Global Institute study on affordable housing in Los Angeles. The county has also significantly increased funding through programs like the Affordable Housing Trust Fund, Measure H and No Place Like Home.
An update to the Downtown Los Angeles Community Plan is further tackling the problem as the city’s affordability gap is the highest in neighborhoods close to downtown. This latest update doubles the area where housing, including permanent supportive and affordable housing, is permitted. This is an expansion from 33 percent of the total downtown area that can permit housing to nearly 60 percent.
“Some of the neighborhoods closest to downtown (South Los Angeles, Koreatown, Westlake) have had the lowest incomes in the city,” says Nora Frost, public information director at Los Angeles City Planning.
“The gap between incomes and rents is therefore highest, which is exacerbated because there has been increased demand to live in more centralized neighborhoods. This new update accommodates anticipated growth through 2040 in an inclusive, equitable, sustainable and healthy manner, while supporting and sustaining downtown’s ongoing revitalization,” explains Frost.
A Modular Solution
Depending on the developer, financing and zoning, there are a variety of ways to tackle the affordability crisis in Los Angeles. These include micro units, adaptive reuse (as well as single-family home conversions) and co-living developments. Modular and prefabricated construction can also reduce the cost of affordable projects.
“There is a very big push to consider alternative construction methods and materials,” says Welton Jordan, chief real estate development officer at EAH Housing. “We are looking at using modular and cross-laminated timber (CLT),
as well as light-gauge steel as some of the traditional building material prices continue to climb.”
The selling price for construction goods increased by 3.5 percent from February to March, and by 12.9 percent since March 2020, notes the Associated General Contractors of America. The price of lumber alone rose above $1,000 per 1,000 board feet in March, according to Random Length Lumber Futures. This price has doubled from just three months earlier.
Aedis Real Estate Group recently created “Hope On,” a series of new modular housing complexes to combat homelessness downtown.
“Modular construction has two main benefits for increasing the affordable housing stock in Los Angeles,” says Mark Oberholzer, associate principal at KTGY who designed the Hope On series. “Modular construction increases the speed to market of housing because aspects of construction can occur simultaneously. Modular units can also be fabricated offsite while site prep and onsite construction is happening at the same time.”
Constructed with prefabricated steel modules, the 84-unit Hope on Alvarado opened in Westlake this past March. It took just four weeks to set the steel modules in place once the concrete base was built. Hope on Alvarado provides wraparound supportive services for homeless individuals.
The Hope On series also includes the 96- unit Hope on Hyde Park near the Crenshaw Line light rail, the 49-unit Hope on Broadway in South Los Angeles inside a transit-oriented community (TOC) and the 88-unit Hope on Avalon in the Willowbrook neighborhood. This series of permanent supportive and transitional housing for the homeless features ground-floor podiums that house supporting services, as well as resident amenities like an interior courtyard and roof deck.
Modular construction comes with its own set of challenges — including financing, reduced resale value and land restrictions — which means each developer should weigh the pros and cons before beginning a similar project. Oberholzer, however, believes the Hope On series represents a few trends that
are becoming pervasive in Los Angeles’ affordable housing developments.
“One of the most interesting trends I’m seeing right now is twofold — a decrease in individual living unit size and a balancing increase in common, community areas, both indoors and out,” he says. “This reflects the reality of construction costs, but also a realization that most people prefer to live in a community with others, so there is a trend toward focusing design efforts on those common spaces that give a building and its residents a real sense of place.”
Community-focused design efforts have also been a priority for EAH Housing, which integrates unique amenities into its affordable communities whenever possible. This includes Pointe on Vermont, a 50-unit affordable housing community in South Los Angeles that will feature 25 units of permanent supportive housing for individuals experiencing homelessness or transitioning from homelessness. The other half of the units are for low income residents, with one manager’s unit.
Pointe on Vermont amenities will include a community room with a kitchen, onsite case management and property management offices, bicycle storage, a retail space and a recording studio in partnership with A2Z Enterprises. St. Joseph’s Center will also provide onsite supportive and resident services for all of the residents to help them maintain their health, wellbeing and self-sufficiency.
“This project and these amenities will help revitalize a neighborhood and eventually be a place for the community to gather, since it includes both retail space and a recording studio, which is a unique feature for any type of multifamily development,” notes Jordan.
Pointe on Vermont opened in April.
TOCs Gain in Popularity
Another strategy to spur affordable development in Los Angeles is Measure JJJ, a voter-approved program that incentivizes affordable housing developments near major transit stations. A study by the Urban Institute and the USC Sol Price School of Public Policy shows that building permits have risen in qualified neighborhoods since the measure was approved four years ago.
Los Angeles City Planning has received 27,280 proposed TOC entitlements since 2017, Frost notes. In 2019, developers proposed more than 14,500 new units — or 42 percent of all proposed housing in the city — through the TOC program. So far, about 5,400, or 20 percent, of the units proposed have been affordable, with half of those units reserved for extremely low-income Angelenos.
“Transit-oriented communities are helping us meet and exceed ambitious housing goals and helping Los Angeles build sustainable solutions,” says Frost. “TOC incentives have also been successful at generating affordable housing.”
The Urban Institute-USC study further notes the TOC program offers more long-term profit potential than market-rate apartments in many neighborhoods. That’s because the measure allows for additional density in exchange for providing affordable units within a half-mile of major transit stops. As a result, qualifying developments can build more units to replace — or even exceed — revenue lost by reducing rent.
“Developing Los Angeles in a manner that bolsters walkability and TOCs is perhaps the only realistic way forward,” notes Evgeny Burinskiy, the study’s co-author and a USC Sol Price School of Public Policy Ph.D. candidate.
“You would be hard-pressed to hear of any multifamily project in LA that is not opposed on the grounds of traffic,” continues Burinskiy. “If we increase density, particularly near public transit opportunities, and decrease incentives for car use and ownership, then we can potentially stem the ceaselessly growing congestion problems and make use of higher density to build more mixed-income and inclusive communities.”
In July 2020, Mountain Pacific Opportunity Partners broke ground on a TOC within an opportunity zone at 336 W. Seventh St. in San Pedro. The $14 million, mixed-use development includes a five-story building with 32 apartments, ranging from one to three bedrooms, in addition to two, two-story penthouses.
It also includes three units designated as affordable housing. In addition, the project will feature 3,750 square feet of ground-floor commercial space intended for restaurant and retail tenants and parking for 44 vehicles. Completion is slated for next summer.
Joan Kramer, co-founder and principal of Mountain Pacific, believes a combination of the opportunity zone designation, San Pedro community plan implementation overlay, TOC and market-driven developments with set-asides can maximize a project to its fullest potential.
“Opportunity zones play the role of encouraging development in areas that would have been marginal in the past,” she says. “There is less bureaucracy with market-driven developments with set-asides and, based on the additional density that is achievable through TOCs, it will be an area for growth for all projects. The hope is that affordable housing can be increased in these areas so that transit does not need to continue to move farther out as land around the transit corridors becomes increasingly expensive.”
Many Affordability Covenants Set to Expire
Surprisingly, supply-constrained Los Angeles is leading the state in housing production, the McKinsey affordable housing study notes. Less surprising is that only about 9 percent — or 7,300 units — of the new housing supply added over the past five years has been affordable to households earning less than 100 percent AMI. For Los Angeles County, that number is only slightly better at 12 percent of the new supply added.
According to the latest Downtown Center Business Improvement District (DCBID) market report, there are 12,290 affordable housing units in the current inventory, with 611 additional units under construction and 2,231 units in the pipeline.
“In recent years that activity has ramped up considerably, and with what looks to be a significant increase in federal and state funding, along with more progressive housing policies, we expect Downtown LA’s leadership position in this marketspace to continue,” says Nick Griffin, executive director of the DCBID.
These efforts can’t come soon enough as there are about 10,000 units throughout the county that have 30-year affordability regulatory rent covenants set to expire before the end of 2023. These expirations will hit some areas harder than others. Hollywood, for example, is set to lose more than 800 existing affordable units, while South Los Angeles will likely lose almost 400 units.
Frost notes the Housing and Community Investment Department has a preservation program to monitor and help preserve at-risk affordable units.
The program does the following:
• assists property owners, tenants and developers in identifying options and resources to preserve existing affordable housing stock;
• provides outreach and education to tenants and owners of at-risk and expiring affordable housing;
• monitors state notice requirement law with respect to projects pending expiration/termination of affordability restrictions;
• supports citywide and inter-agency efforts to share information, develop preservation action plans, policy development and proactive efforts to protect the city’s affordable housing.
Other organizations, such as EAH Housing, would be interested in acquiring these properties to keep them affordable. But that isn’t always an easy path, according to Jordan.
“There are many nonprofits, including EAH Housing, that would purchase these properties to preserve the affordability,” he says. “One central issue facing preservation is the funding needed to purchase and renovate or syndicate with low-income housing tax credits (LIHTCs). It is very difficult for a preservation offer to match the value of the property, if the owner is looking for a value at something much closer to the open market.”
This issue could be mitigated, he believes, if local organizations undertook some outreach efforts to connect interested parties well ahead of the affordability expiration dates.
He also notes that while the tax exempt bond and LIHTC funding are focused on production, a larger set-aside of those funds — coupled with a reduction in the 50 percent test at the federal level to assist in stretching these resources out a little further — could help. (Since 1990, the LIHTC statute has required a minimum of 50 percent of a property’s aggregate basis to be financed by private activity bonds for the property to receive the full allocation of LIHTCs.)
Covenants Bring Contradictory Opinions
Burinskiy, however, doesn’t necessarily see preserving these covenants as a solution to the affordability crisis. Rather, it’s akin to a Band-Aid on a bullet hole.
“There is an ebb and flow of affordable housing units, so if the
county and cities can incentivize sufficient construction of affordable housing then, in theory, covenant expirations would not necessarily be such a large concern,” notes Burinskiy.
“We can say that the expiration of affordability covenants will lead to low-income households being pushed out and continue to fault profit-hungry landlords, but that is not fair. The development of the infrastructure and housing — affordable or not — needed to accommodate a growing population lies with the political will of local residents, city councils and community leadership,” continues Burinskiy.
“By saying the expiration of affordability covenants will lead to loss of affordable housing, we fail to admit our own failures in making it easier to develop housing.”
Burinskiy is also concerned that preserving these covenants ignores the quality of these housing units. Some properties are well over 30 years old, and if everything stays in place, it may force low-income families to live in substandard rental units, he contends. The obvious solution? Provide households displaced by expired covenants with priority access to newly constructed affordable units.
It’s a sentiment that’s easier said than done. Mills notes that organizations like hers are consistently stretched thin, serving as a jack of- all-trades for Los Angeles’ low-income residents, homeless and at risk populations.
“Housing developers don’t just develop housing,” she explains. “We are held to high standards and the hopes of the nation that we should also solve society’s ills with robust social services and case management; construction innovation; environmental sustainability; amenities similar to market-rate housing; open space; accessibility and more.”
Developers may have to accomplish this task with less money and less local support, points out Mills, as many cities experienced a reduction in tax revenue due to business closures tied to the economic fallout from COVID-19. This puts many administrations in a bit of a Catch-22.
“They are grappling with the desire to incentivize tax-generating projects to reboot the economy and the undeniable need for affordable housing that does not produce tax revenue,” contends Mills.