October 5, 2008 in Business

High price of affordability

Agency’s plans to create low-income housing will cost millions
By The Spokesman-Review
Dan Pelle photo

Northeast Washington Housing Solutions maintenance manager Carl Couture views a gutted room at the Helen Apartments on South Adams Street in Spokane. Housing Solutions plans to update the building and rename it the Pearl, with units priced for low-income residents.
(Full-size photo)(All photos)

By the numbers

$245,000: Cost per unit for Helen remodel.

$230,000: Cost per unit for Martindale remodel.

$208,300: Average price of a single-family home in Spokane County, through August.

Comparing costs

Nonprofit leaders caution about comparing housing projects. But Spokane Housing Ventures is spending less to gut and rehabilitate an old building into 36 affordable-housing units than the $245,000-per-unit Northeast Washington Housing Solutions is spending on a rehab of the Helen building.

Fixing up the Bel Franklin Apartments, 225 N. Division St., is expected to cost about $165,000 per unit. That renovation includes new electrical, heating, plumbing and fire suppression systems, along with a new elevator, roof, insulation and construction of a rooftop deck.

The Bel Franklin’s renovation likely costs less because the building is not considered historic – previous owners altered it too much – and because when the organization applied for funding the state did not mandate “green” elements, said Helen Stevenson, of Spokane Housing Ventures.

“It doesn’t surprise me that their costs are higher,” she said. “I would bet that our costs would be higher if we were getting financed this year.”

A public agency rehabilitating two historic Spokane buildings to house low-income tenants expects to spend as much as $245,000 per apartment.

That’s more than the average price of single-family houses sold in Spokane County so far this year – a fact that has some private developers scratching their heads and Northeast Washington Housing Solutions defending escalating costs.

Housing Solutions intends to spend $8.6 million renovating the historic Helen Apartments downtown into 35 single-room dwellings, at a cost of about $245,000 per unit, starting in November. The organization also wants to refurbish the historic Martindale Apartments in Hillyard into 50 units – a majority set aside for the homeless – with on-site support services for $11.9 million, at a cost of more than $230,000 per apartment.

Per unit, the apartments are the most expensive of seven large projects slated to receive affordable-housing funds through the city.

Housing Solutions leaders attribute the steep price tags to the extent of renovations needed and to the costs of obtaining funding for the projects.

But for-profit developers and one local politician contend the costs are excessive compared with private development. For a fraction of that price, they say, nonprofits could buy existing apartment buildings.

“It makes no sense to me to spend that kind of money for low-income housing on a per-unit basis; that’s what I’m having trouble with,” said Spokane city Councilman Al French, an architect and developer. “You could not pay that kind of cost per unit on … market-rate housing and be able to rent it out to get a return on it. It’s just too high a cost.”

Mitch Swenson, a senior apartment broker for NAI Black, said the project costs seem “out-of-this-world goofy to me.” He recalled a roughly 190-unit apartment complex in Liberty Lake that sold for just less than $100,000 per unit about two years ago – what he called a “high-water mark” for area apartment sales.

Building communities

Commissioned by the city in 1971 under state law, Housing Solutions now is the housing authority for five Eastern Washington counties. It provides for “the folks that the private sector does not serve,” said Executive Director Steve Cervantes.

“Unfortunately, we have a lot of need,” Cervantes said.

Hundreds of low-income Spokane residents were evicted in the last year because of redevelopment or foreclosure. Only 2.4 percent of more than 2,000 affordable units tracked by the Spokane Low Income Housing Consortium were vacant in July, down from 3.3 percent in January, said Cindy Algeo, SLIHC’s executive director.

With a budget of about $33 million and a staff of nearly 70, Housing Solutions is governed by a board of directors appointed by Spokane and Spokane Valley public officials.

The most recent Housing Solutions project, located next door to the Helen (sometimes called the Helena), was the 50-unit Cornerstone Courtyard. An $11.5 million venture, it transformed a warehouse into family-friendly apartments, at a cost of about $230,000 per unit. It opened earlier this year.

Cornerstone Courtyard tenant Michael Bernstein said his apartment there is a far cry from assisted housing in New Jersey, which was riddled with drugs and prostitutes.

“It’s given me a chance to start over,” said Bernstein, 37, who became homeless after serving a tour of duty in Iraq with the Marine Corps. “This place definitely needs to be a template.”

Housing authority projects have not always been so expensive, but criticism of costs from the private sector is not new. As early as 1981, the housing authority came under fire for rehabilitating the Parsons Hotel downtown into 50 units for the elderly at a cost of nearly $50,000 per unit. Builders at the time said a new building could be raised for $35,000 per unit.

Adjusted for inflation, those units would cost an estimated $221,000 in 2007 dollars.

And when Housing Solutions bought the Woodhaven Apartments for seniors in 2001, it paid about $37,000 a unit, including rehab work.

Nevertheless, the current cost “strikes me as high,” said Sheryldene Rogers, who develops affordable housing for Goodale & Barbieri Co. But it is “easier said than done to find a realistic alternative.”

“They’re not trying to build their own portfolio for any benefit,” she said. “It’s for an asset to the community.”

Nonprofit officials don’t dispute that their projects can cost more than private-sector work. But they point out that unlike private projects, which might secure lending from a single bank, affordable-housing projects often require multiple, complicated sources of funding, each with their own requirements.

Federal regulations, for example, mandate the Helen and Cornerstone apartment buildings must be maintained as affordable housing for 40 years.

Over that time, “we want that product to be able to sustain a variety of abuses,” Cervantes said.

Instead of charging market rents to pay off construction debt, Housing Solutions keeps rent low by using funds that don’t require as much debt. That may require consultants or a raft of attorneys, driving costs higher.

“It’s an expensive way to build units that are affordable, but it’s the only way right now,” said Helen Stevenson, manager of acquisitions and development for nonprofit Spokane Housing Ventures. Low-Income Housing Tax Credits are the most common source of funding but a complex one to obtain, officials said. The credits allow corporations to receive tax breaks over a 10-year period for providing money to low-income housing developers. Both the Helen, which will be renamed the Pearl on Adams, and the adjacent Cornerstone Courtyard will receive much of their budgets from credits purchased by U.S. Bancorp Community Development Corp.

Because of the age of the buildings, Housing Solutions also hopes to receive money from historic tax credits, offsetting some of the renovation costs.

Housing Solutions each year separately pays local landlords about $24 million in rental assistance to make up the difference between market rents and what low-income renters can afford. When private developments receive that assistance, it makes them comparatively more expensive over the long-term, Stevenson said.

Soft costs

Critics question how much nonprofits pay consultants or pocket as developer fees.

“There’s got to be a whole lot of hands in the kitty here to start making the costs so high,” said French, of the Spokane City Council.

At the Helen, 173 S. Adams St., $957,000 – or 11 percent – will go for consulting and attorneys, according to Housing Solutions. For the Martindale, those costs will comprise about 7 percent of the total. Housing Solutions will charge a developer fee of about 3 percent for both projects.

Housing Solutions uses Beacon Development Group, a Seattle-based firm specializing in affordable housing, as a development partner and consultant.

The Washington state Housing Finance Commission, which allocates the federal credits, encourages keeping development fees to about 10 percent, said Steve Walker, director of the tax credit program.

“There’s nothing in those costs that gives me pause,” Walker said. “This is what it costs.”

Spokane developer Mick McDowell says he completed 28 low-income projects, most of them single-room occupancy apartments in rehabbed downtown buildings, for less than $70 a square foot – about a fourth the cost of the Pearl renovation.

Because the Helen was occupied when Housing Solutions bought it for $685,712, the organization had to pay $6,250 per resident in relocation fees.

“They are, on one hand, buying buildings like the Helena and evicting low-income people and then spending a whole lot of money, and are they going to have the same people come back in?” McDowell said. “In the case of the Martindale … they’re providing apartments at almost twice the cost of new ones.”

But according to Cervantes’ calculations, assuming constructions costs of $220 per square foot, a new building to serve the homeless in a different neighborhood would cost the same or “likely in excess” of the proposed Martindale budget.

Private side

Why aren’t private developers adding more affordable units? Downtown buildings have become prohibitively expensive, and developers can make far more money by creating luxury apartments or condos for the same price as a renovation, McDowell said.

“People who own them want an awful lot of money for them,” he said. “You can’t spend $70 to $100 a square foot to buy the building and expect to put $50 to $100 into it and expect to have anything you can remotely rent as entry level.”

Cervantes said he would challenge private developers to “do it cheaper and offer them affordable rents.”

“We certainly won’t be competing with them,” he said.

Housing Solutions leaders note private developers have the same access to tax credits and other programs. “They could do it, but it takes a level of expertise to put together multiple funding sources, and the compliance that goes with it,” said Lucy Lepinski, director of assets.

The issue of expensive low-income housing also has caught the eye of state Rep. Mark Miloscia, chairman of the House Housing Committee. To generate discussion at a recent meeting, he broached the idea of putting limits on costs. At the least, he would like to set up a measurement system to track what is being produced and how much it costs.“The bottom line is, here in our state, nobody is really looking at those particular cost-per-unit issues or whether we’re getting our money’s worth,” Miloscia said.

Reach Parker Howell at (509) 459-5491 or at parkerh@spokesman.com.

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