A gaping hole in the multifamily housing marketplace exists. Very simply, affordable workforce housing is tough to come by.
Sec. 42 tax credit housing is available for the lower-income segment of the workforce, but many renters are overqualified from an income standpoint. And yet they don’t earn enough to afford market rents for newly constructed apartments. Let’s take a look at the math.
Assume that the area median income (AMI) in a small community is $36,000 a year. Under the Sec. 42 program, a qualified resident cannot earn more than 60 percent of AMI or $21,600 (we won’t worry about family size in this example). This equates to less than $10.50 per hour. The mechanics of the tax credit program involve a federal subsidy to developers enabling the delivery of rental housing that is built at market costs, but rented at rates well below those needed to match development costs. With today’s construction costs, market rents for a typical project would need to exceed $1,025 per month (see table in sidebar). But with Sec. 42 subsidies, developers can deliver rental housing at $500 to $600 per month.
Now assume that we have a renter earning $30,000 per year, or slightly more than $15 per hour. This person is overqualified to live in Sec. 42 housing because his or her income exceeds 60 percent of the AMI. Further, this person can afford a maximum lease rate of $875 per month based upon a rule-ofthumb whereby no more than 35 percent of one’s monthly income be spent for rent (ideally this number should be closer to 30 percent). That leaves our prospective renter $150 short of the $1,025 market rent.
The issue is now painfully obvious. How can people who earn between 60 percent and 100 percent of AMI find affordable housing? Unfortunately, this is the reason why no new market-rate rental housing is being constructed in many small communities across the country. The workforce ends up living in older, often substandard apartments and rental homes. Ultimately, the community suffers because a lack of affordable housing stock restricts the ability for business and industry to expand or locate there in the first place.
One potential solution is for developers to forge long-term partnerships with local employers. The developer agrees to build quality market-rate rental housing and area employers agree to subsidize it. The subsidy can come in any of several forms:
1. Direct ownership
A major employer agrees to own 100 percent of the apartment community, and units are rented at a discount to employees of the employer. Nonemployees can pay full market rent. By discounting the rent, the employer is reducing its return on investment but providing a benefit to its employees.
2. Rent subsidy
One or more employers agree to a long-term master lease of a new apartment property. While the employers don’t have ownership, they do have a long-term contractual obligation to pay the rent. Employees of those employers are given preference when renting, and the company deducts a predetermined amount from their wages for housing. Meanwhile, the developer receives a check from each company each month for the full market rental rate.
3. Equity stake
One or more area employers contribute equity into a partnership formed with a developer. The amount of equity is sufficient to allow the developer to rent apartments at below-market rates with a preference given to employees of the employer-investors. The developer may also bring additional equity and conventional debt to the equation. The developer’s equity would receive a preferred return before any financial benefits flowed to the employer-investors.
In all cases, an employer benefits from becoming a partner in affordable rental housing for its workforce. Among the advantages:
- A housing subsidy is much like other employee benefits—health insurance, day care, a company cafeteria, etc. If a company is willing to provide various types of employee benefits, why not a housing subsidy?
- Assisting employees in finding quality affordable rental housing is an excellent way for a company to stabilize its workforce. Employee loyalty is generated, and turnover is potentially diminished.
- Subsidizing workforce housing makes an employer more competitive in its quest to attract and retain employees.
- The cost of the housing subsidy is a business expense for tax purposes, and thus the cost is partially offset by tax savings.
- In some situations, an equity investment in all or part of an apartment property could prove to be a solid financial investment for a company. This may be especially true if there is appreciation in value over a number of years.
- Companies that help mitigate the shortage of quality affordable workforce housing endear themselves to their communities as good corporate citizens.
An astute developer might also bring the municipality into the mix as well. In partnership with one or more major employers, the developer might approach the city to purchase cityowned land for a nominal fee. The partnership may also secure Community Development Block Grant funds to underwrite the cost of some of the site infrastructure improvements. Some form of property tax abatement or reduction could also be sought. Each of these concepts help to reduce the overall cost of the project and/or the cost to operate, thereby reducing the amount of employer subsidy required.
Corporate sponsorship of workforce housing is not a new idea, but its use is not particularly common. Several small resort towns in Colorado, for example, have such a shortage of housing that workforce commutes of 50-plus miles are standard. Workforce housing partnerships between developers and major employers have been created in some instances. Vail Resorts teamed with builders in the Colorado resort town to construct housing for its workers, many of whom earn only 30 percent to 50 percent of the AMI. The company has developed $56 million worth of employee housing over the past six years and offers 1,300 beds in Eagle County (Vail and Beaver Creek) and another 1,300 beds in Summit County (Breckenridge and Keystone). Similar initiatives have been undertaken by several universities and colleges, as well as major amusement parks, for their employees.
Innovative developers and forward-thinking employers have an opportunity to create affordable workforce housing in a way that provides significant bottom-line benefits to the employer. Development costs are not likely to decrease anytime soon, and another government program similar to Sec. 42 aimed at a higher percentage of the AMI is unlikely. The free market can make this work successfully, but only if all parties are flexible and moving toward the same objective. ¦
R. Lee Harris, CRE, CPM, is president of Cohen-Esrey Real Estate Services, LLC, a Kansas City, Kan.-based commercial real estate organization that has managed more than 53,000 multifamily units since 1969. The firm is active in 95 markets spanning 17 states and is involved in the management, development, and acquisition of conventional and affordable housing. For more information, visit www.cohenesrey.com.
Sidebar: Calculating the Rent on a Newly Constructed Apartment
The cost of constructing an apartment property has moved steadily higher for years. The cost can easily approach or exceed $100,000 per unit including land, site work, construction, loan costs, etc. Using $100,000 as a total cost, here is a calculation of the average rental rate that will be needed to support a typical multifamily project.
Total development cost: $100,000
Total debt at 6.5 percent interest/30 years: $75,000
Total equity at 10 percent cash-on-cash return: $25,000
Annual debt service: $5,689
Annual equity return: $2,500
Annual operating expenses: $3,500
Total outflow at 100 percent occupancy: $11,689
Total outflow at 95 percent occupancy: $12,304
Monthly rent: $1,025