Arminda L Alexander SFU Community Trust Summer 2012 Internship Presented September 13 2012 Objectives of SFU Trust Internship To examine the economic feasibility of developing more affordable housing at UniverCity develop basic ID: 524912
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Slide1
The Economic Feasibility of Affordable Housing at UniverCity
Arminda L. AlexanderSFU Community Trust Summer 2012 InternshipPresented September 13, 2012Slide2
Objectives of SFU Trust Internship
“To examine the economic feasibility of developing more affordable housing at UniverCity; develop basic proformas for up to 3 affordable housing development models – reduced rate rental, co-housing, and reduced land lease. The
proformas
for these three housing tenure models will identify hard and soft costs, as well as the expected short and/or long-term return on investment.”
UniverCity Internship announcement dated March 26, 2012Slide3
Glossary of TermsAffordable Housing Economics
Affordable Housing MacroeconomicsMicroeconomics
Proforma
Housing Tenure
Shared Equity
Internal Rate of
Return
Reduced Rate Rental Rent to Own
Glossary terms
will be explained during the course of the
presentation.Slide4
“Affordable housing
is generally considered to be housing that does not cost more than 30% of a moderate or low-income household’s gross income regardless of whether the housing is market or non-market.”1Moderate income is 80% of
median household income for the region.
Low-income
is 50% of median household income for the region.
Median
income
in 2010 for all census families in the Vancouver Census Metropolitan Area was $67,090.2______________________________________________________________________________________________
Metro
Vancouver Housing Action Plan Resource for Municipalities, Sept. 2011, p. 24, retrieved from:http://www.metrovancouver.org/HousingActionPlan/HousingActionSections/MunicipalHousingActionPlanResource.pdf2. Statistics Canada. Retrieved from: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil107a-eng.htm
Definition of Affordable HousingSlide5
Affordable housing costs no more than $1,340 per
month total shelter cost in Metro Vancouver.3According to the Real Estate Board of Greater Vancouver, the average strata apartment price was $376,200 as of June 2012. For a detached house, it was $961,600. 4Affordable mortgage translates to a strata condo price of approximately $167,000
for moderate
income
and $223,000 for median income (with
current financing at 5%
down, 4
% interest and 25 years amortization). 5 ____________________________________________________________
3. Calculated by Arminda Alexander at 30% total shelter cost (includes utilities) of moderate income household in Metro Vancouver.
4. Real Estate Board of Greater Vancouver. Retrieved from:http://www.rebgv.org/news-statistics/greater-vancouver-housing-market-favoured-buyers-june5. Calculated by Arminda Alexander
Definition of Affordable
Housing, cont’d.Slide6
SFU Trust and UniverCity
SFU retains ownership of the land Home buyers get ownership (strata title) of building improvements
with
a 99
year leasehold on the land.
It’s
a unique ownership
structure which is why the Trust has a vested interest in the longevity, health and sustainability of the
UniverCity community.Slide7
UniverCity: The 4 cornerstones of Sustainability
Education, Environment, Economics and Equity.Equity: Provide an appropriate mix of housing types and tenures that reflect the entire
lifecycle. Affordable
housing
is
part of the housing continuum
that UniverCity can offer so as to be a complete and inclusive community. Slide8
$259,900
($417
psf
) 1 Bed
1 Bath
624 sq.ft. Apartment
309-9232 University Crescent
$449,000
($386 psf) 3 Beds 2 Baths 1,163 sq.ft. Townhouse89-9229 University Crescent
$385,000
($418
psf
)
2 Beds
2 Baths
922 sq.ft
. Condo
309-9266
U
niversity Crescent
Retrieved
from:
Robert Crowe REMAX Real Estate Services on 4-Sep- 2012http://www.simonfrasercondos.com/RecentSales.php
UniverCity
Re-SalesSlide9
UniverCity Pre-Sales
Altitude1 – bedroom $428 psf2 – bedroom $447
psf
Highland House
1 – bedroom
north
$
460 psf
1 – bedroom
west $553 psf2 – bedroom & townhomes north $441 psf2 – bedroom & townhomes west $386 psf2 – bedroom & townhomes south $449
psf
Price lists as of September 13, 2012,
psf
averageSlide10
_______________________________________________________________________________________________________________
Graphic retrieved from: Espinoza, J.J. Supply and Demand Partial Equilibrium Market Model in Matrix
Form, on 13-Sep-2012
http
://espin086.wordpress.com/2010/04/09/supply-and-demand-partial-equilibrium-market-model-in-matrix-form
/
With more
supply, prices will decrease because there will be more choices, demand will be satisfied and buyers will not raise the price through speculation.
However, the
cost to produce new housing is the decisive factor. The cost of creating housing itself is prohibitive for those who earn less than above-average income.MacroeconomicsSlide11
Housing macroeconomics
Factors that affect the cost of housing: Availability and cost of labour and materials,
Availability and cost of financing capital,
Government policies
and regulations that affect where and what
can be built,
Market
incentives generated by those policies – regulation of
the market
.Government can direct resources and supply to the area of high demand through policies and regulations, such as inclusionary zoning, density bonusing and rent control.Yet there is a huge shortage of affordable housing in this region because of the fundamental problem – the high cost of creating housing in relation to incomes. 6
____________________________________________________________________________________________________________________
6. Vancouver’s
Housing and Homelessness Strategy 2012-2021, June 2011, Context, Ltd
., p. 8Slide12
Housing microeconomics
Micro-economics is defined as the particular aspects of an economic firm or individual. The macro influences the microeconomics of
housing creation because it affects costs.
Developers seek to maximize their profits, so they supply to the higher end of the market.
Even with
a high level of
demand for affordable housing, the
price point must be well above cost to
realize
enough profit for the developer. To create more affordable housing the focus must be on direct costs associated with development and construction of housing, development cost efficiencies and lower
production cost. Slide13
Proforma
Proforma: a standard presentation of data, typically a financial statement, where the data emphasize either current or projected figures.
A way of analyzing the microeconomics of
housing production
to
determine feasibility
.
The UniverCity objective is to produce affordable housing without using capital
or operating
subsidies from government or charitable sources, or other mechanisms typically associated with below-market or social housing projects. Slide14
Basic cost components of a Residential Construction ProjectSlide15
UniverCity Parcel 32Slide16
UniverCity Parcel 32
4-storey Woodframe Apartment Building
35,521 sq. ft. gross buildable area
36 units
This example is
Harmony at UniverCitySlide17Slide18
Housing Tenures and Affordable Housing
Housing tenures available for different phases of life or income levels: Lease or rent (deemed insecure due to lack of occupant control),
Freehold,
long-term leasehold or life
lease (deemed secure as owner has the right to occupy).
Something to consider - low-income housing is subsidized
by market units whether through taxes, levies or
bonds.The
models
analyzed herein provide a direct subsidy within the project itself, similar to HUD HOPE VI in USA and the City of Vancouver’s Woodward’s district. Slide19
Affordable Housing models analyzed
For sale Mixed income – market and reduced land value Shared equity
Rental
and Rent-to-own
Co-housing is not a viable option due to financing restrictions.
Like-minded
owners form an ownership entity and act as their
own developers
to construct private homes supplemented by common facilities.7Savings usually achieved in hard costs due to moderate finishes in units; and in soft costs because there is no developer profit and no marketing cost. This model has difficulty
securing financing; lenders need to be able to foreclose and
seize the asset of an individual
homeowner.
8
_____________________________________________________________________________________________________________
7
. Canadian Cohousing Network. Retrieved on 4-Sep-2012 from:
http
://
www.cohousing.ca/cohousing.htm
8
. From interview with Joffre
Pomerleau
, Innovative Housing Consultants, Inc.Slide20Slide21Slide22
Shared Equity
Resale restricted, owner-occupied housing.9 Landowner and homeowner share in equity value of the property based on a formula and other restrictions set forth as covenants on title.
A vehicle for local jurisdictions and institutions with land banks to leverage and preserve social investment.
UniverCity’s
Verdant is an example.
Options for Homes, Greater Toronto model since 1993:
10
non-profit owner develops project at 15 – 20% below market cost (low cost finishes and amenities, economies of scale construction, minimal marketing and admin costs).
Low-income homebuyer pays cost only; non-profit holds market differential as 2
nd mortgage, payable at resale or anytime prior. Proceeds of 2nd mortgage is reused for next low-income household or to fund other projects.______________________________________________________________________________________9. Dubb
, S. (2011). Interview of John
Emmeus
Davis.
The Democracy Collaborative at the
University
of Maryland
. Retrieved
from
:
http://www.community-wealth.org/_
pdfs/news/recent-articles/04-11/interview-davis.pdf
10. Canada Mortgage and Housing Corporation. (Retrieved on 10 August 2012). Affordable Housing Project profiles, Options for Homes,
Greater Toronto Area, Ontario. Retrieved from:
http://www.cmhc-schl.gc.ca/en/inpr/afhoce/prpr/prpr_006.cfm?K1=on&K2=families&K3=construction&K4=ownership&K5=non-profit&K6=funding&Submit=SearchSlide23Slide24Slide25
Rental
Average market rent in Burnaby in 2011 was $
1,103
for a 2-bedroom and $
1,283 for a
3-bedroom.
11
To be economically feasible, new
purpose-built
rental must have a positive investment return. With an average rental rate of $1,103 and market financing for the parcel 32 project, each unit would have to cost no more than $95,000 in order to break even. 12Units cost much more than that to build here, and will require much higher rents to realize a positive investment return.
This illustrates why purpose-built rental is not economically feasible in this region.
Internal Rate of Return (IRR):
“An interest rate giving a net present value of zero when applied to the expected cash flow of a project. Its value, compared to the cost of the capital involved, is used to determine the project’s viability.”
13
______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
11. Metro Vancouver. Retrieved on 4 September 2012 from:
http
://
www.metrovancouver.org/planning/development/housingdiversity/DCCAffordableHousing/AffordableHousingRegionalDCCQA-Attachment1.pdf
12. Calculated by Arminda Alexander; interest at 4
%, 25 years
amortization,
25% equity investment for
a 10
year
term.
13. Dictionary.com Retrieved on 13-Sep-2012 from
: http://dictionary.reference.com/browse/internal+rate+of+returnSlide26Slide27
Rent-to-Own14
Lease with option to purchase after the term. A household pays rent plus an increment that goes toward the down-payment. There is also an option fee for the right to buy at an agreed-upon price.Usually for households with poor credit history or no down-payment. Generally, only a portion of
a
project’s units convert.
This
model was used in the U.S. during the subprime mortgage crisis when the condo market was soft.
_______________________________________________________________________________________________
14. Affordable Housing
Institute,
USA. Retrieved on 4-Sep-2012 from: http://affordablehousinginstitute.org/blogs/us/2008/12/a-toe-in-the-ownership-water-part-1-the-would-be-buyers.htmlSlide28
Although the rent rate is lower, this model is still not affordable and requires above market rent to be economically feasible.Slide29
$57
$35
$0
5 units
9 unitsSlide30
# of Parking stalls per unit
40 stalls
18 stalls
29 stalls
Total # of Parking stalls
3
units
1.5 unitsSlide31
Conclusion
Markets fluctuate and there is increasing market uncertainty; neither will demand be unlimited.The developer who applies inputs and practices that have the most economic efficiencies/benefits (e.g. parking reduction) in projects undertaken will have a leading edge in an uncertain market.
There’s a market value for providing a social good and having the proven ability to supply a substantial segment of market demand.
The recommended project to pursue is the mixed-income model.
Will work whether at market or reduced land value,
Will provide the most units that meet affordable housing definition,
Economically feasible for the SFU Trust,
A “tried and true” model of affordable housing.Slide32
Sources Interviewed
Michelle Paquet, Development Manager, UBC Properties Trust, July 2012
Joffre
Pomerleau
, President & CEO, Innovative Housing
Consultants
, Inc
., July 2012Allan Carr, Senior V.P., Midwest Property Management, July 2012Sharon
Folkes
, Housing Planner, City of Burnaby, August 2012Karen Hemmingson, Director, Research and Corporate Planning, BC Housing, August 2012Heather Tremain, Principal, Urban Fabric, August 2012Ali
Nimji
, Robert Crowe Offices, REMAX Real Estate Services, August 2012
Dino
Celotti
,
Trilogy Management Services
Ltd., August 2012
Terry
Lui
,
Sales & Leasing
Manager, Trilogy
Management Services Ltd
., August 2012Slide33
Special thanks to Jesse Galicz
, Dale Mikkelsen, Gordon Harris and everyone at the SFU Trust for sharing their expertise and assistance.Slide34
And they know how to have fun!!!