The Economic Feasibility of Affordable Housing at UniverCit - PowerPoint Presentation

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 UniverCitySlide17
Slide18

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.Slide20
Slide21
Slide22

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=SearchSlide23
Slide24
Slide25

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

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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+returnSlide26
Slide27

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!!!