U.S. House Looking at Multifamily Infrastructure Needs

Outdated, unnecessary and overly burdensome policies create significant barriers to the development of apartment properties, increasing the cost of apartment development and construction.

WASHINGTON – May 2, 2019 – A representative of the National Multifamily Housing Council and the National Apartment Association – Daryl J Carter, founder, chairman and CEO of Avanath Capital management – offered insight and recommendations to lawmakers on ways to help America's housing shortage.

Abridged testimony presented by Carter

Socially responsible multifamily investment

Avanath is uniquely positioned in the multifamily industry as a firm that focuses on affordable and workforce housing in low-income areas with more than half of our properties being located in communities of color. We strategically invest in markets where renters have high cost burdens. Since our founding, we have served communities with the highest demand for affordable multifamily apartments and the greatest constraints to new supply.

Families with incomes of $30,000 to $80,000 represent the largest segment of the rental housing market. … Avanath believes that the affordable housing sector provides excellent and sustainable risk-adjusted returns with high barriers to entry and strong downside protection.

We operate in many markets that are underserved by institutional capital. Nevertheless, Avanath consistently delivers apartment homes to America's most expensive housing markets at costs considerably below market rate rents. … We have a long history of successful, affordable multifamily development in some of the nation's most difficult and marginalized housing markets.

However, our industry faces serious obstacles that I articulate throughout my testimony. We look forward to working with this committee to break down barriers to apartment development and rehabilitation and finding solutions to the nation's affordability challenges.

Apartments and today's housing needs

A healthy housing market includes a diversity of housing options both rental and for-sale, multifamily and single-family. More broadly, there is a well-established relationship between a community's well-being and economic strength and the availability of suitable and affordable housing. Apartments have an important role in meeting these housing needs nationwide and play a fundamental part in ensuring housing affordability.

The apartment industry – Historic national demand

Beginning in the mid-2000s, the nation experienced the greatest renter wave in its history, as the number of households who rent rose by more than 7 million. Fueled by this historic demand for apartment homes, recent NMHC and NAA research find that we need to build 4.6 million new apartments by 2030 to meet the nation's housing needs.

Driving this demand is a wide variety of households that can afford homeownership, but prefer the flexibility and convenience of renting. Households making $60,336 or more (the national median household income) now make up 29.5 percent of all apartment renter households and account for over half (56.3 percent) of apartment growth over the past decade. Further, immigration (25.1 percent apartment householders were born outside of the United States), baby boomer and other empty nester trends (59.2 percent) of the net increase in renter households from 2007 to 2017 came from householders 55 years or older and other demographic changes are powering demand for apartments.

To meet this demand, we will need to build an average of 328,000 new apartments every year. Yet we have only hit that mark twice since 1989. This supply-demand imbalance seriously jeopardizes housing affordability, limits housing choice and undermines broader economic wellbeing.

In addition, the need for renovations and improvements to existing apartment buildings continues to grow. Recent research found that 51 percent of the nation's 20 million-plus apartment stock was built before 1980, which translates into millions of units that could need rehabilitation or renovation by 2030.

The growing demand for apartments – combined with the need to renovate thousands of apartment buildings across the country – can make a significant and positive impact on our nation's economy for years to come. Apartments and their residents contribute $1.3 trillion to the national economy annually.

There is an opportunity for a tremendous and sustained contribution to the national economy from the apartment industry. However, many factors influence the apartment industry's health and ability to meet the nation's growing demand for rental housing. Infrastructure is an important factor in meeting growing housing demand, and the need for housing affordability.

Housing and infrastructure

Infrastructure and housing are linked in significant ways. The existing supply and efficacy of housing are directly dependent on the condition of related transportation and other infrastructure assets. For example, access to suitable transportation options, safe and reliable water and utility services and broadband and telecommunications are all vital to the livability and, importantly, to the affordability of housing.

Likewise, successful new apartment development depends on additional funding for infrastructure, modernization, and strategic planning for sustained investment. … However, communities nationwide struggle with aging and inadequate transportation, water, sewage, and other public systems.

As policymakers consider infrastructure initiatives, we urge the inclusion of measures to support housing including those that would:

Ensure a long-term and stable transportation funding stream to provide state and local governments, and the private sector, with the certainty and resources they need to meet their infrastructure needs and make further infrastructure investments
Encourage and incentivize all levels of government to remove barriers to apartment development and streamline regulatory burdens
Invest in rehabilitating existing communities
Address the challenges of housing affordability and stimulate new affordable development through density bonuses, fast-track review, and by-right development
Upgrade municipal infrastructure to accommodate growth and facilitate remediation of safety and environmental hazards that burden housing and new construction

Our nation's housing affordability challenge

Any discussion of national infrastructure needs must also include discussion of housing demand and affordability. Thoughtful planning and recognition of the real estate sector's dependency on reliable infrastructure is a critical component to addressing today's housing challenges for those at all income levels.

The increased demand for apartments, coupled with significant supply pressures, is making it challenging for millions of Americans to find quality rental housing that is affordable at their income level.

Those at the lowest end of the income spectrum are especially vulnerable to these problems – one in five renter households earns less than $15,000 annually, and for them, an affordable unit is one with a monthly rent of under $400. Yet from 2003 to 2013, 11 percent of these rentals were permanently lost from the housing stock. This is also the hardest segment to build for without subsidy, given the costs associated with development.

However, housing affordability challenges are not unique to lower income households. The total share of cost-burdened apartment households (those paying more than 30 percent of their income on housing) increased steadily from 42.4 percent in 1985 to 53.9 percent in 2017. Consider that the median asking rent for an apartment constructed in 2017 was $1,550. For a renter to afford one of those units at the 30 percent of income standard, they would need to earn at least $62,000 annually. More than one in four apartment households paid more than half of their income on their housing in 2017.

Across all markets, the supply of multifamily rental housing at a variety of price points will play a vital role in promoting economic growth, attracting and retaining talent and encouraging household stability for all American families. And, the development, preservation, and rehabilitation of apartments for all income levels is a key component to meeting the nation's affordability challenges.

The costs and challenges of apartment development

Our industry faces significant challenges to new apartment construction, development, and renovation and must balance a wide array of concerns including project viability, rising costs and regulatory burdens at all levels of government. A recent study by NMHC and the National Association of Home Builders (NAHB) found that 32 percent of multifamily development costs are attributable to compliance with local, state and federal regulations. In a quarter of cases, that number can reach as high as 42.6 percent.

Breaking down the government regulation costs showed that 95 percent of developers' projects included requirements that went beyond what the developer would ordinarily provide (such as complex architectural design, landscaping and parking requirements). Developers saw an average of 7 percent of regulatory costs coming from building code changes over the past 10 years, and developers were required to dedicate land or otherwise leave land unbuilt in 50 percent of their projects.

The apartment industry stands ready to meet America's demand for rental housing, but our ability to succeed depends on several important needs; including, relief from unnecessary regulatory burdens, the availability of consistent and competitively priced capital and robust and reliable infrastructure.

Barriers to multifamily development

We believe that Congress has a critical role to play in ensuring that the development and rehabilitation of multifamily housing represents a key component of infrastructure legislation.

The ability of our sector to meet housing demand, address affordability needs and deliver lasting job growth depends on collaboration and partnership at all levels of government. The cost to develop apartment homes has escalated at a dramatically faster pace than rent rate increases in many markets nationwide. As the affordability of housing is already strained, development costs must be controlled in order to create needed and affordable housing throughout the United States.

A range of outdated, unnecessary and overly burdensome policies create significant barriers to the development of apartment properties. The resulting impacts increase the cost of apartment development and construction, exacerbate supply constraints and ultimately raise the necessary monthly rent of apartment homes.

Easing regulatory and other policy obstacles in apartment production is a critical consideration as policymakers explore solutions to close the affordability gap in America's housing.

Importantly, some commonplace hurdles are deliberately intended to deter multifamily development and further the ideas of NIMBYISM ("Not In My Back Yard"), which explicitly opposes new apartment development in many communities. Support from policymakers, along with educational and planning tools, can help promote the acceptance of apartments and demonstrate the benefits of multifamily development.

However, even well-intentioned policies can be counter-productive to affordable apartment production and hinder multifamily development. Common impediments to multifamily projects include:

Zoning laws that restrict or otherwise unduly burden multifamily development
Onerous and extended entitlement requirements. The entitlement process, including various approvals and permits, can mire projects for years. According to NAA's Barrier to Apartment Construction Index, development timelines for properties with 50 or more units including permitting, land development, non-conforming use, and zoning ranged from an average of three years in Miami to over eight years in San Diego
Excessive impact and linkage fees
Business license taxes
Assessment and inspection fees
Outdated minimum parking requirements. Parking can cost $30,000 to $75,000 per space depending on location, and often fail to reflect the changing transportation needs and trends of apartment residents
Lengthy environmental site assessments

While these requirements are primarily within the purview of local governments, federal policymakers can play a role by creating incentives for local leaders to reduce barriers and adopt policies that encourage private sector investment in housing. Examples of actions that local governments can take include:

defer taxes and other fees for certain apartment development
make available underutilized land
streamline the development and approval processes with fast-tracking programs
adopt by-right zoning for multifamily development
reduce parking and other land requirements
establish density bonuses
enact separate rehabilitation codes
create an efficient public engagement process
use property tax abatements.

An excellent example of how the federal government can incentivize these actions is the $10 billion set-aside within the CDBG program proposed under the Housing is Infrastructure Act of 2019 to encourage the elimination of impact fees and streamlining of the process for the development of affordable housing. These are exactly the kinds of strategies that are needed to remove barriers to the construction of affordable housing and rental housing overall.

Housing affordability initiatives and community barriers to development

Artificial price controls on rent levels or mandated set-asides of affordable units within new developments, while well-intentioned, can produce the opposite outcome.

Rent control, in any of its various forms, is a mechanism that obligates a property owner to set rental rates for all or a portion of the units on a property. These policies act as disincentives to investing and developing the diversity of housing units that a community requires. There are alternatives to rent control that take slightly different approaches but have the same detrimental effect. The most common form of these is inclusionary zoning.

Inclusionary zoning refers to municipal and county planning ordinances that require a given share of new construction to be affordable to people with low to moderate incomes without an investment from the municipality. … Proponents of inclusionary zoning often fail to acknowledge that these policies drive up costs, and ultimately rents, for the entire project, as developers are forced to raise rents for market-rate units to make up the difference from the affordable units to make the project financially feasible.

Additional strategies for meeting housing demand and addressing affordability

In addition to incentives for local governments to ease the development process, this Committee can take other steps to support the goals of meeting housing demand and affordability needs.

Support housing finance reform that preserves the multifamily mortgage liquidity provided by the government-sponsored enterprises (GSEs)
One of the foremost priorities of federal policymakers should be getting multifamily right in any housing finance reform effort by recognizing its unique characteristics; it is the single most important factor to ensuring that the apartment industry can meet the nation's growing rental housing demand.

We believe the goals of a reformed housing finance system should be to:

Maintain an explicit federal guarantee for multifamily-backed mortgage securities available in all markets at all times
Ensure that the multifamily sector is treated in a way that recognizes the inherent differences of the multifamily business
Retain the successful components of the existing multifamily programs in whatever succeeds them.

Increase funding for and enhance the performance of the section 8 program
Increase support for other crucial HUD programs. Tenant-based section 8 and project-based rental assistance allow low-income families to rent market rate housing, taking advantage of the broad offering of privately owned and operated properties in a given market. In the case of the Housing Choice Voucher Program, there are ways these programs can be enhanced to draw more participation from the private sector and create a better experience for voucher holders.

Additionally, funding for the HOME and CDBG programs should be increased in recognition of their important role in the development of new affordable housing. Both programs allow developers to address financing shortfalls often associated with affordable housing properties and stimulate meaningful development and preservation activity.

Modifying the Community Reinvestment Act (CRA)
The three main banking regulators – Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Federal Reserve – who control the regulations around CRA have begun the process to modernize the existing rules. The regulators have the opportunity to promote lending and investment activities of their member banks in low- and middle-income neighborhoods where infrastructure upgrades are often needed. The CRA could be modified to include greater incentives for banks to provide loans for multifamily apartments that include workforce and affordable housing development.

CRA guidelines currently allow banks to obtain Community Development (CD) credit for multifamily units serving occupants with incomes of up to 80 percent of area median income. While this level captures a significant portion of workforce households, the rules themselves make it difficult to obtain the CD credit due to a requirement to report incomes, information that is not captured.

Investment activity by banks often takes the form of the purchase of tax credits from a LIHTC project. Due to an outdated determination of assessment areas, banks do not efficiently distribute their investments across a broad geographic footprint. The challenge with the current CRA assessment structure is that there may be a misalignment between assessment areas and areas underserved by institutional capital, where capital could be deployed more effectively. There is an opportunity to retool CRA to provide incentives to promote investment into those areas of need where infrastructure projects overlay with low- and middle-income neighborhoods.

Finally, we encourage Congress to address the following tax proposals that all have a significant influence on addressing housing affordability.

Expand and enhance the low-income housing tax credit: The Low-Income Housing Tax Credit (LIHTC) is a public/private partnership that leverages federal dollars with private investment to produce affordable rental housing. Since its inception in 1986, the LIHTC program has financed over 3 million apartments and served 7 million households. Given that there are currently just 45 affordable units for every 100 very low-income apartment households, lawmakers should strengthen the program by: making permanent the increased credit authority enacted in March 2018, further augmenting credit authority by 50 percent and establishing a minimum 4 percent tax credit rate.
Enact the middle-income housing tax credit to support workforce housing: Housing affordability is not limited only to families eligible for units financed by LIHTC. Consider that the median asking rent for an apartment constructed in 2017 was $1,550. For a renter to afford one of those units at the 30 percent of income standard, they would need to earn at least $62,000 annually. Accordingly, this is an issue impacting those supporting the very fabric of communities nationwide, including teachers, firefighters, nurses and police officers. We urge Congress to consider the Middle-Income Housing Tax Credit Act of 2018 (S. 3365) that Senate Finance Committee Ranking Member Ron Wyden introduced during the 115th Congress. The Middle-Income Housing Tax Credit takes over where LIHTC leaves off and is designed to benefit households earning below 100 percent of area median income.
Enhance opportunity zones to incentivize rehabilitation of housing units: Enacted as part of tax reform legislation in 2017, Opportunity Zones are designed to provide tax incentives for investments in distressed communities. While we expect the program to be beneficial in spurring the production of new multifamily housing, we believe it could be improved to incent the rehabilitation of existing multifamily units. NMHC and NAA urge Congress to support statutory modifications to reduce the basis increase necessary to qualify a multifamily rehabilitation project for Opportunity Zone purposes.
Repeal Foreign Investment in Real Property Tax Act: In 1980, Congress passed the Foreign Investment in Real Property Tax Act (FIRPTA) to tax foreigners' gains on the income they earn from, and then the sale of, U.S. real estate and other real property. In doing so, FIRPTA imposes significant costs on foreign investors in U.S. real estate, thereby serving as a significant barrier to such investment. Repealing FIRPTA or enacting additional reforms could unlock billions in foreign capital that could help to refinance real estate loans and drive new investment. NMHC and NAA strongly support FIRPTA repeal legislation, Invest in America Act (H.R. 2210), introduced on April 10 by Reps. John Larson and Kenny Marchant, and believe it would represent a beneficial component of any future infrastructure package.