the future financing of development in cities

Dr Graham Squires, University of BirminghamVisiting Scholar, UC Berkeley Fulbright-RICS

The Future Financing of (Affordable Housing) Development in Cities

Fulbright-RICS Scholarship 2013/14

Report based Findings and Analysis – Report Launch 15th Sep 2014

www.rics.org/financingcities

1. The Future Financing of Real Estate (Residential) Development in Cities RICS Scholar UK-US Fulbright Report The aim of the project was to critically analyse the

financing of cities as encouraged by real estate development.

lesson learning approach was achieved for the future financing of UK cities

Focus on affordable housing as part of real estate development

The Problem?

The lack of adequate basic urban services and infrastructure (including Affordable Housing) is a major challenge in the development of human settlements

The lack of revenues is one of the biggest problems facing most cities all over the world

Governments vulnerable with increasing responsibilities and small share in the allocation of public resources (UN Habitat, 2012)

The Questions

(1) What are the underlying approaches to financing cities via real estate development?

(2) How do financial instruments characteristically operate in real estate development?

(3) What ‘successful’ and ‘unsuccessful’ city examples have used financial instruments in real estate development?

(4) Who are the stakeholders involved in financing cities in real estate development, and how have the stakeholders been involved in participation and implementation?

(5) What have been the outcomes of financing cities in real estate development?

Case study lesson learning

Picture - transbay

Rationale for answers The opportunity for a better management of real estate and

financial resources (including affordable housing) in urban areas

Provide more value for money for all stakeholders; and subsequently create a greater social and environmental condition.

Supporting those who are seeking to find sustainable and resilient solutions to the needs and wants of rapidly urbanizing (and de-urbanizing) cities given increasingly scarce resources.

Methodology

Methodology

Period of 3 months field study – Case Study Approach Method One (1) Desk based study: approaches and

characteristics Method Two (2): Stakeholder Interviews: focus on

institutional approach – Academics; policy makers; developers (including affordable

housing); consultants; think tank-lobby group members; financiers; bankers; activists; practitioner and departmental seminar attendees

Key Institutions Interviewed:

Bay Area Economics Eden Housing Urban Land Institute (ULI) University of California – Berkeley Mayors Office – City Hall –San Francisco Association of Bay Area Governments (ABAG) Prudential Wells Fargo Bank Amcal Housing SPUR (San Francisco Planning and Urban Research Association) Bay Area Council Economics San Francisco Port Authority The US Housing Partnership Network TMG Partners.

Findings and Analysis

1a. Broad Approach Context: Overall Economic Drivers in The Bay Area –

Universities, Technology and Tourism Multiple Governance Structures for Funding Right-Left and Centre Political Differences and Real

Estate Development Partnership Approaches Joined-Up Sector Approaches The Rise and Rise of Condominiums

1b. Broad Approach

• Philanthropic Contributions• Private Financing• Public Finance: Credits, Public Bond, Exaction-Agreements• Owner-Rent Property Dynamic Differences in the Bay Area• The significance and approach of non-profits for affordable units

in The Bay Area• Public Housing Provision and Affordable Housing Developer

Differences• Affordability into Perpetuity

2a. Characteristics & Mechanisms (TLAs!)

1. Importance of the Community Reinvestment Act (CRA) – Federal Act on Banks

2. Value Capture Bonds (VCB) : As similar to Tax Increment Financing (TIF)

3. Value Capture Bonds (VCB) Now operated in Infrastructure Financing Districts (IFDs) – no blight

4. Syndicate Private Real Estate Loans – Joint Bank Loans/Real Estate Investment Trusts (REITs)

5. Impact Fees – Exaction for external impact cost (with a rational nexus) – Community Benefit Agreements (CBAs)

6. Inclusionary Zones (IZs) - Inclusionary Housing Ordinances (Below Market Rate)

7. Inclusionary Housing Fees and Levies – Unit Based (IHFs / IHLs)

2b. Characteristics & Mechanisms (TLAs!)

9. Special Property Tax - Prop. 13 (capped 1%)

10.Community Facilities Districts (CFDs) Bonds – (Mello-Roos Law Drives Financing of CFDs – uncapped)

11.Upzoning – Height De-Regulation

12.Cross-Sector: Employment Tax Exemption for Property – (e.g. Twitter / Mid-Market)

13.Transit Orientated Development (TOD) Funds – Priority Development Areas (PDA) including Affordable Housing

14.Low Income Housing Tax Credits (LIHTC) for Affordable Housing Development Projects

15.Recapitalising/Rehabilitating Existing Affordable Developments – Near end of LIHTC Life

16.Housing Trust Funds (HTFs)

3. Stakeholders and Institutions Federal and State Influence Federal Assisted – Foreign Direct Investment in Real Estate

Development Regional Level - Influence of ABAG (Association of Bay Area

Governments) and MTC (Metropolitan Transportation Commission) City and County Finance Uncoordinated Institutions – Joint Policy Committee Development Partnerships Role of Banks and Financial Institutions as Lenders Role of Communities, Citizens and Residents as Voters

4. Outcomes Working with Strong Public Leadership Weak Stakeholder Links Timing and Flexibility of Finance in Projects Tax Increment Financing (TIF)/Bonding as Evolving:

Progressive not Collapsed Affordable Housing Consolidation Consortiums Developing for Policy Change Flexibility of Cross-Sector Real Estate Development

Finance

Discussion

Discussion: Lesson Learning and Policy Transfer

1. Approach: Mixed and flexible affordable housing finance

2. Characteristic: 4 Tier Finance (Federal credit; city bond; city-project exaction-agreements; multi-institutional donation)

3. Stakeholder-Institution: Uncoordinated and complex institutional finance – partnerships in development

4. Outcomes: Consolidation to Flexible Partnership Finance

Implications and Recommendations for Policy and Practice

Implications and Recommendations for Policy and Practice

Maximize social gains by taking into account more accurately and sophisticatedly the full economic costs (including social and environmental) when financing cities – not just developer financial viability (Economics-Finance integration)

Fair balance of financial resources and gains are made for all stakeholders

Financially appraising, assessing, and evaluating the economic impact Build on land-capture transactions for cities by providing a greater offer

of rich opportunities to help close the infrastructure financing gap

Further Research

Further Research

US national and international comparative study Use ideas of policy transfer and lesson learning,

as well as reflecting on outcomes of good-bad practice

Greater understanding of ‘good’ policy initiatives Engage with the World Bank initiatives on

sustainable urban development, and urban finance initiatives in the European Union and United Nations Development Program (UNDP) Projects)

Thank You! g.squires@bham.ac.uk

www.rics.org/financingcities