www.affordableownership.org © cornerstone partnership 2015 keeping homes affordable &...

www.affordableownership.org © Cornerstone Partnership 2015

Keeping Homes Affordable & Communities Strong

The Pros and Cons of Establishing an In-Lieu Fee

www.affordableownership.org © Cornerstone Partnership 2014

A program of the Community Solutions

Group, LLC, a Subsidiary of

We support inclusionary housing andhomeownership programs to preserve

long-term affordability and community stability.

3www.affordableownership.org

Why Do In-Lieu Fees?

• Legal desirability of flexibility• More units

– Potential for levering outside funds– Use expertise of nonprofits– Can simplify financing of market rate units,

particularly if development community is not used to IZ

• On site performance can be hard to monitor and manage (income verification, HOA dues)

• More flexibility in what units are built


Why Not Do In-Lieu Fees?

• Prices often set too low• Can slow down the process• Can be difficult to get units in

neighborhoods if land is not available or too expensive

• There may not be strong non-profits to give the money to

• Subsidies may already be spoken for


Setting In-Lieu Fees

• Arbitrary• What the Market Will Bear• Affordability Gap• Production Cost


Arbitrary Levels

Low Fees High Fees

The Winner!


What the Market Will Bear

Example Mixed-Use Pro Forma: For-Sale Condos + Ground Floor Retail Space

PROJECT CHARACTERISTICS COST ASSUMPTIONS DEVELOPMENT COST SUMMARY

Site Characteristics Hard Costs Hard CostsSite Area, Sq. Ft. 141,570 Residential Construction Costs (per sq. ft.) $190 Residential Construction Costs $37,164,000Site Area, Acres 3.25 Commercial Construction Costs (per sq. ft.) $150 Commercial Construction Costs $1,500,000DU/Acre 56 On & Off-Site Improvements (per acre) $100,000 On & Off-Site Improvements $325,000Units 183 Tenant Improvement Allowances (per GLA) $50 Tenant Improvement Allowances $500,000

Cost/Parking Space Parking Costs $5,526,000Residential Component Surface $2,000

Total Units Market Rate BMR Structured $30,000 Soft CostsNumber of Units 183 165 18 Residential Impact Fees $3,660,000

Loft 28 25 3 Soft Costs Commercial Impact Fees $7,500,0001BR 78 70 8 Residential Impact Fees (per unit) $20,000 Condo "Wrap" Insurance $1,830,0002BR 77 70 7 Commercial Impact Fees (per sq. ft.) $750 Other Soft Costs $9,003,000BMR % 10% Condo "Wrap" Insurance (per unit) $10,000

Unit Size (Sq. Ft.) Other Soft Costs (as % of hard costs) 20% Financing CostsLoft 1,100 Interest on Construction Loan $3,377,2031BR 750 Requited Profit (% of total development costs) 12% Points on Construction Loan $938,1122BR 1,000

Common Area % 15% Land Cost (per acre) $1,500,000 Land Costs $8,558,798Total Residential Sq. Ft. 195,600

Total Development Cost $79,882,113Commercial Component TDC Per Unit $436,514Commercial Sq. Ft. 10,000Leasable % 90% FINANCING ASSUMPTIONS PROFIT ANALYSISLeasable Area 9,000

Construction Financing Gross Residential Sales Revenue $89,087,500Parking Interest Rate 6.0% Less Commissions/Marketing 5% ($4,454,375)Number of Parking Spaces Ratio 201 Period of Initial Loan (Months) 24 Net Residential Sales Revenue $84,633,125

Surface (per 1,000 retail sq. ft.) 2 18 Initial Construction Loan Fee (Points) 2.0% Structured Parking (per unit) 1 183 Average Outstanding Balance 60.0% Gross Commercial Revenue $189,000

Loan to Cost Ratio 70.0% Less Operating Costs 2% ($3,780)Hard & Soft Costs, Site Costs $67,008,000 Less Vacancy 5% ($9,450)Amount of Loan $46,905,600 Commercial NOI $175,770

REVENUE ASSUMPTIONS Capitalized Commercial Value $2,197,125

Sales Price Market Rate BMR Total Project Value $86,830,250Loft $650,000 $325,000 Less TDC $79,882,1131BR $400,000 $200,0002BR $575,000 $287,500 Total Profit $6,948,137

Profit as % of Development Costs 8.7%Lease Rate (Monthly/Sq. Ft. NNN) $1.75Cap Rate 8.00%

Source: Peninger Consulting, 2013.

“Opportunity cost:” how much money the developer loses by having the affordable unit there.


Affordability Gap

Oh no, here comes math• Market sales price = $10• Lower income person can afford $4 • Gap = $6

Sales/rent price lower income

person can afford

Sales/rent price of market rate unit

City of Berkeley – The in-lieu fee shall be sixty two and a half percent (62.5%) of the difference between the permitted sale price for inclusionary units and the amounts for which those units are actually sold by the applicant.


Production Cost

Cost to build minus cost to sell• Without subsidies

– 6 units cost a total of $24 to build and will sell for $12 total.

– In-lieu fee = $2 per unit

• With subsidies– 6 units cost a total of $24 to build

and will sell for a $12 total. Subsidies available from state or feds come to $6.

– In-lieu fee = $1 per unit


San Francisco

“San Francisco wanted to create a fee structure that reflected the true cost of developing a restricted unit when developers decided not to build on-site units…We now base our fees on the difference between what it costs to build a unit of housing and the affordable/restricted price.”


Boston and San Francisco

• Boston: $200,000 per unit in-lieu fee – Based on the average city subsidy (not total

subsidy) used to build an affordable unit at the time.

• San Francisco: $335,000 per unit fee for a 2br unit in San Francisco– Based on the total subsidy required to create

an affordable unit without federal subsidy.


Adding Confusion

• Some cities talk about the fee per market rate unit

• Some talk about it per affordable unit.

Oh no, more math!• A city requires developers pay an in lieu fee of $200,000

for every affordable unit they don’t build. • A city requires developers that don’t build the affordable

units to pay $20,000 per market rate unit in their development.


Key Takeaways

• Try to agree on the methodology first, then get accurate data for establishing the fee.

• Agree on goal: Do you want on-site units or fees?

• Fees allow leverage, which can be very powerful.• If fee is priced too high, no one will use it.• If fee is priced too low, you could get more units.• While pro formas are complicated, in lieu fees

are easier.


How Do You Respond?

It won’t pencil. You’ll kill all

development

Liar liar, pants on

fire!


How Do You Respond?

• Make sure it is not true (have flexibility in the program, perhaps phase in requirements, offer incentives).

• Keep conversation focused on goals and need.

• Have case studies from comparable cities that show development before and after the new requirements.

• Be able to articulate that it is land speculators who bear the cost.

• Ask to look at their pro forma. Share it with Cornerstone or other economics to get feedback.

• For fees, agree on goals and methodology.


Contact Information

@ http://affordableownership.org/

www.affordableownership.org © cornerstone partnership 2015 keeping homes affordable &...

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