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The Real Deal Los Angeles

“Underwater from the start”: LA’s multifamily players tell us how they really feel about Measure JJJ

Apartment supply growth expected to decline under ordinance: experts

November 22, 2016 08:30AM
By Julie Walmsley

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Kitty Wallace (credit: Adam Southland), Daniel Mense (via Ness Holdings) and the DTLA skyline (credit: Hunter Kerhart)

Kitty Wallace (credit: Adam Southland), Daniel Mense (via Ness Holdings) and the DTLA skyline (credit: Hunter Kerhart)

By passing Measure JJJ, Angelenos have decided that if you’re a building a project of 10 or more residential units within the city, you have to adhere to California government codes on density bonuses. If you are seeking a Los Angeles General Plan amendment to increase floor area, height, or density by more than 35 percent, or are introducing new residential use where it did not exist before, you will have to set aside between 11 to 20 percent of those units for affordable housing if they’re rentals. If they are for-sale units, 40 percent need to be affordable. You will also have to hire and pay construction workers by a a particular set of guidelines.

Exactly how and when the new requirements will apply is not yet clear. The measure is an ordinance — a Los Angeles city law — that will become effective when City Council votes to certify the election results. That should happen in three to four weeks. Whether the law will apply to projects already in the entitlement application process has not been announced.

The Real Deal spoke with those who have a stake in L.A.’s multifamily sector, and the common sentiment regarding the passing of the measure was disappointment. Real estate insiders said the local law, also known as Build Better L.A., could actually worsen, rather than improve, the area’s affordable housing crisis.

Kitty Wallace, an executive vice president at Colliers and a multifamily housing expert, told TRD that the expense of building affordable housing will cause market rents to rise as developers seek to stay above water.

“The cost of [affordable] units is three times less that what it cost to build the unit,” she said. “Offsetting the affordable [units] requires many market-rate units in a city where average rent is $1,694.”

Read on for more reactions to the passage of Measure JJJ.

A building code that works for no one

Piecemeal zoning decisions are ironically the ire of both development opponents and developers.

“The needs of the city have changed [since the code was written]. Since there is no thoughtful code in place, developers are going one-off,” Wallace told TRD.

Ness Holdings’ managing director Daniel Mense had stronger words.

“The zoning code is completely archaic,” he said. “The housing crisis is not a function of what developers have been doing. It’s a function of government policy.”

Where are the incentives?

Many developers argue better incentives are needed to make affordable housing investment palatable for investors. That could be done without JJJ, which also tacks on construction labor regulations and prevailing wage requirements that can be additionally cost prohibitive.

Mense said the California Senate Bill No. 1818, commonly referred to as SB1818, is a start, but it could go further to make mixed-income housing an attractive investment for developers. “It allows density in exchange for affordable housing,” Mense said. “[On top of that] there needs to be a little bit of give and take, like tax credits.”

The need for a streamlined process

The zoning code must change, not only because of the substantive changes that are needed, but because negotiating each exception is time expensive with an entitlement process that is byzantine and unpredictable. A little more consistency in the system would go a long way, said the experts TRD interviewed .

“I can’t speak for everybody [in the development community], but it’s restricting our ability to build more housing,” Mense said.

Wallace said that making entitlements easier for developers would actually lower housing costs.

“Negotiating adds to the overall cost of the project,” she said.
“The city of Santa Monica [at times] takes seven years to break ground on a project.”

Wallace also noted that the lengthy period during which developers aren’t sure what they will build and neighbors aren’t sure what is coming in builds tension that can add to standoffs.

“It’s also the uncertainty,” she said. It causes stress and angst for the neighborhood as well.”

Bad math

Units offered below market must be offset by some profit somewhere, and that requires a ratio that the authors of JJJ don’t grasp, according to the measure’s critics.

Wallace said Colliers is currently marketing two mixed-income properties, one in Miracle Mile and one in West Hollywood. The returns are not so encouraging for investors, she said.

“It’s a much smaller ratio of units [than would be required under JJJ] but you need lots of market rate [inventory] to counteract the fact that you’re basically underwater at the start.”

“The supporters of the measure say we’re all about profit,” Mense said. “The fact of the matter is we have investors. We have a fiduciary duty.”

Holland Partner Group’s Tom Warren, speaking generally about affordable housing set-asides at a Los Angeles Business Council housing conference last month, said requiring affordable units will only limit investment in new developments, as all investors want attractive returns. He estimated that for every 15 percent requirement, rental prices on the market rate units must shift upward by 10 percent.

Accordingly, a recent report from research firm Green Street Advisors predicted JJJ will result in less multifamily investment.

“Conversations with local developers will shed light on the magnitude of the impact, but the passing of Measure JJJ suggests that Los Angeles multifamily supply growth expectations should decline.”

What about middle-income renters?

On the same LABC panel where Warren spoke, the California Community Foundation’s Ann Sewill shared staggering statistics about housing insecurity, including the finding in a recent poll by her organization that 30 percent of Angelenos who make between $60,000 and $90,000 a year — enough to afford LA’s average rent of $1,694 — fear homelessness. But JJJ does not change market rates for middle income residents; it opens up stock only for those who qualify for government entitlements.

Mense said his firm wouldn’t be significantly affected, as they operate in the value add space, but Build Better LA does little for those in the middle.

“The value add guys are going for $1,500 to $2,500 [per month rent] for a two-bedroom, mostly for millennials,” he said. “[The effects of JJJ] are going to [newly developed] class A buildings… It’s going to be very difficult [for those developers] to underwrite new projects”

The housing crisis is real

Industry insiders agree that, despite qualms with JJJ, the affordable housing situation truly is a crisis.

“Our city is one of the least affordable in the country,” Wallace said. “It’s crazy. But haphazard ballots like this don’t really accomplish anything.”

Mense said he hopes better policy can help his firm and others build more affordable projects, which it actually wants to do.

“We have a duty [to our investors], “Mense said. “But that doesn’t mean we can’t help too.”

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