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The Real Deal Los Angeles

Are LA’s affordable housing developers getting priced out of the market?

New measures encouraging low-income construction are also squeezing builders' bottom line
By Hannah Madans | March 16, 2018 04:00PM

Rendering of Weingart Center’s proposed towers (Credit: JWDA)

Born in Los Angeles, Andre Bueno has called many places home. He eventually moved to the Midwest, where he became a developer of affordable housing and a principal at Bueno Group. When he returned to L.A., he hoped to create affordable housing developments in a city in desperate need of them.

Bueno quickly found the task wouldn’t be so easy.

Paying non-union labor, Bueno said, gives developers a 15 percent profit margin. But a recently-passed L.A. law requires developers pay union wages if they want to receive incentives for construction with at least 8-25 percent affordable units. That would increase costs by 30 percent, Bueno said, leaving the developer in the red.

“No one would loan you the money. The project just doesn’t work,” he said.

Some of L.A.’s biggest affordable housing developers are grappling with whether the city’s new push to add more units for low-income residents will also push them out.

There are exceptions. Some of those, mostly nonprofits, can maximize the incentives with developments whose units are all classified as affordable.

But other private developers — who far outnumber the nonprofits — are having a tougher time. They say the city should provide additional incentives to build affordable units. That would include being able to change zoning laws to add a retail component on a property, which would help the bottom line while keeping the affordable mandate.

Agora Hills-based AMCAL has been building affordable housing in L.A. and throughout the state since the mid-1990s. Its president, Arjun Nagarkatti, said requiring union labor on projects will likely mean having to scale back the number of units he can build.

“It’s not impossible to do affordable housing with prevailing wages, it just makes it more difficult and you get fewer units, which in some cases may not financially work for a project,” he said.

Other developers agree. The math, they say, just doesn’t add up.

Steven Fifield, the founder of Chicago-based Fifield Companies, has developed two market-rate residential constructions in Los Angeles. He would consider more projects in the city, but said the affordable housing requirements — particularly the ones making developers hire union labor — are preventing him from diving back in.

Measure JJJ

He pointed to the city’s Measure JJJ initiative, which requires developers seeking zoning exemptions to add affordable housing and pay union wages. The measure, which was approved by L.A. voters in November 2016 and took effect in September, was “well intended,” he said, speaking at The Real Deal’s Westside Spotlight event on March 7. Ultimately, he said it will hurt development in the long run.

For their part, unions maintain the higher wages are necessary to maintain a skilled workforce in the city.

In exchange for setting aside a portion of a residential construction as affordable, developers can receive incentives from the city. Those include the ability to add more units and build taller apartments, along with reducing the required number of vehicle parking spaces. The measure affects developments within half a mile of a major transit stop, with the idea that it would make L.A. a more transit-friendly and environmentally cleaner city.

Fifield said most developers use 60-70 percent non-union labor. He said the requirement to use union labor for affordable construction would drastically increase development costs.

But while many smaller affordable developers are shying away, others building mostly market-rate construction have sought the city incentives as part of their projects.

In an analysis of proposals filed, TRD found developers had submitted applications for incentives in 43 apartment proposals. Subtracting three of those planned projects whose units were all affordable, the remaining set aside around 10 percent of the total number of units for low-income residents. The rest would be rented at market rate.

To date, AMCAL has developed 2,614 affordable units in Los Angeles County, making it one of L.A.’s biggest players in that space. Nagarkatti said AMCAL is utilizing Measure JJJ incentives, particularly fewer parking space requirements, which saves money on the overall cost of the project.

He has 488 affordable housing units in the works, including 126 for Florence Avenue, 61 set aside for military veterans in Pomona and 109 affordable units in Downtown L.A.

Statewide, tax credits can also be a boost for affordable housing. Investors buy those credits in exchange for equity in a project. The Low Income Housing Tax Credit pays 20 to 70 percent of development costs for below-market rental properties, according to Novogradac & Co.

Enter the nonprofits

Developers who have traditionally played in the affordable housing space are nonprofits, which utilize bank loans, tax credits and subsidies to build their developments.

Downtown L.A.-based nonprofit Abode Communities is working on a handful of affordable projects. Those include La Veranda, which has 77 affordable units in Boyle Heights; and an 86-unit project in Adams Terrace. Both will open in 2020.

All Abode projects are 100 percent affordable. So far, Abode has completed 35 affordable housing developments in the county with 2,354 units, making it another major player. Abode President and chief executive Robin Hughes said the group was meeting Measure JJJ requirements before the law was implemented.

“The incentives allow us to continue to produce affordable housing at the scale and density we have in the past few years,” she said. “From a market-rate developer standpoint, it has been an opportunity to include affordable housing and take advantages of the incentives.” Hughes said Abode will take advantage of the density bonus and reduced parking requirements.

It’s not Measure JJJ, but two different ballot initiatives, Measures HHH and Measure H that the group is really benefiting from, Hughes said. Those measures provide bonds to help with permanent supportive housing and resources for residents. Measure HHH will allow for 10,000 new units of housing for the homeless with $1.2 billion in bonds.

Another large affordable housing provider is Carlsbad-based Chelsea Investment Corp. Its latest project in L.A. is working with homeless service provider The Weingart Center to build two affordable and permanent supportive housing complexes in Skid Row.  In total, they will have more than 1,000 units.

Can retail help?

To help offset the cost of fixed-price rental units, many affordable housing proposals have incorporated ground floor retail into their projects. But some areas don’t allow it, and private developers say future zoning laws may need to be changed to make affordable construction more attractive.

The Weingart Center’s project in Skid Row will have ground floor retail, with an eye toward community-oriented organizations.

Bueno said he wishes a project he is working on at 417 South Kenmore Avenue could have ground-level retail, but was not allowed under existing zoning regulations. The project is still in the early stages of planning but will have affordable and market-rate housing.

AMCAL’s Nagarkatti said creating a mixed-use property comes with its own complications, and possible vacancies that could further weigh down a bottom line. Generally, he said, AMCAL will avoid a retail component.

“We really do housing and that’s our focus,” he said. “I haven’t seen much ground level retail be successful when tied to affordable housing.” But there are exceptions, and it’s all about location. He has retail component at one of his projects in Downtown L.A., located in a very walkable area. For that 109-unit construction, AMCAL will have 10,500 square feet of retail space.

AMCAL has completed six affordable housing projects with a retail component and has three affordable housing projects with retail components in the works.

Bueno, who returned to L.A. hoping to develop affordable homes, said it has become increasingly difficult for the little guy to build, and expects to see fewer projects in the future.

Measure JJJ has not yet been the disaster that many developers had predicted, Bueno said. “It just didn’t start new construction projects,” he said. “All the cranes we see up in the sky, those are amazing projects that they got into the ground before.”