On September 7, the National Council of State Housing Agencies (NCSHA) has released a much anticipated the report by Abt Associates entitled “Variation in Development Costs for LIHTC Projects.” The new research demonstrates that housing credit financed apartments on average cost roughly the same to develop as typical conventional apartments, even though LIHTC properties must by law meet many requirements that conventional apartments buildings do not.
Report analyzed a nationwide database of more than 2,500 Housing Credit properties containing more than 160,000 units over a multi-year period and found the following total development costs (TDCs):
- The median TDC per unit, inclusive of soft costs (e.g., fees for contractors, architects, and other professionals) and land costs, between 2011 and 2016 was $164,757, adjusted for construction cost inflation.
- The mean TDC per unit, inclusive of soft costs and land costs, between 2011 and 2016 was $182,498, adjusted for construction cost inflation.
These figures reflect TDCs for newly constructed buildings as well as rehabilitations of existing properties. The sample includes approximately 47% of the units in properties developed with 9% credits and 20% of the units in properties developed with 4% credits placed into service between 2011 and 2016. Every state was represented in the sample.
The report goes on to find that, “According to data provided to NCSHA by Dodge Data and Analytics, construction costs — not including soft costs and land — for all newly constructed apartments averaged approximately $151,000 per unit between 2011 and 2016. According to Fannie Mae, soft costs account for an average of 25 percent of overall apartment development costs. While land prices vary widely, and national data is difficult to obtain, anecdotal evidence suggests they may account for 5 to 10 percent, on average, of TDC. Adjusting the $151,000 per-unit construction costs by 30 to 35 percent to account for soft costs and land costs yields an average TDC for multifamily apartments overall of roughly $196,000 to $204,000 per unit between 2011 and 2016. Abt Associates found the average Housing Credit cost per unit for new construction, including soft costs and land, was approximately $209,000 during that period.
The slightly higher costs suggested for new construction of Housing Credit developments are likely explained by financing requirements on them that generally do not apply to market-rate apartment developments, such as the need for higher upfront operating reserves and funding to cover the developer’s services. Market-rate apartments can generate capital to pay these costs by charging higher rents. Housing Credit properties cannot: They must by law serve low-income households at restricted rents for several decades.”
The report also examines development cost growth in housing credit properties through multiple methodologies and data suggests that LIHTC TDC actually grew less than conventional TDC based on Fannie Mae data or at roughly the same average rate as overall apartment development cots, based on the RS Means Historical Cost Index.
The analysis confirms a number of geographic and project characteristics that contribute to cost differences. For example, costs were higher projects developed in principal cities of metropolitan areas, DDAs and QCTs. Costs were also higher in New England,, the Mid-Atlantic and Pacific regions compared with other regions. Project and unit size is also a significant contribute — smaller projects were more expensive per unit to build than larger projects and likewise projects where unit size averaged more than 2.5 bedrooms were also more expensive. The report observes, “These findings illustrate the important tradeoffs involved in developing affordable housing across the U.S. Projects cost more to build in high-cost areas, but people need affordable housing in these locations just as much as (or even more than) in lower-cost areas. Smaller projects cost more to build on a per-unit basis than larger projects, but larger projects are not desirable in all locations. Smaller units cost less to build but are not appropriate for all household types.”