By Brian Bandell, South Florida Business Journal
Building affordable housing projects has become more difficult than ever, developers say. The challenges couldn't have come at a worse time, as South Florida residents reel from one of the worst affordable housing crises in the nation.
Housing Trust Group President and CEO Matthew Rieger said he hasn't encountered as many obstacles in making projects make sense financially in his 20 years at the company. HTG is one of the largest affordable housing developers in Florida.
“The numbers don’t work anymore," he said. "If you were to sit down today and plan pro forma an affordable job, none of them work.”
Miami-based HTG, like other developers, is being hit by a perfect storm of risings costs for construction, insurance and bank loans for these projects.
A spike in construction costs by 20% to 30% over the past year has impacted all types of development, but it’s a bigger problem for affordable housing. While market rate apartment developers can raise rents to compensate for higher construction costs, rents at affordable housing complexes are fixed based on tenant income levels.
In some cases, Rieger has had to write checks to cover additional costs of HTG's projects because he signed financial guarantees that he would complete the construction.
“I promised I would do that and I did it, but I’m not happy about it,” Rieger said.
Rising insurance costs present a similar problem, Rieger said. Not only does insurance cost more during construction, the property insurance and general liability costs for completed buildings have dramatically increased, he said. That reduces the cash flow from the project even further, leaving less money to pay the mortgage.
“At the current level of construction costs and now knowing what it will cost to insure the buildings, nothing pencils out right now," he said.
Compounding the problem is rising interest rates, which have made bank financing more expensive. Most affordable housing projects use a combination of low-income housing tax credits and a bank loan.
Willie Logan, CEO of the Opa-Locka Community Development Corp., said he’s delaying significant construction projects until interest rates and construction costs come down. He
had a 288-unit affordable housing project in Miami Gardens he hoped to build. But when construction bids came back, the costs were 100% higher than 18 months ago after factoring in construction and interest rate increases.
He also realized it would cost more to operate because maintenance employees are demanding higher salaries now. The numbers just don’t work, he said.
When Housing and Urban Development Secretary Marcia Fudge visited Miami in June, she called the city the “epicenter of the housing crisis in this country.” Recent data from RealPage found Broward and Miami-Dade counties were in the Top 3 nationwide for rent increases.
Logan said federal officials should take action to address that crisis, and HUD could start by declaring Miami-Dade County a “Difficult Development Area. That would automatically increase low-income housing tax credit awards here by 30%.
“The extra 30% would make a big difference,” Logan said.
Rieger said the Florida Housing Finance Corp. needs to raise the amount of low-income housing tax credits faster to keep up with inflation and all levels of government needs to get serious about funding affordable housing. Having more housing tax credits will reduce the amount of the bank loan and free up cash flow for the project so the developer could better absorb the higher insurance costs, he said.
“We need more resources or what is a catastrophic problem now only gets worse,” Rieger said.