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The High Cost of Low Cost Housing in Venice

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Rose Ave Apartments

Rose Ave Apartments (Venice Current)

VENICE- In 2016, 77% of Los Angeles voters passed Proposition HHH, a property tax increase ($10 per $100,000 of assessed value) the measure's supporters said would "solve homelessness" by raising $1.2 billion over 10 years (at an average contribution of $120,000 per each of 10,000 units expected to cost, on average, $340,00 apiece).

By October, 2019, an audit by L.A. Controller Ron Galperin's office found that just a few projects totaling 228 units had been built using HHH funding, at an average cost of about $531,000, taking between 3 and 6 years to complete.  According to the data on his website, there are currently another 7640 units in various stages of development, at an average cost per unit of $516,104.83, with a total of $1,028,065,108 in HHH funding committed to all projects.  In other words, all HHH funds have been spoken for, and because of cost-overruns, less than 80% of the promised units will be built -- at a time when homelessness in Los Angeles is skyrocketing.

According to local developers and architects, privately-funded, multi-family housing developments in West Los Angeles typically cost about $250,000 per unit to build, not including the cost of land.  And it only costs about $530,000 to buy a median-priced condo in L.A. County

An analysis of the staff reports of the costs of two projects in the pipeline in Venice -- the 35 unit Rose Avenue apartments, developed by Venice Community Housing (VCH) and currently under construction, and the 98 unit Thatcher Yard, developed by Thomas Safran and Associates (TSA), scheduled to break ground at the end of 2021 -- may shed light on why costs are so high.  

Line Item

Rose Avenue

Percent of Total

Thatcher Yard

Percent of Total

     

Land And Acquisition

$1,019,902.00

4.9%

$1,110,719.00

1.8%

Construction Costs

$9,522,294.00

46.0%

$38,900,191.00

66.0%

Construction Hard Cost Contingency

$832,274.00

4.0%

$2,798,738.00

4.7%

Soft Cost Contingency

$90,680.00

0.4%

$386,674.00

0.7%

Architectural/Engineering

$870,528.00

4.2%

$2,482,273.00

4.2%

Const. Interest, Perm. Financing

$1,601,054.00

7.8%

$3,643,748.00

6.2%

Legal Fees

$49,874.00

0.2%

$291,182.00

0.5%

Reserves

$1,710,041.00

8.3%

$520,440.00

0.9%

Other Costs

$1,211,088.00

5.9%

$1,835,148.00

3.1%

Developer Fee

$2,032,218.00

9.8%

$6,700,000.00

11.0%

Commercial Costs

$1,700,029.00

8.2%

$0.00

0.0%

     

TOTAL

$20,639,982.00

 

$58,669,113.00

 

At What Cost? 

The per unit cost of the Thatcher Yard is $598,664.  For the Rose Avenue Development, that number is $541,141.  Why so high?  When looking for an explanation, a few things stand out:

1)  The cost of land in each projects is minimal.  Consequently, costs for land are limited to the cost of acquisition, which is roughly the same for both projects.

2)  The staff reports imply that construction expenses are the primary reason development costs are so high.  According to the report on the Rose Avenue project, "The project's cost of $541,141 per unit is attributable to historically high labor and materials costs affecting Los Angeles area projects.  The combination of local and state funding will trigger prevailing wage requirements, also adding to cost".  In addition, one well-cited, 2020 academic study of the high-cost of affordable housing stated that "hard construction costs—specifically the costs of material and labor—are the primary driver of rising development costs." 

While it is true that the cost of materials and labor has increased exponentially in the past few years, it's also worth noting that in 2014, when the cost of new construction was considerably lower, Venice Community Housing, in partnership with Hollywood Community Housing Community Housing Corporation, spent $512,119 per unit to build the 21-unit Gateway Apartments in Mar Vista, a permanent supportive housing project also benefitting from state and local funding.  Furthermore, construction costs account for less than 50% of the Rose Avenue project.

As for the Thatcher Yard, the staff report also cites prevailing wages as a factor affecting the high cost, as well as "mitigation of methane zone construction, high groundwater and...potential de-watering and redesign of the foundation", all of which would appear to specifically reflect the cost of building at this specific location.   Nevertheless, Safran has seven HHH projects currently under development (the most of any HHH developer), at an average cost of $538,015.78, in such disparate locations as Reseda, Hollywood and West Los Angeles.  In  2016, TSA acquired and renovated a 20 unit apartment building in University Village -- Dudley Oaks -- for a per unit cost of $563,743, with the benefit of government funding.

3)  Many progressives have suggested that rampant "NIMBY-ism" in the form of lawsuits is to blame. New York Times opinion writer Ezra Klein recently tweeted that, after watching Angelenos who had voted to raise taxes to aid the unhoused it was:  "depressing to watch those same communities pour into the streets to protest shelters being placed near them." Galperin's report cites one such lawsuit against the city's implementation of a Transit Oriented Communities program as potentially adding to development costs and delays, as it might impact developers' ability to get funding for projects taking advantage of the TOC program.  In a 2018 interview, Thomas Safran lamented a case where neighbors successfully constrained the number of units in one of his projects by legal means. 

Neither Rose Avenue nor Thatcher Yard appear to have been impacted by so-called NIMBY lawsuits.  Both projects were met with community support in the form of approvals from the Venice Neighborhood Council's Land Use and Planning Committee and General Board.   The lack of NIMBY resistance is reflected by the fact that legal fees for Rose Avenue and Thatcher Yard total just .2% and .5% of their total costs.

4)  Galperin cites "funding complexity" as a major source of the additional cost of these projects:  "on average, each development...had seven funding sources (including Proposition HHH), and...this model adds costs and delays housing production". 

"Construction Interest and Financing" represent a whopping 7.8% of development costs for the Rose project and 6.2% for the Thatcher Yard.  But in Safran's case, there was only one funding source besides HHH -- Wells Fargo tax-exempt bonds and a taxable loan.  In the case of Venice Community Housing, there were just two other sources -- Bank of America and an LA County Community Development Loan. 

5)  Galperin's primary reason for the high costs of these developments are "the permitting and approval processes that apply to any development project in the City".  One developer responding to a survey in late 2018 described the City's permitting processes as a "nightmare".  Recently elected City Councilmember Kevin De Leon, in his wide-ranging plan to address homelessness entitled "A Way Home", also blames "excessive requirements set forth by multiple government entities" for cost overruns.

But 100% affordable housing projects are exempt from the highest  fees private developers must pay;  in a typical west Los Angeles development, in lieu Park and Recreation fees fees, linkage fees and West LA Transportation Improvement and Mitigation Specific Plan (TIMP) fees can add up to tens of thousands dollars per market rate unit.  As for permitting, HHH-funded projects also benefitted from a 2015 Mayor's Executive Directive which called for prioritizing case processing of all projects containing more than 20% affordable rental units.  The City also hired a dedicated staffer -- the so-called "HHH Concierge" -- to streamline the permitting process for these projects.

6)  Galperin's report does not comment on the cost of developer's fees for these or any other HHH projects.   Nevertheless, they represent by far the highest percentage of soft costs of each of these projects (close to 10% for the Rose Avenue Project, 11% for Thatcher Yard).  An examination of other VCH and TSA project costs reveals that both developers charge roughly the same percentage of the total cost of development for each project they work on (and then, in a few cases, citing the waiving of a portion of those fees as a source of project financing).  In other words, the more a project costs, the higher the fee to the developer.   Private developers, on the other hand, receive fees based upon the profitability of a project, and so their fees go up when the project costs go down.

We passed these figures along to private Los Angeles developers and architects to try to get a sense of other ways they compare to commercial developments.   At the May, 2019 meeting of the Venice Neighborhood Council, local architect Matt Royce, then the head of the VNC's Land Use and Planning Committee, was the sole voice in opposition to the Thatcher Yard project when it came before the Board for a vote.  When reached for comment on this article, he stated, "Regardless of how these costs per unit have come about, if they represent the real cost in LA, then we will never have enough funds to build our way out of the homeless and affordability crisis. If there are roughly 50,000 homeless in LA County, and at $500k per unit, that's $25 billion or 25 times more funds than HHH.  Very few people in need will benefit from the small number of units built, and as the figures show, lots of the funding goes to lawyers, developers, architects, engineers, lenders, etc. That is not sustainable or fair to those in need or the taxpayers."  At a recent presentation before the VNC, Galperin echoed these sentiments, stating that, at this rate, the City would need to "triple its budget and spend the whole thing on affordable housing in order to house everyone living on the streets of Los Angeles". 

Another local architect (who asked that their name not be used) was more critical of the numbers themselves.  They pointed out that a recently constructed, 88-unit multi-family development in West Los Angeles was funded with a $25 million bond that covered all development expenses save for land (total cost per unit:  $284,090) -- a project which included several city-mandated affordable units.  They also expressed frustration at being unable to make an "apples to apples" comparison between privately- and publicly-funded projects, given that there are many more line items in a financial prospectus for a privately funded project than in a City Planning Staff report for a project taking advantage of public funding.  Nevertheless, both they and another, local private developer called these costs "absurdly padded".  The architect went on to suggest that perhaps the city could -- for far less money -- buy privately-constructed buildings at a much lower cost.   Any developer, they said, would be thrilled to have a "guaranteed sell out" for a development.  But HHH regulations (according to Galperin) require developers to "demonstrate a history of building and managing supportive housing projects", thereby favoring (perhaps exclusively) developers like VCH and TSA, despite their prior history of high-cost developments.

A March 23, 2021 letter from the Los Angeles Business Council to Judge David Carter, who is overseeing a lawsuit against the City by the L.A. Alliance for Human Rights echoed many of this architect's sentiments.  The Council demanded Carter "Direct the city to conduct a review/audit of Prop HHH to insure that any instances of fraud, waste and abuse be identified and addressed, and set a 12 month timeframe to finalize pre-development of HHH funded projects".  They went on to point out that delays in HHH-funded construction are due to an April, 2020 Public Order from the Mayor which stated that "All deadlines prescribed by the Los Angeles Housing and Community Investment Department (HCIDLA) related to the financing and predevelopment activities necessary to develop or rehabilitate affordable and supportive housing shall be tolled and suspended until further notice" despite the Governor's previous declaration that deemed construction work "essential".  HHH projects, which previously had a 24 month deadline for pre-development, are now free to delay as much as they see fit.  Furthermore, because the funds have already been committed, the City is legally unable to reallocate HHH funds to other, more cost-effective and timely projects.  On the opposite end of the political spectrum, housing advocates L.A.CAN  have also implied there is corruption involved, and demanded a far more aggressive audit of HHH funds than Galperin is providing. 

CD11 Councilman Mike Bonin was a staunch advocate of Proposition HHH when it was on the ballot, going so far as to form a Ballot Measure Committee to promote it (and raise funds to enable him to "to communicate directly with voters" at a time when he was running for re-election).  In 2019, he told the Argonaut, “The HHH money approved by the voters is limited to brick-and-mortar — to permanent supportive housing and to affordable housing, because that’s what the city’s taxing authority was. Now, the average city investment in each of these projects — the city is not spending $500,000 per unit; the city is spending about $120,000 per unit, which is not bad."  In fact, while the total HHH contribution to the Thatcher Yard's budget is only about $119,000 per unit, the Rose Apartments are using $208,000 per unit of HHH funds, and the city is spending, on average, about $134,000 per unit to build HHH projects.

More recently, Bonin's rhetoric around the issue has focused around alternatives to new construction, including shared housing, hotel room acquisition and master leasing.  In a March, 2021 interview he stated, "The biggest problem with homelessness solutions is the City, County, and agencies tend to do one thing at a time, and they do it really slowly and really expensively."  

According to the City's website, as of January, 2021 Bonin is no longer a member of the City Council's Homelessness Committee.

Galperin's suggestions for what he terms a "course correction" on HHH includes evaluating the feasibility of reallocating some Proposition HHH funds  to temporary housing (Kevin de Leon's "A Way Home" plan makes a similar proposal).  This would, as he puts it, especially apply to "funds committed to housing projects with outlier development costs".  And as he also points out, "most Proposition HHH Projects are in the middle or early development stages, and therefore, formal loan agreements have not been executed" suggesting the city could, in these cases, "claw back" funding for them.

Venice Community Housing has moved ahead with construction on their building on Rose Avenue at a time when most HHH construction across the City (including at the Thatcher Yard) has been delayed due to Covid concerns.  And they have two other equally high-priced developments totaling 200 units in the pipeline in Venice, both expected to cost well in excess of $500,000 per unit:  the Reese-Davidson Community and the Lincoln Apartments.  Because there are no more Proposition HHH funds available, both projects are instead using funding from Proposition 2, a motion passed in 2018 that was meant to create "homelessness prevention housing for persons in need of mental health services".  Both projects are also looking to take advantage of AB1197, a bill passed by the California State Assembly which would exempt affordable housing projects from CEQA requirements, effectively sheltering them from community opposition in the continuing belief that it is neighborhood concern, and not the developers themselves, who are to blame for the high cost of low cost housing. 

Councilman Bonin has been vocal in his support of both projects.