The Price of Liberty is Eternal Vigilance
City Real Estate Committee Meeting - March 7
How much "affordable housing" on Ansonborogh Field? Problem with the "affordable housing" bond issueWarwick Jones, Editor
The City spoke again of its broad plans for the development of Ansonborough Field at the Real Estate Committee meeting last night. Essentially the City plans on constructing about 250 condominium units, 2 small hotels, a possible building for a culinary school and some commercial space. It plans to move to a Request for Proposal (RFP) sometime in the next year or so. But last night's meeting was about pre-qualifying potential bidders for the project. The Mayor said that he hoped (expected) that there would be at least $5 million available from the RFP consideration that could be used to establish Concord Park and to pay the State Port Authority for a small parcel of land that abuts the Field. Concord Park will be the 5 acre space between the developments at either end of the Field.
What the Mayor couldn't tell the meeting last night was the precise percentage of housing that would be "affordable" and what would be for sale, at market rates. Nor could he precisely say what the breakdown would be of "affordable housing" into rental and "for sale". He did say however, that there would be no difference in appearance or construction of the "affordable" and "market rate" housing. The reason for the uncertainty of course is the financing and the vicissitudes of the real estate market.
Given the likely conditions of the development contract, the developer has to look largely to the sale of the condominiums at market rates for his profit on the project. These profits have to subsidize the sale and rentals of the "affordable" units. They may have to subsidize the sales of the hotels and the culinary school as well but this is arguable. We don't think that these hotels are well located nor do we think they will be sought with great enthusiasm. But it will depend on the cost or lease terms.
And on the subject of costs, we should point out that development on the Field will be costly by virtue of FEMA regulations. The ground floor can not be used for habitation orfor permanent fixtures. It can be used for parking and as the City has indicated, such activities as retailing from barrows, or food vending. So the cost of the "affordable housing "will most likely be higher than the $90 a sq foot development cost quoted by some other affordable housing providers for developments elsewhere.
To make a point easier, let's take the most pessimistic and perhaps unrealistic scenario Assume that all construction apart from the market rate housing i.e. hotels, school, affordable units, are sold for cost, then the sale of the market-rate condominiums will have to cover their cost, the developer's margin and the payment to the City of $5 million. Is this possible? We think it is but only if the major part of the condominium development is sold at market rates. (150 units out of 250 is our guess) If profits were realized on the sale of the hotels and other space, then a greater proportion of housing devoted to "affordable" would be possible.
Until more details are known, we should not extrapolate too far in our projections. After all, development plans could change as could markets. But our point really is to say that the proportion of "affordable housing" on the Field will depend on a number of factors, the profit on the sale of the hotels, commercial space, schools but primarily the condominiums. Low interest rates and a strong market for condominiums could see a high proportion of "affordable housing". Conversely, a collapse in the condominium market in the City could see only a small proportion of "affordable" units.
Taking a converse tack, the City may be very successful in its plans and with a strong condominium and other markets, a large proportion of the proposed housing could be devoted to "affordable". But as we have argued before, the City would be doing a service to the needy if it sold the "affordable housing" on the Field at market rates and took the proceeds and deployed them in areas where real estate is cheaper, where more units could be built at a lower cost, and more folk accommodated.
Bond Issue has problemsWe wonder why these problems have only come to light. The City in a referendum some 3 years ago asked voters to approve a $10 million bond issue for "affordable housing". The voters approved but until a few months ago, there was little mention of the raising of the funds. Now we find there is a problem with their utilization. The City can only raise this money for a 15 to 20 year term.
So why is this a problem? The bond obviously has to be repaid at the end of the term. The rents that are received from any "affordable housing" that is financed by the bond have to cover interest and amortization. And at this time, there are indications that they can't. The problem would be alleviated if the repayment could be stretched to 30 years but for reasons we don't understand, mainly legal, they can't.
The City was planning on financing three developments with the bond proceeds. The developments - at William Enston Homes, Daniel Island and Romney Street entail the construction of about 64 units. The construction costs amount to roughly $150,000 a unit and would absorb just about all of the $10 million to be raised. The units on Charles Street will be much less than $150 a sq ft while those at the William Enston Homes will be much more.
The issues are as follows. Assuming the bond issue is made and the proceeds received, interest and amortization will be incurred almost straight away. But it will take 18 months more or less for these units to be constructed. Over this period, nothing to pay interest or amortization will be collected. Then there is the main problem. Can the rents received cover the interest and amortization?
Assuming an interest rate of only 4% a year, we calculate that rents would need to be between $900 and $1100 a month per unit on average to cover interest and amortization on $150,000 over a 20 and 15 year period respectively. These rents are beyond the means of most needy folk, certainly those that fall below the median income. And of course we have ignored the cost of repairs and maintenance that would be necessary over the years. But the payment necessary to cover the interest and amortization would fall to about $720 a month if the loan term could be stretched to 30 years. This payment level looks more hopeful.
We hope the City can work out a way to secure 30 year financing. The projects it has identified for financing by the bond issue are worthy. And as has been pointed out to the City by Mr. Don Cameron, the head of the Housing Authority, the financial burden could be eased with time. Rents can be raised in line with wages in the region. This may only be a few percentage points each year but it will be represent a significant easing within a few years.
We also note that the City may need to move speedily to lock in low interest rates. Long term rates have been moving up. A percentage point increase in the loan will have a very negative impact on the financing ability of the City.