It is very difficult to find a clear and empirical comparison of the costs to bring an affordable housing development (here defined as a development with significant subsidy for construction either in the form of government grants or tax credits) and a market rate housing development. Affordable housing projects have many unique costs, and often cost more because of financing, construction, and labor requirements. Affordable housing projects can be more expensive than market-rate due to some of these unique costs, although the gap between the two can vary widely.  Variation in the factors like construction type, location, and funding sources, can offset or enlarge the expenditure gap between affordable housing and market rate projects. These differences along with varying typologies, organizational structures, and funding sources also makes  a cost comparison between an affordable and market rate project to the end user difficult.

However, both State’s 2009 Affordable Housing Cost Analysis and Keyser Marston Associates’ 2011 Construction Cost Comparison Analysis in San Diego found that it often the case that affordable housing projects are more expensive. This is especially true for projects that contain a lot of supportive services, since the cost per unit also includes the service fees for childcare, treatment facilities and other co-located services [2014 California Affordable Housing Cost Study]. While subsidized housing is generally more expensive, those additional costs have to be weighed against the public benefit of producing affordable housing for poorer families. Any financed housing project—subsidized or not—must generate enough funds from rents to cover operation and debt service. Because some families simply can’t pay the rents to generate this revenue, government responds by subsidizing this gap.

It is important to understand why affordable housing projects often have higher costs and find ways to lower those costs. Additionally, to ameliorate the current rising rents, local communities have to decide at what levels of income are low enough to require newly constructed units versus adopting  other interventions like vouchers or tax exemptions to privately funded projects that help  lower housing costs.    Building affordable units isn’t the single answer, especially when those units are expensive to build. For example, vouchers and tax exemption programs like Seattle’s Multifamily Tax Exemption (MFTE) program, allow the leveraging of private capital; these programs allow the private sector to take the risks and absorb the costs of building new housing and limit the costs of restricting rents simply to the amount of difference between what a family earns and lowered rent.

Deeper research and analysis is needed to find the tipping point: when should we fully subsidize the construction of a new, expensive unit instead of simply making cash payments or transfer payments to lower the rent burden of an individual or family. Intuitively, it would seem that poorer, larger families would benefit the most from the construction of new fully subsidized units, since their residual costs are higher and their needs for space are greater as well while their incomes cannot support the needed rents to offset operating costs and debt service.

What follows is a review of the different costs and financing structures impacting housing development. Bolded in the table are differences in costs between affordable housing projects and market rate projects, followed by how these differences affect the final outcome. Besides, discussion of other factors that can influence the cost of both market rate development and affordable housing projects comes at the end. Some specific cost comparison figures are highlighted in the Appendix. This review is only a start, but in the end, the best thing policy makers could do is to reduce regulatory costs of all housing including the unique costs associated with affordable housing, while also reviewing the normative standard of when direct cash payments are warranted versus construction of new units. Current discussions in Seattle seem to be assuming that any cost burdened household need a new unit; this assumption needs a deeper review.

1. Total Residential Cost

Cost Category	Main Components
Acquisition Cost	Cost of land, existing building, improvements on the site
Construction Cost (60%-70%)	Construction fee (material & labor cost), contingency cost, infrastructure cost, Sales Tax
Development Cost	Developer fees, project management fees, architect fee
Other Cost	Financing & legal fees, carrying costs, permitting & impact fees, bridge loans.

 

2. Differences between affordable housing project and market rate development, and how the differences influence the cost.

The term “affordable housing” can refer to housing units developed in whole or in part with public subsidies and reserved for low-income residents. Main difference between the two lies in the variation of financing and regulation with respect to benefit policies (unique to affordable housing projects).

Financing

Housing Trust Fund & Federal Low-income Housing Tax Credit Financing

LIHTC Program reduces the tax liability of property owners and investors who agree to provide low-income housing. Housing Trust Fund authorizes trust to fund proposals for new construction, acquisition, rehabilitation and etc.

• To be eligible for these programs, projects would generate costs associated with higher legal, development, and financing fees to meet various state and federal regulations about tax laws and other requirements.

Finance Complexities – diversified funding sources

Funding for affordable housing projects comes from a diverse array of sources ranging from federal grants to local grants and capital campaigns, such as LIHTC, Housing trust fund, local funds, federal funds, equity investment, permanent loan and etc.

• Diversified funding sources take longer time, even twice as long as market rate development does, (according to 2009 WA Affordable housing cost study) to go through funding processes. Time-consuming process contributes to more legal and transaction costs.

Bridge Loans

A bridge loan is a type of short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing. Unlike market rate projects, developers of affordable housing need to use bridge loans as interim financing before they secure the permanent funding.

• Bridge loans require projects maintain certain levels of operating reserves to pay for the loan. For the market rate developments, they may not have this concern to keep higher levels of reserves.

Benefit Policies & Regulations

Durability and contingency

All federal, state, and local affordable housing programs require a very long time frame for receiving public funds, usually from 30 to 55 years.

• Thus, developers would use durable materials for construction and focus more on quality to meet regulatory requirements. Better materials and quality lead to more construction cost (material cost).
• Good quality also means excellent ability to deal with potential risks during the long period, which contributes to higher contingency costs and higher project management expenditures.

Prevailing Wage

Most affordable housing projects should pay prevailing wages in accordance with state and federal prevailing wage regulations since they receive public funding.

• Higher labor cost than market rate developments

Evergreen standard and Apprenticeship program

These two programs are associated with Housing Trust Fund. Affordable housing projects, which receive funding from Housing Trust Fund, must meet the environmental standard and employ enough employees from apprenticeship programs.

• There is additional development cost to target subcontractors that can meet the apprenticeship requirement and to observe sustainable building practices.

Source: 2009 Affordable Housing Cost Study, Department of Commerce, WA

3. Other factors influencing cost of developments

Project type and unit size: Different types of unit have different cost. smaller units would cost less per unit, but more per square foot compared to the larger units. Four stories and taller building would cost ten percent more to build.

Developers: Larger developers and developers that employ general contractors can build projects less expensively. Developers can decide which type of projects to build and how to manage the projects. Brilliant decisions can save the cost and manage the projects well.

Community Opposition: Local force can influence the cost of construction. Community opposition can delay the project. And even worse, developers may cost a lot to make changes to original projects just to mollify the opposition.

Location: Location determines the cost of land acquisition. Even though we exclude the cost of land out of development cost, location still plays a role in affecting the total construction cost. When developer purchases an expensive land, he would prefer to construct a higher building and more units. Different type of projects would need different design, materials, labors and etc. Costs are varied this way.

 

Appendix

Source: 2014 California Affordable Housing Cost Study

This study collects cost data of 400 developments in California. However, only 22 developments report their market-rate price. Thus the above statistics is based upon the sample of 22.

 

Source: 2009 Affordable Housing Cost Study, Department of Commerce, WA

The chart is from a case study in 2009. Thus, the statistics might not be appropriate to use for reference.