Not EVERYONE Agrees Grand Bargain is a Bargain

I find myself heading down to City Hall often these days to throw shade on various proposals about housing hatched by well meaning people at City Hall usually backed with dubious data and economics. Yesterday was no different. The Council passed resolutions putting them on a course to force builders to take more square footage in exchange for restricting rents in that extra square footage. I’ve already said why the math here is worrisome: the additional costs of construction are likely to result in rent increases for other units in the building, something counter to the stated intent of the policy. Seattle needs to stop playing with schemes that try to pay for subsidized housing with new housing construction and just let us build more housing.

Today, we’ll be meeting to discuss the numbers I mention in the KING5 report. As I pointed out, the math doesn’t favor the bargain. When rent revenues drop, costs go up, and there isn’t any other options, projects can become financially infeasible. This infeasibility means projects don’t happen and possibly law suits because of that. We’ll keep update EVERYONE as soon as we have completed a review of the impact of the Grand Bargain’s upzones on actual projects.

Concerns About Grand Bargain’s Financial Feasibility Grow

We’re going to be spending a lot of time this week looking at whether the upzones proposed as part of the so called Grand Bargain on housing actually add value to projects. Intuitively, I think the Grand Bargain isn’t feasible financially. New square footage comes at a cost and so do rent restrictions. My guess is that the additonal revenue or value created by the new square footage doesn’t offset those costs. The Grand Bargain ignores a basic principle of economics, that when you add cost to the production of something that will be sold in a market it will go up in price since the sale price is the only way to recover the additional costs. Our early look at the numbers shows that the costs of Grand Bargain’s mandatory upzones and inclusion of rent controlled units aren’t offset by the value they create.

There will be lots of numbers we’ll be kicking around. I suggest the feature video above as a way to prepare for our discussion. The video elegantly describes how money works in rental projects. New square footage creates an additional construction cost and rent restrictions limit revenue in the new square footage. Here are some of the questions we’ll be asking as we look at how the Grand Bargain plays out in neighborhood zones.

• What impact do added construction costs have on the bottom line, NOI and cash flow?
• How much additional revenue is generated by new units and what effect does additional revenue have?
• What happens to NOI and cash flow if new revenue is less than additional costs?
• Since the NOI and cash flow is the basis upon which money can be borrowed for a project, what impact would lower NOI and cash flow have on loans?
• Can rents be dialed up to offset costs?
• What if increased rents also increase vacancies because they’re higher than comparable housing? What effect would those higher vacancies impact NOI and cash when seeking a loan?
• How will changes in NOI and cash flow impact the Debt Coverage Ratio (DCR) for financing.

The video doesn’t account for construction costs, but it does show the delicate balance between the various elements of an operating budget for rental properties and how they impact NOI.

Gross Rent [Scheduled]
(Vacancy Reserve)
__________________
= Gross Rent [Adjusted]
(Maintenance)
(Management)
(Property Taxes)
(Landlord Insurance)
(Other — Utilities, HOA, etc)
___________________

=Net Operating Income [NOI]
(Capital Expense Reserve)
___________________

Cash Flow from Operations [CFO]

The real problem for the Grand Bargain is what it ends up doing to that NOI and CFO line in a pro forma. If the added costs end lowering NOI and rents can’t be raised enough to offset that impact then it will impact whether the project can get financing. Most lenders expect a ration of NOI to borrowed money to be $1.20 of NOI to every dollar of debt service. When NOI drops the DCR does too from the minimum required by most lenders and investors. That lowered ratio can kill a project.

Here’s a tutorial on how a DCR is calculated.

If the upzones raise costs and additional rents or raised rents can’t offset those costs, then the project can’t get necessary financing, whether from a borrower or investor. That means the project doesn’t happen. 

This creates a the need for a legal challenge because forcing projects to lose money is fundamentally against State law, specifically Chapter 82.02 of the Revised Code of Washington (RCW). There is a paper from a few years ago that highlights the legal hazards of mandatory and voluntary programs that aren’t fair.

We’re going to analyze the proposal looking at the economic impact and how it affects the basic math that determines whether a project can get needed loans or investment. If the Grand Bargain kills projects it is not only counter to its stated intent of creating more affordable housing, but would likely be illegal. We may need to go back to the drawing board and use the principles of good housing policy we’ve already mapped out.

 

Election 2015: It Was Good, but Not That Good

Already we’re seeing lots of things being read into this weeks election with Knute Berger suggesting that it means Seattle has moved even further to the left and the Seattle Times suggesting that “Urbanists” (whoever they are) won the election. For people who produce housing in Seattle, the election is a lot like taking a fall skiing: it sure feels good when you stop falling. But not falling anymore, in Seattle’s case toward more and more bad ideas about housing, doesn’t constitute a win. It means maybe we can start undoing some damage and start making good housing policy. It also means that advocates for good housing policy need to work even harder to keep people at City Hall on the right track. So as we say goodbye to the old Council what should we expect from the new one?

Looking just at the City Council election, heres what we’ll have as far as housing and land use policy goes (I’ll define what each Caucus represents later):

Bye Felicia Caucus

Sally Clark
Tom Rasmussen
Nick Licata

Anti-Growth, Slow-Growth, Social Justice Caucus

Kshama Sawant, District 3
Mike O’Brien, District 6
Lorena Gonzalez, At Large

Facebook Friends of Growth

Shannon Braddock, District 1
Rob Johnson, District 4
Debora Juarez, District 5

Old Council Middle of the Road Finger in the Wind Caucus

Bruce Harrel, District 2
Sally Bagshaw, District 7
Tim Burgess, At Large

Bye Felicia Caucus

We are saying so long to three of the worst Councilmembers the city has had when it comes to land use. While Nick Licata was friendly and likable he always took an adversarial position to anything that even remotely seemed to benefit builders or developers. I personally genuinely like Councilmember Licata, but I am pleased he won’t be making policy affecting housing. Councilmember Rasmussen had an odd tendency to want to micromanage aspects of housing like the size of hedges in front of buildings and the color of the siding. And Sally Clark would probably make a decent television judge, listening to both sides then rendering a verdict that tries to make everyone happy. The fact that these three are gone is good news for housing in the city.

Anti-Growth, Slow-Growth, Social Justice Caucus

These Councilmembers, I think, take very seriously the flavor of what they frequently call “social justice” or “social equity.” I don’t think any of them can or will give a consistent or clear definition of what either of those terms means or how they inform policy and implementation of land use regulation. Lorena Gonzalez notably said she wants to use a “social justice lens” when making housing policy. I don’t have a clue what that means. I’m not sure she does either. And Councilmember O’Brien seems to identify with Robin Hood, trying to take money from developers who he thinks are rich and give that money to people who earn 60 percent of Area Median Income (AMI), all with a dashing smile on his face. His run on as Chair of the PLUS Committee was disastrous. He’ll continue to make trouble, but perhaps can be better contained.

Councilmember Sawant has until now been the only leader on the Council, pushing her idea-challenged colleagues to embrace an array of bad ideas ranging from blowing off the Greater Seattle Chamber of Commerce’s retreat to seriously considering rent control. As I’ve said before, in a room with zero ideas, a person with one bad idea generally wins. Sawant has been leading the Council because her colleagues simply have no new ideas or grounding in policy. And Sawant has some great ideas like using the City’s credit to build housing on City owned land; but she tends to push the divisive ones that won’t work like rent control. Hopefully the new Council will be able not simply to oppose her, but support her good ideas come up with better ideas of their own.

Facebook Friends of Growth

I call these Councilmembers Facebook friends because they have sounded really good on housing and land use issues in one on one conversations. I’ve also asked them very explicitly to please listen to us and take our math seriously when we tell them that a policy will make housing prices go up. For example, I think these incoming Councilmembers would take seriously that adding design review requirements push up costs instead of dismissing our sample pro forma work out of hand simply because we are builders and developers. But they haven’t passed the test yet. It’s like asking a Facebook friend for a ride to the airport: will they come through? Or will these three be the kinds of Facebook friends you see in the coffee shop but just can’t place because you never really met them in person?

Rob Johnson gets land use and housing policy and how it interacts with transportation policy. I think Johnson will likely be the next Chair of the Planning, Land Use, and Sustainability Committee. That’s a big switch from the Current Chair Mike O’Brien who started with bad ideas that his colleagues made worse in the process. At least Rob has good frame of reference acknowledging the role the market plays in housing prices. Braddock and Juarez were both very positive about listening and having through conversations with people who build housing before making decisions. And my sense from all three is that each will make decisions we disagree with, but will make them with a full understanding of the issues, not just a desire to pacify angry neighbors. I am hopeful these three Councilmembers won’t just not disappoint, but will actually lead with some courage and conviction.

Old Council Middle of the Road Finger in the Wind Caucus

Councilmembers Bagshaw, Harrell, and Burgess are what’s left of the pre-district election Council. To be fair, each of them has demonstrated an ability to listen, do the math, and make good decisions and take tough votes. Bagshaw, for a time, was the only member of the Council to push back on linkage taxes and offer other ideas. Personally, I don’t think our community gave her enough ammunition and we wound up with the so called “Grand Bargain.” However, Bagshaw is also pushing a strange, millionaire funded tower spacing scheme downtown that would take new housing options off the table to protect some rich people’s views.

Harrell helped us push back on a bad amendment to the Omnibus legislation and helped with small-lot legislation. But he also voted for the linkage tax and spent too much time fighting Councilmember Sawant’s re-election creating a mini scandal pushing for Pam Banks endorsement from local Democrats. Harrell has listened and we have appreciated it, but often he seems influenced more by politics than good math.

Burgess stood tall against his colleagues several years ago, urging significant upzones in Pioneer Square. He knows how to be a leader politically and practically on the Council. But he seems still bitter about his foiled efforts to crank up incentive zoning fees as part of his failed run for Mayor. He tends to be unreliable on land use and housing issues and has a stubborn streak.

Could Have Been Worse, Could Get Better

I won’t even go into how much worse this new Council could be had Lisa Herbold, Jon Grant, and Bill Bradburd been elected. It could have been much, much worse for housing. But let’s not start declaring and Pax Urbana yet. The best case scenario for housing in the next two years is Councilmember Johnson taking a strong and confident leadership role on housing and land use. Councilmember Braddock and Gonzalez did get lots of support and help from the business community, something that might make them less antagonistic in general and perhaps more willing to take leadership on housing from Johnson. And Debora Juarez is intelligent and experienced. She’s been a judge and understands and takes seriously the broader legal issues of policy.

We are going to put our intentions into a Council that can muster 6 or 7 votes for fixing damaging changes to design review pushed by Councilmember O’Brien in omnibus legislation, bringing back microhousing, and fixing damage done to the Multifamily Tax Exemption (MFTE) program. I think the votes to do these things are there, but it will take work on our part, leadership from Councilmember Johnson, Braddock, and Juarez and a willingness to go along from Bagshaw, Harrell, and Burgess. But that’s 6 votes. That’s possible now. It wasn’t a week ago.

Braddock and Johnson Winning: Some Good Election News

The results are in. Well, sort of. Thanks to various rules and laws on elections, we won’t see final results until much later. But the trends in the first round of counting are important. Those numbers are positive for Shannon Braddock  and Rob Johnson, candidates we supported.

Overall, the results look good. We have some other new Councilmembers including Lorena Gonzalez and Deborah Juarez in the 5th district.  We’re going to work with all the new Councilmembers and their staffs to make our point: if you want lower housing prices, build more and lower costs!

We’ll see.

 

 

Mail in Your Ballots: Braddock and Johnson are Best

I’ve written already about the sorry state of affairs here in Seattle when it comes to our choices for City Council. I’ll say right now that when it comes to sensible housing and land use policy the two best candidates by far are Shannon Braddock in the 1st district (West Seattle, South Park) and Rob Johnson (Roosevelt, Ravenna, Green Lake). I have not gone on a big road show advertising how good I think these candidates are because the atmosphere is pretty poisonous; support from the builder and developer community can be seen as a negative. But as I’ve said before, our candidates and political discourse reflect the electorate, and the electorate just doesn’t get it, when you’re having a housing “crisis” the best thing to do is make more housing, not more rules and fees. Most people marking their ballots are more worried about the pace of growth than they are about welcoming it.

Nevertheless, this is just a quick reminder to get your ballot mailed in as soon as possible. In some cases I’ll be writing in a name in the two at large Council district races and in my own, Council district 3, the home of Councilmember Sawant. I will sleep better at night knowing that how ever things turn out in those contests I didn’t vote for the eventual winner; yes Burgess and Grant, and Gonzalez and Bradburd are all very weak or outright terrible on our issues. Burgess and Gonzalez are the better candidates mostly because they aren’t Grant and Bradburd. Burgess as I pointed out in my early post has a stubborn tendency to ignore basic math about critical development issues and Gonzalez seems to prefer the company of the Tenants Union and Puget Sound Sage to that of business owners and housing builders.

Sally Bagshaw, in district 6, has made some really inexplicably bad moves of late in downtown pushing significant changes to land use rules downtown to benefit some of her wealthy campaign contributors who live the the Escala Building (starting  price for a condo there is about $1 million). She’s called me strident for being vocal about her move to put a small group of people at the front of the land use and housing process line with their request for changes that benefit them. Strident? More like outraged.

In District 2, Bruce Harrell has listened to us, proposing an amendment to thwart a destructive change to design review requirements that forces new projects into design review because a project next door didn’t go through design review. We appreciate that even though the amendment failed. But we’re hoping for more leadership in 2016 from Harrell, who is running for Council President as well as reelection, especially when it comes to managing the process more effectively and pushing his colleagues to consider the impact of the legislation they propose and support.

In District 3, Kshama Sawant is mostly assured reelection. She has provided a great rallying point for the business community, however Pam Banks doesn’t seem to have matched her rhetoric or her charisma. She also hasn’t been especially responsive to us or reached out to the builder community. From experience, Banks would be slightly to the right of Nick Licata if elected. Not exactly the sea change we’re looking for in district 3.

I had a great conversation with Deborah Juarez running in District 5 shortly after the primary. However, she hasn’t pursued builder or developer support, and neither has her opponent Sandy Brown. Both candidates seem like they might be supportive of our issues, but they also have had to pay a lot of lip service to anti-growth sentiment in their district. I think both candidates offer the potential to take a fresh look at growth issues and I look forward to working with either one of them.

And of course, Councilmember Mike O’Brien is running for almost certain reelection in the 6th. If you are in District 6, vote against him, not because his opponent is very good, but because O’Brien has been like Godzilla when it comes to the housing economy in Seattle. Since his vote 5 years ago to blow up a proposal to allow ground floor commercial in low-rise zones, O’Brien has been relentless in pursuing and supporting just about every bad idea when it comes to housing and land use policy. Not only that, when he has compromised and tried to leaven terrible proposals, he hasn’t demonstrated the requisite leadership to keep the bad ideas from coming back and even getting worse. On small-lot legislation, for example, he got the idea that the 100 percent rule would make things better for everyone, but he couldn’t get his colleagues to go along.

Those are my thoughts for what they are worth, which isn’t much. The only people who’s voice will count are the ones who turn in their ballot. So please fill out your ballot now and mail it or drop it off.