Decatur Development Authority explores affordable housing options
By Cathi Harris, contributor
City of Decatur leaders may need to look beyond inclusionary zoning or other incentives that target new development if they want to keep the city more affordable for middle income residents, a local real estate developer warns.
High land prices, limited supply, and rapidly rising construction costs are combining to make development of new affordable housing units financially untenable for developers in urban centers, Conor McNally, a partner in the real estate development firm Shelton McNally and a member of Decatur’s Downtown Development Authority (DDA) told authority members Friday.
“People tend to look at it like there’s these big, rich developers coming in and building all these new developments. There’s so many of them, just make them do it,” McNally said. “I think that people tend to focus on that as a simple answer. But, the costs to build are so high … that it is really a small piece of the answer.”
The discussion took place as part of a DDA retreat held Friday morning at Legacy Park, formerly home to the United Methodist Children’s Home. The members spent time discussing the previous year’s achievements and goals and priorities for the coming year. Although the authority’s focus is on commercial development in the city, members felt that maintaining affordable housing is key to attracting new business, alleviating traffic problems, and supporting a stable workforce.
To illustrate his point about inclusionary zoning, McNally cited the example of the new planned redevelopment of the Bank of America lot into a mixed-use complex that includes retail shops, restaurants and 194 new apartments. Although the developers originally applied for a density bonus in order to add affordable housing units to the mix, issues with the site pushed construction costs too high for them to do it.
“Their cost per apartment unit constructed is between $325,000 to $330,000 per unit,” McNally said. “To put that in context, compare it to The Place on Ponce, which had a per unit cost around $170,000. So, the cost has almost doubled between 2012 and 2019.”
The public perception that large-scale apartment developments rake in the money belies the reality that they really have very thin profit margins in high-density areas, he said.
The city’s zoning includes restrictions on building heights, which also effectively limits the total number of units that can be constructed.
Raising the rent on the non-restricted units enough to offset the affordable units would push it too high to be competitive in the rental market – and no bank or investor would finance it.
The way that these projects are financed now has also changed, McNally said.
“It’s not just the developer borrows the money, comes in and develops it and turns around and sells it for a profit. You can’t do that anymore,” he explained. “It is too expensive to build.”
Now, it is often larger investment entities, such as pension funds, that — instead of buying existing housing developments — will give the money for the development up front, with the intention of holding the property for 10 years or more to make a profit in the future.
That can be a good thing for the stability of the city as a whole, he says. The owner of the property is investing in the city and interested in its stability.
“That is what the Mill Creek guys are doing with the [Bank of America] development, too. They are building to hold onto it,” McNally said. “They know there’s no chance of selling in the next five years and turning a profit.”
But market rents increasing enough to quickly offset expensive new construction would be bad for affordable housing for the entire city and region. It might finance a few affordable units, but not on a scale large enough for what is needed, he believes.
If the city were to pass an inclusionary zoning ordinance, requiring new developments to set aside a portion of units as affordable, it would slow new development, while also not offering a substantial boost to affordable housing.
“If it were super successful, we might see, over the next five years, an increase of 30 to 50 affordable housing units,” he said. “That’s not nothing. And I am not saying that we can’t look at something like that. But, for the kind of impact we want to have on this issue, we need to look at more than just new development, especially where it costs as much to build a new [apartment] unit as it does to build a single-family home.”
A better option might be for the city to look at ways to preserve its existing “naturally occurring” affordable rental housing, he said. Older, smaller multifamily buildings exist throughout Decatur’s neighborhoods, but are often targeted by developers who want to tear them down to be replaced by new higher-end townhomes.
A strategy that has been employed in other places is for the city to offer tax breaks to owners of these properties in return for keeping the properties maintained and on the rental market instead of selling them.
The city could also consider a land bank or affordable housing fund to purchase the property, perform lower cost updates and any repairs needed and then sell the property with covenants in place that would keep the units on the rental market.
Preserving the older units would have the added benefit that they are already distributed throughout Decatur’s neighborhoods and might generate less public opposition than the prospect of higher density townhouses or new, large apartment buildings, said Assistant City Manager Lyn Menne said.
“They are already there, they are consistent with the scale of the neighborhood, and the neighbors are used to them being there,” she said.
The city is in the process of establishing an Affordable Housing Task Force to develop recommendations to take to the City Commission, said Menne. The DDA, as well as the Planning Commission and other boards, will have representation and provide input.
The city manager hopes to have a report ready for the commission in October, Menne said. So the task force will work quickly, with members dividing up into smaller groups to study a particular issue or solution intensely and then collaborate on recommendations.
“It will be a lot like the task force on infill housing,” she says. “Members will be asked to do a deep dive into a particular area.”
Community members who are interested in serving on the task force can submit an application here.
Other areas of focus discussed at the Development Authority retreat included:
– Downtown parking. Finding a balance between supporting the needs of downtown businesses and local residents continues to be a challenge. The city is still refining its policies to ensure people can find adequate parking near the downtown core and that the available parking turns over quickly enough. DDA members discussed ways to encourage shared parking between developments. For example, new apartments could plan to share space with nearby offices instead of needing to support all of their own parking, which is expensive and inefficient.
– Recruiting new office tenants. The city will be making a new push to market itself to companies that need to lease office space. Decatur has many retail businesses, but would like to add more offices to the mix.
– Public communication. They also explored different plans and opportunities to communicate with the public about new developments in the city.
– Coordination with City Schools of Decatur. Members felt the DDA needed to renew regular communication with the School Board about the potential impact of new residential developments.