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Developer continues push for efficiency in affordable housing

Rob Justus has just finished another apartment complex in East Portland — 78 one- and two-bedroom units that rent for $395 to $775 a month. The building cost developer Justus and his bankroller, the nonprofit Portland Habilitation Center, about $5 million to build.

What’s remarkable about the new development, at Southeast 171st Avenue and Division Street, is the math. Justus built at a little under $65,000 per apartment. As a result of keeping building costs low, PHC is able to charge rents that are about half the market rate for comparable apartments in that neighborhood.

Here’s another notable aspect of the project: Justus didn’t use any taxpayer money. Despite the availability of what is known as “affordable housing” funds, Justus and PHC, as they have before, chose to build their low-rent apartments privately.

All of which is remarkable, considering that Portland and Oregon are facing a housing affordability crisis. Too many residents, according to a Portland Housing Bureau study, cannot find apartments that cost no more than the recommended 30 percent of their take-home pay for rent. Approximately 24,000 low-rent apartments are necessary to meet the city’s need. Statewide, officials say that number is close to 50,000.

Most publicly funded low-rent apartment buildings cost $200,000 or more per unit to build. If those costs could get closer to what Justus spends, potentially two or three times as many apartments could get built. Which is why Justus has been on a mission.

There’s another reason Justus is stepping up talks with city and state officials. The stakes have been raised this year because the state Legislature has provided the Oregon Department of Housing and Community Services with $62 million to fund new affordable housing projects. That’s state money, not federal, which means it comes with fewer strings attached.

Justus thinks his low-cost production models finally might be getting attention. But he’s also getting impatient.

“Why hasn’t the housing bureau gotten behind our alternative model, or any alternative model, that would reduce the costs to build affordable housing?” Justus asks.

It isn’t easy, says Kurt Creager, the Housing Bureau’s director. The bureau has put together a study that shows that 9 percent of the cost of building new affordable apartments comes in the form of social costs. Examples? City rules that require developers to hire contractors who pay a prevailing wage to workers, submit their projects to city design review, and in some cases, include parking.

Like Justus, Creager would like to cut those social costs as a means to lowering the per-unit price of development. He even has his own cautionary tale. Recently, he says, city money helped Catholic Charities build a 106-unit apartment building at St. Francis Park in Southeast Portland. The design of the project, undertaken by housing agency Home Forward for Catholic Charities, met all city code requirements, according to Creager. The exterior made use of a siding called HardiPlank that cost about $16 a square foot.

But when the project went through the city’s required design review, the developers were told the HardiPlank would have to go. A different exterior was chosen that cost $26 a square foot.

Ironically, the added cost meant the building could not meet the city’s own cost containment standard, which meant the city had to increase the taxpayer subsidy to the building. That translated to less left in city coffers to fund other affordable housing projects.

“That’s an example of a government policy that drives the cost, at perhaps the expense of another government policy that drives affordability,” Creager says.

Portland’s cost containment standard for a one-bedroom apartment in an affordable housing building, by the way, is $250,000 per unit.

Adding another layer of irony, Creager says that in 2006 he participated in an affordable housing project in Vancouver, Wash., that received a national development award. The exterior? HardiPlank. “And yet it didn’t pass design review in Portland,” Creager says.

More money for

housing projects

Rob Justus doesn’t have to worry about such issues because he isn’t using public money. But he’s convinced that there is substantial public money out there that could be funneled into affordable housing projects without the attached strings that drive up soft costs. The state’s $62 million is a great starting point, he says.

The state’s Department of Housing and Community Services can insist on simpler design standards with that money. It can reduce regulation. It can allow developers to forgo green designs. System development charges and permitting fees could be lowered. Committees are just beginning to meet to determine how the money will be spent, according to Margaret Van Vliet, the department’s director.

Van Vliet recognizes the opportunity represented by the $62 million, and says she’s all for cost containment — to a point.

“I’m not prepared to say we should throw out the building codes, but in some places we could probably afford to have more modest design and more simple construction without sacrificing durability,” she says.

Van Vliet says putting in place a per unit cost containment figure for affordable housing projects is tempting, but she isn’t ready to commit to the idea. Justus and Alysa Rose, president of PHC, would like a ceiling of $100,000 per unit. Asked whether it is possible for other developers to meet Justus’ construction costs, Van Vliet says, “I like to think so. I’m not too optimistic.”

Developers using the state funds still will have to document their costs, which Justus doesn’t have to do. And, Van Vliet says, Justus may pay union wages, but he doesn’t have to pay bookkeepers to document it.

“You can’t completely eliminate the public oversight costs,” Van Vliet says.

Truly affordable housing

Shelley McQuaw says she loves her 395-square-foot, one-bedroom at D Street Apartments. The 71-year-old McQuaw loves the full-size washer and dryer units in her apartment, the granite countertops in the kitchen and bathroom, and especially, the rent.

McQuay says for years she lived in a small apartment building on Northeast Halsey Street and paid $425 a month for rent. But the building’s owners recently decided to remodel and told her the rent would be rising considerably. A brand-new Portland apartment for $395 a month?

“This is a really good place to live,” McQuaw says.

Justus says more efficiently built affordable housing can only become a reality if city and state officials undergo a major change in their thinking.

“The housing bureau is set up to only do things one way,” Justus says. “Very complex tax credits where they control everything.” And that control makes their buildings more expensive. Which means either rents have to be higher to pay for the cost of the building or the public subsidy has to be greater, Justus says.

The key, in Justus’ view, is for at least some developers to resist the lure of federal dollars for affordable housing. He believes those funds always will have too many restrictions. He’d like to see private foundations start a housing investment fund that could provide seed money for projects like his.

Rose says her nonprofit isn’t realizing a cash windfall in financing Justus’ projects, but the cash flow from each building is covering the debt. She’d like to see a variety of local developers take on affordable housing projects as a form of socially conscious investing.

“Why couldn’t you be a for-profit developer and have a mixed portfolio?” Rose asks. “That’s what the world needs.”

Creager says he’s open to new ways to cut the cost of building low-rent housing. Once the current construction boom subsides, turnkey development is one possibility. Fifteen years ago, Creager was involved in a 296-unit development in Vancouver that cost about $58,000 per unit to build. That was about half the cost of other affordable housing developments at the time, Creager says.

The development skirted the social costs associated with taxpayer funding by not using public financing at all. Instead, public money was used to buy the completed project. That meant, for instance, that contractors on the building didn’t have to meet prevailing wage rules — they could hire whomever they wanted. Creager says he’s not sure Portlanders would be willing to do that in order to get more affordable housing apartments built.

Justus says local affordable housing developers are too tied to business as usual, but Robin Boyce, executive director of Portland nonprofit Housing Development Center, says they are starting to change their attitudes. Boyce is a member of a housing-cost efficiencies work group formed by the Meyer Memorial Trust that will release its recommendations Oct. 1.

Boyce says those attitude changes will require developers and public officials to make some hard choices that were avoidable as long as the traditional federal funding sources and the attendant high construction costs went unchallenged.

“I think we have to ask about our public policies, and it’s a very slippery, not easy slope,” she says.

For instance, Boyce says, most affordable housing developments include common areas. Even Justus’ D Street Apartments has a playground, a basketball court and a separate building for community events. Maybe it’s time for affordable housing developments to cut back on the common space, Boyce says.

The Housing Development Center’s latest project in Hillsdale included a pricey sign out front. Necessary? Maybe not, according to Boyce.

“Every bit of that costs money,” she says.

The Watershed in Hillsdale also cost nearly $250,000 for site cleanup because it was built on a contaminated brownfield.

Boyce says a state rule that requires most apartments be accessible to visitors in wheelchairs has “a huge impact” on costs.

Paying union wage to contractors can bump up the overall cost of an affordable housing project as much as 10 percent, says Jessica Woodruff, Director of Housing Development for nonprofit Reach Community Development.

Reach recently completed its 209-unit Gray’s Landing affordable housing development in South Waterfront. The project was expensive — about $50 million, with underground parking included. Property in South Waterfront costs a great deal more than the land Justus builds on in East Portland.

But Gray’s Landing, she says, is right on the streetcar line and many of its residents are veterans, who only have to walk a few blocks to get to the Oregon Health & Science University South Waterfront campus and tram. Woodruff is convinced her tenants will thrive better in South Waterfront than they would in East Portland, so in her opinion the $200,000 plus per unit cost of Gray’s Landing makes sense.

Woodruff sees potential cost savings if the city of Portland stops requiring LEED certification on affordable housing buildings. The state also could loosen requirements on the overall size of affordable housing apartments, she says. In some cases, she says, affordable housing developers taking state money are building larger apartments than expensive market-rate apartments being built by private developers.

Woodruff knows how she’d like to see the state use the $62 million. “The best thing for the industry right now is for (the state) to be really flexible with that money and not create some new program with a lot of restrictions and extra requirements,” she says.

What Woodruff doesn’t want to see is more business as usual—the state allowing developers to use portions of the $62 million to leverage other funding sources that would impose requirements that add soft costs to new projects.

“What we need, given this crisis, is to be more streamlined,” she says.

Next: Divine Intervention?

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