Why More Developers Opt Out of Government Financing
A new affordable housing project for low-income individuals is making headlines and challenging the status quo.
Jordan B.
March 17, 2024
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Good morning. Welcome to the weekend edition of CRE Daily.
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📰 Feature: Private funding for affordable housing
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⏪ Catch up: The most-read stories from the week
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👍️ Reviews: 4 new product reviews on CREDaily.com
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📈 Chart: The average down payment for a house by state
Today’s issue is brought to you by Calvera Partners.
A FRESH TAKE
Why More Affordable Housing Developers Are Opting Out of Government Financing
Construction of this 49-unit apartment building in South Los Angeles is expected to cost about $291,000 a unit.
In California, a new affordable housing project for low-income individuals is making headlines by not using any of the tens of billions of dollars allocated by state and local governments, marking a fresh approach to the housing crisis.
A new blueprint: SDS Capital Group is pioneering a 49-unit Los Angeles apartment complex for some of the city’s lowest-income residents, fully funded by private capital, not government money. The project is expected to cost approximately $291,000 per unit—significantly less than the typical government-subsidized housing projects, which have soared to roughly $600,000 per unit.
The high cost of good intentions: Los Angeles and California at large have been grappling with an escalating homelessness crisis despite tens of billions in government spending aimed at increasing affordable housing stock. A staggering figure from San Jose highlights the issue, where the average construction cost for affordable housing projects hit around $939,000 per unit last year. This is where SDS Capital Group’s approach breaks the mold.
The strategy: SDS plans to fund the project through a private impact fund, including contributions from banks and foundations. This strategy speeds up construction and cuts costs by avoiding public funding’s ‘soft costs.’ While it indirectly taps into government aid via housing vouchers, it highlights private capital’s effectiveness in tackling public issues.
Challenges and concerns: The move to private funding for affordable housing raises questions about project quality and sustainability, with concerns over potential compromises for profit and the adequacy of federal housing voucher support. Success could, however, drive affordable housing reforms, making solutions more efficient and cost-effective.
➥ THE TAKEAWAY
A catalyst for change? SDS Capital Group’s venture into affordable housing challenges the norm of depending solely on public funding. Their ability to construct affordable housing more affordably and efficiently could encourage both public and private sectors to seek innovative solutions for homelessness and housing crises across the nation.
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Many investors have forgone common sense and cash flow-based models and opted to rely on appreciation, plugging in outlandish assumptions solely to win the deal. This certainly doesn’t help the underlying investor—and here’s why.
⏪ Weekend Wrap-Up
Catch up on the most clickworthy stories of the week.
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Legal battle: CBRE sues ex-executive for joining competitor Cushman & Wakefield, alleging breach of contract.
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Coming due: A staggering $525B in multifamily property loans will mature by 2029, casting a shadow over the sector.
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Rental activity: February’s RentCafe.com report shows the top cities for renters, with Minneapolis leading the way.
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Misallocated: NYC owns 196 acres of land in prime Manhattan, worth around $26B, that’s currently underutilized for housing.
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Take a pause: JPMorgan Chase (JPM) CEO Jamie Dimon urges the Fed to delay rate cuts due to looming U.S. recession uncertainty.
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Market turn: PwC and ULI’s 2024 outlook predicts a pivotal recovery in global real estate investment despite economic challenges.
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Cooling down: The industrial sector is nearing its worst Q1 performance in more than 10 years, with early CoStar data indicating a major drop in US industrial net absorption.
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Changing the story: American Dream, near MetLife Stadium, faces financial challenges despite $553M in sales as it aims to attract future World Cup visitors.
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📈 CHART OF THE DAY
The National Average for a down payment is $31,500. Where does your state fall?
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