Montgomery County, Maryland
FINANCIAL ANALYSIS
AND SWOT FINDINGS
RENTAL HOUSING STUDY
August 24, 2016
Presented by:
Kyle Talente, RKG Associates, Inc.
Dr. Lisa Sturtevant, Lisa Sturtevant & Associates, LLC
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
PROJECT OVERVIEW
Task 1: Project Kickoff/
Data Collection
Task 2: Secondary
Analysis
Task 3: Narrow Options
Task 4:
Recommendations
Identify Data Needs
Identify Key Stakeholders
Review Background Materials
Focus Groups and Stakeholder Interviews
Neighborhood Assessment
Local and State Policy Analysis
Best Practices Analysis
Identify Options
Financial Feasibility Model
Cost/Benefit Assessment
Develop Recommendations
Draft Final Report
Meet with Advisory Committee, Planning Board, County
Executive and County Council
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
PRESENTATION OVERVIEW
SWOT Analysis
Market
Policy
Capacity
Key Policy Considerations
Produce New Housing
Preserve Existing Housing
Generate Resources
Financial Analysis
Methodology
Results
Implications
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
SWOT ANALYSIS
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
STRENGTHS
Market
Local and regional market demand strong at all incomes
Data indicate households continue to seek MC opportunities
Most profitable along Metro, Purple line, and within ICC
Best serving 60% to 80% right now
Certain areas have broader appeal
Metro corridors, inner subareas, well regarded elementary schools
Also tied to available amenities
Substantial supply of traditional ownership (single -family) units
augments rental market (large units)
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
STRENGTHS
Policy
MPDU program very effective at delivering units
Focused in the 50% to 70% range only
MPDU program has distributed the price controlled housing
throughout the County
CR zoning has a reward system for additional MPDU production
Right of first refusal program for sale of multifamily developments
Code enforcement responsive in addressing resident concerns
Housing trust fund (HIF) to incent price appropriate housing
Use of County-owned land to develop income controlled housing
Co-location
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
STRENGTHS
Capacity
Leadership proactively seeking to enhance price appropriate rental
housing
Elected officials, planning board, advocates
HOC is a stable, well positioned implementation partner
DHCA helpful and proactive in going through the MPDU approval
process
Still has many requirements to be met
Committed, experienced non-profit affordable housing
development partners in the region
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
WEAKNESSES
Market
Imbalance of supply and demand pushing rents higher
Continued increase in rents
Not enough rental housing for households earning less than $50,000
Many of the more cost effective areas do not have the amenities or
transportation support demanded
Limited land availability for development
Redevelopment costly
Placing developable parcels in to Ag Reserve reduces supply
In older buildings, renovation costs start to be comparable to
redevelopment
Building efficiency/competitiveness
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
WEAKNESSES
Market (cont.)
Not enough large 3+ bedroom large unit housing to accommodate
families
Not enough housing built to accommodate special needs persons
Physical/mental disabilities
Homeless/transitioning households
Not enough on-site services at existing facilities
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
WEAKNESSES
Policy
CR Zoning includes affordable housing in menu of benefits but
developers not required to choose that benefit
More cost effective to avoid housing option
Lack of flexibility in MPDU program delivery (e.g., limited off -site
units)
Housing one of several priorities in Montgomery County
County policies focused on regulating to stop something, not
encourage something
Certain County spending priorities determined ad hoc (HIF)
Can change with staffing change/political will
The time from project initiation to opening can take too long
Entitlement risk; construction risk; market risk
County impact fees/taxes on new development onerous to providing
affordable housing
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
WEAKNESSES
Policy (cont.)
There is a perception that approval process/requirements are
inconsistent and inconsistently applied
Unpredictability = cost
Process needs to be constantly improved to be as consistent and
predictable as possible
Timeline for approvals is perceived as too long
Similar to other DMV communities
Montgomery County non-competitive with other regions in state
for LIHTC funds
Entrenched position to keep doing things the same way
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
WEAKNESSES
Capacity
Not enough money/resources being put to meet local needs
(region-wide)
Cost of development is a barrier to entry for smaller developers
Limited number of affordable housing developers to partner with
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
OPPORTUNITIES
Market
Tap into the value of excess public land
Right of way land not needed for transportation projects
Co-locating public services with rental housing development
Preservation of existing units is more cost effective in certain
markets
Preservation does not necessarily mean keep the exact unit
Incentivize redevelopment that keeps same number of affordable units
or total bedroom count
Retrofit older commercial corridors with mixed use development
Recapture development potential of parking fields
Metro areas in particular
Use of micro units in transit areas
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
OPPORTUNITIES
Policy
Flexibility in meeting County MPDU requirements
Provide lower MPDU percentage for units meeting lower income
targets
Make MPDU requirement on square footage rather than unit count
Allow for off-site unit delivery
Create distance requirement for proximity
Payment in lieu of units
Has to be at market rate value, though
Increase density and height allowances in certain areas to enable
additional supply
Increase use (funding) of right of first refusal
Tier priority for preservation based on set of criteria
Serve vulnerable populations?
Already receive Federal funding?
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
OPPORTUNITIES
Policy (cont.)
Use public land for price appropriate housing development
Ag Reserve property swaps
Continue to work towards creating more predictable and efficient
development approval process
Metric-based requirements
Administrative approvals for smaller projects
Modify waiver of impact fees for more MPDUs
Adjustment of % requirement
Same flexibility in terms of income target
Create County voucher program to augment Federal program
Lobby state government to allocate LIHTC pool for Montgomery
and Prince Georges County
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
OPPORTUNITIES
Policy (cont.)
Tie access to certain funds for development/rehabilitation that
incorporates accessible units
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
OPPORTUNITIES
Capacity
Increase investment in Housing Investment Fund
Mandate HIF for construction/preservation only
Require HIF contribution for commercial/residential projects
Regional housing program to attract Federal/foundation support
Local communities control their own money
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
THREATS
Market
Portion of resident base that opposes multifamily and/or increased
density development
Locating new developments away from services and transportation
access (value to lower-income HHs)
Purple Line displacement as redevelopment/rent increases occur
Redevelopment of existing market rate affordable properties will
reduce 3+ bedroom supply
Unless policy change in delivery of MPDU units
Reversion of rented single family units back into ownership will
impact supply-demand balance
Displacement of communities (particularly ethnic communities)
that disrupt social networks
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
THREATS
Market (cont.)
Key renter market segments have different needs
County demographics are changing
Housing affordability challenges include credit worthiness, not just
income
Senior households with disabled adult children at risk
Caretakers for both
Transportation accessibility for extremely low income and disabled
persons
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
THREATS
Policy
Off-site/in lieu development is counter to Countys history of
prioritizing mixed-income developments
Increasing inclusionary zoning requirement without offsetting
benefits could chill market
Using blanket policies may not be the most effective way to
develop/preserve housing
Should be done on case-by-case basis
Placing redevelopment restrictions on existing market rate
affordable properties disproportionately impacts owners
Have to balance tax burden on residents with investments in
programs such as housing trust fund
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
THREATS
Capacity
Lack of increase in financial funding will limit effectiveness
Equity investors only interested in A rental developments
Hard to get funding for secondary/tertiary locations
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
KEY POLICY
CONSIDERATIONS
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
KEY POLICY CONSIDERATIONS
Successful local housing strategies are:
Comprehensive
Flexible
Responsive to local needs
Consistent with community goals
Greatest needs among lowest income households,
larger households
Financial resources are key but land use/zoning
policies are also essential
Changing needs means its necessary to revise
longstanding policies
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
COMPREHENSIVE STRATEGY
Preserve
Existing
Housing
Produce New
Housing
Generate
Resources
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
POLICY OPPORTUNITIES FROM REVIEW
OF BEST PRACTICES
PRODUCE NEW HOUSING
Add flexibility to the MPDU program
Varying income targets and affordability requirements
Include an off-site and/or in lieu option
Key issues
Consistency with Countys mission/goals
Appropriateness in different markets
Getting the parameters right both to serve households in needs and
to avoid stalling housing activity
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
POLICY OPPORTUNITIES FROM REVIEW
OF BEST PRACTICES
PRODUCE NEW HOUSING
Increase use of density averaging and density
transfers
Expand public land program
Other potential smaller-impact interventions
ADUs
Development review process
Parking requirements
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
POLICY OPPORTUNITIES FROM REVIEW
OF BEST PRACTICES
PRESERVE EXISTING HOUSING
Key Issues
Make use of existing programs (e.g. Right of First Refusal)
Resources (see below)
Carrot and stick approaches
Tax exemption abatement
Demolition tax
Plan for preservation as part of redevelopment
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
POLICY OPPORTUNITIES FROM REVIEW
OF BEST PRACTICES
GENERATE RESOURCES
Expand access to tax credits
Need to work at the state level
Other Key Issues
Possible to expand sources of revenue for affordable housing
Commercial linkage fee, demolition tax, TIFs, developer fees
Assess who pays/what impact/political will
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
FINANCIAL ANALYSIS
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
FINANCIAL MODEL
Built to accomplish two primary tasks
Assess the value impact on units by changing AMI target
Difference of value for property owner
Analyze the proforma impacts of adjusting MDPU requirements
How do policy changes impact development potential?
Assumptions broken down based on availability
Subarea level (i.e. rents)
County level (i.e. interest rates)
Regional level (i.e. construction costs)
Proforma piece not complete yet
Waiting on additional market data from local operators/developers
Should be ready for September meeting
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
VALUE IMPACT METHODOLOGY
Measured the capitalized value of affordable units
against a similar market rate unit
Same market subarea
Same building type
Same bedroom count
Used market data to determine thresholds
Rent 2014 Rent survey
Vacancy and collection loss (VACL) REIS
Operating expenses REIS
Cap rates REIS, Capital One
Will refine results based on feedback from
development/operator community
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
METHODLOGY
The model is interactive, allowing customized
parameters for various locations and types
The models inputs are unique to those parameters
SUBAREA
BUILDING MATERIAL
TYPE OF HOUSING
INTERIOR FIT OUT
AGE OF HOUSING
PARKING
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
METHODOLOGY
Every variable can be
customized based on specific
input requirements
Allows user to assess very
specific projects with realtime, specific pro forma and
cost impact results
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
ASSUMPTIONS
Some performance metrics do not change with
income limits
Vacancy and collection loss percentage
Operating expenses
Cap rate
Units operate with same costs to the developer
Construction
Operating expenses (set to market rate units)
Areas with no typology representation used
Countywide average
Variable override built into the model to customize as necessary
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
CAPITALIZED VALUE MATH
N e w c o n s t r u c t i o n h i g h r i s e i n F r i e n d s h i p H e i g h t s / B e t h e s d a /W h i t e F l i n t s u b a re a
ONE BEDROOM RENTAL CALCULATIONS
30% of AMI
50% of AMI
PGI
$7,716
$12,840
VACL
$293
$488
OI
$0
$0
EGI
$7,423
$12,352
OE
$11,784
$11,784
NOI
($4,361)
$568
NOI/Unit
($4,361)
$568
Unit Value
($87,229)
$11,357
Value PSF
($159)
$21
65% of AMI
$16,692
$634
$0
$16,058
$11,784
$4,273
$4,273
$85,470
$155
80% of AMI
$20,544
$781
$0
$19,763
$11,784
$7,979
$7,979
$159,582
$290
100% of AMI
$25,680
$976
$0
$24,704
$11,784
$12,920
$12,920
$258,399
$470
Market Rate
$29,805
$1,133
$0
$28,672
$11,784
$16,888
$16,888
$337,757
$614
TWO BEDROOM RENTAL CALCULATIONS
30% of AMI
50% of AMI
PGI
$8,676
$14,448
VACL
$330
$549
OI
$0
$0
EGI
$8,346
$13,899
OE
$15,283
$15,283
NOI
($6,936)
($1,384)
NOI/Unit
($6,936)
($1,384)
Unit Value
($138,724)
($27,671)
Value PSF
($252)
($50)
65% of AMI
$18,780
$714
$0
$18,066
$15,283
$2,784
$2,784
$55,677
$101
80% of AMI
$23,117
$878
$0
$22,238
$15,283
$6,956
$6,956
$139,117
$253
100% of AMI
$28,896
$1,098
$0
$27,798
$15,283
$12,515
$12,515
$250,309
$455
Market Rate
$38,653
$1,469
$0
$37,184
$15,283
$21,901
$21,901
$438,025
$796
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
NEW CONSTRUCTION, GARDEN
ROUTE 29 CORRIDOR EAST
UNIT SIZE
30% of AMI
50% of AMI
60% of AMI
65% of AMI
80% of AMI 100% of AMI
Efficiency
($159,700)
($73,500)
($30,400)
($8,700)
$27,500
$77,000
One Bedroom
($225,300)
($126,700)
($77,300)
($52,600)
$6,200
$62,800
Two Bedrooms
($272,600)
($161,600)
($105,900)
($78,200)
($4,100)
$59,500
Three Bedrooms
($342,900)
($219,400)
($157,700)
($127,800)
($34,200)
$42,600
FRIENDSHIP HEIGHTS/BETHESDA/WHITE FLINT
UNIT SIZE
30% of AMI
50% of AMI
60% of AMI
65% of AMI
80% of AMI 100% of AMI
Efficiency
($251,400)
($165,300)
($122,100)
($100,400)
($35,600)
$22,900
One Bedroom
($328,500)
($229,900)
($180,500)
($155,800)
($81,600)
$2,100
Two Bedrooms
($424,000)
($313,000)
($257,400)
($229,600)
($146,200)
($35,000)
Three Bedrooms
($458,200)
($344,700)
($273,100)
($242,100)
($149,500)
($26,000)
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
NEW CONSTRUCTION, HIGH RISE
ROUTE 29 CORRIDOR EAST
UNIT SIZE
30% of AMI
50% of AMI
60% of AMI
65% of AMI
80% of AMI 100% of AMI
Efficiency
($220,700)
($134,600)
($91,400)
($69,700)
($5,000)
$41,000
One Bedroom
($280,300)
($182,300)
($132,800)
($108,100)
($34,000)
$30,100
Two Bedrooms
($331,900)
($220,900)
($165,200)
($137,500)
($54,100)
$24,600
Three Bedrooms
($390,100)
($266,600)
($205,000)
($174,000)
($81,400)
$14,800
FRIENDSHIP HEIGHTS/BETHESDA/WHITE FLINT
UNIT SIZE
30% of AMI
50% of AMI
60% of AMI
65% of AMI
80% of AMI 100% of AMI
Efficiency
($352,600)
($266,500)
($223,300)
($201,600)
($136,800)
($50,400)
One Bedroom
($425,000)
($326,400)
($277,000)
($252,300)
($178,200)
($79,400)
Two Bedrooms
($576,700)
($465,700)
($410,100)
($382,300)
($298,900)
($187,700)
Three Bedrooms
($900,200)
($776,700)
($715,000)
($684,100)
($591,500)
($468,000)
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
IMPLICATIONS
Subarea, development type and bedroom count each
influence the potential cost of affordability
VALUE DIFFERENTIAL BETWEEN MARKET AND MPDU
Efficiency
1-Bedroom
2-Bedroom
3-Bedroom
Garden, Low End
($8,700)
($52,600)
($78,200)
($126,800)
Garden, High End
($100,400)
($155,800)
($229,600)
($242,100)
High Rise, Low End
($69,700)
($108,100)
($137,500)
($174,000)
High Rise, High End
($201,600)
($252,300)
($382,300)
($684,100)
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
IMPLICATIONS
Location has the greatest impact on value differential
Highest along Metro Corridors and inside the ICC
Where demand is the greatest
Lower affordability level = larger value loss
$150,000 to $230,000 per unit for 30% of AMI (from MPDU)
Gap for garden apartments lower due to lower rent
threshold numbers
Owners in certain parts of the market not interested in selling to
garden density since land price is based on total unit count
Capitalizing on higher development densities
Denying density likely will result in suppressing development or
encouraging move to low density ownership housing
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
IMPLICATIONS
Attaining deeper subsidies in high cost areas requires
less tradeoff of units
Value loss the same in all areas due to the fixed price
However, amount of value loss from market varies
$70,000 in Route 29; $202,000 in FH/B/WF
So, trade off from 65% to 30% is 3:1 in Route 29; 2:1 in FH/B/WF
Actual trade-off varies by subarea, development type
Type of development impacts the tradeoff ratio
High rise vs garden
It is better to buy-down cost in some areas and trade
unit totals in others
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
SO WHAT?
Net Present Value of 1-Bedroom Unit in a new
construction high rise within FH/B/WF (10% return)
$28,700 at market rate rent
($92,800) at MPDU level
($175,900) at 30% of AMI
How do we pay for 12.5% 1-bedroom units at 30% of
AMI in a high rise in the FH/B/WF subarea?
36.5% additional market rate units (density bonus)
33% reduction in impact fees for project
$83,000 cash payment FOR EACH UNIT at approval
Reduce MPDU requirement from 12.5% to 7.5%
REHABILITATION
Rehabilitation costs are harder to project
Costs are variable based on property condition/need
Costs reported to vary from $50 to $100+ per square foot
Can range from $30,000 to $125,000 per unit
**Waiting on AOBA data to have more solid numbers
However, cost per unit for preservation substantially
lower than new construction
Rents naturally tend lower for older properties
If acquisition is necessary
Rehabilitation costs less than new construction costs
When acquisition not necessary
Better deal in higher-cost areas (i.e. Metro corridors)
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
NEXT STEPS
Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016
