Why affordable housing costs so much to build (Part 2)

While some cities are spending millions of dollars on fancy new projects (as I discussed in my previous post) other cities aren’t building housing at all.

Last fall, a Los Angeles Times investigation found that at least 120 California municipalities had spent a combined $700 million in housing funds from 2000 to 2008 without building a single new housing unit.

Here’s a sampling of the spending detailed in the report:

“– In Santa Ana and Avalon, officials spent millions on projects that knocked down homes, displaced low-income people and worsened blight without producing anything in its place. Block after block in a 94-acre area east of Santa Ana’s civic center is lined with boarded-up buildings and vacant lots. In the Santa Catalina Island city, where housing is so scarce that workers sometimes sleep in the bushes, a half-block of property where cottages were razed to make way for more homes has sat, sun-baked and undeveloped, for 15 years.

Rancho Cucamonga paid $42.5 million to a politically connected developer to keep about 550 units below market rate for 99 years — even though a consultant to the city said the price was “unwarranted” and city officials were told that an appropriate price for slightly fewer units would be about $13 million.

— Nearly three dozen cities, including Monterey Park and Pismo Beach, reported spending most of their affordable housing money over the decade on “planning and administration” — but never built a single unit. Asked to account for the $361,000 spent by Pismo Beach, Administrative Services Director George Edes said some of it paid the salaries of staffers who were “thinking about concepts of how do we get something going … but we never did get to the point of taking those to the council with a concept that was developed.”

And other cities are not strangers to high salaries for housing officials.

In Chicago, the president of an affordable housing nonprofit earned roughly $685,000 in 2008 and took out, according to the Chicago Tribune.

 “At the same time, some residents living in one of CDA’s buildings at 727 E. 60th St. have protested rent hikes, filed a lawsuit against the nonprofit and have complained that CDA and its management firm, Community Management Association, aren’t keeping up the building.”

Alleged fraud

And then there are the most egregious cases — where at least some of the inflated construction costs have been fueled by alleged fraud schemes.

Currently, both Los Angeles and New York City are embroiled in high-profile federal investigations into allegations of fraud against affordable housing developers and public officials.

Last year, prominent California developer Advanced Development & Investment Inc. was charged with allegations that it had bilked cities across the state out of at least $80 million of taxpayer funds in construction overcharges.

A federal investigation remains ongoing.

A December Los Angeles Times investigation (that I worked on with reporters Jessica Garrison and Dave Zahniser), showed that the firm had carefully cultivated the political process — funneling hundreds of thousands of dollars of campaign contributions to elected officials across the state through subcontractors.

“In Glendale, where the city has paid ADI more than $33 million over the last five years, ADI subcontractors flooded council members with campaign contributions. In the two years leading up to the 2009 council election, nearly one of every four dollars received by the top four candidates for the council — more than $100,000 in total — came from those companies, their employees and those employees’ relatives. Collectively those donations outstripped any other known source in the race.”

Several subcontractors told us that they were pressured to give the donations in order to get work from the firm.

We later reported in June that Glendale City Councilman John Drayman was also under FBI investigation in relation to roughly $200,000 in renovations performed on his personal condominium by ADI subcontractors, at the same time he was voting to approve ADI projects.

And a subcontractor told me that he had been paid for work on the Drayman’s condominium out of an account intended for the construction of a Los Angeles affordable-housing project.

This outraged local affordable housing advocates.

Larry Gross, executive director of the renters’ rights group Coalition For Economic Survival, said all of the allegations surrounding ADI should serve as a “wakeup call” for city decision makers. “This is a clear indication that the city of L.A. needs better oversight on how this money is being used,” he said. “Maybe we should look at confiscating [Drayman’s] condo and turning it into affordable housing,” he added.

In New York, an even larger scandal is brewing after federal prosecutors last month charged one of the city’s senior housing officials with allegedly using his position to conduct a racketeering scheme.

Federal prosecutors allege that Wendell B. Walters, the assistant commissioner at the Department of Housing Preservation and Development responsible for new construction took“$600,000 in bribes and kickbacks from developers who hid the cash in golf ball boxes, coffee cups and overnight envelopes,” according to The New York Times.

“The authorities said Mr. Walters, 49, steered contracts the developers’ way in exchange for the cash, which he pocketed at meetings at locations around the city, including a golf driving range and a parking lot. Developers and contractors involved in the scheme then passed the cost of the kickbacks and bribes on to the city with inflated invoices, the authorities said.”

Six developers are also charged.

So what are people doing about it?

As more and more cases of fraud and misspent funds in the public housing industry become public, some government agencies are starting to take notice.

Last week, federal officials in charge of doling out the federal housing funds proposed instituting a slew of new regulatory requirements aimed at increasing accountability for the spending of the funds.

“There’s more we can do to boost the program’s performance and accountability,” U.S. Housing and Urban Development Secretary Shaun Donovan said in a press release. “Through these new steps, we want to expand HOME’s impact and ensure that every dollar is used smartly to help families afford their homes.”

Here’s the department’s take on what the proposed rules would do:

  • Require state and local governments to adopt policies and procedures to improve their oversight of projects, develop a system for assessing the relative risk of projects, and more closely monitor their HOME-funded sub-recipients;
  • Require state and local governments to assess a developer’s capacity and the long-term viability of the project, before they commit HOME funds to a project;
  • Require more frequent reporting by state and local ‘participating jurisdictions’ to enable HUD to more closely track projects once they’re under way; and
  • Set a higher ‘performance bar’ by establishing specific timeframes for taking appropriate corrective actions against participating jurisdictions who fail to complete what they started.

Still, it’s hard to tell whether these rules would help prevent the kind of  widespread fraud that allegedly occurred in both Los Angeles and New York City.

In California, where excessive costs are especially apparent, the state committee that allocates the competitive tax credits is also looking at ways to force cost containment.

This summer, the California Tax Credit Allocation Committee, which is headed by the California State Treasurer, announced they would study the issue, laying the groundwork to potentially limit development costs within tax credit projects.

Until things change, though, housing developers — like Roberts, the nonprofit housing exec mentioned in my previous post —  say they will be forced to play the current game.

 “The real truth – the cost to house this country’s homeless population could be cheaper… But in the world of building affordable housing, you have to play by the rules in order to win the public funding. It is a catch twenty-two.”


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2 Responses to Why affordable housing costs so much to build (Part 2)

  1. Pingback: Why Affordable Housing Costs So Much to Build (Part 1) |

  2. Ed Kirshner says:

    In terms of all public funds for affordable housing, from the local level including redevelopment, to the state and federal, much has been squandered on extraordinarily expensive projects. For example, in Oakland, a $28 million single room occupancy (SRO) rehab is under way with a cost of $875 per net residential square foot. Each of its small SRO units runs $275,000, which is more than the median sales price for homes in the City.
    Worse, the project will have fewer units than the existing buildings being rehabbed. Thus, after the expenditure of all these public funds, Oakland will lose almost 50 SRO units, while members of the development team will get millions of dollars of scarce public funds in fees. Unfortunately, this is not the only example of very expensive and dubious affordable housing in Oakland.
    However, not to be outdone, San Francisco is doing a $100 million SRO rehab for the “chronically homeless” in the Tenderloin. The SRO units there are even smaller than the ones in Oakland but cost $500,000 each. Dozens of publically financed projects like these can be found throughout California. Sadly, most all are by nonprofit developers.
    Perversely, tax money out of the pockets of innumerable families who are losing their homes goes to these extraordinarily expensive publicly financed housing projects. This appalling situation should be fully and publicly investigated as part of any attempt to renew funding for affordable housing. This must go well beyond the current “cost containment” efforts at the state level which are not serious and are intended to mostly contain the issue.
    Ed Kirshner, Affordable Housing Consultant, Oakland

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