Since 1990, Los Angeles has not been building enough homes to keep up with our growing population. This has resulted in a dramatic run up in rents and home prices as well as worsening overcrowding. Building more homes is clearly part of bringing rents and home prices within the reach of more Angelenos.
How does housing get built? The following pages provide information about the process of building new housing. Real estate development is a lengthy and complex process with a wide number of private and governmental organizations and individuals working together and taking various roles at different stages.
Some of the major players are developers, architects, banks, investors, state and federal housing agencies, local government planners, neighbors and community members, expediters, market analysts, real estate agents, contractors and construction workers.
The basics of housing development. Developers of market-rate housing generally build when they can collect rents that generate enough money to pay back the loans they need to buy the land and construct the apartments.
For example, let's say the lot on the corner is for sale for $2 million and you figure it would cost you another $12 million to build 60 apartments on the site. To "make it pencil" you would have to collect enough rent to cover a $14 million bank loan you will need to buy the land and construct the building. In addition, you will also need to be sure you have enough money to properly manage the building and make repairs. Therefore the rents for the 60 apartments will need to be high enough to pay off the mortgage of about $84,000/month and cover your monthly operating expenses of about $21,000/month (about $350/mo. per apartment).
At this rate you would need to charge your new tenants around $1,750/month. To be able to afford this apartment you would need to have an annual income of around $70,000.
60 Unit Apartment Building |
|
|---|---|
| Land | $2,000,000 |
| Construction | $12,000,000 |
| Total Development Costs | $14,000,000 |
| Monthly mortgage on building | $84,000 |
| Monthly operating & maintenance | $21,000 |
| Total Monthly Costs | $105,000 |
| Monthly Cost/Unit (Rent) | $1,750 |
Developing affordable housing. If it costs $1,750/month to build a new apartment, how do you make apartments affordable to working families earning $26,000/year that can only afford about $650 in monthly rent? Most of the costs — land, construction, operations, and maintenance — are going to be same. To make up the difference, affordable housing developers use government subsidies to help pay for the land and construction, leaving them with a much smaller monthly mortgage. With a smaller mortgage the affordable housing developer can charge lower rents.
60 Unit Apartment Building |
|
|---|---|
| Land | $2,000,000 |
| Construction | $12,000,000 |
| Total Development Costs | $14,000,000 |
| Minus subsides | -$11,000,000 |
| Permanent Loan to Repay | $3,000,000 |
| Monthly mortgage on building | $18,000 |
| Monthly operating & maintenance | $21,000 |
| Total Monthly Costs | $39,000 |
| Monthly Cost/Unit (Rent) | $650 |
