Can I Make the Mixed-Income Mandate Workable?

Ms. Real Estate

  SAN FRANCISCO— Wouldn’t it be convenient if someone had clear, intelligent answers to most of your CRE-related questions? Problem solved. Nina J. Gruen, a.k.a. Ms. Real Estate, a.k.a. the principal sociologist overseeing market research and analysis at Gruen Gruen + Associates, is here to answer readers’ questions. Have a question for Ms. Real Estate? Ask anonymously by clicking here. Dear Ms. Real Estate, I currently have two projects in Marin County where I am being required to pair market rate units with some affordable units. What has been your experience in the workability of these mixed income projects? Thanks in advance for sharing your knowledge and experience.

—Tentatively Tying Together Two Dissimilar Tenants.

Dear Tentatively Tying, As we both know, Marin County is a very desirable residential location, offering a scenic environment, social status and good public schools. Marin has never been an inexpensive housing alternative, and like San Francisco and San Jose has experienced steep price increases over the last five years. In 2009, the price of the average Marin County condo was $337,000. By 2014, the average condo price had already experienced a 50 percent increase to $560,000. Average rents in the County increased 66 percent from 2005 to $2,456 in June of 2015. The first quarter of 2016 has seen an additional jump to $2,559. You specifically inquired as to the “workability,” which includes a positive return on investment (ROI). The financial effect of the inclusionary zoning requirements will depend upon three factors. The primary, but relatively easy to calculate effect on your ROI will be determined by the amount and income mix of the very low, low and moderate income households your project is required to serve. In Marin County, in 2015 a two-person household is defined as very low income if they earn up to $41,050; low income if they earn up to $65,700; median income if they earn up to $82,400; and moderate income, which is 120 percent of median, if they earn up to $98,900. You can assume households in each of the categories will pay up to 30 percent of their income in rent or an equivalent percentage on mortgages for condos in those affordability brackets. Multiplying the resulting rent or price for each of the categories by the required percentage of condo or rental units you would be required to produce for each of these “affordability groups” and inputting these figures into your pro forma will enable you to predict their contribution to net operating income (NOI) for rental units and estimate the mortgage debt they can carry for condos. Depending on your land and construction costs, you may find that, at the higher end of the scale, some of the units that are counted as below market affordable will be making a positive contribution to your cash flow, even though they pay less than the market rent for new construction. For example, a moderate income household at 120 percent of the County average would be paying about $2,470 a month in rent. If we assume the average one-bedroom unit for this two-person household is 600 square feet, then the monthly rental payments average over $4.00 per square foot. Further, a high proportion of these moderate income households can be expected to be employed as teachers, public sector workers, firemen and policemen, etc. which is a decided advantage for the County as a whole. If you have very high land costs, which is likely in Marin County, you may be allowed some additional density because your development is providing housing to households who would otherwise be unable to rent or purchase new housing in the County. If you have the option of making some tradeoffs between the number of affordable units and the percentage of units to be provided to lower income households, Ms. Real Estate recommends offering to include a higher number of total affordable units in return for being allowed to provide a higher proportion of those units to moderate income households.