Report: Regulation Accounts for 32% Of Multifamily Development Costs

WASHINGTON DC–Government regulation accounts for 32.1% of the cost of an apartment project, according to a joint report by the National Association of Home Builders and the National Multifamily Housing Council. Practically all multifamily developers incur costs when paying fees to local jurisdictions — both when applying for zoning approval, and again when local jurisdictions authorize the construction of buildings. These hard and upfront costs, of course, are not surprising but the report also dug into how government regulations impose costs in other ways.

These include, the report found, sometimes lengthy approval processes, development standards that go beyond what would ordinarily be done, changes to building codes over the past decade, and OSHA requirements. There are other regulations that are less common, such as requiring developers to dedicate land to the government.

The report acknowledges that some regulation, such as safety standards, are necessary. But it takes issue with the high percentage (32.1%) of costs that are attributed to government regulation, which the two associations say, raises other other questions as well. Such as: Are governments aware they aware of how much regulation currently exists? Do they realize how multiple regulations with conflicting standards can cause delays and increase costs? And do they understand the extent to which these increased costs translate into higher rents and make it difficult to build new housing that families with modest incomes can afford?

Types of Regulation

Regulatory costs fall into several categories including fees, development standards, building codes and land dedicated to public purposes. The range of these regulations can be broad, and the cost of complying with them substantial, the report said.

For example, at the zoning approval stage costs can average 4.1% of the total development costs. “Regulatory costs incurred at this stage can include fees paid directly to a government, but may also include other types of costs,” the report said, citing environmental impact, archeological or other types of studies.

Multiple fees from overlapping jurisdictions is also a problem, such as from a municipality, a water district, and a school district. 93% of the typical projects of multifamily developers in the NAHB-NMHC survey pay fees at this stage of the process. When they exist, these fees average 4.5% of total development costs.

Almost all (95%) of the typical projects of the developers surveyed were subject to design standards that that go beyond what the developer would otherwise do. When these beyond-ordinary requirements were present, they accounted for an average of 6.3% of the overall development cost.

Of all the listed categories, changes to building codes over the past 10 years, which came to 7% of total development costs, imposed the highest average costs.

Total Cost of The Regulations

The report also calculated the upper and lower quartiles of these costs to illustrate their variability.

It found that the ten components in the lower quartile come to less than 21.7%

The implication of this is that multifamily developers can minimize some types of regulatory costs depending on where they operate—but not all of them proportionately at the same time, the report said.