Making Up for Lost Time Can Be Costly for Affordable Housing Developers
Despite evidence of their own experience, developers of affordable housing can still minimize the incidence of unforeseen delays and underestimate their costs. Capital One has 75 such developments under construction, and more than half are in some way behind schedule.
This is neither unusual nor a comment on our partners’ skills as developers of much-needed affordable housing. The point is that making up for lost time can be particularly costly.
While unforeseen delays are no more common in affordable housing than in other building types, developers of this product type run the unique risk of losing crucial tax credits when they miss a place-in-service deadline. Loss of tax credits as a funding source, which can account for as much as half the capital funding project costs in some cases, upends the carefully crafted funding structure of the development.
Other developers might be content to pay an extra month’s interest on their construction loan while addressing the source of delay, as this constitutes a less-significant sacrifice at today’s rates than in the past. But affordable housing developers must incur extra expenses and do whatever is necessary to get the project back on track.
A case in point is the Sugar Hill Apartments in Harlem, developed by the nonprofit Broadway Housing Communities (BHC). Capital One provided a $25 million construction loan and $38.5 million in equity for the $80.2 million project, as well as a $750,000 social services grant.
Sugar Hill Apartments is a success story despite the costly unforeseen delays encountered during construction. The community integrates affordable housing, education and cultural resources in a critically acclaimed building designed by David Adjaye Associates.
In addition to providing 124 families with affordable homes, the development, which opened in 2014, includes a 12,000-square-foot early childhood education center serving 100 children ages 2 to 5 and an 18,000-square-foot area that houses the Children’s Museum of Art and Storytelling.
But as construction began, the contractors found an unexpectedly dense outcropping of Manhattan schist on the building site that made sinking the foundations especially
time-consuming. To minimize the delay, BHC secured a city variance to operate a 17-hour, double-shift construction schedule from 7 a.m. to midnight, six days a week.
Not only did BHC endure doubled construction costs for the two months it took to complete the drilling, but the developer also had to address the complaints of neighbors. Those residents had to contend with the loud jarring noise and piercing vibrations of the contractor’s large hydraulic jackhammers during their waking hours, and they were not pleased.
Another example of an unforeseen delay occurred during the construction of Thomas and Lilly Keller Manor in the South Bronx Morrisania neighborhood. Hard hit during the 1970s, Morrisania has seen an influx of new residents in recent years, which, while revitalizing the area, has exacerbated its shortage of affordable housing.
Brisa Builders Development Group and Evergreen City, in conjunction with the NYC Housing Partnership, developed Thomas and Lilly Keller Manor in response to this crisis. Capital One provided a construction period letter of credit for $19.2 million to credit enhance the tax exempt bonds issued by the New York City Housing Development Corp. (HDC). Capital One also provided a $14.5 million equity investment in the form of federal low-income housing tax credits for the property.
The two six-story buildings, one on Westchester Avenue and the other diagonally across from it on Rogers Place, were built on parcels that had been owned by the Evangelical Disciples of Jesus Christ. As part of the sale, the developers agreed to include more than 14,000 square feet of church sanctuary space on the first and basement floors of the Westchester Avenue building, making Thomas and Lilly Keller Manor one of the first affordable housing developments to incorporate a new church within its design.
The 83-unit community was completed in May 2019, but only after the developers addressed groundwater issues at the Westchester Avenue site that were only discovered post-closing. The delay caused by the need to dewater the site before laying the foundation was compounded by the need to determine the effects of dewatering on piers supporting the elevated subway line fronting the parcel.
Brisa not only had to determine the impact of the dewatering on the tracks, but also had to secure the approval of New York’s Metropolitan Transit Authority before moving forward. The result was an eight-month delay, which added to construction costs.
The Planning Fallacy
Though extremely costly, site preparation is just one source of costly and time-consuming delay. Labor shortages have been another issue. As the economy has strengthened over the last few years, subcontractors have experienced greater difficulty retaining skilled labor. Tight municipal budgets and the resulting shortage of building inspectors have led to postponed inspections. Similar issues have prevented utilities providers from turning on services as scheduled.
In almost every case, the contingency account and built-in allowance for delay that banks bake into affordable housing construction schedules help to keep developers from jeopardizing their tax credits. Nonetheless, delays do generate inordinate stress by diverting time and money that might beneficially be applied for other purposes.
As most developers know, unforeseen delays are inevitable. So why don’t developers make allowances for them? One reason is what Daniel Kahneman, a Nobel Prize winning economist and psychologist, and his colleague Amos Tversky call the planning fallacy.
This is the universal tendency, not by any means confined to developers, to underestimate the time, costs and risks of future tasks regardless of experience with similar tasks in the past. And one of the factors that people discount most heavily are external causes of delay.
One way to counteract the planning fallacy is for affordable housing developers to take a close, objective view of the obstacles they encountered the last time they completed a similar project and to consider the experiences of competitors held up in similar situations. You can’t ever expect to be completely insulated from unforeseen delays, but it really helps if you can make allowances for them.
—By Laura Bailey. head of community finance, Capital One. This article first appeared in the October 2019 issue of Northeast Real Estate Business magazine.