Northwest Arkansas Democrat-Gazette
Profit margin key Developers need more help to build affordable homes
Editor’s note: This is the third in a four-part series exploring the challenges and possible solutions for providing affordable housing in the region’s larger cities.
Northwest Arkansas must either subsidize the profit for private developers or funnel money through nonprofit groups if it wants to increase the amount of affordable housing in the larger cities, experts and local officials said.
The Arkansas Constitution prohibits cities from subsidizing private housing developers — that must come from federal and state programs, said Mark Hayes, executive director of the Arkansas Municipal League.
The few programs that exist would need a large infusion of cash to make a dent in the shortage here, developers said.
Cities can offer to build infrastructure such as streets and sewer lines and waive or lower fees and regulations, but those represent a comparatively small amount of
the overall cost of building, city officials and developers said.
Funding nonprofit groups has taken a foothold in Fayetteville. Officials hope the idea spreads.
The Northwest Arkansas Council projects 80,000 more households will move to the region’s four largest cities by 2040. Home prices are on the rise, with a low inventory of homes on the market. The cost of purchasing a home increased 11% last year, averaging $293,403 in Benton County and $268,987 in Washington County, according to the latest Arvest Bank Skyline Report.
The amount of vacant land is shrinking, forcing cities to squeeze homes closer together or put multifamily units in single-family neighborhoods. Both have met resistance from homeowners in single-family neighborhoods.
The result is new homes on the outskirts of the four major cities, or suburban sprawl patterns in the smaller cities, which requires working-class families to drive farther for work, amenities and services.
Residents of Northwest Arkansas’ larger cities pay more to live and get around — as a percentage of their incomes — than residents of New York City or Chicago, according to the Center for Neighborhood Technology, a Chicago-based nonprofit group.
New home construction is going to need help from multiple fronts to have viable options for first-time home buyers and working-class families, said Mark Marquess, owner of housing builder Riverwood Homes.
“What about the people who want a home and there’s nowhere to go? They’re going to get pushed back into apartments or older homes that are going to require quite a bit of maintenance and upkeep and energy efficiency that the new homes don’t,” he said. “We’re really struggling with it.”
GOVERNMENT PROGRAMS
The state Constitution limits what cities can do to encourage affordable housing, Hayes said. The constitution prohibits cities from handing a developer money to build a housing project, for instance.
There is some wiggle room for cities to enter into a contract for services involving a housing project, but what taxpayers would receive in return would have to be clearly defined, he said. Public-private partnerships also can address certain issues such as homelessness or living in substandard housing, without involving money directly, Hayes said.
About 180 cities in the nation have some form of rent control, meaning ordinances set a price ceiling or cap annual rent increases at a certain percentage, according to the Urban Institute, a national nonprofit research organization.
Arkansas law most likely would prohibit such a measure, Hayes said.
“It would be very, very hard in the legal bubble that we live in for cities,” he said.
The government incentive programs meant to entice developers to build affordable housing come with strings attached, such as competition, lengthy applications and limited money to award, developers said.
The state’s Low-Income Housing Tax Credit program serves as the most direct method using federal tax credits to incentivize affordable housing development.
The Arkansas Development Finance Authority awards about $7 million to $8 million in tax credits annually to individual projects. The statewide program is competitive.
The program supports residential developments that offer lower rents for lower-income people, said Bryan Scoggins, the authority’s president. Lower rents mean less profit for the developers, so the program provides specialized financing to make the projects viable, he said. Property owners receive the credits annually for 10 years and agree to keep rent low for a certain number of units for at least 30 years.
Another state program gives loans from the federal Home Investment Partnerships Act to authority-approved nonprofits and cities and counties. Recipients can use the money to build housing for low-income families or rehabilitate buildings. The program also can be applied along with the Low-Income Housing Tax Credit projects.
A third state-run program awards $3 million annually from the National Housing Trust Fund to developers to build housing for extremely low-income families.
A fourth, smaller program through the Development Finance Authority makes tax-exempt bonds available to developers to finance construction of apartments. The developer is required to set aside a certain number of units for low- and moderate-income families in exchange for below-market interest rate financing.
That program isn’t enough to cover the costs of an entire project, so other funding sources are needed to keep rents low, said Jim Petty, a developer from Van Buren.
Those programs represent the bulk of what’s out there in government programs, Scoggins said. The programs come from the federal government, administered through the state.
The state has a trust fund for low-income housing; the fund just doesn’t have any money. The Legislature created the fund in 2009 with $500,000 to start, which was used for projects in Little Rock, Fort Smith and Harrison. The fund has stayed depleted since.
A few historic factors have contributed to a decline in public housing stock around the country. Changes in federal law in the 1990s shifted policy to demolishing dilapidated public housing structures and redeveloping them into smaller-density, mixed-income residences, according to a January 2020 article from Curbed, an online magazine focusing on homes, neighborhoods and cities. A 1998 federal law also repealed a rule every public housing unit demolished had to be replaced on a one-forone basis.
Public housing stock plummeted nationally as a result. Subsidized housing efforts largely shifted to the Section 8 tenant-based voucher system. The two federal funds used to build public housing have remained chronically underfunded for years, creating a maintenance backlog for public housing properties, according to the Curbed article.
Petty has headed about 30 affordable housing projects using the Low-Income Housing Tax Credit program. The Development Finance Authority ranks applications using a scoring system. Petty knows through experience projects most likely to get approved are located near grocery stores, schools, parks and other services that would serve low-income, elderly or disabled residents.
Petty is a partner on a housing project south of Cobblestone Farms in west Fayetteville. The project was approved for the Low-Income Housing tax credit and involves building about 90 units of affordable housing, consisting of duplexes, triplexes and cottage homes. Rent for the units will range from $400 to $700 per month. The target annual household income range for tenants is $29,000 to $68,000.
He understands why a developer wouldn’t want to take the risk to apply for a program he may not get, Petty said. The programs, as a whole, don’t make much of a dent in the shortage of affordable housing, he said.
“They’re laborious, and they are limited in availability and resources,” he said. “You just can’t make a significant impact with the limited dollars that are available with those programs.”
GETTING CREATIVE
Cities and local governmental agencies have to find workarounds or indirect ways to support affordable housing because of the limitations in the state Constitution. Cities can give money directly and offer tax breaks to private, for-profit companies to develop or expand for broad economic development purposes, but not to developers to build housing.
Cities can waive fees and cover infrastructure costs for housing developers.
Fayetteville provided $1 million in 2016 to Partners for Better Housing, a nonprofit organization developing the 80-home Willow Bend neighborhood planned east of Washington Avenue on the south part of town. The money paid infrastructure costs such as streets, drainage and water and sewer lines, because those features are publicly owned anyway.
Willow Bend will offer financing for one-third of the homes to people who make below 80% median family income for the Fayetteville-Springdale-Rogers metropolitan area. Median income for a family of four in Northwest Arkansas is $73,600, according to the U.S. Department of Housing and Urban Development. Eighty percent of that is $58,900.
Partners for Better Housing calls the program Pay it Forward.
Another one-third of the homes will be reserved for buyers earning 80-100% median income. The final onethird will be sold to buyers of any income level. All buyers will use traditional mortgage financing options.
Even though all of the homes will be sold at market rate, those who qualify for the Pay it Forward program will be eligible for $35,000 in down-payment assistance that will function like an interest-free loan. The assistance will lower monthly payments.
In turn, the buyer will agree to pay the $35,000 back upon resale or within 30 years. Partners for Better Housing will reserve the first right of refusal if a home is to be sold. Home-value appreciation will be capped at 2% annually to ensure affordability for the next buyer.
The Office of Policy Development and Research at the U.S. Department of Housing and Urban Development promotes shared-equity programs such as Willow Bend as a sustainable way to get more people into home ownership.
Programs look a little different across the country, but they all focus on owner-occupancy and long-term affordability, according to the office webpage.
For instance, the One Roof Community Housing program in Duluth, Minn., has a land trust with a board buying and renovating homes, selling them to income-eligible buyers at prices about 25% lower than appraised value. One Roof creates a subsidy by retaining ownership of the land beneath the homes. Buyers enter into a 99-year ground lease and pay a small lease fee to the land trust every month, according to the office.
Partners for Better Housing hopes its program in Fayetteville will be replicated for homes being resold across Northwest Arkansas. The concept of shared equity isn’t new in the United States, but it’s new in Arkansas, said Tiffany Hudson, the nonprofit’s executive director.
“We’re trying to balance the wealth-building of home ownership with long-term affordability for multiple families who want to buy into that neighborhood,” she said.
Public housing authorities have a little more leeway than cities because they use federal money. The Fayetteville Housing Authority has a development nonprofit group, FHA Development Inc., it uses to buy and renovate property. The group bought within the past year two apartment complexes and leases two others with the option to purchase. It also bought the former Hi-Way Inn & Motel on North College Avenue in 2019 to house veterans.
Purchase price for the four apartment complexes totals more than $4.8 million, and the properties are under renovation. The authority nonprofit group used bank loans with the seller helping with financing. The group uses residents’ rent to pay back the loans, said Kristen Bensinger, Housing Authority board chairwoman. Rents stayed low at the complexes and more than 100 units are open to families of a variety of incomes, she said.
reGional solutions
The 2019 Our Housing Future report from the Walton Family Foundation calls for a regional approach to gain more affordable housing units, in addition to state or federal options.
One idea is to create a regional housing trust with money from private and philanthropic sectors. A regional organization could administer the fund, and cities and developers could pull from it to encourage affordable housing construction.
Last month, the foundation announced the creation of a workforce housing center with the Northwest Arkansas Council. The center’s functions are still being fleshed out, but Karen Minkel, the foundation’s Home Region program director, said it will get into the weeds of solutions and use the report as a building block.
Models used in cities in other states may also work in Northwest Arkansas, the Walton Family Foundation report says.
The Safe, Mixed-income, Accessible, Reasonably priced, Transit-oriented development program in Austin, Texas, allows expedited permitting and reduced or waived fees for affordable housing projects. The program has helped produce about 5,000 affordable units in the past 20 years, according to the report.
The publicly assisted housing supply falls far short of the need. The report counted 460 public housing units and 1,150 vouchers for tenant-based rental assistance in Northwest Arkansas. An additional 3,400 affordable units come from 65 properties of privately owned, but federally assisted housing.
PRIVATE SECTOR
Some of the regulations and policies cities have in place inadvertently raise the cost to a developer, who passes the cost to the homeowner.
Tom Hennelly, vice president of private development with civil engineering and planning firm Crafton Tull in Rogers, pointed to a subdivision approved in Fayetteville last month as an example.
In 2018, Crafton Tull got a preliminary plan approved for Meadows at Stonebridge subdivision near the southeastern city limits. The plan was to build a traditional subdivision, but city requirements to build trail and street connections and plant new trees increased the cost, and the original developer pulled out, Hennelly said.
The property got a new owner, and Hennelly and his team went back to the city’s planning staff to find a way to make the project profitable. Planning staff suggested varying the size of the residential lots and adding strips of commercial uses, increasing the overall density. The increased density made the project work financially, and the Planning Commission approved a zoning plan for it.
The Stonebridge project was unique among projects like it, Hennelly said. Oftentimes, a developer gets fed up with city regulations and hops over to the county side, or to a smaller city, where fewer regulations allow for less costly construction, he said.
“It’s almost like death by 1,000 pinpricks,” Hennelly said. “It’s a little bit here and a little bit there, and the next thing you know, your engineering fees have climbed up because of additional permitting, and all that winds up in the price of the house.”
Avoiding upfront costs also can depend on a project’s approach. Riverwood Homes in Fayetteville acts as developer and builder on its projects, which significantly reduces costs, Marquess said. The company also makes it an explicit goal to build affordable homes — it boasts on its website that more than 75% of its homes sell for less than $250,000.
The goal is getting harder to keep. Last year, the cost of lumber soared because of covid-19, Marquess said. The cost of sheet rock and insulation also has gone up. The higher the costs for building material, the higher the sale price to maintain profitability, so more people will be pushed out of the market, he said.
Marquess said being able to build on smaller lots helps. Any fees that cities can waive or reduce — such as the impact fees assessed to developers to pay for police, fire, ambulance and other services — helps too, he said.
Those are minor fixes that won’t go a long way in improving the overall affordability of homes, Marquess said.
He expressed hope the Northwest Arkansas Council workforce housing center will come up with better solutions. Developers and city planners also are keeping an eye on President Joe Biden’s $2 trillion infrastructure plan, which proposes more than $200 billion toward renovating or building 2 million affordable housing units.