March 15, 2018 - From the March, 2018 issue

Related’s Bill Witte Thoughtfully Addresses California’s Complex Affordable Housing Problem

As the California Legislature takes up a number of controversial bills regarding land use and Los Angeles leaders push to build more permanent supportive units to combat homelessness, the development of affordable housing continues to be a challenge. Bill Witte, CEO and Chairman of Related California, one of the largest developers of urban and multifamily housing in the state, recently sat down with TPR to discuss why the market is not producing affordable housing. Witte opined that the confluence of high speculative land prices, a lack of rules from community plans, increased building costs, and reduced federal tax incentives are all contributing to a lack of truly affordable units.


Bill Witte

“It’s a little mystifying, given the magnitude of the affordable housing crisis, that the city has not found a way to encourage more affordable housing as part of the Downtown development boom.” – Bill Witte

Having founded the California arm of one of the nation’s largest builders of affordable and market-rate housing, do you believe affordable housing is especially difficult to build in Southern California? And if so, why is that the case?

Bill Witte: There are two issues here: why the market isn’t producing affordable housing, and what cities and counties could be doing to promote more affordable housing.

The first is a problem California-wide, and I believe that it is a challenge of both supply and public policy. Land-use policy in California and throughout the LA metro area has been unduly restrictive; has not allowed housing to keep pace with job growth; and has suffered from an economy that is producing high- and low-end jobs, but not many in the middle. That is not a problem that is unique to LA, but it certainly exists here.

In LA, the city has actively encouraged housing in the Downtown area, and we see the results: 10-12,000 units currently under construction. But in many other areas, the city has not undertaken the detailed planning efforts that would allow both developers and neighborhood groups to understand the rules, and encourage more development in a timely manner.

Then there is the issue of the amount of affordable housing within the supply chain. Of those 10-12,000 units under construction or in the pipeline in Downtown LA, hardly any that I’m aware of are affordable. It’s a little mystifying, given the magnitude of the affordable housing crisis, that the city has not found a way to encourage affordable housing as part of that development boom. (Of the 1,065 units Related has built or has under way downtown, 212 are or will be affordable.) 

Elaborate on the locus of Related’s housing investment in California. In what cities are Related’s projects concentrated? 

Our affordable housing division has 13 projects under construction, with as many in the pipeline. They are spread among San Bernardino County, Orange County, San Francisco, Oakland, Silicon Valley, and LA.

Our market-rate and mixed-income division has $2 billion of development throughout the state. We have 1,300 units under construction in San Francisco across three projects, in which 20 percent of units are affordable, as well as 3,000 units under development in Santa Clara in Silicon Valley. In Los Angeles, we have an 18-story, 115-unit tower near the Capitol Records building in Hollywood, which will open in the next few months. We’re working on another high-rise site in West LA, and we have the Grand Avenue project, which includes a significant residential tower.

When last interviewed by TPR in August 2016, you opined on the city of LA’s inability to adopt rational community plans for building new housing. Since the defeat of Measure S and the passage of the labor-sponsored Measure JJJ, has LA made any progress setting rules to better facilitate its affordable housing supply goals?

The good news is that Los Angeles has a mayor and city council who are very supportive of housing and knowledgeable about housing policy. There is a general acknowledgment of the need for more housing at all income levels, and certainly for affordable housing.

Having said that, I haven’t sensed a totally coherent policy on housing—which, granted, is tough for a big and diverse area—nor much movement on the type of neighborhood planning that would provide a clear path for development to get approved. JJJ happened, in my opinion, in part as a response to this lack of policy. It is important to note, however, that developers—and, I think, neighborhood groups—prefer rules. We may complain about certain aspects of them, but they make the approval process a lot easier.

TPR recently interviewed Tom Safran, an experienced and successful affordable housing developer in metropolitan Los Angeles, who argues that CEQA is a major inhibitor to building the affordable housing now in short supply. Do you agree?

Yes. Seattle, over the past 10 years, has built one new housing unit for every three new jobs. San Francisco, which is building more aggressively than ever in recent history, is building one new housing unit for every 10 new jobs.

Both are very progressive cities undergoing huge tech booms. The biggest difference between them is the time it takes for projects to get approved. That is partly a function of the local ability to process requests and referee between neighborhood groups and developers, and partly because of CEQA.

Affordable housing can be subject to the same kinds of delays that affect larger projects, but you can’t raise rents to offset the impacts. Instead, the project may just become infeasible.

We need to be able to apply the same principle to affordable and mixed-income projects that was applied to the Sacramento Kings arena and the (ultimately ill-fated) NFL stadium in Downtown LA: CEQA wasn’t waived, but there was a finite period of time during which any disputes over CEQA had to be decided.

That’s the big issue: not that there shouldn’t be environmental review, and not even that people shouldn’t have the right to contest a project, but rather that it can’t go on forever. There needs to be some way to conclude discussions about a project.

The issue of timing has infected the entire land-use process throughout much of California. Construction costs go up, and you can lose control of the parameters of the project. And it affects small developers a lot more than big developers, because they have less means to carry a project over an extended period of time.

It appears that, as a result of the problems you’ve identified, some of the development community has pivoted to the state Legislature to press for relief from local zoning and the authority to densify residential neighborhoods near transit. Speak to the pros and cons of this approach.

The pro is that there is more awareness of and sensitivity to the need for more housing production in the state than there has ever been in my professional lifetime. Legislators like Richard Bloom from Santa Monica, as well as David Chiu and Scott Wiener from San Francisco, have been at the forefront of this. And there is data being produced to reinforce this for policymakers.

The con is that, in a big state like ours with very diverse areas, conditions, and markets, it is doubly hard to enact statewide policies. There are also competing constituencies, particularly at the statewide level. Some, like the State League of Cities, tend to resist any effort to overturn local control. Environmental groups almost reflexively resist these efforts, although inroads are being made. The building trade unions have their own objectives, like ensuring that certain wages are paid. Jumble all these things together and try to generate something statewide—it’s extremely difficult.

The climate is much better than it has ever been. More people are talking about it, and people who have disagreed in the past are increasingly coming to consensus. Those are all good things, but the change is not going to happen overnight.

We recently interviewed Professor Patrick Condon of the University of British Columbia about Vancouver’s new focus on housing the “missing middle”—working with existing land-use configurations, town-house densities, and neighborhood plans to sensitively densify neighborhoods. Is Vancouver a model for coastal California? 

The missing middle is generally viewed as the part of the population that can’t afford the market, but isn’t served by formal affordable housing programs. It can be expensive to build housing to reach this group.

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For example, about three years ago, Related built a 900-unit tower in the Long Island neighborhood of Queens. One hundred percent of the building is reserved for below-market-rate incomes—from those making 50 percent of the area median income to those making 200 percent. (In New York, believe it or not, that is below market rate.) This building was accomplished through: a 100-percent property tax exemption (which would not be possible in California for all of those income levels); a $70 million loan from the city of New York; the use of tax-exempt bonds; and tax credits for some of the building. All of those tools had to be thrown at it.

Some have proposed reaching that group in neighborhood-sensitive densities, which are in fact less expensive to build. But the problem I see is that land is still very expensive, particularly in these established neighborhoods. If you don’t control the land, I don’t see how to get around that.

In California, there has been discussion of creating a private investment fund that would accept a below-market-rate, but adequate, return on its investment—say, 6 percent instead of 8-10 percent—to help finance projects with a significant component of workforce or “missing-middle” housing.

The most expensive cities, like New York and San Francisco, have begun to include moderate- and middle-income units as part of inclusionary zoning requirements. San Francisco now requires almost 20 percent onsite affordable housing; half of that is what we’re calling “missing middle,” and half is lower income.

I don’t think any one of these things alone makes a difference. At the end of the day, it’s about economics: You have to provide some kind of incentive for affordability. Even the progressive de Blasio administration has accepted this to some degree, and New York has become very aggressive on requiring higher affordability in projects in return for higher density. California’s density bonus law, by contrast, is irregularly enforced, and particularly difficult to enforce in LA for political reasons.

What jurisdictions are models for how best to encourage denser affordable housing at a scale acceptable to existing communities?

An established area or neighborhood plan is a precondition. Without that, you end up with more disputes with residents, more time spent in limbo, and a totally uncertain outcome.

It’s easy for developers to demonize neighborhood groups, or groups that oppose growth. But we have to listen. They have issues that have to be dealt with—that can’t just be dismissed. There needs to be more dialogue to lead to plans that both sides can accept in some form.

One challenge in the LA area is that, while the city has been pretty active in trying to steer development to transit-oriented sites, that can be a tough sell here because the transit itself is far less developed. The public is skeptical that people are going to actually use that transit once we build density there. It’s tough, but necessary, to plan for a future that looks different.

There is growing attention, yet no consensus, about city policy changes needed to better address homelessness. What is your take on how cities and the state ought to approach addressing an embarrassing shortage of homeless housing in metro California?

There is no magic bullet to solve this problem. Recently, the state passed legislation to allocate $2 billion of funds initially set aside for mental illness for homelessness, which mental health groups have sued to block. The city of LA passed a $1.2 billion bond to build housing for the homeless, and LA County passed a companion measure for several hundred million in operating support for homeless housing projects.

Despite these efforts—and perhaps in part because of an inability to execute—we have seen the homeless populations in San Francisco and Los Angeles increase over the last four years. As near as we can tell, that can be attributed not to more mental illness, but to economics, as rents have risen. That just makes these efforts even more necessary.

Unfortunately, funding was the easy part—not that it was easy. Finding the sites and getting them approved is the really tough task. Where do you put these developments? Can cities look to more efficient cost-effective means of supplying housing to the homeless, such as modular construction? There are only so many resources, so we’ve got to stretch the dollars further. And I do not see an easy way to get around the problem of neighborhood opposition.

Homeless housing is a very complicated, labor-intensive business, which includes services as well as bricks and mortar. But there are things we can do better. We need to find ways to speed up the process; this is either a priority or it’s not. We need to find more efficient and cost-effective ways to build. There are groups in LA, like A Community of Friends, PATH, and the Skid Row Housing Trust, who are very good at this, and can point to projects that they’ve completed successfully. We can learn from them.

Will the 2018 federal tax cuts undermine one of the pillars of affordable housing financing by making tax credits less valuable?

The Tax Reform Act, as approved, did not directly go after the Low-Income Housing Tax Credit program (LIHTC), which has traditionally enjoyed bipartisan support. Rather, by reducing the corporate tax rate from 35 percent to 21 percent, it reduced the value of the credit to corporate investors by approximately 20 percent. For example, if a project was expecting $5 million in tax credit equity from an investor, it might now obtain only $4 million, for the same Internal Rate of Return. Investors had anticipated this, so deals as of 2018 were being given quotes at a lower number than before.

Of course, while hardly fatal, this change puts more pressure on local funds, which are already stressed, to make up that difference. And there could be future changes that prioritize issues that would indirectly harm the credit program.

This year, the things to watch for are: firstly, whether the $4 billion affordable housing bond on the state ballot in November passes; and secondly, whether legislation at the federal level to increase the value of the credit, sponsored by Washington Senator Maria Cantwell and others, moves forward.

Lastly, what has happened in the last year at the federal level to encourage or discourage developers to build affordable housing?

Nothing has happened at the federal level to encourage the production of affordable housing. If there is some initiative coming out of HUD that is intended to help, I am certainly not aware of it.

Nothing has been done intentionally to actively discourage affordable housing production, either. But a consequence of the corporate tax reform was that the value of the low-income housing tax credit to the corporate investors shrunk by 15-20 percent. Instead of getting $5 million in tax credit equity, for example, the same project might generate only $4 million.

Frankly, regardless of whether any particular administration is Democratic or Republican, I don’t think we can look to the federal government for a lot of assistance on the housing crisis. Land-use policy and state and local initiatives are going to be our main tools to address this problem, and we all need to rise to the challenge.

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© 2020 The Planning Report | David Abel, Publisher, ABL, Inc.