Seattle Housing Affordability

The Seattle City Council is considering legislation that would require developers of multifamily housing to include some affordable units in their projects or pay the city to help build the units elsewhere.

The legislation would take effect in conjunction with the council approving zoning changes across the city — mostly in multifamily areas.

Those changes would allow developers to build larger and taller buildings, offsetting the cost of the requirements.

Mayor Ed Murray unveiled the broad strokes of the policy almost a year ago, saying it would help make Seattle more affordable.

But there are a lot of important details for the council to investigate, including some that still need to be hammered out. For the complete article, click here.

As a developer, I know that construction costs and market variables are unpredictable. There are parts of the city where development lags behind because of its riskiness, places like Rainier Beach - exactly where more affordable housing is needed. The city needs to consider encouraging development in these areas, without additional costs and restrictions that impede economic growth and development.

Happy Investing!

Commercial Deal Analysis

Demographics
Median household income in Rainier Beach is $55,424, as compared to $63,470 in Seattle general. The median home sale price is $224,962. It is ethnically diverse and home to a number of newly arrived immigrants.

Comparables
Rent comparables from Dupre and Scott seem to support a rental price of $1.75/sf for new construction 1BR units in this area. Rainier Beach saw the greatest appreciation in rental rates and in tax-assessed residential values within the city of Seattle during 2014.

Building Your Team:
Who has done similar projects in the past? What architect/builder has experience in this particular asset class or construction?
Van Gogh Studio Lofts hired SMR Architects to design the project and Andersen Construction as the builder.
SMR was the lead architects for all of the ArtSpace Projects in Washington, including the Tashiro-Kaplan Building, Hiawatha Lofts, Mt. Baker Lofts, as well as the artist live/work renovations at Youngstown Cultural Center in Seattle.
Andersen Construction has been in business since 1950 and has built over 8000 projects on the west coast. They have much expertise in wood frame and mixed use multifamily housing, and were recently hired by Paul Allen’s Vulcan development company to do the Yesler terrace renovation in Seattle.

Financials:
ProForma
Does the project pencil?
We are now estimating a $7million project, which will be worth $8.273million at a 6.5 cap when completed, about a 17% increase in value.
It is estimated to cash flow around $258,755 per year when stabilized. This is projected to earn investors a 15% cash-on-cash return.

Are there financial incentives available?
SE Seattle Bus Tour sponsored by REAPS
Multifamily tax exemption

Low-interest financing?
Rainier Valley Community Development Fund

Pros
Potentially much greater financial returns from ground up development
More creative transactions
Greater community impact
Team does much of the work

and Cons
Much longer timeline, typically 1-2 years or more
Market uncertainties moving forward
More complex transactions
More parties involved
More government review and regulation

Happy Investing!

ProForma Budget Numbers

Today my Van Gogh business partner and I met with Joel Andersen, the owner of Andersen Construction Company, our builder for Van Gogh Lofts on South Henderson Street in Seattle. The purpose of the meeting was to go over the construction bid on the project. Construction costs are estimated to be anywhere between $4.1 to $4.8 million dollars. Andersen is trying to get those costs reduced, whether that is by providing structural support other than with pilings, or shortening corridors, or just getting better bids from sub-contractors.

Joel Andersen also suggested an option to keep the Seller in the deal as an equity partner. This has benefits when it comes to getting bank financing. We are assuming a bank loan at 65% LTV, and a loan from the community development fund at 25% LTV. That leaves us 10% to raise, but we also receive credit for the cost of the land.

Joel Andersen has literally developed or seen hundreds of proforma budgets in the course of his work. His company was hired by Vulcan to do the redevelopment of Yesler Terrace, and they have been doing projects in both Portland and Seattle for the past sixty years. He seemed surprised that I was using the rental figure of $1.50/sf for rental rates on our project. He felt confident that new construction in Rainier Beach should be able to pull in at least $2/sf. He quickly calculated the numbers on a proforma budget for our 34-unit 28,500sf building.

He estimated operating costs at $500/unit/month, but recognized that property tax exemption would be a big benefit in reducing our costs on this project. He included a 5% development fee for Van Gogh Development Corporation, and 5% estimated cost for architectural fees. He calculated the cash-on-cash return for investors to be around 18%. With our projected net operating income and a conservative cap rate of 6.5% for Rainier Beach, he estimated that the value of our completed building would be somewhere in the neighborhood of $9 million. That represents a significant upside to our project.

He will be sending us an updated proforma budget, and much can change during the course of development. But numbers look pretty good now for a profitable project. Stay tuned!

Happy Investing!