Dick Spotswood: For Workforce Housing, Marin Should Buy Older Apartment Buildings
Occasionally, a good public policy idea is sunk due to flaws in the plan for execution. One example is the Oak Hill Apartments, a concept conceived by Marin’s County Office of Education and county government.
Financing is more affordable since the rents needed to cover purchase and upgrade costs in existing apartments is less than the total price of building an entirely new complex from scratch. Financing costs will be lower since rents needed to cover costs will be less than comparable market rate units.
That virtually guarantees full occupancy. Which means there’s far less risk of default than there will be if rents were higher. That lowers interest on bonded indebtedness.
Now is the time for an analysis by experienced construction and finance professionals of the idea of purchasing existing properties to achieve the goal of affordable workforce housing.
The good idea is that teachers, school staff and county employees who meet income requirements have access to rental housing in Marin. That enables them to avoid the grind that’s the out-of-county commute and is affordable given their income. It will offer Marin County government and Marin public schools an employee recruiting and retention tool.
The plan envisions that a 135-unit apartment complex be constructed for this purpose on a hillside along Sir Francis Drake Boulevard on land that once was the gunnery range associated with San Quentin Rehabilitation Center. The state has declared this site surplus and is granting developers a long-term land lease at a nominal rent.
Oak Hill is currently estimated to cost $136.1 million. That works out to be more than $1 million for each of the 135 rental apartments.
Now, the financing scheme is in trouble. Construction costs continue to rise and the interest rates on bonds needed to finance most of the $136.1 million project are spiraling upward. Despite contributions by Marin County and the state, the project faces a $12.5 million shortfall.
Those agencies are tapped out. Marin County Supervisor Brian Colber said, “it is extremely difficult for me to see significant additional county financial involvement without affecting our ability to support other current and future housing projects.”
It’s time to think outside the box. Retain Oak Hill’s laudable goals but pursue a different strategy to achieve them. Instead of building a new complex at a time when construction costs are skyrocketing, purchase existing apartment houses and rent them at subsidized rents to educators and county employees.
Commercial real estate brokers use the online site LoopNet.com to locate multiunit properties on the market. My review of Marin apartment houses with 10 or more units listed for sale discloses 13 properties containing 131 units. That’s close to Oak Hill’s proposed 135 units.
I ran this idea by Michael Burke of Golden Gate Sotheby’s, one of Marin’s top real estate brokers. He replied, “It’s not a new concept. It’s been successfully pursued by nonprofits across the county.”
Using data from LoopNet and assuming sales are achieved at listing prices, the total cost to amass a portfolio of 13 properties is $42.5 million. Basic math discloses that the cost of acquiring these 131 units is $325,000 per apartment.
It’s understood that Oak Hill would involve new construction. That means first-class apartments. Acquiring existing apartment houses inherently involves older structures needing significant upgrades to bring them to a suitable condition for our workforce and their families. Presume that those upgrades cost $275,000 per unit. That brings the cost of acquisition and renovation to $600,000 per apartment.
That’s $400,000 per unit less than what it will cost to build new apartments at the San Quentin Peninsula site. Oak Hill requires significant infrastructure costs, a new intersection with Sir Francis Drake Boulevard, plus toxic remediation expenses due to expended ammunition on the old gun range. Buying existing apartments incurs none of those one-time costs.
Financing is more affordable since the rents needed to cover purchase and upgrade costs in existing apartments is less than the total price of building an entirely new complex from scratch. Financing costs will be lower since rents needed to cover costs will be less than comparable market rate units.
That virtually guarantees full occupancy. Which means there’s far less risk of default than there will be if rents were higher. That lowers interest on bonded indebtedness.
Now is the time for an analysis by experienced construction and finance professionals of the idea of purchasing existing properties to achieve the goal of affordable workforce housing.
Columnist Dick Spotswood of Mill Valley writes on local issues Sundays and Wednesdays. Email him at spotswood@comcast.net.