|3 Apr 2023
|Context Spring 2023
By Mo Rushdy
In developing a successful, housing policy for Philadelphia, predictability should be the single most important goal for all elements of the process. The city should work toward eliminating confusion and building consistency into every aspect of the real estate development process to attract the investment that Philadelphia needs and avoid costly delays and unexpected expenses. Doubt and uncertainty equate to risk, and good developers, the type that we should be encouraging to invest in our city, look to limit risk wherever possible.
To that end, the following recommendations are intended as achievable goals which, when implemented, will pave the way towards a more clear and linear development process.
OVERLAYS OFTEN FRUSTRATE THE UNDERLYING ZONING CODE
Overlays and councilmanic district exemptions undermine the zoning code, expose the city to legal challenges, and create a patchwork of regulations with little to no consistency from one neighborhood to the next. A recent writeup showed that over 70% of city land has at least one overlay imposed. Between the Planning Commission, Registered Community Organizations (RCOs), and development agencies, our city is replete with the expertise to thoroughly vet proposed overlays to ensure consistencies with the underlying zoning and that sufficient community awareness and support exists. Equally troubling from the perspective of a developer or a Philadelphia resident, without a thoughtful and rigorous process to impose any overlay, neighborhoods can be reshaped against the desires of the community and the development process, in turn, becomes even more unpredictable.
STRENGTHEN THE PROCESS
The planning and development process is often unpredictable, however, there are opportunities for it to be strengthened in the following ways:
In summary, predictability. Goals for affordable housing and equitable community engagement could be realized if developers and owners were able to plan more efficiently because they could make realistic budget decisions for the development process.
AFFORDABLE HOUSING POLICY THAT WILL WORK
Creating an affordable housing policy that will meet the need of the number of Philadelphia residents who need access to affordable housing is difficult. It is an issue that many private and public sector leaders have been working on for years. The solution needs to be multi-faceted and not rely solely on the private sector to create the bulk of affordable units. There are some issues that are lower-hanging fruit where the City could quickly and efficiently aid in the production of thousands of affordable units.
PROPERLY RE-DISTRIBUTE UP TO 10,000 CITY-OWNED VACANT LOTS.
Philadelphia has thousands of city-owned vacant parcels available for affordable housing and it is critical that disposition decisions be made by the Land Bank, not City Council. A non-competitive land disposition policy was passed 2 years ago¹ which allowed the transfer of land to qualified applicants who would deliver projects with only a 51% affordability component and a 49% market rate component. (Legislation 190606). This policy allows market rate housing on nominally priced land, allowing developers to cross subsidize the affordable component reaching deeper affordability. In essence instead of building 20 homes all at 120% AMI, a developer could do 9 market rate homes, maybe 3 at 120%, 5 at 80% AMI and 3 at 60% AMI. With proper support in this land distribution process, this public/private partnership can yield 5,000-6,000 new home ownership opportunities, along an additional 10,000 rental units.
ADDITIONAL FINANCIAL INCENTIVES TO BOOST AFFORDABLE HOUSING PRODUCTION:
MANDATORY INCLUSIONARY ZONING DOES NOT WORK
Mandatory Inclusionary Zoning (IZ) requires that a percentage of units in an otherwise market rate project are deed restricted for 15+ years with target specific lower rent prices, allowing people who meet the income requirement to acquire housing.
Simply put, Mandatory Inclusionary Zoning is not executable in Philadelphia and it will not deliver affordable housing at scale.
Private development relies on debt and equity for the financing of a projects. For simplicity, assume 25% of project cost comes from sponsor or investor equity and 75% comes from bank debt financing. To be able to secure the equity and debt, certain parameters must be met.
For the debt portion, the net operating income (NOI) of a building must cover the mortgage payment by a 1.25 ratio, called the Debt Service Coverage Ratio (DSCR). In other words, if a building has an NOI of $1,000,000, the maximum mortgage payment that would allow an approved loan cannot exceed $800,000.
For the equity portion, a project pencils out if the annual cash on cash (annual new cash flow/invested equity) is over 7.5%. If a $10 million development project with an equity requirement of $2.5m is to be feasible for the sponsor equity, the annual cash flow needs to reach $187,500 on that $2.5m investment.
A model was run over 500 times by the Building Industry Association of Philadelphia to test these 2 parameters (DSCR and Cash on Cash) at different project densities, various land costs, as well as various affordability components. This analysis demonstrates comprehensively that it is difficult to make a project pencil out without accompanying incentives to bridge the financing gap. In summary:
The need for affordable housing, and more housing in general, is at a high in Philadelphia, and to achieve the required growth, the public and private sectors must work collaboratively.
Simple policy changes, and increased support for those within the development process, as outlined above, will produce more affordable housing units from the private development community. There still will be a need for other nonprofit and government agency programs to meet the overall need we have in Philadelphia – but without the recommendations outlined here, the private sector will not be able to contribute towards solving this issue at the scale required.
Mo Rushdy is a Managing Partner of The Riverwards Group and serves as the Vice President of Building Industry Association of Philadelphia.
Strengthen the Process by Supporting the Planning Commission, ZBA, and RCOs.
Photo: Courtesy of the Philadelphia City Planning Commission
Firm Projects include Budd Bioworks, Bellwether District and New York Medical College More...