U.S. Department of Housing and Urban Development Office of Policy Development and Research Barriers to the Rehabilitation of Affordable Housing Volume I Finding and Analysis Visit PD&R's Web Site www.huduser.org to find this report and others sponsored by HUD's Office of Policy Development and Research (PD&R). Other services of HUD USER, PD&R's Research Information Service, include listservs; special interest, bimonthly publications (best practices, significant studies from other sources); access to public use databases; hotline 1–800–245–2691 for help accessing the information you need. Barriers to the Rehabilitation of Affordable Housing Volume I of II Findings and Analysis PREPARED FOR: U.S. Department of Housing and Urban Development Office of Policy Development and Research AUTHORED BY: David Listokin Barbara Listokin Center for Urban Policy Research (CUPR) Edward J. Bloustein School of Planning and Public Policy Rutgers—The State University of New Jersey RESEARCH ASSISTANCE PROVIDED BY: National Trust for Historic Preservation Department of Law and Public Policy Tamar Osterman Bridget Hartman The Enterprise Foundation Planning, Design, and Development William Duncan Peter Werwath and Bradford J. White, Project Management Advisors Robert Kuehn, Keen Development Corporation Stephen Turgeon, Consultant Ioan Voicu, CUPR MAY 2001 ACKNOWLEDGMENTS We would like to acknowledge the critical assistance of the National Rehab Study Housing Resource Group: Robert Adams, VMH, Inc. Randall P. Alexander, The Alexander Company DeWayne H. Anderson, Anderson Development Company Alfred Arezzo, Hoboken, New Jersey William Asdal, Asdal Builders James E. Babbitt, Flagstaff, Arizona Richard Baron, McCormack Baron & Associates Eddie Belk, Belk Architects Peter Bell, National Housing & Rehabilitation Association (NHRA) Bruce Block, Milwaukee, Wisconsin Jim Bonar, Skid Row Housing Trust William Brenner, National Institute of Building Sciences (NIBS) Thurman Burnette, Rural Development Andrew Chaban, Princeton Properties William Connolly, New Jersey Department of Community Affairs, Division of Codes and Standards Karen A. Danielsen, Director of Housing Policy and Practice, Urban Land Institute (ULI) William F. Delvac, Latham & Watkins Linda Dishman, LA Conservancy Dan Dole, Scottsdale, Arizona Carl Dranoff, Dranoff Properties David Engel, Office of Policy Development and Research Dan Falcone, New Economics for Women Mario Fonda-Bonardi, Fonda-Bonardi & Hohman, Architects Joan Galleger, Garsten Management Corporation Terry Goddard, Law Offices of Terry Goddard Tony Goldman, Goldman Properties, Inc. Dean Graves, FAIA Frank Green, Chattanooga Neighborhood Enterprise (CNE) Cissy Gross, Kansas City, Missouri George Haecker, Bahr Vermeer & Haecker, Architects David Harder, Executive Director, Little Haiti Housing Association (LHHA) James Harger, Winn Management David Hattis, Building Technology, Inc. Curt Heidt, Federal Home Loan Bank Michael Hervey, Jackson, Mississippi Kitty Higgins, National Trust for Historic Preservation Bill Huang, Community Partners (National Trust) Lawrence Jacobsen, Mortgage Bankers Association Marty Johnson, Isles, Inc. Anthony Jones, Clearwater, Florida Will Jones, Research Officer, National Association of Housing and Redevelopment Officials (NAHRO) Wendall C. Kalsow, McGinley Hart & Associates Kevin Kelley, Leon Weiner Associates C. Theodore Koebel, Center for Housing Research, Virginia Tech Karl K. Komatsu, AIA Komatsu Architecture Richard Kuchnicki, International Code Council Robert Kuehn, Keen Development Corporation Michael Lappin, The Community Preservation Corporation (CPC) John Leith-Tetrault, Community Partners (National Trust) Aaron Lewit, Enterprise Foundation Kelley Lindquist, Artspace Projects, Inc. Stanley Listokin, Executive Director, Masada Construction Stanley Lowe, Executive Director, Pittsburgh Housing Authority Weiming Lu, Lowertown Redevelopment Corporation Alan Mallach, City of Trenton, New Jersey, Department of Housing and Development Christy McAvoy, Historic Resources Group Bob McLoughlin and Helen Lopez, Albuquerque Housing Services Michael Mills, Ford Farewell Mills & Gatsch Architects D. Thomas Mistick, Mistick Construction William Mosher, Mile High Development Ronald F. Murphy, Stickney Murphy Romine Architects Jerry Myers, Pocatello, Idaho James Paley, Executive Director, Neighborhood Housing Services of New Haven Bryan Park, Northwest Housing Resources (NHR) Sharon Park, Heritage Preservation Services, National Park Service Brian Patchan, National Association of Home Builders (NAHB) Perry Poyner Alley, Poyner Architects Jonathan F. P. Rose, Affordable Housing Construction Corp. Donovan Rypkema, Washington, D.C. Clark Schoettle, Providence Preservation Society Revolving Fund Howard B. Slaughter, Jr., Pittsburgh, Pennsylvania Kennedy Smith, National Main Street Center (National Trust) Robin Snyder, U.S. Environmental Protection Agency Gary Stenson, MetroPlains Properties, Inc. Kathleen Taylor, Owner, Taylor Construction Services Pat Tiller, National Park Service Stephen Turgeon, Memphis, Tennessee Mike Turner, Professional Remodeler George Vallone, West Bank Realty Emily Wadhams, Burlington, Vermont Ronald Wells, Spokane, Washington Kathleen H. Wendler, Southwest Detroit Business Association Peter Werwath, The Enterprise Foundation Jim Wheaton, Chicago Neighborhood Housing Services (NHS) Bradford J. White, Esq., Project Management Advisors, Inc. David Wood, Professional Remodeler We also gratefully acknowledge the patience and critical assistance provided by Edwin Stromberg, GTR at the U.S. Department of Housing and Urban Policy Development, Office of Policy Development and Research. Mr. Stromberg is a consummate professional. Importance assistance was also provided by Tamar Osterman of the National Trust for Historic Preservation; William Duncan and Peter Werwath of the Enterprise Foundation; as well as other consultants to the study (Bradford J. White, Robert Kuehn, Stephen Turgeon, and Ioan Voicu). We also thank numerous unnamed professionals who attended two national review panels held in conjunction with the annual conference of the National Trust for Historic Preservation. Lastly, we thank those working in the case study organizations for participating in this study. They gave generously of their time and expertise. Final responsibility for the contents of this report, however, rests with the authors alone. The contents of this report are the views of the contractor and do not necessarily reflect the views or polices of the Department of Housing and Urban Development of the U.S. Government. Foreword The rehabilitation of the country's aging housing stock is a major resource for meeting the Nation's affordable housing needs. Large numbers of communities recognize this and use HUD, as well as other public and private resources, to address their affordable housing needs. These communities do this because of the demonstrated economic and social benefits of rehabilitation. Despite the demonstrated benefits of rehabilitation, there is potential for even greater use of the existing stock, not only to address affordable housing needs, but also to promote broader community revitalization goals. However, heretofore there has been a lack of in-depth research on the factors that act as barriers to rehabilitation of affordable housing. Gaining a sound understanding of the issue is difficult because barriers vary from project to project and from community to community. To address these concerns, HUD entered into a cooperative agreement with the National Trust for Historic Preservation to examine the major barriers to urban rehabilitation. The result of this collaboration is this study, Barriers to the Rehabilitation of Affordable Housing, which is intended to fill this information gap and, in doing so, empower decision-makers and housing professionals to begin work to eliminate these barriers. The project's research team reviewed relevant literature, conducted case studies, and convened study groups of highly-qualified real estate developers, nonprofit leaders, architects and other professionals who face barriers to affordable housing rehabilitation in their "real world" experiences. Volume I provide the context of the study as well as a synthesis of findings and technical analysis. Volume II presents the case studies in detail. The rehabilitation needs of our cities will continue to grow. The comparative advantages of housing made available through the rehabilitation of existing buildings will enhance the character of our housing stock in the years to come. Through this report and other activities, HUD will continue to encourage rehabilitation as a way to renew our cities and as a way to increase homeownership opportunities for all Americans. Lawrence L. Thompson General Deputy Assistant Secretary for Policy Development and Research CONTENTS Executive Summary ............................................................................................................ iv Introduction and Major Findings .......................................................................................1 Context and Synthesis of Findings ....................................................................................17 Chapter 1: Study Context...................................................................................................19 Chapter 2: Synthesis of Findings .......................................................................................39 Technical Analyses............................................................................................................139 Chapter 3: Estimate of the Need for and Affordability of Housing Rehab .....................141 Chapter 4: Low-Income Housing Tax Credits (LIHTC) and Rehab ...............................169 Chapter 5: Building Code and Rehab ..............................................................................187 Bibliography on Housing Rehab and Barriers to Renovation......................................205 Bibliography ....................................................................................................................207 Literature Annotation.......................................................................................................228 EXECUTIVE SUMMARY The rehabilitation of affordable housing (hereinafter rehab or renovation) faces many barriers. It is concerned inherently with existing, typically older buildings, making the rehab process less predictable and in many ways more challenging than new construction. Rehab faces a major economic barrier, namely the gap that often exists between the costs of renovation and the financial resources available for those buildings requiring improvement. Of the $623 billion in rehab needed nationwide—a conservative estimate—$227 billion, or about one-third, is unaffordable without some measure of subsidy or other means of support (e.g., using “sweat equity” or staggering the improvements over time). Accomplishing rehab also is a challenge. The development process can entail difficulties in acquiring properties, estimating costs, dealing with restrictive land-use requirements (e.g., limitations on mixed use and adaptive reuse), and other issues. The construction phase involves assembling qualified tradespeople and abiding by myriad codes regulating asbestos, construction, fire safety, energy efficiency, historic preservation, lead paint, radon, and so on. Although development and construction requirements are essential for the public’s welfare and in many respects foster rehab efforts (e.g., historic designation often encourages upgrading), they can be challenging. For example, trying to retrofit off-street parking in a building undergoing rehab (sometimes mandated by land-use regulations) or ensuring that a building meets all new- construction standards (sometimes mandated by the building code) are significant difficulties. The rehab barriers are of a diverse nature and encompass economic constraints, professional inadequacies, regulatory and programmatic problems, and miscellaneous other issues. Furthermore, the specific incidence of the barriers varies by jurisdiction and project type. For instance, the building code can be a major problem in one city where archaic provisions prevail, but only a minor issue in a community that enjoys more flexible codes and code administrators. The barriers to rehab are far from insurmountable. The roughly $150 billion of renovation done annually in the United States attests to this. The public and private sectors are working together on many fronts to resolve lingering issues. More rehab-friendly building code regulations have been adopted in New Jersey, Maryland, and other states. Banks have become more receptive to financing renovation. There are promising collaborations between the public sector and industry that are improving the collection of data on rehab so that it can be better understood. Nonetheless, many challenges remain. The U.S. Department of Housing and Urban Development (HUD) contributes to rehab through subsidies, regulations, technical assistance, and in other ways. Its Community Development Block Grant (CDBG) and HOME programs alone assist in the renovation of about 200,000 units annually. HUD’s sponsorship of the National Applicable Recommended Rehabilitation Provisions (NARRP) has helped foster regulatory reform concerning renovation’s construction standards. Potential HUD assistance in the future includes encouraging local adoption of the NARRP, reducing the “costs” of HUD subsidies from ancillary requirements (e.g., discouraging local jurisdictions from effectively raising minimum standards when subsidized renovation is undertaken), and monitoring how the new lead-based paint regulations, which will be fully implemented in April 2001, affect affordable rehab. iv INTRODUCTION AND MAJOR FINDINGS STUDY PERSPECTIVE: THE CRITICAL ROLE OF HOUSING REHAB • About $100 billion to $200 billion1 in housing rehabilitation (hereinafter rehab or renovation) is carried out each year in the United States. Rehab activity thus approaches or even exceeds investment in new housing construction and constitutes about 2 percent of the nation’s economic activity.2 • Rehab is essential for sustaining the useful life of America’s housing stock—which, like its population, is aging. In 2000, the median housing unit in the United States was “thirty- something,” and in central cities, it was “forty-something.” In a decade or two, much of America’s housing stock will be in advanced middle age, and central-city housing will be geriatric. Rehab is a matter of life or death to these aging housing units. • While rehab takes place throughout metropolitan areas, it is especially prevalent in central cities. From 1990 through 1994 (curtailments in census data do not allow more current reporting), rehab constituted almost 80 percent of the total dollar amount of central-city residential construction in St. Louis and 50 percent to 60 percent in Baltimore, Cleveland, Detroit, Philadelphia, San Francisco, and Washington, D.C. Rehab is thus critical for central cities. If these places and other older centers are to be invigorated—as is contemplated under smart growth—then a vital rehab industry is essential. • The overwhelming share of rehab in the United States is done without government intervention or support. The public sector, however, does play a role through regulations, and in some cases, with subsidies. • Several major programs of the U.S. Department of Housing and Urban Development (HUD) have a large rehab component. About one-quarter of HUD’s Community Development Block Grant (CDBG) funds and nearly half of its HOME program monies are used for renovation. CDBG helps fund the rehab of 175,000 to 200,000 housing units annually, and HOME about 30,000 units yearly. Since its inception, HOME has provided financial support for the rehab of more than 250,000 housing units (253,984 units as of February 28, 2001). • Given the above, it is important for the private and public sectors involved in housing to better understand rehab. Unfortunately, rehab—especially in comparison to new construction—has received relatively little attention in housing research and the housing literature. • This study examines barriers to the rehabilitation of affordable housing. It is envisioned as the first of a two-part investigation. In the next phase, we will examine how the hurdles to renovation can be overcome. 1The wide range is due to variations in how rehab is defined (e.g., whether it includes or excludes repairs and whether conversions from nonresidential use, such as loft conversions, are included). 2These data are from the Joint Center for Housing Studies and the National Association of Home Builders (2000). 1 STUDY OBJECTIVE, DEFINITIONS, AND METHODOLOGY Our charge is to examine the barriers to the rehabilitation of affordable housing. The elements of the study objective are defined as follows: • Barriers are obstacles that are either unique to rehab or generally more problematic in rehab than with new construction. A barrier in this instance can be the result of many factors, ranging from public regulations (e.g., restrictive building codes) to market and other forces (e.g., inability to afford the rehab and inadequate tradespersons). • Affordable housing is defined as housing that is targeted to the middle- and lower-income markets (approximately 80 percent to 120 percent of area median income). • Rehabilitation is defined as repairs, improvements, replacements, alterations, and additions to existing properties. While the study considers all levels of renovation— minor, moderate, and substantial—the focus is on the moderate and substantial categories. Adaptive reuse, from nonresidential to residential, is considered briefly as well. The barriers to affordable housing rehab cited in this study are ascertained from multiple sources. • Literature. The study reviews pertinent literature on housing rehab, including previous studies examining renovation barriers. • Case studies. Since the literature on rehab barriers is limited, 11 case studies in cities across the United States were carried out for this report. • Study resource group. The current investigation provides insight into the “real world” barriers to renovation through communication3 with a range of individuals and organizations knowledgeable about affordable rehab. This “housing resource group” of nationwide contacts includes for-profit developers, nonprofits, knowledgeable industry groups, architects, and other professionals. • Technical analyses. We perform a number of technical investigations on such topics as estimating the need for and affordability of housing rehab in the United States. • Research team experience. The Enterprise Foundation has decades of experience in the development and construction of rehabbed housing, and other members of the research team have done a great deal of work pertinent to the current investigation. Because there are so many constraints to rehabilitation, we present an analytic framework of the hurdles as a means of organizing the information. 3The resource group members are identified in the acknowledgements. The resource group was contacted by telephone and at two national meetings (in Washington, D.C., and Los Angeles, CA) conducted as part of this study. 2