TESTIMONY BY SUSAN ANSEL PRESIDENT & CHIEF EXECUTIVE OFFICER, GABLES RESIDENTIAL

TESTIMONY BY SUSAN ANSEL PRESIDENT & CHIEF EXECUTIVE OFFICER, GABLES RESIDENTIAL ON BEHALF OF THE NATIONAL MULTIFAMILY HOUSING COUNCIL AND THE NATIONAL APARTMENT ASSOCIATION BEFORE THE HOUSE COMMITTEE ON FINANCIAL SERVICES HOUSING AND INSURANCE SUBCOMMITTEE FOR A HEARING ENTITLED THE COST OF GOVERNMENT REGULATIONS ON AFFORDA- BLE MULTIFAMILY DEVELOPMENT SEPTEMBER 5, 2018

Chairman Duffy, Ranking Member Cleaver, members f the Subcmmittee, it is my privilege t appear befre yu tday t speak n behalf f the multifamily rental husing industry, the Natinal Multifamily Husing Cuncil and the Natinal Apartment Assciatin regarding regulatry barriers t apartment cmmunity develpment. My name is Sue Ansel and I am the President and CEO f Gables Residential. Gables Residential is an award-winning, vertically integrated, real estate cmpany specializing in the develpment, cnstructin, wnership, acquisitin, financing and management f multifamily and mixeduse cmmunities. Gables wns, develps and manages cmmunities in high-grwth U.S. markets such as Atlanta, Austin, Bstn, Dallas, Denver, Hustn, Suth Flrida, Suthern Califrnia and metrplitan Washingtn, D.C. Gables als prvides third party management services in the New Yrk, Baltimre, Tampa, Phenix, Charltte, Central and Nrth Flrida markets. Gables manages ver 30,000 apartment hmes and apprximately 430,000 square feet f retail space and has received natinal recgnitin fr excellence in develpment, cnstructin, management, sales, marketing, learning and develpment, benefits and crprate accmmdatins. These achievements reflect the impact f experienced and dedicated team members, superir knwledge f the markets served, and expertise in develpment and management. Fr mre than 25 years, the Natinal Multifamily Husing Cuncil (NMHC) and the Natinal Apartment Assciatin (NAA) have partnered t prvide a single vice fr America's apartment industry. Our cmbined memberships are engaged in all aspects f the apartment industry, including wnership, develpment, management and finance. NMHC represents the principal fficers f the apartment industry s largest and mst prminent firms. As a federatin f mre than 160 state and lcal affiliates, NAA encmpasses ver 73,000 members representing nearly 9 millin apartment hmes glbally. One-third f all Americans rent their husing and 39 millin f them live in an apartment hme. I appreciate the pprtunity t be here tday t present the multifamily industry s perspective n the regulatry barriers at the federal, state and lcal levels that can prevent, slw r increase the cst f develpment f multifamily husing units acrss the cuntry. I will als use this as an pprtunity t highlight a wide array f plicy slutins that wuld help increase prductin f multifamily husing and lessen the existing shrtage f husing that is affrdable that plagues ur natin. Befre I d that, hwever, allw me t describe sme key aspects f the apartment market and hw changing demgraphics will demand plicymakers at all levels f gvernment t partner with the private sectr t innvate ur husing develpment and prductin prcess if we are t meet the natin s current and future husing needs. The apartment sectr is a cmpetitive and rbust industry that helps nearly 39 millin peple live in hmes that are right fr them. We help build vibrant cmmunities by ffering husing chice, supprting lcal small businesses, creating millins f jbs and cntributing t the fabric f cmmunities acrss the cuntry. We are a critical sectr in the husing industry and ur ecnmy verall. Rental Husing The Supply-Demand Imbalance There has been a fundamental shift in ur natin s husing dynamics as changing demgraphics and lifestyle preferences have driven mre peple away frm the typical suburban huse and twards the cnvenience f renting. This demand is fueled by a grwing ppulatin, demand fr rental husing by yunger Americans, immigratin trends and Baby Bmers and ther empty nesters trading in single-family huses fr apartments. There are mre than 75 millin peple 2

between 18 and 34 years ld, many entering the husing market, primarily as renters. 1 Similarly, many f the ver 74 millin Baby Bmers and ther empty nesters have the ptin f trading single-family huses fr the cnvenience f rental apartments. In fact, mre than half f the net increase in renter husehlds between 2007 and 2017 came frm the 45-plus demgraphic chrt. 2 Given these demgraphics, it is unsurprising that the apartment vacancy rate has remained at r belw five percent fr the past fur years 3. Apartments Needed by 2030 (Millins) 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2017 2019 2021 2023 2025 2027 2029 New Apartments Needed Current Annual Rate (2011-2017) Surce: Hyt Advisry Services; NMHC/NAA; U.S. Census Bureau. Beginning in the mid-2000s, the natin experienced the greatest renter wave in its histry, as the number f husehlds that rent rse by 7-12 millin (different Census Bureau surveys shw different figures). This increased apartment demand creates a critical need fr 4.6 millin new apartments at all price pints by 2030 accrding t a study cnducted by Hyt Advisry Services and cmmissined by the Natinal Multifamily Husing Cuncil (NMHC) and the Natinal Apartment Assciatin (NAA). 4 T meet that demand, we will need t build an average f 328,000 new apartments every year. Yet we have nly hit that mark nce since 1989. 5 The western U.S., as well as states such as Texas, Flrida and Nrth Carlina, are expected t have the greatest need fr new apartment husing thrugh 2030, althugh all states will need mre 1 Annual Estimates f the Resident Ppulatin by Single Year f Age and Sex fr the United States: April 1, 2010 t July 1, 2016, US Census Bureau. 2 NMHC tabulatins f 2017 Current Ppulatin Survey, Annual Scial & Ecnmic Supplement, U.S. Census Bureau.. 3 RealPage, Inc. 4 Hyt Advisry Services; NMHC/NAA 5 U.S. Census Bureau, New Residential Cnstructin. 3

apartment husing mving frward. Acrss all markets, the supply f multifamily husing at a variety f price pints will play a rle in prmting ecnmic grwth, attracting and retaining talent, and encuraging husehld stability fr all American families. There will als be a grwing need fr renvatins and imprvements n existing apartment buildings, which will prvide a bst in jbs (and the ecnmy) natinwide. Hyt s research fund that 51 percent f the natin s 20 millin-plus apartment stck was built befre 1980, which translates int millins f units that culd need rehabilitatin r renvatin by 2030. The grwing demand fr apartments cmbined with the need t renvate thusands f apartment buildings acrss the cuntry will make a significant and psitive impact n ur natin s ecnmy fr years t cme. Fr frame f reference, apartments and their 39 millin residents cntribute $1.3 trillin t the natinal ecnmy annually. 6 As the industry cntinues t grw, s will this tremendus ecnmic cntributin. While many factrs influence the apartment industry s health and ability t meet the natin s grwing demand fr rental husing, the existing patchwrk f verly cmplex, cstly, duplicative and ften cunter-prductive regulatins at all levels f gvernment remain ne f the biggest threats t delivering much-needed husing units acrss the cuntry. Our Natin s Husing Affrdability Challenge Husing affrdability is a significant challenge facing many Americans tday wh are seeking t rent an apartment. The number f husehlds renting their hmes stands at an all-time high, thus placing significant pressure n the apartment industry t meet the demand. This is making it challenging fr millins f families natinwide t find quality rental husing that is affrdable at their incme level. Fr many families, the shrtage f rental husing that is affrdable creates significant hurdles that make it even mre difficult t pay fr basic necessities like fd and transprtatin. Ultimately, this als impacts their future financial success. Thse at the lwest end f the incme spectrum are especially vulnerable t these prblems fr the ne in five renter husehlds that earns less than $15,000 annually, an affrdable unit is ne with a mnthly rent f under $400. Yet frm 2003 t 2013, 11 percent f these rentals were permanently lst frm the husing stck. 7 This is als the hardest segment t build fr withut subsidy, given the csts assciated with develpment. The issue f lack f husing affrdability is nt unique t lwer incme husehlds, hwever. The ttal share f cst-burdened apartment husehlds (thse paying mre than thirty percent f their incme n husing) increased steadily frm 42.4 percent in 1985 t 54.8 percent in 2015. 8 Cnsider that the median asking rent fr an apartment cnstructed in 2016 was $1,479. Fr a renter t affrd ne f thse units at the 30 percent f incme standard, they wuld need t earn at least $59,160 annually. 9 Affrdability is an issue impacting the very fabric f cmmunities 6 Dr. Stephen Fuller; NMHC/NAA. The Trillin Dllar Apartment Industry 7 Harvard Jint Center fr Husing Studies, America s Rental Husing (2015), available at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/americas_rental_husing_2015_web.pdf. 8 NMHC tabulatins f American Husing Survey micrdata. 9 NMHC calculatin based n U.S. Census Bureau, Survey f Market Absrptin. 4

natinwide, including ur teachers, firefighters, nurses, plice fficers and their families. Accrding t Harvard s Jint Center fr Husing Studies, 10 in 2015 mre than ne in fur renter husehlds apprximately 11.1 millin paid mre than half f their incme fr rental husing. Setting aside that real (inflatin adjusted) incmes in the U.S. are nly slightly abve their 2000 levels, clearly the key factr driving the affrdability crisis, husing industry leaders agree that prmting cnstructin, preservatin and rehabilitatin are three f the vital ways t meet the surging demand fr apartment hmes. Barriers t Multifamily Develpment and the Cst f Regulatin Develping real estate, whether multifamily, single-family r cmmercial, is difficult. Prductin f any kind has its natural barriers. Thse are fr the mst part bjective barriers that can, and ften d, fluctuate, but are predictable enugh t still meet a pr frma. Multifamily, hwever, brings with it a level f entitlement subjectivity and regulatin layered n tp f these cmmn barriers and is much mre difficult t predict. Plainly stated, many lcalities have a develpment preference that wrks against multifamily husing prductin and ultimately wrsens the cuntry s affrdability challenges. Multifamily develpment ften faces stiff cmmunity resistance, cmpetes with ther frms f real estate that prduce sales tax revenue desired by municipalities and is subject t increasing regulatry barriers at all levels f gvernment. In a speech befre the Urban Institute in Nvember 2015, Jasn Furman, frmer chairman f The White Huse Cuncil f Ecnmic Advisers, said that the U.S. culd build a lt mre apartments but nted multifamily husing units are the frm f husing supply that is mst ften the target f regulatin. In fact, a recent study by NMHC and the Natinal Assciatin f Hme Builders (NAHB) based n respnses frm a variety f multifamily develpers thrughut the cuntry fund that n average, 32 percent f multifamily develpment csts are attributable t the csts assciated with cmplying with lcal, state, and federal regulatins. In a quarter f cases, that number can reach as high as 42.6 percent. Breaking dwn the gvernment regulatin csts shwed that an average f 7.0 percent f regulatry csts cme frm building cde changes ver the past 10 years, 5.9 percent are attributable t develpment requirements that g beynd what the develper wuld rdinarily prvide (such as cmplex architectural design, landscaping, and parking requirements), and 4.2 percent f the csts cme frm nn-refundable fees charged when site wrk begins. 10 Harvard Jint Center fr Husing Studies, The State f the Natin s Husing 2017, Appendix Tables. 5

These are nt regulatins that nly a few develpers face when trying t build new husing. The respndents t the NMHC-NAHB survey built in virtually all types f markets frm garden apartments in rural and suburban areas t high-rise buildings in the urban cre and at least half f develpers in the survey respnded that they were subject t every cst item but ne (cmplying with affrdability mandates). At least 90 percent f respndents indicated that they had t figure cst f specific regulatins int their verall develpment cst, including the csts f applying fr zning apprval; nn-refundable fees charged when site wrk begins; develpment requirements that g beynd the rdinary; fees charged when cnstructin is authrized; increased csts due t building cde changes; and the pure cst f delay. While many f the csts assciated with regulatin in the study are attributable t lcal requirements, respndents reprted that federal regulatins create csts, including 90 percent f develpers surveyed that included the cst f cmplying with Occupatinal Safety and Health Administratin (OSHA) requirements as part f their ttal develpment cst, accunting fr an average f tw percent f the ttal. And as stated befre, the csts assciated with changes t building cdes ver the past ten years, which the federal gvernment has invlved itself in, accunted fr an average f 7.0 percent f ttal develpment cst. And sme lcal regulatins are subject t federal requirements as well, including requiring certain cnditins at the lcal level t btain grants. Regulatry Red Tape at the Lcal Level Often, well-intentined lcal regulatins can be nerus and cumbersme, can increase develpment csts acrss the bard and, in sme cases, prevent develpment altgether. Belw is a brief summary f sme ntable barriers t develpment at the lcal level: Land Cst: In an attractive market take any majr metrplitan area as an example land can accunt fr a significant prtin f ttal develpment csts. Land in thse 6

markets is nt nly fundamentally mre expensive t purchase than land in secndary r tertiary markets, but it als typically attracts multiple bidders, each seeking t deply the land fr diverse purpses, which further drives up csts. Accrding t the Harvard Jint Center fr Husing Studies, between 2012 and 2017, the price f vacant cmmercial land rse 62 percent; by cmparisn, the general inflatin rate rse seven percent. This cst increase can stretch r stress ther financial assumptins and, in sme extreme cases, even make the prperty impssible right ut f the gate. Zning Laws: Zning laws impact what is permitted t be built at a site. In sme places, zning requirements can make it extremely difficult t build new multifamily husing. Changing zning can be nerus and expensive if it is even pssible. Entitlements: The entitlement prcess, which cvers apprvals, zning and nearly everything in between, is an amalgam f utright csts, additinal fees, land-use regulatin (sme f which can date back t the first half f last century) and cde cmpliance. During the navigatin f this ften-lengthy prcess, an apartment develper bears bth direct and indirect csts with n assurance f a successful utcme. In sme high-barrier-t-entry markets, entitlements can take fur, five, six years r mre befre cnstructin actually begins. As an example, accrding t NAA s Barrier t Apartment Cnstructin Index, develpment timelines fr prperties with 50 r mre units including permitting, land develpment, nn-cnfrming use and zning ranged frm an average f three years in Miami t ver eight years in San Dieg. 11 Sme municipalities have tried t fast track this prcess, but they have been met with nly varying degrees f success. The lng lead time and significant upfrnt investment required t btain entitlement n land is leading sme investrs t rethink cntinued interest in multifamily develpment. Reduced investr demand fr multifamily develpment may lead t fewer units delivered in the future and increased cst per unit delivered as remaining investr capital becmes scarce. Impact Fees: Impact fees are payments required f new develpment by lcal gvernments fr the purpse f prviding new r expanded public capital facilities t serve that develpment. These fees typically require cash payments in advance f the cmpletin f develpment, are based n a methdlgy and calculatin derived frm the cst f the facility and the nature and size f the develpment, and are used t finance imprvements ffsite frm, but t the benefit f, the develpment. Linkage Fees: A linkage fee is assessed n a develpment t pay fr the cst f prviding a public service. These fees are attributed t select develpments t pay fr a benefit deemed utside f what is recvered frm prperty taxes. Business License Taxes: These are additinal municipal taxes assessed n prperty wners that is nt assessed n ther frms f husing. These are used t justify the cst f impacts nt cvered by prperty tax assessments. Assessment and Inspectin Fees: These are additinal municipal fees assessed n prperty wners t inspect rental husing fr habitability. While these fees are ften 11 Natinal Apartment Assciatin, Barriers t Apartment Cnstructin Index, https://www.naahq.rg/news-publicatins/barriers-apartment-cnstructin-index 7

assessed annually, the rental husing cmmunities ften d nt realize additinal benefits reflecting the cst. Parking Space Requirements: The requirement t build r ffer parking spaces, especially in urban settings, can significantly impact site use and cst and ften run cunter t current resident trends and needs. Accrding t a recent reprt by NAA entitled The Transfrmatin f Parking, estimated csts t build parking vary widely, with estimated price tags f $30,000 t $75,000 per space, depending n the market. The type f parking als greatly influences the cst, with surface parking the least expensive, and undergrund parking the mst. 12 Envirnmental Site Assessments: An envirnmental site assessment is a reprt that identifies ptential r existing envirnmental cntaminatin liabilities. The analysis typically addresses bth the underlying land and physical imprvements t the prperty. In many lcal jurisdictins, each develpment site requires an envirnmental site assessment, the results f which culd require cstly remediatin and/r prject recnfiguratin. Additinally, these assessments have been used by develpment ppnents t frustrate planning and can serve t severely hamper r defeat the entitlement prcess. Husing Affrdability Initiatives and Cmmunity Barriers t Develpment In additin t the ften-used lcal regulatry fees and prcesses that can drive the cst f multifamily husing prductin up, cmmunity led initiatives and plicy slutins can add cst and time t a prject that in sme cases can prevent much-needed husing frm being built. Effrts by lcal fficials t impse artificial price cntrls n rent levels r mandate the cnstructin f affrdable husing units r develpments, while well-intentined, can have the adverse effect. In additin, cmmunity ppsitin t the develpment f multifamily husing is a great driver f prject delays and cst. While lcal input is certainly imprtant, it can ften be cunter-prductive and add a great deal f expense, which in turn drives up develpment csts and ultimately rents. Outlined belw are several f the mst significant f these challenges: Husing Affrdability Initiatives: Rent Cntrl: There are varius frms f rent cntrl utside f the traditinal versin that mst are accustmed t seeing: a rent cntrl bard that sets maximum rent fr a unit r the maximum amunt that rent can be raised annually. Rent cntrl, in this cntext, is any mechanism that bligates a prperty wner t set rental rates fr all r a prtin f the units n a prperty. In any frm, this plicy wrks as a disincentive t investing and develping the diversity f husing units that a cmmunity requires. There are alternatives t rent cntrl that take slightly different appraches but have the same detrimental effect. The mst cmmn frm f these is inclusinary zning. Inclusinary Zning: Inclusinary zning refers t municipal and cunty planning rdinances that require a given share f new cnstructin t be affrdable t 12 Natinal Apartment Assciatin, Transfrmatin f Parking, https://www.naahq.rg/news-publicatins/transfrmatinparking 8

peple with lw t mderate incmes withut an investment frm the municipality. It is nrmally a cnditin f apprval f the develpment. Prpnents f inclusinary zning ften fail t acknwledge that these plicies drive up csts, and ultimately rents, fr the entire prject, as develpers are frced t raise rents fr market-rate units t make up the difference frm the affrdable units t make the prject financially feasible. NIMBYism: Anther substantial cst driver fr multifamily husing develpment cmes in the frm f cmmunity resistance thrugh effrts cmmnly knwn as Nt In My Back Yard r NIMBY. The narrative f NIMBYism typically fcuses n a handful f themes utside f the nrmal zning apprval prcess, including: Traffic impact; Hmewner prperty values; Schl vercrwding; and Cmmunity character. NIMBY ppsitin can frequently ccur during the rezning prcess the NMHC/NAHB study cited earlier fund that 85 percent f multifamily develper respndents had experienced added csts r delays due t neighbrhd ppsitin. In the end, NIMBYism keeps apartments frm being built where they are needed mst and at prices many peple can affrd. All the factrs utlined abve, r a cmbinatin theref, can lead t increased hurdles fr multifamily develpment. T ften, the cmbinatin f lcal husing affrdability initiatives and NIMBYISM can lead t a cmplex, duplicative and cstly regulatry landscape that can drive up the csts f multifamily husing develpment and exacerbate ur natin s husing affrdability prblem. A Snapsht f Multifamily Develpment T give plicymakers a sense f the practical challenges faced by multifamily husing develpers, ne has t lk n further than a few neighbrhds away frm the Capitl Building in the histric Shaw neighbrhd f Washingtn, DC. The Bzzut Grup, a large reginal real estate firm, aided in the develpment f a transfrmatinal multifamily prject. As the prperty manager, Bzzut prvided assistance t the wner and lead develpers f the prject while they navigated a lng and painful entitlement prcess nly t realize peratin after 12 years. The prperty serves as the anchr t the redevelpment f a histric area f ur natin s capital, the O Street market, which sits n a 3 ½ acre site. At ne time, it was a thriving public market built in 1881 and served the surrunding neighbrhd as bth a center f cmmerce and cmmunity. After a trubled histry fllwing rits and gang vilence, the market clsed in 1994 and laid empty until the current prject gt underway. In the early 2000s, develpers saw an pprtunity t reinvent the area and cmbine the O Street Market, which is listed n the Natinal Register f Histric Places and 8 th Street, which was part f the riginal L Enfant plan fr Washingtn, DC int ne large, icnic and transfrmatinal develpment fr DC. The develpment team cllabrated with 3 mayral administratins t secure 9

apprvals, financing and a develpment prgram that wuld accmmdate cmmunity expectatins. The lead prject develper teamed up with a lcal affrdable husing develper fr the develpment f The Hdge n 8 th. Lcating all affrdable apartments in ne building n the site allwed fr 15% mre units t be created. The building nw serves senirs with median incmes belw 60% f the median incme. Develpment was nt easy the site was purchased in 2001. Cnstructin began a decade later in 2011 and bth the histric market and the apartments pened in 2013. The market-rate apartments leased up within a year f pening a recrd pace by any measure and the affrdable, senir husing building, the Hdge, was 95% leased befre it even pened and maintains an nging waiting list f ver 500 senirs. The prject was financed with a cmplicated stack f 12 different private and public financing surces ttaling $315 millin which included: Private land and cash equity investments $102 Millin f EB-5 financing Mezzanine debt $35 millin in TIF bnd prceeds $128 millin Sectin 220 HUD lan the largest ever granted fr a mixed-use develpment LIHTC and tax-exempt bnds frm the DCHFA and Hme lans secured by the DCHCD The mixed-used cmmunity nw features: 90K square feet f retail 549 market-rate apartments in three buildings 90 affrdable apartments in a 4 th building fr senir citizens 182 rm/suite htel Preservatin f a histric market that huses a Giant grcery stre The entitlement prcess, regulatry hurdles at the federal and city levels as well as the need fr s many different surces f funding fr this prject tk a significant amunt f time t vercme. And while n tw prjects are exactly the same, the challenges this prject faced ften are. In this case, the prject is a raging success serving as the anchr t a revitalizing neighbrhd and catalyzing ver $1 billin in new investment since its inceptin by bringing new jbs and new businesses t the area. In additin, the develper and cnstructin firms privately funded skills training resulting in 51% f new cnstructin jbs ging t DC residents and awarding $192 millin in prject cntracts t minrity wned businesses. 10

Red Tape Acrss the Cuntry A View frm the Field The fllwing list is cmprised f real-wrld examples encuntered by multifamily husing develpers as they sught t build r renvate apartments acrss the cuntry. These highlight the cmplex and tangled web f regulatin, zning requirements and ther barriers t develpment that multifamily develpers face as they aim t deliver husing fr American families. In Gergia, ne city required a new develpment prject t pay the entire cst f widening a rad and upgrading the traffic signals. Prjected additinal csts are apprximately $200,000. In Gergia, the sewer capacity was inadequate fr the number f units that were being built in a new multifamily develpment. The city had upsizing f the sewer main in their future infrastructure plans, but they culd nt cmmit t the timing. The develper tk n the task f upsizing the sewer line under the highway, thrugh the rapid transit maintenance facility and acrss railrad tracks int the main basin. The cst was $2 millin, and the city agreed t split the cst. This tk a significant amunt f man hurs t administer and cst the develper $1 millin in pure trade cst. It als enabled the city t have an upgraded sewer system delivered at a fractin f what therwise wuld have been their full cst, labr and administratin. In Gergia, it is cmmn fr inspectrs t require additinal wrk that is ften nt part f the cde r part f the apprved plans. At ne multifamily prject, the fire marshal required apprximately $500,000 in additins r changes that were nt part f the apprved plans. The largest single item change was the inclusin f a heat detectin system in the parking deck f the prject. This accunted fr an increase f clse t $200,000 in prject csts. The same fire marshal had apprved the plans as part f the permitting prcess and then dictated changes when inspectrs cnducted their review in the field. In Gergia, ne city required a prject t install metal luvers n the parking deck at an added cst f apprximately $105,000. The metal luvers sit n tp f the cncrete crash walls. The cncrete crash walls serve a dual purpse prviding vehicular prtectin and blcking vehicle lights frm shining int the residential prject t the nrth. Due t clse prximity f the adjacent building t the nrth, the required luvers are nt visible and d nt serve a purpse. In Texas, a new develpment was required t run a water line extensin almst 600 linear feet t serve bth the multifamily develpment and future grwth in the area. The line was upsized by 50% t accmmdate future grwth. All f the $370,000 in cst was absrbed by the develper. Additinally, this prject was required t have a specific blend f limestne exterir and clay tile rf as determined in the zning prcess. This requirement added apprximately $450,000 t the ttal cst f the prject. In Texas, ne multifamily prject was required t replace and increase the capacity f a strm line by 75% in cnjunctin with the develpment f the site and t help address cmmunity flding suth f the prject. This resulted in tw mnths f additinal permit time, 30 days f additinal build time and $250,000 in added cst. In Suth Flrida, several municipalities have adpted Art in Public Places requirements and fees, which range frm.5% - 1% f the ttal hard cst prject budget. On a recent multifamily 11

prject, the additinal cst was ver $275,000. The city als required the develper t rebuild and restre the public plaza adjacent t the site at an additinal cst f $1.2 millin. In Flrida, a municipality required the installatin f natural stne in lieu f pre-cast n the grund level clumn wraps and building entrance at ne develpment. The cst f the natural stne is apprximately a $80,000 premium t pre-cast. In Flrida, at a ptential new develpment, the city is requiring the develper t rebuild a lng sectin f public sewer and repave a lng sectin f rad that is nt part f the develpment. Regulatry Red Tape at the Federal Level Our industry, and particularly apartment wners and develpers, must balance a wide array f cncerns regarding prject viability, regulatry cst and cmpliance at all levels f gvernment. While many regulatry hurdles and csts such as impact fees, cntinual envirnmental reviews and antiquated zning prcesses lie within the purview f state and lcal plicymakers, there are a wide array f existing federal regulatins that cntribute t making husing less ecnmically feasible t develp and perate. We believe that regulatins must have demnstrable benefits that justify the cst f cmpliance and that federal agencies shuld be aware that brad-strke regulatins ften have a disprprtinate effect n industries that serve as key drivers f ur ecnmy. As a highly regulated sectr, the apartment industry is gverned by a fld f regulatins stemming frm diverse federal agencies such as the Department f Husing and Urban Develpment (HUD), the Envirnmental Prtectin Agency (EPA), Department f Labr (DOL), OSHA, and the Department f Energy (DOE), as well as state and lcal jurisdictins. NMHC/NAA members acknwledge the rle that smart regulatin has in ensuring the health and well-being f the American public. In the apartment sectr, many such regulatins allw fr flexibility and cmplement the gal f building mre multifamily husing in an efficient and cst sensitive manner. With that said, NMHC/NAA have wrked with Cngress and the Administratin t identify and seek relief frm federal regulatry barriers t multifamily develpment and peratin. Excessive regulatin and cmpliance uncertainty results in cstly mandates that divert resurces frm the prductin and peratin f multifamily husing. Key State and Lcal Slutins t Address the Natin s Husing Shrtage Municipalities acrss the cuntry are at the epicenter f the natin s husing affrdability challenges. In that all plitics is lcal, s is husing. Lcal fficials have a leading rle t play in driving develpment and reducing barriers t multifamily husing develpment while prtecting the health and safety f their residents. What wrks in ne jurisdictin might nt wrk in anther but utilizing utside-the-bx thinking can lead t prgress. Officials have a range f ptins at their dispsal. They can lk t defer taxes and ther fees fr a set perid f time t help the develper reduce the rents required t make the develpment viable. They als wn tangible assets buildings, raw land and entitled parcels that can be leveraged t bring dwn the cst f cnstructin r redevelpment. They can 12

help streamline the develpment and apprval prcesses with fast-tracking prgrams. Sme additinal state and lcal slutins t addressing the natin s husing shrtage and affrdability challenges are utlined belw. These slutins enable the public and private sectrs t bring their tls and assets int play and increase the likelihd f finding viable slutins t meet ur rental husing challenges. Nt all f these plicies will wrk in every jurisdictin and ftentimes a variety f these plicies must be utilized: Adpt Plicies that Leverage the Private Sectr t Make Husing Affrdability Mre Feasible: Establish By-Right Zning Mst develpments g thrugh a discretinary review prcess such as public hearings r legislative review by the lcal land use authrity r bard f zning appeals. Public review is certainly imprtant, but it is ften duplicative, arbitrary and inefficient, and establishing a by-right prcess allws the cmmunity t prvide input n the character f an area befre an individual prject is prpsed. Reviews als increase the cst f husing by slwing dwn its prductin r even preventing it frm being built. By right develpment allws prjects, bth new cnstructin and rehabs f existing prperties, t be apprved by lcal administratrs withut discretinary reviews as lng as they cmply with current zning rules and cmmunity develpment plans. Expedite Apprval fr Affrdably Priced Apartments Lengthy permitting prcesses add cst, time and uncertainty t husing cnstructin. Fast-tracking review and permitting f husing that includes affrdable units is a n-cst way fr lcal jurisdictins t expand their supply. Reduce Parking Requirements Parking requirements are ne f the biggest csts fr a develpment, particularly in urban envirnments, ranging frm $30,000 t $75,000. 13 The Urban Land Institute fund that parking minimums were the number ne barrier t building affrdable rentals. 14 Many cities can significantly reduce r even eliminate parking requirements, particularly in transitriented r urban infill develpment. Establish Density Bnuses t Encurage Develpment f Affrdable Husing Density bnuses make building affrdable husing mre cst-effective fr develpers. In return fr including a certain number f affrdable units in a building, the develper can build mre market-rate apartments than are nrmally allwed. This allws fr the develper t make up the difference frm the 13 Natinal Apartment Assciatin, Transfrmatin f Parking, https://www.naahq.rg/news-publicatins/transfrmatinparking 14 Bending the Cst Curve: Slutins t Expand the Supply f Affrdable Rentals, Urban Land Institute, 2014. 13

affrdable units withut being frced t pass the rent increase n t the marketrate units. Adpt Separate Rehabilitatin Building Cdes Jurisdictins require develpers t bring a building up t the current building cde when they want t substantially rehab it, ften making it prhibitively expensive t upgrade it. Lcalities can vercme this by adpting separate building cdes fr rehabilitatin prjects that balance the need t ensure safety and structural integrity, but d nt sacrifice affrdability. They can als ffer tax abatement fr prperties that include affrdable husing when prperty taxes rise because f imprvements. Create an Efficient Public Engagement Prcess New develpments benefit frm cmmunity input. But the public engagement prcess can als result in NIMBY ppsitin that creates lng delays, and even lawsuits, that increase cnstructin csts. There is n single mdel that wrks t strike a balance, but lcalities shuld examine their prcess t ensure it is nt ne-sided and des nt create uncertainty. Increase Public-Private Partnerships: Leverage Underutilized Land Federal, state and lcal gvernments shuld priritize affrdable husing when dispsing f public land. Land accunts fr apprximately 10 t 25 percent f an apartment prject s cst, and even mre in high-cst areas. 15 Develpers als ften struggle t find develpable land in urban areas. Yet many lcalities wn underused r abandned land that culd be used fr affrdable husing. Underutilized buildings, which can be renvated, are anther resurce. Making gd use f these lands and buildings requires strng public-private partnerships. Use Prperty Tax Abatements Tax incentives and abatements are anther way t spur develpment. While they d reduce public revenues, they are ften mre plitically palatable than direct subsidies. Waive Fees fr Prperties that Include Affrdable Units Husing develpers ften pay significant fees t expand public infrastructure r t supprt the creatin f city amenities such as schls and parks. Because fees add t the cst f husing, jurisdictins shuld waive impact fees fr prperties that include affrdable units. Leverage State-Level Authrity t Overcme Obstacles t Apartment Cnstructin: 15 Based n evidence prvided by NMHC members. 14

States shuld enact laws that verride lcal zning restrictins that inhibit apartment cnstructin, whether intentinally r nt. States can als make sme state financing cntingent n a lcality meeting a minimum affrdable husing threshld r adpting plicies that supprt husing prductin. Key Federal Slutins t the Natin s Husing Challenges The natin s challenge is t reduce the barriers and bstacles that inhibit the expansin f the husing stck and the federal gvernment has a key rle t play. While it is clear that new cnstructin is ften impeded at the lcal level, there are federal slutins that may be beneficial as well. Overhauling antiquated, verly-cmplex and cstly regulatins cupled with incentivizing new develpment, preservatin and rehabilitatin f existing apartments wuld g a lng way t addressing ur natin s husing affrdability challenges. NMHC/NAA encurage Cngress t take the fllwing steps: Retain and Expand Pr-Develpment Tax Plicies that incentivize investment in rental husing at all price-pints: Expand the Lw-Incme Husing Tax Credit. The Lw-Incme Husing Tax Credit (LIHTC) is a public/private partnership that leverages federal dllars with private investment t prduce affrdable rental husing and stimulate new ecnmic develpment in many cmmunities. Since its inceptin in 1986, the LIHTC prgram has financed ver 3 millin apartments and served 7 millin husehlds. The LIHTC prgram prvides critical supprt t the natin's affrdable husing prductin. Given that there are currently just 45 affrdable units fr every 100 very lw-incme apartment husehlds, lawmakers shuld strengthen the prgram by: (1) making permanent the increased credit authrity enacted in March 2018 t enable the prductin f new units; and (2) establishing a minimum 4 percent credit rate. Create a Middle-Incme Husing Tax Credit. Build n the success f LIHTC and cmplement its wrk by establishing a Middle-Incme Husing Tax Credit (MIHTC), which wuld spur the prductin f multifamily rental hmes fr America s wrking families. This type f prductin wuld address husing shrtages fr ppulatins wh d nt qualify fr any type f husing subsidy but wh struggle t affrd their living expenses. Supprt Husing Finance Refrm that Preserves the Multifamily Mrtgage Liquidity Prvided by the Gvernment-Spnsred Enterprises (GSEs): One f the fremst pririties f federal plicy makers shuld be getting multifamily right in any husing finance refrm effrt by recgnizing its unique characteristics; it is the single mst imprtant factr t ensuring that the apartment industry can meet the natin s grwing rental husing demand. The bursting f the husing bubble expsed serius flaws in ur natin s husing finance system. The very successful multifamily prgrams f the GSEs, Fannie Mae and Freddie Mac, were nt part f the meltdwn and have actually generated ver $34 billin in net 15

prfits since the tw firms were placed int cnservatrship. Preservatin f the mrtgage liquidity currently prvided by the GSEs in all markets during all ecnmic cycles is critical. NMHC/NAA urge lawmakers t recgnize the unique needs f the multifamily industry. We believe the gals f a refrmed husing finance system shuld be t: Maintain an explicit federal guarantee fr multifamily-backed mrtgage securities available in all markets at all times; Ensure that the multifamily sectr is treated in a way that recgnizes the inherent differences f the multifamily business; and Retain the successful cmpnents f the existing multifamily prgrams in whatever succeeds them. These principles can be achieved thrugh a refrmed structure that preserves the high quality and value f the current multifamily secndary mrtgage market s activities. Increase Funding and Supprt fr Subsidy Prgrams that address husing affrdability such as the Sectin 8 Husing Chice Vucher Prgrams, Prject-Based Rental Assistance, Rental Assistance Demnstratin, HOME and Cmmunity Develpment Blck Grants. Husing csts cntinue t grw and demand fr rental husing cntinues t escalate, but incmes fr many lw-incme families remain stagnant. Given these realities, demand fr subsidized affrdable husing has increased dramatically thrugh the ecnmic crisis and int the recvery years since. Hwever, federal funding fr the primary prgrams serving lw-incme husehlds has been virtually flat r declining. Prgrams like Tenant Based Sectin 8 and Prject Based Rental Assistance allw lw-incme families t rent market rate husing, taking advantage f the brad ffering f privately wned and perated prperties in a given market. Prgrams like HOME and CDBG allw develpers t address financing shrtfalls ften assciated with affrdable husing prperties and stimulate meaningful develpment and preservatin activity as a result. In rder t address husing affrdability challenges fr all Americans acrss the incme spectrum, increased funding fr these prgrams is essential. Supprt Funding fr the FHA Multifamily Prgrams, which are an imprtant surce f capital supprting apartment cnstructin and redevelpment. FHA Multifamily is best knwn fr ffering an alternative surce f cnstructin debt t develpers that supplements bank and ther private cnstructin capital surces. It als serves brrwers with lng-term investment gals as the nly capital prvider t ffer 35-40-year lan terms. FHA lending is essential t brrwers in secndary markets, brrwers with smaller balance sheets, new develpment entities, affrdable husing develpers and nn-prfit firms, all f which are ften verlked r underserved by private capital 16

prviders. It is imprtant t the apartment industry that FHA cntinues t be a credible and reliable surce f cnstructin and mrtgage debt. FHA nt nly insures mrtgages, but it als builds capacity in the market, prviding develpers with an effective surce f cnstructin and lng-term mrtgage capital. The FHA Multifamily Prgrams prvide a material and imprtant surce f capital fr underserved segments f the rental market and d s while maintaining cnsistently high lan perfrmance standards. NMHC/NAA encurage Cngress t cntinue funding FHA s Multifamily Prgrams, including: HUD 221 (d)(4) Multifamily Lans New Cnstructin and Substantial Rehabilitatin f Multifamily Prperties HUD FHA 223 (f) Multifamily Lans fr the Refinance r Acquisitin f Multifamily Prperties HUD FHA 241(a) Supplemental Lans HUD FHA 223(a)(7) Refinance f an Existing FHA Insured Multifamily Mrtgages and Healthcare Mrtgages Refrm Overly Burdensme Regulatins and Prgrams. The fllwing federal prgrams and regulatins culd benefit frm imprved efficiencies and review by Cngress and the Administratin: Sectin 8 Husing Chice Vucher Prgram This public-private partnership has the ptential t be ne f the mst effective means f addressing ur natin s affrdable husing needs and supprting mixed-incme cmmunities. Hwever, the prgram s ptential success is limited by t many inefficient and duplicative requirements, which discurage private prviders frm accepting vuchers. The prgram has als been plagued with a flawed and vlatile funding system that has undermined private-sectr cnfidence in the prgram. Research by Jhns Hpkins University fund that bureaucratic factrs were ne f the three majr reasns fr landlrds having a preference fr r against residents with Husing Chice Vuchers. 16 With Cngress fcused n austerity measures, insufficient funding is expected t be wrse in the near-term budget cycles. Cmmn- sense refrms that culd help cntrl csts, imprve the prgram fr bth renters and prperty wners, and increase private husing participatin include: Establishing a reliable funding frmula; Streamlining the prperty inspectin prcess; and Simplifying rent and incme calculatins. 16 Garbden, et. Al. Urban Landlrds and the Husing Chice Vucher Prgram: A Research Reprt 17

It is als imperative fr lawmakers t reinfrce the vluntary nature f the prgram. Cngress specifically made participatin vluntary because f the regulatry burdens inherent in the prgram. Hwever, state and lcal gvernments are enacting laws that make it illegal fr a private wner t refuse t rent t a Sectin 8 vucher hlder. Recent examples include surce f incme discriminatin prvisins passed by a number f cities. While ften well intentined, such mandates are self-defeating because they greatly diminish private-market investment and reduce the supply f affrdable husing. Rental Assistance Demnstratin (RAD) Prgram NMHC/NAA supprt RAD, which was established in 2011 as an affrdable husing preservatin strategy fr public husing authrities (PHAs). The prgram allws PHAs t cnvert public husing prperties at risk f bslescence r underfunding int prject-based vuchers r rental assistance cntracts under the Sectin 8 prgram. Once the units are re-designated frm public husing (Sectin 9 f the 1937 Husing Act) t Sectin 8 husing, husing authrities are able t leverage private capital t address capital needs. This allws husing authrities t wrk with private sectr develpers and managers t preserve their affrdable husing stck. RAD is designed t reverse the trend f lst affrdable units by accessing private capital t make up fr related funding shrtfalls. Cngress shuld increase funding fr this innvative prgram t prevent further public husing units frm falling int bslescence. Mdifying the Cmmunity Reinvestment Act (CRA) The three main banking regulatrs Office f the Cmptrller f the Currency, Federal Depsit Insurance Crpratin, and Federal Reserve wh cntrl the regulatins arund CRA have begun the prcess t mdernize the existing rules. The CRA culd be mdified t include greater incentives fr banks t prvide lans fr multifamily apartments that include wrkfrce and affrdable husing develpment. CRA guidelines currently allw banks t btain Cmmunity Develpment (CD) credit fr multifamily units serving ccupants with incmes f up t 80 percent f area median incme. While this level captures a significant prtin f wrkfrce husehlds, the rules themselves make it difficult t btain the CD credit due t a requirement t reprt incmes, infrmatin that is nt captured. We urge this Cmmittee t wrk with the multifamily industry t encurage these regulatrs t make cmmn- sense, mdest changes that wuld remve impediments t btaining CRA credit fr wrkfrce and affrdable multifamily husing. Fair Husing Rules Including: Disparate Impact Rule, Quid Pr Qu Rule, Resident Criminal Histry Screening Guidance, Limited English Prficiency Guidance, Lcal Nuisance Ordinance Guidance and Occupancy Memranda 18

The apartment industry is cmmitted t equal husing pprtunity fr all withut regard t race, religin, clr, sex, natinal rigin, handicap r familial status. Hwever, mre guidance and clarity are needed frm HUD n specific fair husing prgram areas. During the Obama Administratin, HUD actively expanded fair husing cmpliance and enfrcement effrts. Their regulatins and guidance dcuments reinfrce an interpretatin f disparate impact that cnflicts with recent Supreme Curt precedent and creates uncertainty fr husing prviders. HUD has als asserted new criteria fr familial status and ccupancy cmpliance that is cntrary t lng-held practices. Davis-Bacn Wage Determinatin Under current law, develpers must adhere t Davis-Bacn wage rates fr cnstructin financed by federal dllars. Unfrtunately, DOL s methdlgy and HUD s applicatin f the wages are causing serius issues. The fllwing Davis- Bacn issues are having a negative impact n the ability f the apartment industry t efficiently add new, r preserve existing, multifamily rental units: unwarranted split-wage decisins, disruptive updates t wages, applicability t the preservatin f existing federally assisted husing stck and the determinatin f s-called prevailing wages suffers frm structural defects related t the availability f data. DOL and HUD shuld lk t reexamine and mdify its methdlgy and prcess. Affirmatively Furthering Fair Husing While the Trump Administratin has annunced a review f this rule, as it is currently written, the Affirmatively Furthering Fair Husing rule s brad missin t desegregate cmmunities by cmbating exclusinary zning and ther practices deemed discriminatry culd indirectly affect the multifamily industry. Specifically, the prpsal culd lead t delays in cnstructin and permitting decisins. These types f disruptins may aggravate the husing market s already shrt supply f apartments. American s With Disabilities Act (ADA) Enfrcement The apartment industry supprts the gals f ADA and is cmmitted t creating cmmunities that are accessible t peple with disabilities. The respnsibilities f the apartment industry under the Act smetimes require the inclusin f specific building design features. Hwever, the cmplex and smetimes cnflicting nature f guidance, building cdes and statutry language have led t varying interpretatins f design and cnstructin cmpliance. Apartment wners and peratrs, alng with many thers in the brader real estate industry, have recently been targeted by a substantial increase in ADA cmpliance cmplaints dubbed drive-by lawsuits. Cngressinal actin is needed t address what shuld be the primary cncern in ADA cmpliance - fixing design issues and increasing access fr peple with disabilities. Specifically, business wners shuld be prvided an pprtunity t cure an alleged ADA deficiency prir t the initiatin f a lawsuit. This wuld eliminate the incentive fr cmplaints mtivated purely by financial gain and reduce unnecessary peratinal expense n the husing prvider. 19

Cnclusin We applaud the Cmmittee fr engaging stakehlders t lk fr innvative ways t reduce regulatry barriers that inhibit multifamily husing develpment and exacerbate ur natin s affrdable husing shrtage. Plicymakers at all levels f gvernment must recgnize that addressing husing needs at all price pints-- requires a partnership between gvernment and the private sectr. Officials must utilize a variety f tls t drive investment and supprt affrdable and market rate husing prductin. They can d this by incentivizing fr-prfit entities t prduce the necessary multifamily units at a range f price pints that husehlds can affrd. Federal, state and lcal gvernments all have a rle t play in encuraging public-private partnerships and incentivizing private develpers t implement prven slutins t deliver husing that acknwledges ur natin s changing husing demgraphics and its accmpanying demand. On behalf f the apartment industry and ur 39 millin residents, we stand ready t wrk with Cngress t ensure that every American has a safe and decent place t call hme at a price that enables individuals t affrd life s necessities. 20

BACKGROUNDER June 2018 Regulatin: Over 30 Percent f the Cst f a Multifamily Develpment Paul Emrath, Natinal Assciatin f Hme Builders Caitlin Walter, Natinal Multifamily Husing Cuncil Regulatin impsed by all levels f gvernment accunts fr an average f 32.1 percent f multifamily develpment csts, accrding t new research released tday by the Natinal Assciatin f Hme Builders (NAHB) and the Natinal Multifamily Husing Cuncil (NMHC). In fact, in a quarter f cases, that number can reach as high as 42.6 percent. Apartment and cnd develpment can be subject t a significant array f regulatry csts, including a brad range f fees, standards and ther requirements impsed at different stages f the develpment and cnstructin prcess. Hwever, until nw there had been n previus research dne t analyze the extent f this regulatin. This jint research effrt surveyed NAHB and NMHC members t quantify hw much regulatin exists and hw much it is adding t the cst f develping new multifamily prperties.

Abut NAHB Multifamily NAHB Multifamily represents the interests f builders, develpers, wners and managers f all sizes and types f multifamily husing, including affrdable and tax-credit husing, market-rate rental apartments, cndminium husing, student husing and mixed-used multifamily cmmunities. NAHB Multifamily strives t ensure that multifamily husing functins as a strng sectr within a thriving husing and real estate industry, and effectively serves the husing needs f a brad range f American families and husehlds. Fr mre infrmatin, please visit NAHB Multifamily at www.nahb.rg/en/members/cmmittees-andcuncils/cuncils/multifamily-cuncil.aspx. Abut NMHC Based in Washingtn, DC, the Natinal Multifamily Husing Cuncil (NMHC) is a natinal assciatin representing the interests f the larger and mst prminent apartment firms in the U.S. NMHC s members are the principal fficers f firms engaged in all aspects f the apartment industry, including wnership, develpment, management and financing. NMHC advcates n behalf f rental husing, cnducts apartment related research, encurages the exchange f strategic business infrmatin and prmtes the desirability f apartment living. Nearly ne-third f Americans rent their husing, and almst 15 percent live in an apartment (buildings with five r mre units). Fr mre infrmatin, cntact NMHC at 202/974-2300, e-mail the Cuncil at inf@nmhc.rg, r visit NMHC s Web site at www.nmhc.rg. The Cst f Regulatin t Apartment Develpment 2

Intrductin Many Industry experts have becme cncerned abut affrdability f rental husing in America, and hw difficult it has becme t address the prblem thrugh new cnstructin. Accrding t the reprt n America's Rental Husing 2017 published by the Jint Center fr Husing Studies at Harvard University, The lack f new, mre affrdable rentals is in part a cnsequence f sharply rising cnstructin csts, including labr and materials. The Harvard reprt ges n t say, Tight land use regulatins als add t csts by limiting the land zned fr higher-density husing and entailing lengthy apprval prcesses. Recently, the Natinal Assciatin f Hme Builders (NAHB) and the Natinal Multifamily Husing Cuncil (NMHC) undertk a jint research effrt t find ut hw much gvernment regulatin adds t the cst f building new multifamily husing. Results shw that well ver 90 percent f multifamily develpers typically incur hard csts f paying fees t lcal jurisdictins, bth when applying fr zning apprval, and again when lcal jurisdictins authrize the cnstructin f buildings. Hwever, gvernment regulatin can impse csts in ther ways as well. Over 90 percent f multifamily develpers als incur csts f delays caused by smetimes lengthy apprval prcesses, develpment standards that g beynd what wuld rdinarily be dne, changes t building cdes ver the past decade, and OSHA requirements. Other regulatins, such as requiring develpers t dedicate land t the gvernment, are smewhat less cmmn, but can be quite cstly when they are encuntered. The bttm line is that regulatin impsed by all levels f gvernment (whether lcal, state r federal) accunts fr 32.1 percent f the cst f an average multifamily develpment. A substantial amunt f regulatin is well intentined and sme f it undubtedly serves a wrthwhile purpse. Few wuld argue, fr example, that basic safety standards fr structures and wrkers are unnecessary. But regulatin that exceeds 30 percent f a prject s develpment csts raises questins abut hw thrughly gvernments are cnsidering the cnsequences f their actins. Are they aware f hw much regulatin currently exists? D they realize hw multiple regulatins with cnflicting standards can cause delays and increase csts? And d they understand the extent t which these increased csts translate int higher rents and make it difficult t build new husing that families with mdest incmes can affrd? Survey Design While the assertin that regulatins increase the cst f multifamily develpment is cmmnly heard, the extent t which this happens is nt easy t measure, and currently des nt exist n a natinal scale. The nly way t gather data that is at all cmprehensive is frm multifamily develpers, as they are the nly nes wh experience a wide range f the varius frms regulatin can take. NAHB and NMHC set ut t accmplish this thrugh a survey f bth memberships. The purpse f the survey was t quantify hw much regulatin exists and hw much it is adding t the cst f develping new multifamily prperties. The Cst f Regulatin t Apartment Develpment 3

Multifamily develpers d nt, in general, have accunting systems designed t tease ut these regulatry csts, s NAHB and NMHC crafted questins that mst develpers wuld be able t answer. The questins asked develpers abut the typical prjects they build. The questins cvered varius delays and csts incurred at different stages f the develpment prcess. Develpers were asked t prvide all hard csts as a percent f ttal develpment cst fr their typical prjects (see Appendix 2). The survey was cnducted in the furth quarter f 2017. A ttal f 40 usable respnses were received frm multifamily develpers, evenly split between NAHB and NMHC members (with n duplicatin). The develpers wh respnded reprted building multifamily prjects in all regins f the cuntry, and the typical prjects they build vary widely: frm fewer than 5 apartments t mre than 400, and frm under $2 millin in ttal develpment csts t mre than $100 millin. NMHC and NAHB cmbined the results with infrmatin frm ther survey cllectins and public data surces, such as typical terms n cnstructin lans and the average time it takes t cmplete different phases f a prject, t estimate the final csts (see Appendix 1). Types f Regulatin Regulatry csts fall int several categries fees, develpment standards, building cdes, land dedicated t public purpses, etc. The range f these regulatins can be brad, and the cst f cmplying with them substantial. Figure 1 shws the incidence f different types f regulatins impsed n multifamily develpers, as well as the average cst f cmplying with thse regulatins when they d exist. Figure 1: Incidence and Typical Magnitude f Regulatry Csts Type f Cst Share f Develpers Prjects Subject t the Cst Average Cst When Present (as a Share f Ttal Develpment Csts) Cst f applying fr zning apprval 98% 4.1% Interest csts n refundable fees charged when site wrk begins 50% 0.5% Other (nn refundable) fees charged when site wrk begins 93% 4.5% Develpment requirements that g beynd the rdinary 95% 6.3% Land dedicated t the gvernment r therwise left unbuilt 50% 4.3% Fees charged when building cnstructin is authrized 93% 4.2% Cst f cmplying with affrdability mandates (e.g., inclusinary zn 30% 5.7% Cst ) increases frm changes t building cdes ver the past 10 years 98% 7.2% Cst f cmplying with OSHA requirements 90% 2.6% Pure cst f delay (i.e., even if regulatin impsed n ther type f cst) 98% 0.7% The Cst f Regulatin t Apartment Develpment 4

The first significant interactin between a multifamily develper and the gvernment usually ccurs when the develper applies fr zning apprval t allw multifamily husing t be built n a particular parcel f land. The U.S. Cnstitutin gives states the authrity t regulate land use; and, althugh states smetimes try t influence land use patterns in varius ways, they mst ften leave this up t lcal gvernments. Lcal gvernments, in turn, pass zning rdinances that divide their territries int districts and specify hw land in each district can be used (single-family versus cmmercial versus multifamily, fr example). It s nt impssible fr a develper t acquire land that allws multifamily structures t be built n it withut ging thrugh a rezning prcess r btaining sme type f exemptin t an existing rdinance, but this is the exceptin rather than the rule. The typical prjects f almst all the respndents (98 percent) were subject t csts at the zning apprval stage. When they exist, these csts average 4.1 percent f the ttal develpment csts. Regulatry csts incurred at this stage can include fees paid directly t a gvernment but may als include ther types f csts. Fr example, the develpers may have t pay fr envirnmental impact, archelgical r ther types f studies. Althugh lcal gvernments have the authrity t apprve develpment, existing envirnmental laws als give a rle t the federal gvernment. A develper may need t btain a wetlands, strmwater and/r endangered species-critical habitat permit, each f which is verseen by a different federal gvernment agency. Many states manage the wetlands permits under federal guidance, and states and lcal jurisdictins may have their wn sets f requirements. Indeed, it can be difficult t identify which level f gvernment is ultimately respnsible fr sme regulatin and trying t recncile cnflicting requirements is ne factr that can drive up the cst f cmpliance. It is als cmmn fr gvernments t impse fees n a multifamily develpment when site wrk begins. Many cmmunities charge impact, utility hk-up and ther fees at this pint. Impact fees are fees that are charged nly n a new develpment and are suppsed t be used nly fr capital imprvements. State legislatin establishes the types f impact fees lcal gvernments can charge. Examples are impact fees fr the cnstructin f new schls, rads, water facilities, sewer facilities, strmwater management, parks, fire, plice, libraries, slid waste management, and general gvernment. Sme states allw all f these, while a select few f states d nt allw them, such as Virginia. There are cnsultants wh travel the cuntry and specialize in calculating the maximum impact fees lcal gvernments can legally charge. Mrever, as a recently published University f Califrnia, Berkeley paper dcumented, cities ften charge additinal fees, negtiated n a case-by-case basis at different pints in the develpment prcess, t allw a prject t be built. Accrding t the 2012 Census f Gvernments, there are rughly 90,000 lcal gvernments in the U.S., and a particular develpment may be subject t fees frm mre than ne f them fr example, frm a municipality, a water district, and a schl district with verlapping jurisdictins. The verwhelming majrity (93 percent) f the typical prjects f multifamily develpers in the NAHB-NMHC survey pay fees at this stage f the prcess. When they exist, these fees average 4.5 percent f ttal develpment csts. Sme lcal gvernments charge develpers guarantee r ther fees that are refundable when the prject is cmpleted. Althugh these fees are als usually impsed when site wrk begins, the survey treats them separately, due t the different cst implicatins. If the fee is eventually refunded, the develper The Cst f Regulatin t Apartment Develpment 5

ultimately pays nly the interest that accrues n the develpment and cnstructin lans until that happens. Half f respndents typical prjects were subject t these fees; which, when present, averaged half a percent f the ttal develpment cst. Many lcal gvernments require new develpment t cnfrm t cmmunity design standards. This may include standards fr streets and sidewalks, parking, height f buildings, landscaping and the architectural design f individual buildings. These standards impse little extra cst if they dn t significantly exceed the develper s rdinary practices. In the absence f regulatin, fr example, develpers will still rdinarily prvide spaces fr walking and parking, landscaping, and emply architects wh attempt t design buildings that are attractive t ptential tenants. The NAHB- NMHC survey asked multifamily develpers specifically abut the cst f standards that g beynd what they wuld therwise d. Almst all (95 percent) f the typical prjects f the develpers surveyed were subject t design standards that that g beynd what the develper wuld therwise d. When these beynd-rdinary requirements were present, they accunted fr an average f 6.3 percent f the verall develpment cst. Energy efficiency is a wrthwhile bjective, but NMHC and NAHB have argued that the up-frnt cst needs t be kept within reasnable bunds. NMHC and NMHC have supprted sme recent changes t the IECC but ppsed thers as nt cst-effective. Nt surprisingly, manufacturers f building prducts advcate fr cde changes that mandate mre use f their prducts and tend t be less cncerned than NMHC and NAHB abut csts. Past analysis by NMHC n previus cde cycles (which remain in effect in many states) has shwn that changes t the IECC have the ptential t drive up cnstructin csts by ver $3,000 per apartment (depending n type f building and climate zne) and argued that subsequent savings n utility bills cme nwhere near justifying the cst. Half f the typical prjects required develpers t dedicate land t the gvernment r therwise leave it unbuilt. This requirement can take many frms, such as creating a park n the prperty r reserving part f the prperty fr the gvernment t use in sme way. In these cases, the develper must pay fr the land but is nt allwed t derive revenue frm it, driving up the cst per unit fr the husing that can be built. Fr thse prjects subject t this regulatin, it represented an average f 4.3 percent f ttal develpment cst. Almst all f respndents (93 percent) paid sme srt f fee when cnstructin in their typical prject was authrized. This culd be limited t a building permit fee, but additinal impact, hk-up r ther fees may als be charged at this pint. When they exist, the fees charged at this pint average 4.2 percent f develpment csts, large enugh t suggest that they ften encmpass mre than the building permit fees. Lcal jurisdictins are increasingly beginning t cnsider impsing affrdability mandates t attempt t create new affrdable husing. These mandates withut any ffsetting incentive like a tax exceptin typically create few units and effectively tax sme husing units (and their ccupants) t subsidize thers. The easiest way t see this is in cases where develpers pay a fee t avid the requirement that amunt gets added t the verall amunt the develper must pay, thus raising the rents required. But even if they dn t pay a fee, the regulatin may require them t lse mney n sme f the husing they build, which is effectively a tax, resulting in higher rents n nn-subsidized apartments. Almst ne- The Cst f Regulatin t Apartment Develpment 6

third (30 percent) f develpers wh respnded indicated that their typical prjects incurred csts related t cmplying with such mandates. These csts, when they exist, averaged 5.7 percent f ttal develpment csts, enugh t result in substantially higher rents. The NAHB-NMHC survey als asked develpers abut the cst implicatins f changes t building cdes ver the past ten years. Mst jurisdictins have been enfrcing building cdes fr decades, and the cdes have been updated and refined many times ver that span. Mst have adpted a versin f natinal mdel cdes, which have been in widespread use since the 1950s. These are updated every three years, and the number f refinements cnsidered and vted upn during each three-year cycle runs int the thusands. Virtually n ne wuld argue against public standards fr basic sundness and safety f residential structures, but ver the decades cdes have expanded well beynd this and are increasingly being used as a vehicle t advance varius plicy bjectives. A leading example is energy efficiency. There is nw a mdel Internatinal Energy Cnservatin Cde (IECC). Energy efficiency is a wrthwhile bjective, but NMHC and NAHB have argued that the up-frnt cst needs t be kept within reasnable bunds. NMHC and NMHC have supprted sme recent changes t the IECC but ppsed thers as nt cst-effective. Nt surprisingly, manufacturers f building prducts advcate fr cde changes that mandate mre use f their prducts and tend t be less cncerned than NMHC and NAHB abut csts. This is anther area where the federal gvernment has becme increasingly invlved. The Envirnmental Prtectin Agency, the Federal Emergency Management Agency, and the Department f Energy (DOE), all actively participate in the develpment f natinal mdel cdes, prpsing changes t natinal mdel cdes and testifying in favr f them during cde hearings. DOE als has a share f its budget set aside fr persuading state and lcal jurisdictins t adpt mre stringent cdes. Representatives frm NAHB wh witnessed all f the recent cde hearings have criticized federal agencies fr supprting certain cde changes that remved flexibility and limited builders ptins, driving up csts withut imprving energy efficiency, t the benefit f specific prduct manufacturers. Nearly all (98 percent) f develpers said changes in building cdes ver the past 10 years increased develpment csts in their typical prjects, and these csts, when they exist, average 7.2 percent f ttal develpment csts. Nine ut f ten develpers said cmplying with requirements f the Occupatinal Safety and Health Administratin (OSHA) increased csts in their typical prjects, and these csts, when present, average 2.3 percent f ttal develpment csts. Again, few wuld argue that safety standards fr cnstructin wrkers are unnecessary. In recent years, hwever, OSHA has issued a substantial number f regulatins impsing cstly cmpliance requirements all withut prviding any evidence that they wuld actually imprve safety in the residential cnstructin industry. In the Beryllium rule, fr example, the evidence f a health risk came frm wrkers in manufacturing industries r perfrming abrasive blasting activities. In the Vlks rule, OSHA was criticized as ding little beynd driving up recrd keeping csts fr businesses (and pssibly vilating the statute f limitatins in the prcess). The Cst f Regulatin t Apartment Develpment 7

Even when regulatin impses n direct csts, it can have a financial impact if it delays the develpment and cnstructin prcess. If it takes lnger t begin leasing and earning incme n a prperty, it will take lnger t pay ff any develpment and cnstructin lans and mre interest will accrue. Sme regulatry delay is inevitable, as it will naturally take sme time fr lcal building departments t review and apprve plans and respnd t requests fr inspectins. Precisely hw lng it is reasnable fr a develper t wait fr apprvals and inspectins is pen t debate, but there are examples that clearly seem excessive. One academic study, fr example, fund that it tk an average f 788 days t prepare a submissin and receive apprval fr an individual federal wetlands permit. Virtually all the develpers (98 percent) said cmplying with regulatins caused sme srt f delay fr their typical prjects. Fr these prjects, NMHC and NAHB estimated that average additinal interest was 0.7 percent f ttal develpment csts. This is a pure cst f delay that regulatin wuld cause even if it impsed n ther type f cst. It is calculated by subtracting every ther type f regulatry cst, then estimating the additinal interest accruing n the share f the remaining develpment cst that is typically financed. Ttal Cst f Regulatin T estimate hw much in ttal the gvernment regulatins described abve add t multifamily develpment csts, it is necessary t take bth the incidence and magnitude f the varius types f regulatin int accunt in ther wrds, t average in the zeres when a particular regulatin des nt apply. Figure 2 shws that, when this is dne, the listed categries taken tgether n average accunt fr 32.1 percent f develpment csts fr a multifamily prject. Amng the listed categries, average cst is highest fr changes t building cdes ver the past 10 years (7.0 percent f ttal develpment csts), fllwed by develpment standards impsed by gvernment that g beynd what the develper wuld rdinarily d. It is interesting that gvernment cntrl ver hw a prject is built can be mre cstly than actual fees charged, but unsurprising given that they can be time cnsuming and thus cst mre. Figure 2: Gvernment Regulatin as a Share f Multifamily Develpment Csts Type f Cst Lwer Quartile Average Upper Quartile Cst f applying fr zning apprval 1.1% 4.0% 5.3% Interest csts n refundable fees charged when site wrk begins 0.0% 0.2% 0.2% Other (nn refundable) fees charged when site wrk begins 1.9% 4.2% 5.5% Develpment requirements that g beynd the rdinary 1.1% 5.9% 8.4% Land dedicated t the gvernment r therwise left unbuilt 0.0% 2.1% 3.3% Fees charged when building cnstructin is authrized 1.1% 3.9% 5.4% Cst f cmplying with affrdability mandates (e.g., inclusinary zn 0.0% 1.7% 2.6% The Cst f Regulatin t Apartment Develpment 8

Cst increases frm changes t building cdes ver the past 10 years 5.2% 7.0% 7.1% Cst f cmplying with OSHA requirements 1.3% 2.3% 2.3% Pure cst f delay (i.e., even if regulatin impsed n ther type f 0.1% 0.7% 1.2% TOTAL ESTIMATED REGULATION AS A SHARE OF DEVELOPMENT 21.7% 32.1% 42.6% Affrdability mandates, when they exist, are nearly as cstly as relatively recent changes t building cdes and beynd- rdinary develpment starts, but verall have a smaller average impact n csts because they are encuntered less frequently. In cntrast, regulatry delays are encuntered very frequently, but have a cmparatively small average impact n csts because they are limited t the extra interest that accrues n develpment and cnstructin lans. Refundable fees have the smallest impact f any f the types f regulatry csts listed, bth because they apply nly half f the time and because they are limited t the interest that accrues until they are refunded. T illustrate the variability in regulatry csts, in additin t averages, Figure 2 shws the upper and lwer quartiles (csts are belw the lwer quartile fr 25 percent f respndents, and abve the upper quartile fr 25 percent). While n average regulatin accunts fr 32.1 percent f ttal multifamily develpment csts, the quartiles give a range f 21.7 t 42.6 percent. Althugh the cst cmpnents sum t the bttm line ttal fr the averages in Figure 2, the cmpnents f the upper and lwer quartiles d nt. The ten cmpnents in the lwer quartile clumn in particular sum t cnsiderably less than 21.7 percent. The implicatin is that multifamily develpers can minimize sme types f regulatry csts depending n where they perate but nt all f them prprtinately at the same time. Csts Nt Captured Althugh the NAHB-NMHC survey sught t be as cmprehensive as pssible, the abve results d nt capture everything. Sme gvernment actins impact develpment csts in a way a multifamily develper can t reasnably be expected t quantify. Fr example, federal immigratin plicy may affect the supply f cnstructin labr, and tariffs can affect prices f building materials like lumber 1 and steel. Develpers d nt in general have a way f evaluating hw much the prices they pay fr labr and materials are influenced by these federal plicies. The survey asked develpers abut delays due t gvernment regulatin, but there can be multiple reasns fr thse delays nt all unambiguusly tied t a gvernment actin. One is neighbrhd ppsitin t the develpment. At the lcal level, gvernments may encurage r facilitate lcal grups wh ppse multifamily develpment. An bvius way t d this is by allwing lcal grups t sue any develper wh prpses t build multifamily husing, but there are many mre subtle ways t encurage ppsitin. A develper may have t devte time and financial resurces t deal with this ppsitin, by meeting with lcal grups befre seeking zning apprval, fr instance. T quiet the ppsitin, develpers may The Cst f Regulatin t Apartment Develpment 9

find it necessary t make cncessins t lcal grups, such as reducing size f the buildings s that land csts are allcated t fewer apartments and cst per apartment is increased. In an extreme case, lcal ppsitin may be able t cause a lcal gvernment t reverse its decisin t apprve a prject after the develper has already invested heavily in it. In many f these cases, there is an bvius cst t neighbrhd ppsitin, but hw much respnsibility the lcal gvernment bears fr it may nt always be clear. It is nt uncmmn fr develpers t hire cnsultants t debunk claims made by ppsitin t a prject. Figure 3 belw shws that the verwhelming majrity (85 percent) f the develpers respnding t the NAHB-NMHC survey have experienced added csts r delays due t such ppsitin. Figure 3: Have yu experienced added csts r delays due t neighbrhd ppsitin t multifamily cnstructin? N Yes Prfile f Respndents and Their Typical Prjects The range f csts highlights that nt all develpment prjects are the same. Csts can vary by jurisdictin, as well as by gegraphic lcatin and type f prject garden apartments n undevelped land can be much less cmplicated t build than a high-rise in an urban area, fr example. Respndents were able t chse mre than ne ptin as t their typical prject type. The Cst f Regulatin t Apartment Develpment 10