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This would be a great time for the federal government to fund public/non-profit acquisition of privately-owned apartment buildings. (thread)
Here's a 12-unit property on the market for $3.6 million. With a 1% interest 30-year loan on 100% of the purchase price, monthly mortgage + tax + insurance costs would be $15,000. Revenues are currently $18,300 per month. https://www.redfin.com/CA/Los-Angeles/1506-S-Wilton-Pl-90019/home/6906899
I say 1% interest loan because the federal government has that power, and borrowing costs are incredibly low. Today 30-year treasury yields are 1.57% so a 1% loan would constitute a very modest subsidy. Realistically they could just make it zero-interest.
I say take a loan on 100% of the purchase price (no down payment) because the building is rent-controlled so it's priced below market value. It simply doesn't face the same risk of going underwater as housing that's more exposed to the market.
Revenues are $3,300 per month more than costs in this scenario, but that'd be a pretty thin margin to operate a building. Very possibly negative cash flow. You could solve this with a zero-interest loan, but it's not necessary. More on that in next tweets...
The long-term goal here is partly to take private property off the speculative market, but also to balance rents with ability to pay. Over time, rents can be increased on some units and frozen or even reduced in others.
This is important because it addresses one of the major problems with rent control: that the people who benefit aren't always the ones most in need of support. Acquiring these buildings for public benefit would be a way to address that.
Right now the average rent for the nine 2 BR 1 BA units in this bldg is $1600/month. Over time those units could diverge. After 5 years the rents might be: 2 @ $1300/month, 3 @ $1600, and 4 @ $1800. Compare that to a private owner where average rents would likely all be $1800+.
Note that the total monthly income for the publicly-owned building is still higher at year 5 than when it was acquired (good for financial sustainability). Depending on operating expenses, you could be more or less aggressive with limiting/reducing rents.
And importantly, rents in the publicly-acquired building are much lower than the privately owned bldg. And note that this didn't really cost the the govt anything, or not much. It was just a low-interest loan. 30-year treasury yields are already around 1.5%.
I want to reiterate this point: The government can borrow at such low interest rates that we could acquire multifamily housing with zero (or near-zero) subsidy and no equity and still operate the properties profitably. It's effectively free affordable housing.
Are there caveats? Of course. For one, if the government did this at massive scale right away then it would probably increase the cost of acquisition. It's also very likely that operating costs would be higher than in the private market.
This also doesn't address the fact that we need a lot more *new* housing. In cities like LA, costs are too high even if we froze them in place today. Vacancy rates are among the lowest in the country and overcrowding rates are the highest. Supercommuting, etc. We need more homes.
But there's no particular reason that funding for new housing should compete with acquisition. Again, at these rates acquisition is basically free. While we build new, we can also acquire, and at ~zero cost 2-3 out of every 10 units are made more affordable. Pretty good deal IMO.
I wrote about this several years ago at my blog, here. I'm sure it's out of date but the basic message is the same. http://www.betterinstitutions.com/blog/2016/6/19/private-development-public-ownership-housing-affordability
This is also one of the 50ish ideas discussed in my book, The Affordable City, which you can buy here: https://islandpress.org/books/affordable-city
Also, bonus! These buildings could permanently serve low and moderate income households, rather than expiring or having to be repurchased at 30 or 55 years. https://www.lewis.ucla.edu/research/increasing-duration-affordability-requirements/
Another thing. A huge problem with using state/local funds is that they can't offer large quantities of low interest loans, and if they can't do low interest loans they need a down payment to ensure positive cash flow. In either case, that severely restricts purchasing capacity.
Also, qualifications about state/local funding aside, this would be a great use of funds from a progressive real estate transfer tax: https://www.lewis.ucla.edu/research/transfer-tax-reform/
...a transfer tax made even better by a Prop 13 multiplier: http://www.betterinstitutions.com/blog/2020/7/28/building-more-equitable-california-transfer-tax-reform
No, this thread will never end.
