Introducing the Housing Development Dashboard

Making it Pencil: The Math Behind Housing Development

April 22nd, 2021

Making it Pencil – The Math Behind Development

What are the various costs that

go into the development of new housing?

How are new housing

developments financed? What are the benchmarks

required by financial institutions and capital sources to invest in new housing?

How do various requirements

impact the ability of developers to deliver projects?

The Realities of Housing Development Math

• Market rate building – East Bay

• 120 units: • (48) studios • (40) 1 bdrm apartments • (32) 2 bdrm apartments

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

“Terner Terrace” characteristics

• 120 parking spaces

• 1,500 square feet of retail

• 5 over 1 construction (stick over podium)

Photograph courtesy of BRIDGE Housing

The Realities of Housing Development Math

Development assumptions:

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

• No EIR* • No demolition* • No environmental

remediation* • No offsite infrastructure

improvements*

• No exactions* • Standard approval

times • Standard wages • $40,000/unit in fees • Q1-2019 Construction

Costs

* It is rare that infill projects avoid these costs. Any combination of these

costs plus current inflation could add as much as $100,000/unit.

Total Cost to Build East Bay Prototype: $68,828,255

$7,858,500

$46,169,455

$5,400,000

$6,394,660

$2,298,271

$707,369

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

East BayLand Cost Hard Cost Fees Financing Consultants Tax, Title, Insurance

Total Cost to Build East Bay Prototype: $573,569/unit

$65,488

$384,745

$45,000

$53,289

$19,152

$5,895

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

East Bay

Land Cost Hard Cost Fees Financing Consultants Tax, Title, Insurance

68%

22%

10%

What are the financing requirements to make this project feasible?

0

0.2

0.4

0.6

0.8

1

1.2

1.4

DSCR 1 DSCR 1.3

Debt Net Operating Income (NOI)

Terner Terrace Financing Requirements

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

How much debt can I raise?

Debt Service Coverage Ratio (DSCR) is the Debt to Net Operating Income (NOI) required by our bank

Terner Terrace Financing Requirements

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

How much debt can I raise?

Financing breakdown for a 65% “Loan to Cost”:

$51,985,347 in debt (at 5% interest rate)

$27,106,654 in equity needed

Debt, $44,738,365

Equity, $24,089,889

Terner Terrace Equity Requirements

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

4.30%

5.46%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

East Bay

Prototype ROC/Cap Rate Spread

Cap Rates Return on Cost

15.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

East Bay

Internal Rate of Return

Internal Rate of Return

The Result: High Rents To meet debt, operating expense, and investor

requirements, Terner Terrace monthly rents must be:

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

$0

$1,000

$2,000

$3,000

$4,000

$5,000

Studio 1 bedroom 2 bedroom

$2,138

$3,366 $4,441

$5.70/sf

$5.30/sf $4.75/sf

5.46%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

East Bay ROC

Baseline

Cumulative Policy Impacts on Terner Terrace

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

The layering of many common city policies can result in either higher rents or stopping projects altogether

5.46%

5.02%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

East Bay ROC

Baseline

2:1 Parking

Cumulative Policy Impacts on Terner Terrace

The layering of many common city policies can result in either higher rents or stopping projects altogether

5.46%

5.02% 4.84%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

East Bay ROC

Baseline

2:1 Parking

2:1 Parking, $60k/UnitFees

Cumulative Policy Impacts on Terner Terrace

The layering of many common city policies can result in either higher rents or stopping projects altogether

5.46%

5.02% 4.84%

4.46%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

East Bay ROC

Baseline

2:1 Parking

2:1 Parking, $60k/UnitFees

2:1 Parking, $60k/UnitFees, 15% Inclusionary(60% AMI)

Cumulative Policy Impacts on Terner Terrace

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

The layering of many common city policies can result in either higher rents or stopping projects altogether

5.04%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

East Bay ROC

15% Inclusionary (60%AMI)

Cumulative Policy Impacts on Terner Terrace

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

Calibrating policies to work with the market can help projects pencil while achieving important goals

5.04% 5.31%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

East Bay ROC

15% Inclusionary (60%AMI)

15% Inclusionary (60%AMI), $20k/Unit Fees

Cumulative Policy Impacts on Terner Terrace

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

Calibrating policies to work with the market can help projects pencil while achieving important goals

5.04% 5.31% 5.55%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

East Bay ROC

15% Inclusionary (60%AMI)

15% Inclusionary (60%AMI), $20k/Unit Fees

15% Inclusionary (60%AMI), $20k/Unit Fees,.5:1 Parking

Cumulative Policy Impacts on Terner Terrace

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

Calibrating policies to work with the market can help projects pencil while achieving important goals

5.04% 5.31% 5.55% 5.72%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

East Bay ROC

15% Inclusionary (60%AMI)

15% Inclusionary (60%AMI), $20k/Unit Fees

15% Inclusionary (60%AMI), $20k/Unit Fees,.5:1 Parking

15% Inclusionary (60%AMI), $20k/Unit Fees,.5:1 Parking, TaxExempt IZ units

Cumulative Policy Impacts on Terner Terrace

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

Calibrating policies to work with the market can help projects pencil while achieving important goals

Please visit www.ternercenter.berkeley.edu

for more information on our Cost of Building Housing Research Series and our other work.

Thank you!