Jobs Created by New Construction and Rehabilitation

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1 Financing Affrdable Rental Develpment Jbs Created by New Cnstructin and Rehabilitatin Cnstructin and develpment are imprtant jb and ecnmic generatrs fr states and lcal cmmunities. In carrying ut its missin t help ur fellw Flridians access husing that may nt therwise be accessible t them, Flrida Husing Finance Crpratin prvides financing thrugh a range f federal and state prgrams that prvide imprtant ecnmic benefits fr the state. With regard t rental develpment, Flrida Husing generally prvides debt and equity financing t develpers wh leverage these resurces with private and ther public sectr funding t develp new rental apartments r rehabilitate existing affrdable units. Bth rehabilitatin and new cnstructin prvide imprtant surces f direct and indirect ecnmic benefit and jbs. Tday, we see a variety f ecnmic cnditins impacting the ability f cnstructin jbs t be a useful ecnmic generatr in Flrida: n ne hand, with the prliferatin f unsld single family hmes that are nw available fr rent, husing rents have been pushed dwn in many markets, leading t an versupply f affrdable rental husing and high vacancy rates in thse rental markets with slw r n ppulatin grwth (r new family frmatins) in these areas. On the ther hand, in sme lcatins, vacancy rates are lw and there is a cntinued demand fr new rental husing. Flrida Husing s prpsed rules allcate federal Lw Incme Husing Tax Credits t bth new cnstructin and preservatin, which is generally defined as prviding financing t new r current wners t recapitalize and rehabilitate existing affrdable rental units that are 20+ years ld t maintain and extend affrdability and ensure that they are in gd cnditin ging frward. A questin has been raised abut the ability f new cnstructin and preservatin financing t create jbs and whether ne apprach des a better jb f this during a time when jb creatin is s critical t the state s ecnmy. The infrmatin belw summarizes what Flrida Husing s research and analysis shws. Flrida Husing Finance Crpratin prepared an evaluatin fr this paper f the ecnmic and jb impacts f the upcming, prpsed Lw Incme Husing Tax Credit cycle. We carried ut this analysis with assistance frm the Shimberg Center fr Husing Studies at the University f Flrida, a natinally knwn husing data/research center, and Dr. Alan Hdges, an ecnmist wh runs the Ecnmic Impact Analysis Prgram at the University f Flrida. We used a cmmnly used ecnmetric mdel called IMPLAN Versin 3, with 2009 Flrida state data, t estimate impacts frm financing bth new cnstructin and preservatin develpments by inputting estimated Ttal Develpment Csts exclusive f prperty acquisitin csts. Flrida Husing analyzed the Lw Incme Husing Tax Credit transactins underwritten in late t get the average allcatin, ttal develpment cst and ther variables fr bth new cnstructin and preservatin (rehabilitatin) transactins. Based n this infrmatin and the prpsed 2011 rules, we estimated the number f new cnstructin and preservatin develpments that will be funded in the 2011 cycle, hw much each average award will be, the average ttal develpment csts and ther variables. Then we wrked with the Shimberg Center fr Husing Studies and Dr. Hdges t estimate jb creatin and ecnmic benefit frm the prjected ttals f all new cnstructin awards and, separately, all preservatin 1 Awarded thrugh the 2009 Universal Applicatin Cycle. Page 1 DRAFT February 15, 2011

2 awards. The financial data Flrida Husing prvided fr this purpse are summarized at the end f this dcument. FINDING: Each new cnstructin develpment, n average, creates mre jbs than each preservatin develpment: 340 jbs per new cnstructin prperty, versus 217 jbs per preservatin prperty; Hwever, when equal allcatins t new cnstructin and preservatin are made, as prpsed in the 2011 rules, mre ttal jbs are created verall by the preservatin transactins. This is because preservatin develpments require fewer Lw Incme Husing Tax Credits t cmplete, because the cst f preservatin develpment is generally lwer than new cnstructin. This means that the state s Lw Incme Husing Tax Credit allcatin ges further fr these develpments and mre develpments can be financed with the same amunt f funding an estimated 22 preservatin develpments versus 12 new cnstructin develpments, thus creating mre verall Ttal Develpment Csts, and therefre creating mre jbs verall: Preservatin 4,772 jbs, versus new cnstructin 4,079 jbs. The IMPLAN ecnmic impact assessment mdeling system uses sphisticated ecnmetric mdeling t generate estimates. 2 This and ther natinally recgnized mdels estimate the ecnmic impacts f investments and/r changes in industry and frecast tax revenue and emplyment generatin. They d this by estimating the gds and services frm hundreds f industry sectrs and the types and numbers f these business establishments in the study area (inputs) t prduce each dllar f utput fr the sectr in questin. In ur case, the study area is Flrida, but these mdels can be used fr smaller areas. Fr example, if the cnstructin industry in Flrida requires the use f cncrete and it can be purchased frm a manufacturer in Flrida, the ecnmetric mdel includes the impacts (e.g., jbs, incme) frm the cncrete cmpany, and there is greater ecnmic benefit t Flrida. If gds fr that same industry must be purchased utside the study area, then the ecnmic benefits are nt included in the final estimate f ecnmic impact fr the study area. These mdels prvide direct, indirect and induced prjectins fr jbs, verall earnings, taxes generated and verall ecnmic impact. That is, they are intended t prject cmprehensive ecnmic benefit fr the industry r funding in questin fr the specified study area. Input-Output Mdels are created t estimate the entire impact f investing in an industry, including direct impacts like the jbs, taxes and fees t build a prperty; and ripple effects, als knwn as indirect and induced impacts: Direct impacts related t the industry under study; fr cnstructin, this includes all spending by develpers and thse hired t build/rehabilitate a prperty, exclusive f prperty acquisitin; Indirect impacts spending by suppliers f materials/services and thers t keep up with business (including verhead); Induced impacts spending f earnings frm bth direct and indirect activities; fr example a cnstructin wrker s purchases f grceries; 2 IMPLAN is used by hundreds f universities and gvernment agencies acrss the cuntry t estimate the ecnmic and fiscal impacts f investments and t frecast emplyment generatin, amng ther things. There are three cmmnly used mdels natinally RIMS II, IMPLAN and REMI. The Flrida Legislative Office f Ecnmic and Demgraphic Research has used all three, but currently uses the tw latter mdels in its wrk. Page 2 DRAFT February 15, 2011

3 Overall, these mdels prvide prjectins fr jbs, earnings, taxes and ttal ecnmic impact. Other studies have been carried ut by ecnmists t measure the ecnmic impact f husing develpment. The summary f findings belw fcuses just n jbs, althugh mst f these studies als prvide additinal prjectins f cmprehensive ecnmic benefits. The Natinal Assciatin f Hme Builders published an updated study in 2007 evaluating jbs, fees and taxes created by a typical new rental cmmunity financed by Lw Incme Husing Tax Credits. FINDING: Estimated state impact f funding a new 100-unit prperty One-year impact 151 jbs Recurring impact 38 jbs A study was prepared in 2009 fr The Husing Alliance f Pennsylvania estimating the ecnmic benefit f state investment in affrdable husing, lking at bth new cnstructin and rehabilitatin. FINDING: Estimated impacts in Pennsylvania assciated with each $10 millin f expenditures fr affrdable husing New multifamily cnstructin 148 jbs Remdel/rehabilitatin (preservatin) 200 jbs A study was prepared in early 2010 fr the Federal Hme Lan Bank f Atlanta (FHLB) using 2007 IMPLAN data analyzing the ecnmic value created by the cnstructin and renvatin f develpments financed thrugh that bank s Affrdable Husing Prgram. FINDING: Impact per millin dllars f ttal develpment cst resulting frm the FHLB s Affrdable Husing Prgram Rental new cnstructin 11.4 jbs Rental rehabilitatin (preservatin) 12.2 jbs A literature review f the rle f affrdable husing in creating jbs and stimulating lcal ecnmic develpment was cmpleted by the natinal Center fr Husing Plicy in January The review was generally brad, but nted the Pennsylvania study finding (abve) related t the difference in new cnstructin and rehabilitatin this way: The multiplier fr remdeling/rehabilitatin is higher than fr new cnstructin activities because in the frmer, a greater share f ttal funds is spent n lcal labr, whereas in the latter, mre funds are spent n materials ften prduced utside f the jurisdictin. In ther wrds, funds are mre likely t leak t ther cmmunities when they are spent n new cnstructin than when they are spent n rehabilitatin. (Wardrip et al, 2011) On the issue f jb creatin, Flrida Husing has received cmments frm develpers f bth new cnstructin and preservatin. Sme prvided infrmatin n jbs created directly related t their specific develpments (i.e., specific t the cnstructin/develpment prcess). Others have made anecdtal statements abut likely impacts t the ecnmy. Page 3 DRAFT February 15, 2011

4 Flrida Husing believes that many f these cmments have merit. Hwever, we knw f n existing studies that individually measure the particular ecnmic benefits utlined in these statements. The ecnmetric mdels discussed abve are set up t incrprate all r a number f these pints. In summary, the cmments are: STAKEHOLDER COMMENTS New Cnstructin New cnstructin creates lnger lasting cnstructin/develpment jbs than preservatin develpment, because new cnstructin takes lnger t cmplete than rehabilitatin f an existing prperty. New cnstructin develpments pay lcal impact and utility cnnectin fees that supprt lcal gvernment services, while preservatin develpments pay n impact r utility cnnectin fees (because they already exist). New cnstructin creates additinal permanent jbs, particularly fr management and maintenance f the new develpment, while preservatin develpments already have management and maintenance wrkers emplyed. New cnstructin adds t the tax base f the lcal gvernment, while preservatin des nt increase the tax base, because the existing apartments are already part f it. Many f the materials purchased fr new cnstructin are prduced here in Flrida, thereby increasing indirect jb creatin in the state, e.g., cncrete strm structures, cncrete, rad base, asphalt, cncrete blck, etc. But the majrity f the materials purchased fr preservatin f existing units are prduced utside f Flrida, e.g., n cncrete strm structures, minimal (if any) cncrete blck, n cncrete fundatins, n rad base, minimal asphalt, etc. If lder affrdable develpments that are candidates fr preservatin instead cnvert t market rate prperties, they may have enhanced lcal fee generatin in lcal taxes. Preservatin Preservatin prjects are mre labr intensive than new cnstructin prjects. While new cnstructin csts are typically 50% labr and 50% materials, preservatin prjects are clser t 25% materials and 75% labr. Preservatin develpments pay sales taxes and building permit fees and pay them quickly, while new cnstructin can take years t cmplete due t permitting and financing delays, smetimes due t neighbrhd r envirnmental impact cncerns; and because these preservatin develpment starts faster than new cnstructin, the impact t lcal revenue ccurs mre quickly. The predevelpment stage f preservatin develpments requires mre time than new cnstructin fr such activities as reviewing the histrical peratins f the prperty, including all service cntracts, a 100% unit inspectin, meetings with tenants and prperty staff, etc. In Preservatin, the amunt f wrk that ges int a mderate-t-substantial rehabilitatin prject invlves mdernizatin f all/mst majr systems; new rfs; all new cabinets/cuntertps in bathrms/kitchens; new insulatin, flring, security systems; dispsal f existing materials; mving tenants belngings; and remval and/r abatement f lead/mld/asbests as needed. Preservatin transactins stabilize neighbrhds and prmte cnfidence in existing neighbrhds, spurring better investment and expansin by existing business. Develpments being preserved typically require asphalt fr parking lts, cncrete fr additins, and ceramic tile fr finishing; cncrete is a small piece f the verall cnstructin budget. Preservatin transactins stabilize rent levels, increase valuatins f existing apartment buildings and valuatins f existing neighbrhds, thereby increasing tax revenues. Page 4 DRAFT February 15, 2011

5 There is a need fr affrdable new cnstructin as well as preservatin f existing affrdable multifamily rental husing. The data shw us there is currently a need fr new affrdable rental units in sme markets in Flrida. Hwever, in many cunties r prtins f cunties in Flrida (ver half), existing affrdable rental cmmunities in Flrida Husing s prtfli are experiencing lw ccupancy rates (in many cases, prperties with nly 85-89% f units ccupied) because f saturatin. Because s much single family stck is currently n the market fr sale, many wners have chsen t rent ut their hmes rather than try t find buyers in this market. These additinal rental units are cmpeting with market rate and affrdable apartments, leading apartment wners t respnd with lwer rents and special ffers. With an excess f rental husing available in many places, vacancies in Flrida Husing s prtfli are higher than usual. Flrida Husing s bjective is t carefully target any new rental cnstructin t thse areas f the state where there is a defined need fr such husing. Our bjective is t help avid cannibalizing existing state financed rental develpments and particularly that prtin f develpments in ur Guarantee Prgram prtfli. Nte that negative pressure n the affrdable rental transactins financed by Flrida s Guarantee Fund may lead t a statutry call n State Husing Trust Fund resurces t prvide additinal supprt t the Guarantee Fund. These resurces have been utilized in recent years by the Legislature and Gvernr t help balance Flrida s budget. On the Preservatin side, there are ver 400 rental prperties thrughut Flrida that were riginally financed with funding frm U.S. Husing and Urban Develpment and U.S. Department f Agriculture s Rural Develpment prgrams and are nw ver twenty years ld. Over 300 f these prperties have substantial amunts f federal rental assistance as part f their verall financing package. The prpsed Preservatin resurces will assist the state with tw bjectives: T recapitalize and rehabilitate lder prperties which are falling int disrepair because f age: and T enable the preservatin f the federal rental assistance that enables these rental prperties t serve ur lwest incme Flridians. The federal rental assistance prvides supprt directly t these prperties in exchange fr serving elders, persns with disabilities and thers with extremely lw incmes wh cannt affrd t pay rents at levels that will supprt daily peratins at a prperty. Preservatin allws the federal rental assistance t remain n the prperty. Withut this federal rental assistance, which is rarely prvided in new cnstructin develpments tday, it wuld be difficult t huse these same families in newly cnstructed rental develpments financed thrugh tday s typical Lw Incme Husing Tax Credit transactin structures. Page 5 DRAFT February 15, 2011

6 References Ecnsult Crpratin. Ptential Ecnmic and Fiscal Impacts f a Pennsylvania Husing Trust Fund. Submitted t Elizabeth G. Hersh, The Husing Alliance f Pennsylvania. 24 April The Hendricksn Cmpany in cnjunctin with the Shimberg Center fr Husing Studies, University f Flrida. Beynd Units: Ecnmic Benefits f Federal Hme Lan Bank f Atlanta s Affrdable Husing Prgram. January Natinal Assciatin f Hme Builders, Husing Plicy Department. The Lcal Ecnmic Impact f a Typical Tax Credit Husing Prject, Incme, Jbs and Taxes Generated. September Wardrip, Keith, Laura Williams and Suzanne Hague, Center fr Husing Plicy. The Rle f Affrdable Husing in Creating Jbs and Stimulating Lcal Ecnmic Develpment, A Review f the Literature. January Page 6 DRAFT February 15, 2011

7 Prjected Ecnmic Impact f the 2011 Universal Applicatin Cycle Cmparing New Cnstructin and Preservatin DRAFT February 15, 2011 New Cnstructin Preservatin Ntes: Analysis f 2009 Universal Applicatin Cycle (Awarded in February 2010)* Number f 9% LIHTC Transactins Analyzed 32 7 Average 9% LIHTC Allcatin $1,601,538 $901,656 Average Ttal Develpment Cst (TDC) $17,027,557 $9,265,819 Average Number f Units Amunt f TDC per $1 f LIHTC Awarded $10.63 $10.28 Amunt f LIHTC Awarded per $1,000 f TDC $94.06 $97.31 Amunt f LIHTC Awarded per Unit $16,976 $9,004 * This is the mst recent applicatin cycle. The data in this sectin are derived frm final credit underwriting reprts r ther credit underwriting evaluatins required f these develpments befre they may prceed. LIHTC = Lw Incme Husing Tax Credit TDC represents all csts f the develpment, exclusive f land and buildings. Estimates fr 2011 Universal Applicatin Cycle Percent f Ttal LIHTC allcated t each Pl 50% 50% This represents hw much f the $39,000,000 estimated 2011 Ttal LIHTCs is allcated t each Pl. Amunt f 9% LIHTC Allcatin in each Pl $19,500,000 $19,500,000 This represents the LIHTC Allcatin per Pl (New Cnstructin Pl, Preservatin Pl). Number f Avg 9% LIHTC Allcatins that Fit int each Pl The Average 9% LIHTC Allcatin frm 2009 is divided int the respective prpsed 2011 LIHTC Pls. Hw Many Applicants Estimated t Receive an Allcatin The # f applicatins is determined by simply runding the previus rw. Implied Average 9% LIHTC Allcatin per Awardee $1,625,000 $886,364 The LIHTC Allcatin per Pl is divided by # f applicatins in the respective Pl. Crrespnding Average TDC per Awardee $17,280,000 $9,110,000 Based n 2009 Avg TDC, adjusted fr Avg LIHTCs in 2011, relative t 2009, runded t nearest $10,000. Crrespnding Average Number f Units per Awardee Based n 2009 Avg # f Units, adjusted fr Avg LIHTCs in 2011, relative t Amunt f TDC per $1 f LIHTC Awarded $10.63 $10.28 Amunt f LIHTC Awarded per $1,000 f TDC $94.04 $97.30 These last three rws shw that 2011 estimates are in line with the 2009 averages. Amunt f LIHTC Awarded per Unit $16,927 $9,045 Ecnmic Impact Estimates fr 2011 Universal Applicatin Cycle Cumulative LIHTC Allcatins per LIHTC Pl $19,500,000 $19,500,000 # f 2011 Awardees times average 2011 LIHTC Allcatin Cumulative TDC per LIHTC Pl $207,360,000 $200,420,000 # f 2011 Awardees times average 2011 TDC Cumulative Number f Units per LIHTC Pl 1,152 2,156 # f 2011 Awardees times average 2011 units per awardee Average Jbs Created per Develpment Ttal IMPLAN jbs (belw) divided by # f 2011 awardees per LIHTC Pl Average Ecnmic Impact per Develpment $43,670,690 $23,736,269 Ttal IMPLAN Ecnmic Impact (belw) divided by # f 2011 awardees per LIHTC Pl Average Impact n Earnings per Develpment $15,218,410 $9,513,318 Ttal IMPLAN Impact n Earnings (belw) divided by # f 2011 awardees per LIHTC Pl Ttal Jbs Created per LIHTC Pl 4,079 4,772 IMPLAN Multiplier times TDC per LIHTC Pl Ttal Ecnmic Impact per LIHTC Pl $524,048,279 $522,197,918 IMPLAN Multiplier times TDC per LIHTC Pl Ttal Impact n Earnings per LIHTC Pl $182,620,915 $209,292,994 IMPLAN Multiplier times TDC per LIHTC Pl The figures presented within the bx abve were generated using IMPLAN v.3 multipliers and Flrida state data, WHAT DOES THIS TELL US? The first set f three lines in the bx abve shw that an average new cnstructin develpment prvides mre jbs than the average preservatin develpment, because each new cnstructin deal has a higher ttal develpment cst. New Cnstructin Develpment - Average Jb Creatin 340 Jbs Preservatin Develpment -- Average Jb Creatin 217 Jbs The secnd set f three lines in the bx abve shw that the preservatin pl prvides mre jbs, given the prpsed pl allcatins, because (a) each rehab transactin is smaller, (b) thus yielding mre rehab awardees, and (c) althugh these develpments n average have a smaller TDC per preservatin develpment, mre preservatin deals gives a higher ttal TDC fr the pl. Preservatin Develpments (22 estimated) 4,772 Jbs New Cnstructin Develpments (12 estimated) 4,079 Jbs Ttal in 2011 Funding Cycle 8,851 Jbs FHFC February 2011