Builder helps create affordable housing

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by Andrew Petkofsky and Paula C. Squires

Builders can help create affordable housing and still make a profit.  Just ask Frank Spadea. The 71-year-old CEO of Franciscus Homes in Virginia Beach has spent 30 years building modestly priced homes in southeastern Virginia.

Not even a setback — his hometown recently rejected a major project — blunts Spadea’s enthusiasm for putting home ownership within reach of working people.

“There are a number of things in it for builders,” says Spadea.  “It’s just that most of the builders don’t know it.” For instance, some localities offer increased density to developers of affordable or “work-force housing.” This major concession translates into more units per acre, lowering the cost for including these homes in projects. 

The magic of his neighborhoods, says Spadea, is that the “affordable” homes blend in with everything else. That’s because the exterior style is no different than the style of homes being sold at market rates.  “What you’re going to have is the old neighborhood of years ago,” he says. “You drive down the street and you’re not going to know
that a policeman lives in that house.” 

Spadea is so sold on his model that he and some partners are trying to get a franchise off the ground called Workforce Housing Partners. It would offer builder partners licensed affordable housing designs and access to capital for qualified projects.

The timing may be prescient. With home prices falling and foreclosures rising as a result of the subprime mortgage fallout, affordable housing is getting a new look in some Virginia locales. Elected officials in Charlottesville and Fairfax County — one of the country’s most expensive housing communities — are exploring ways to invest in
homes that would be affordable to local government employees such as teachers, firefighters, police officers and health-care workers. 

In fact, despite concerns about funding for affordable housing, market conditions actually bode well for these projects, says housing economist Thomas Lawler of Leesburg. “The best news for working people who saw home prices go way up beyond their income is for the prices to come back down.”

Throw in a large stock of unsold houses, increased liquidity in the markets as a result of the Federal Reserve’s recent actions, and it’s easy to see why the outlook is improved for people who couldn’t afford much during the inflated housing bubble.

Yet, the flip side of the bursting bubble, adds Lawler, is that some builders are just trying to survive. “They’re not going to cut their profit margins to include affordable housing in a big project if they’re strapped.”

High prices in resort city

A self-employed consultant and former 22-year employee of Fannie Mae — a major, government-backed player in the mortgage securities market — Lawler offers this advice to buyers:  “In a boom, buy lots of room. In a bust, only what you must.” 

Spadea seems to offer proof that affordable housing can be a successful part of a construction portfolio in an up or a down market.  Typically the company builds 125 to 200 housing units a year and is on track to build 129 units this year, he says, or about $30 million in gross volume. 

As the average price for a home in Virginia ticked up to more than $327,000 in 2007, Spadea and other developers worked with local governments to develop a regulatory framework that would produce affordable homes for city workers.  The need was particularly acute in the resort city of Virginia Beach. Steep land prices there had pushed
the average price of a new home to above $500,000 in a community where starting police officers earn just more than $36,000 a year and teachers begin with salaries ranging from $34,000 to $36,000.

New home prices haven’t dropped much, says Sharon Prescott, a housing programs administrator in Virginia Beach, although that’s not the story across the state. Localities in Northern Virginia such as Prince William County have seen major price drops. Statewide, average home prices fell 3.1 percent in 2007 to $327,700, according to the Virginia Association of Realtors, while median home prices went up 1.2 percent to $262,300, meaning one half of the homes sold for above this price and one half sold below. 

To encourage developers to sell homes at more affordable prices, Virginia Beach passed an ordinance in August. The range for pricing, from $173,326 to $259,988, includes homes affordable to those who make between 80 percent and 120 percent of the city’s $65,100 median income. 

That same month Spadea proposed what he considered a model development. Named Village Bend, it would have provided 106 single-family homes on about 30 acres along with 150 tenplexes. One of Franciscus’ most affordable designs, these buildings group 10 relatively small condominium units (average size is 1,400 square feet) behind an elegant
brick or stone façade, bumping up the total number of units per acre.

Since Virginia Beach’s statute provides a 30 percent density bonus for builders who discount 17 percent of a neighborhood’s homes for qualifying buyers, Spadea thought he was on solid ground.  In the end, though, the City Council rejected the bid because Village Bend’s proposed density exceeded what the city’s comprehensive plan envisioned for that part of Virginia Beach. Plus, neighbors of the site opposed the plan. 

“It broke my heart when it didn’t pass,” recalls Prescott. “It was an excellent project.” Densely packed with small homes and multifamily residences that would have sold in the mid-$200,000s, Village Bend was designed so the discounted, “affordable” homes blended in with the neighborhood’s other homes.

Programs try to help
A shortage of work-force housing is especially critical in the heavily populated corridors running from Northern Virginia south through Fredericksburg to Richmond and from Charlottesville east to Hampton Roads. In those regions, soaring costs for land and construction combined with a trend toward bigger houses pushed prices out of reach for
many workers whose jobs are important to the communities.

State and local programs and laws adopted since the 1990s recognize the problem and hold out various solutions. These include government subsidies for homebuyers. Under some programs, the local government holds a “silent” second mortgage on the discounted homes. In that way the official recorded value of the discounted homes is the same as its market-rate neighbors so real estate values don’t drop as a result of the discounted prices.

In Fairfax County, recent changes to its comprehensive plan require that high-rise developments devote 12 percent of their units to work-force housing. Some builders, depending on the size of their projects, are required to set aside discounted units in return for density bonuses. Others make cash proffers to the county’s work-force housing
program in lieu of building the affordable units. Another change added affordable-housing incentives for developments that aren’t high-rise. 

In March, County Chairman Gerald E. Connolly proposed another idea: using county funds (from an existing affordable housing program) to buy foreclosed properties that could then be sold to working families at below-market prices. 

Meanwhile, officials in Charlottesville successfully appealed to the state legislature this year to expand its work-force housing program so it could offer a density bonus to developers who contribute money to the city’s affordable housing fund. Previously, the city offered the bonus only to builders who volunteered to build discounted units. “It didn’t provide enough of an incentive,” says Mayor Dave Norris. “We’ve never had a single developer take advantage of it.”

Michael L. Toalson, executive vice president of the Home Builders Association of Virginia, says local governments could solve the affordable housing problem by allowing higher density in residential neighborhoods and reducing the fees and requirements. Then builders wouldn’t have to build big, expensive homes just to cover the cost of buying land and meeting local requirements. “If we could produce profitable [low-cost homes], we would construct them,” says Toalson.  “But what my builders tell me is we can’t.”

The 6,500-member home builders association backed legislation in this year’s General Assembly that would have created a system of impact fees to replace the builder-paid proffers required by some localities to fund a variety of public services including affordable housing.  But the assembly set aside the legislation for further study.

Spadea’s approach — offering neighborhoods that are just as attractive as those with more space — encourages localities to allow higher density. A second incentive offers local governments the second mortgage for the amount of the discount applied to the “affordable” homes. Virginia Beach incorporated that idea into its ordinance and planned to use the proceeds, gained when the first buyer sells the home, to sustain its affordable housing program.

Spadea estimates that his cost in discounting 17 percent of a development’s units would be 4 to 5 percent of the total cost.  He considers it money well spent if a project wins approval, produces homes for people of modest means and provides revenue for the local affordable housing program. “It’s a negotiation that takes place between everybody with a pot of gold for everybody.” 


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