How To Build 7000+ Affordable Housing Units In 6 Strategic Steps

The Housing Problem

It all started in November 1990 in Bogota, Colombia at the National Savings Fund (FNA). The FNA is very similar to the US-based National Equity Fund, but instead of equity, the FNA provided individual mortgage loans to his clients at a lower (not subsidized) market-based interest rate.

Two years earlier, the FNA issued requests for proposals (RFP) regarding the construction of 7000+ units. At the same time, the FNA pre-approved and qualified more than 5000 potential homebuyers in Bogota. For developers, this was always a very attractive deal because it secured buyers for their for-sale stock of homes. Unfortunately, two problems arose. First, the RFPs came back with submissions for a maximum of 1000 units, much less stock than requested. Second, the proposed locations did not match demand. Simply put, no one wanted to purchase homes built on the outskirts of the city, where land was cheaper. 

For the first time in FNA’s 30 year history, the Board of Directors rejected all of the affordable housing projects submitted. This sent a powerful message to the market. Families were interested in living closer to jobs, saving money and valuable transportation time. By questioning the location and quality of the affordable housing proposals, the FNA was protecting the quality of its loan portfolio as well as the financial health of its middle and low-income clients.

The Strategy: Step One

The board instructed FNA’s President and Vice Presidents to come up with a STRATEGY to build more affordable housing closer to infrastructure and job opportunities. A fast-tracked market analysis concluded that the cost of land was a major obstacle to the production of affordable housing. That being the case, the first step taken was to assemble a sizable amount of land (and take advantage of economies of scale, mass production, and replicability), in a prime location - close to job opportunities and infrastructure at a price that will not exceed ten percent of the construction cost of the project. 

One month later the FNA secured 104 acres, next to the City’s Bus Rapid Transit system (BRT) located between downtown Bogota and the airport. For the first time, the Government gave Tax Credit benefits to the land sellers. Once purchased, this land was transferred to a trust with the sole purpose of building affordable housing. This froze the price of land, suppressed speculation, avoided capital gain taxes and secured the project’s future affordability.

The Strategy: Step Two

As soon as the land was shielded, the FNA started negotiations with national and local authorities to define the project’s scope and site requirements. Step two was, by and large, the most cumbersome and frustrating. Several times the FNA was ready to pull the plug. To deal with bureaucracy anywhere you need patience, perseverance, and prudence. On January 31, 1991, after almost twelve months of painful negotiations and several feasibility studies, the Planning Department finally issued an ordinance describing minimum urban preconditions, densities, and building requirements.

The Strategy: Step Three

Step three was the most exciting and rewarding. The FNA issued RFPs to Design, Build, Finance and Transfer more than seven thousand units in the newly acquired land in Bogota. The best architects, students, developers, construction companies, and Community Development Organizations teamed together and submitted sixty-four proposals. For the first time in the country, there was a national discussion on how to do urban regeneration and build quality affordable housing. To choose the winner(s), FNA clients and the community around the site were asked to vote. At the end of the process, four groups were selected. This created a unique but diverse project.

The Strategy: Step Four

The fourth step involved securing construction finance. Each group had to figure out how to pay for the pre-development and construction cost. As a reminder, the land was not part of the construction cost. Having sold all the projects in advance to the FNA’s clients, developers had no trouble getting finance.

Before I continue with the next step, it is important to explain Colombia’s version of the Community Reinvestment Act (CRA). By law, financial institutions are obliged to provide not only financial services to underserved communities but also to finance 80 percent of the construction cost of affordable housing in underserved areas. Affordability is defined as 80, 60, or 40 percent or less of the Area’s Median Home Value (AMHV). This allows projects to be built in areas where people want to stay and live and avoid displacements and costly disruptions to the market. Projects are usually mixed-use, mixed-income, high density vis-a-vis low rise developments, with flexible parking requirements and a combination of unit sizes (number of rooms) and finishing along with sharing high-quality community facilities. Last year Colombia produced 80,000 units using this version or a variation of the CRA.

The Strategy: Step Five

Step five revolves around the demand side of the equation. A key element of the success of any affordable project is to organize the demand. This means reducing the time between the completed construction of the house and the time occupants move in and start paying their loans. Presales reduce the cost of finance, marketing, commissions, inspectors and closing. Many home buyers had savings at the FNA or other financial institutions. Getting purchase loans was not complicated.

The FNA used two very creative tools to help increase sales. The first tool used was to build a park. A salesroom and an exact model of the average unit was constructed next to the park. After one hour of playing in the park, it was the children who closed the deal with a loud “Mommy! Daddy! I want to live here”,  

The second tool used was data and technology. The FNA worked diligently to create an algorithm matching time needed to put together a 30 percent downpayment and the time needed to start building and finishing the newly acquired housing unit. This whole concept was developed taking the best practices and lessons learned from the automobile industry. No new unit is started unless you have fully paid your down payment.

The Strategy: Step Six

In order to synchronize supply and demand, new construction technology was needed. Step six was about acquiring the right technology to increase quality, productivity and affordability. During the evaluation process, each proposal was given additional points if technology increased productivity (outputs), allowed scalability, reduced waste, used local materials, and the units were inexpensive to maintain and upgrade. In the early 1990s, construction was more labor-intensive and low productivity activity. Today the industry is better and more sophisticated with off-site technologies. This should increase the chances of producing more, better, and cost-effective affordable housing.

Lack of affordable housing is a problem. It takes knowledge, experience, and creativity to produce the number of houses we need to address the crisis we currently face. If you reach this far you understand that every single step taken made some savings. This allowed houses to be sold between 30 to 40 percent below market value. Also, more than two hundred units were set aside for rent. The math worked the same. As more rental units were available, rent values stabilized and ultimately decreased.

The Need to Act Now

There is no doubt that America is facing a housing affordability crisis. Just in Chicago, more than 120,000 Chicagoans are currently cost-burdened. Chicagoans “spend more than 30% of their income on their rent or mortgage,” says Juan Sebastian Arias, manager at the Metropolitan Planning Council. Juan feels Chicago needs a comprehensive approach [plan] that “produces new affordable homes in all wards and neighborhoods, preserves existing affordable housing stocks, and protects vulnerable tenants and homeowners from displacement”.

Much of the current housing that has been produced is largely out of the price range that many working families can afford. This is due, in part, because of overly costly regulatory burdens that make building affordable housing economically infeasible in most areas. “For too long those in a position to deal with these problems have ignored this gathering storm by relying on outdated programs and not challenging antiquated views,” says David Schwartz, CEO chairman & co-founder of Waterton and chair of the National Multifamily Housing Council (NMHC).

There is no single solution or magic plan. What is needed are creative solutions, bold ideas, proactive strategies, and an “all-hands-on-deck approach” while working hand-in-hand with lawmakers at all levels and with the private sector. Flexible planning systems, appropriate taxation and financial regulation, creative design, innovative construction technology, and better land management can result in more production and turn housing into a force for social and economic stability. Anything short of this is an “abdication of the public’s trust and our responsibility as industry leaders” concludes Mr. Schwartz.