Multifamily Development Basics
Multifamily development is a costly and complex endeavor. Developers must demonstrate that their project can be financially self-sustaining while offering a return on investment to both equity investors (individuals or entities providing upfront capital for ownership stakes) and lenders (banks or financial institutions providing loans with a set annual return). These projects often compete for funding against other housing developments and various investment opportunities.
The Terner Center of UC Berkeley provides a helpful policy memo and interactive guide on how developers look at potential projects. As the report notes:
- “Return requirements have increased and financial underwriting has tightened.” Since all developers must get loans and investments, rising interest rates and demands for higher returns from potential lenders make it more difficult to get a project built.
- A typical development project can cost anywhere between $450,000 – $600,000 per unit for an apartment. This would mean a new 100-home housing project could cost between $45 million and $65 million if there were no complications.
Redevelopment of Existing Housing
In addition to these challenges, demolishing a building to build new housing would face several hurdles.
- Lenders would look at the potential return against the cost of simply keeping the building in operation and implementing repairs.
- The cost of demolition will add to the cost of development as the builder will have to safely take down the older building, remove the materials, and prepare the site for the new building.
- Some nationwide estimates have the cost of a 100-unit building being torn down at roughly $2.25 million.
- This cost can be significantly higher if the building has toxic materials (such as asbestos) or the site is close to environmental resources like waterways.
- There are local barriers to tearing down a building:
- Several renter protection policies provide renters with rights and the ability to get payouts if they are displaced by construction, raising the cost of any redevelopment.
- These include the City’s Tenant Opportunity to Purchase Law (TOPL), as well as the County’s Tenant Displacement Law
- Many multifamily properties in the City also have deed restrictions which limit their use to affordable housing and are owned by non-profit housing providers .
- These policies and costs do not preclude a building from being torn down, but create strong incentives to instead choose to rehabilitate a building rather than tear it down.
- Several renter protection policies provide renters with rights and the ability to get payouts if they are displaced by construction, raising the cost of any redevelopment.
The Development Process
Any housing project would have to get permitted and approved through the appropriate County permitting process. A helpful guide on the process can be found on the City of Takoma Park Website.
New construction and substantial renovation typically require the development to provide:
- a payment of impact fees for roads and schools and
- the provision of public benefits
Large housing projects (Typically 10,000 square feet of building or more) would have to go through a public benefits process known as option method development.
- You can read more about this from the Montgomery County Planning Board.
- Public benefits vary based on the project but include the requirement to build/upgrade sidewalks, provide open space, public art, or other benefits based on the area plan.
- New development also must be built to the current building code standards, which include more stringent requirements for stormwater management and energy efficiency.
