32% of Multifamily Production Expenses Caused by Regulation

July 23, 2018 by Dennis R. Baranowski, Esq.

President Trump made removing burdensome regulations a cornerstone of his campaign. So far, his administration has been busy eliminating regulations on a variety of industries. However, regulation imposed by all levels of government on multifamily developments accounts for 32% of all development costs.

In some cases, the development costs can be as high as 42.6%, when you consider federal, state, county, and local expenses.

The increasingly rising costs of designing and building multifamily developments already hamper builders, but tack on excessive regulatory expenses, and developers begin to struggle to stay competitive.

Regulatory costs for apartment complexes and condo developments include fees levied through various stages of construction. About 75% of a builder’s regulatory costs are derived from building code changes that have occurred over the past ten years. Around 6 percent come from development requirements, such as sidewalks, easements, street construction, and landscaping, and 4.2% are incurred from startup non-refundable fees that are due upon beginning construction.

Regulatory burdens from all levels are tying the hands of builders and creating unaffordability challenges when developers look to acquire property for their next project. Some states and municipalities consider these property developments as a cash cow for their government coffers. They tack on fees at every stage of construction.

In California, the requirement to build more low-income housing is placing additional burdens on developers. Many times, to get a project approved a developer must agree to include a specific amount of affordable housing in their plan. Since most real estate developers do not want to add low-income housing into high-end developments, they are forced to build affordable housing projects on another parcel.

Although the developer does get to sell the low-income developments, many times it is at a net loss, which is absorbed as a regulatory expense of the primary development.

According to Doug Bibby, president of the NMHC, the current regulatory framework limits the amount of housing that can be built and makes those multifamily developments in process more expensive.

“At a time when states and localities are struggling to address housing affordability challenges, public and private stakeholders should work together to streamline regulations and take the steps necessary to expand housing in communities across the country,” he added.

While local municipalities are generally responsible for approving multifamily developments, federal and state agencies are now getting more involved, adding additional regulatory and compliance costs.

Louisiana homebuilder and chairman of the NAHB, Randy Noel, said that the homebuilding industry “is one of the most highly regulated industries, and the multifamily sector is particularly subject to these obligations.”

“Housing affordability is a huge issue throughout the county, and this new research only further illustrates how the layers of excessive regulation translate into higher rents and reduced affordability for consumers,” he continued.

Builders and developers are hoping that the present administration’s mission to undo years of bureaucratic regulatory burdens for banks, utility providers, and agricultural companies will soon extend to the homebuilding industry, which needs relief in order to continue to meet America’s demand for new, and more affordable housing.