Should homeless housing cost half a million dollars a unit?

Photo by Saul Gonzalez

At a construction site near the 101 Freeway in East Hollywood, the talk about building housing for LA’s homeless has turned into action.

It’s here that PATH Ventures, a nonprofit development company, is building the first homeless housing project funded with Measure HHH funds. When built, it will feature 122 housing units, plus supportive services, like a mental health care clinic and job-training.

“HHH allowed us to move forward with the project that we did,” said Amy Anderson, the executive director of PATH Ventures.

The $1.2 billion raised by the HHH bond measure is supposed to create 10,000 units of homeless housing in 10 years, or a thousand units a year. That would be a big step forward in housing the homeless in Los Angeles, a city where there are 31,000 people who are homeless according to the most recent homeless count conducted by the Los Angeles Homeless Services Authority.

The PATH Ventures supportive housing project under construction in East Hollywood. Called PATH Metro Villas II,  it’s the first HHH project to break ground and should be finished by the end of 2019. (Photo: Saul Gonzalez)

But even as construction begins, there are big and growing concerns about the speed and mushrooming costs of housing projects funded through HHH, problems that could threaten the ambitious housing goals of the program.

LA voters approved HHH in November of 2016, but so far only three of 29 planned projects have funds to begin construction. There’s the Path Ventures project in East Hollywood, one in downtown Los Angeles and another in South LA.

And the first project of the three to break ground, the Path Ventures building, won’t open until the end of 2019. That’s three years after Measure HHH was approved.

At a recent citizens oversight meeting at City Hall about the progress of HHH, some residents and housing activists, like Patricia McAllister blasted the program’s progress in public testimony.

“I think we need an investigation into this HHH,” said McCallister. “I want to know where the money is going. What are you doing? You are not building the housing”

Rushmore Cervantes is the general matter of L.A.’s Housing and Community Investment Department. It oversees the development of supportive housing using HHH funds.

He says he understands people’s frustration with a lack of fast progress, but asks for patience given the scale of the homeless crisis and the number of projects that need to get built.

“We didn’t get here overnight, and we’re not going to get out of this overnight,” said Cervantes.

He cites complex construction codes, permitting and the hassles of finding and buying land in Los Angeles for slowing the speed of construction.

Rushmore Cervantes is the General Manager of the Los Angeles Housing and Community Investment Department. His agency is in charge of funneling HHH funds to supportive housing projects. (Photo: Saul Gonzalez)

But an even bigger challenge is the notorious complexity of financing homeless and low income housing, even with the billion dollar plus pot of HHH money available.

You can be looking at three years, maybe four years, maybe five years to put your financing together for an affordable housing or supportive housing development,” said Amy Anderson of PATH Ventures. 

Although you might think HHH housing projects are fully funded by the bond measure, they are not. HHH only accounts for a fraction of the total development money mix, with the bond measure funds being used to attract an assortment of other investors.

For instance, the PATH Ventures project in East Hollywood will cost $53 million to build, but only $3.5 million of the total amount come from HHH funds.

There are a total of eight funding sources, and almost half the project’s financing comes from private investors seeking low income housing tax credits. Tax credits have been an indispensable part of the low income housing development mix since Congress passed the Tax Reform Act of 1986.

“I mean if we could just do this with two funding sources that would be great because we’d be able to get things built,” said Anderson. “We wouldn’t have to run around and secure multiple funding sources.”

As homeless housing developers and the city of Los Angeles put together financing from multiple investors, the costs of HHH projects are soaring.

When voters passed the bond measure, they were told new permanent supportive housing would cost about $140,000 a unit. But average per unit costs are now more than triple that.

The PATH Ventures project in East Hollywood has an estimated per-unit cost of $440,000. Even with real estate prices soaring, that’s as much as a single-family home in many places in Southern California. Other HHH projects cost more than $500,000 a unit.

I understand the inability to get one’s head wrapped around those numbers,” said Rushmore Cervantes. “It’s mind-boggling.”

He blames many factors for the escalating costs: the price of construction materials, compliance with environmental standards, and rules that require developers to pay top-dollar for union labor on most projects.

And in the region in the midst of a a building boom, contractors can demand a lot for their services, or work elsewhere.

“We are in some ways a victim to the health of this economy by virtue of the large amount of construction that’s going on in the region,” said Cervantes.

KCRW asked Richard Green, director of USC’s Lusk School of Real Estate to review the cost breakdowns of the first HHH projects under construction.

Green said, given the market, so called “hard costs” made sense. These are things like materials and labor costs. But hard costs are only part of the cost of construction.

What was really striking to me was how expensive what are called ‘soft costs’ are,” said Green. 

Soft costs often involve finance and legal fees associated with housing projects. In the first three approved HHH projects, soft costs account for 29 percent of the total.

Green says the complexity of financing low income housing likely drives the costs up.

“It makes it more expensive, said Green.” I mean in an existential sense, does it make sense? No. Is this how it’s actually done? Yes.”

But others say even if that’s the way it’s done, there are far more affordable and faster ways to get the homeless housed in Los Angeles.

In downtown LA, a century-old King Edward Hotel has been converted into low-income and homeless housing by the AIDS Healthcare Foundation, which is becoming increasingly involved in local housing development.

It says its per-unit cost is one $70,000 a unit, a fraction of HHH projects.

Michael Weinstein of the AIDS Healthcare Foundation at the grand opening of a supportive housing project in the King Edward Hotel. The chart behind Weinstein details the per-unit cost of this project versus HHH projects being developed. (Photo: Saul Gonzalez)

Michael Weinstein, the director of the AIDS Healthcare Foundation, says the city hasn’t been creative enough when it comes to thinking about how to create affordable housing for the homeless. He especially likes the idea of renovating existing buildings to get housing projects open faster and at a lower cost.

“I mean there’s a lack of a sense of urgency, that’s really the core of the problem,” said Weinstein. “If we really regarded this as an urgent problem, we would come up with creative solutions as if we were in an earthquake or another natural disaster.”

In response to such criticism, the city says its working on other housing options, like covering motels to long-term housing or converting shipping containers into dwellings.

If LA doesn’t find a way to control costs, there will be real world consequences. New estimates that the $1.2 billion in HHH funds could produce just 6,000 units of housing, 40 percent fewer than the city’s 10,000 unit goal.