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Modular Construction - Another Component for Solving the Affordable Housing Crisis

There is an affordable housing crisis in the United States - of that there is no doubt. The reasons for the crisis are well known: a lack of will at the national level to provide necessary funding; a growing labor shortage; and restrictive local zoning and the age-old problem of NIMBYism ("not in my backyard). Labor shortages in construction are leading to increased costs and extended timelines. While the price of goods has increased due to tariffs on China, Mexico, and Germany (which may be easing due to recent agreements), it is the lack of labor that is the primary driver of the price increases. Immigrants have traditionally made up a large percentage of the construction workforce, but current immigration policies at the federal level are putting a severe crimp in the number of available workers. Another factor - which is generally unacknowledged - is the opioid crisis, which is depleting the existing construction workforce. The government, at least in its current configuration, is not going to help with the labor crisis. As an industry, we are going to have to find ways to build with less labor. Modular construction is one solution - building in factories and assembling onsite.  This can substantially reduce construction time.  With modular construction, whole rooms, including kitchens and bathrooms, are built in offsite factories, loaded onto containers that are trucked to construction sites, and placed onto structures. Benefits to modular construction include: Reduced cost (15% or more);Reduced operational costs due to a reduction in defects that are common with "stick-built" housing;Increased energy efficiency due to a better fit of components;Easier higher-vertical density; andLess stress on the environment. A major reason for the cost effectiveness of modular building is the labor efficiencies that are built into the factory construction. A significant impediment to this type of construction are the localities. Nearly every major U.S. city has built-in restrictions - or even prohibitions - against manufactured housing.  This is the case even though manufactured housing is now virtually indistinguishable from stick-built housing. No matter how local governments couch their reasons for denying such housing, it is just another example of NIMBYism - just an effort to keep out certain "types" of people. What Makes Modular Construction so Efficient? Efficient production; andControl of an entire process through vertical integration. In addition to the built-in efficiencies, consumer perception of modular housing is changing, as are the viewpoints of many in the construction industry. One of the most inefficient workplaces in the world is a construction jobsite. In my days as a builder/developer, it was always frustrating to watch people standing around waiting for something to be completed, installed, or delivered. With pre-fab construction, an entire room, or even larger building elements are manufactured offsite, trucked in, and lifted into place by cranes - resulting in a 20-50% reduction in the construction timeline. The change is most dramatic in areas subject to weather delays. Manufactured Housing & Labor The construction industry is experiencing a clear shortage in skilled and semi-skilled labor. Fewer younger workers are coming into the construction trades to replace those who are aging out. Estimates of vacant trade positions nationwide range as high as 250,000. Factories are much easier to staff on a regular and predictable basis with full-time and long-term employees. The vagaries of weather and seasons don t play a role in the production process. End-users of modular buildings are becoming more comfortable with the product. Decades of experience with computer-aided design have made modular construction much more attractive and inviting, with bright colors, large windows and interesting shapes. This method works best for projects that are both repeatable and scalable, such as affordable housing, schools and hotels. Differences in materials used - lighter, stronger and often easier to produce - will also have an increasingly positive effect on costs and perception. It is becoming common for cement and concrete to be replaced by cross-laminated timber and modules with light steel frames that can simply be bolted into place on site. While this will lead to an increase in factory jobs, onsite positions will decrease. The traditional method of onsite construction will still be required for small, specialized and one-off projects, but offsite prefabrication will become a growing force in the construction industry. A recent example of how modular construction works well with affordable housing is Hope on Alvarado, a LIHTC project in Los Angeles. This is an 84-unit tax credit deal with tax-exempt bonds and is targeting the chronically homeless. It is a five-story building with a concrete podium and four stories of modular steel units on top. The modular units were manufactured in China, shipped to Long Beach, CA, trucked hour to the site and put in place by cranes. Components installed at the factory in China included electrical and plumbing, kitchen cabinets, energy star appliances, floor-to-ceiling windows, wall, ceiling, and floor finishes. On-site contractors hooked up electrical fixtures and plumbing and bolted the modular units to the existing platform. While pouring of the base was delayed due to weather, once it was in place, one floor per week was finished. The modules meet or exceed every applicable CA and U.S. code, are earthquake and hurricane safe, termites and mold proof, and have a GOLD green rating. A recent report by McKinsey & Company states that modular construction is poised for a great leap forward - with a 50% decrease in construction time and a 20% cost reduction. Origins of Modular Construction After World War II, in order to rebuild Europe, Britain, the Netherlands, and Germany began developing modular models. With the catastrophic loss of buildings and decimation of the male population of Europe, there was no choice but to push for efficiency over labor. Using only 10% of the labor force present before the war, they were able to build safe, affordable, and weather-proof shelter. That lesson should not be lost on the United States. Labor shortages and the opioid crisis have made traditional construction methods more expensive and less reliable. After years of hard physical labor many older workers have become addicted to opioids to the point that they are unable to work at all. One early effort in this area has been the use of shipping containers as housing. While these containers are fine for pop-up retail or emergency housing, once they are reinforced and the doors and windows are cut, they are as costly as traditional construction. Lack of Labor & the Aging of the Industry During the 2009-2010 recession, millions of people who worked in construction left the country and are now unable to return. This - along with an average construction worker age of 48 - is creating an existential threat to the construction industry s business model. Factory Proximity to Construction Sites is Critical For the modular housing model to work at maximum efficiency, factories should be no more than a day s drive (350 to 400 miles) from the site. Transportation costs are high and can quickly eat into potential cost savings. The process must be scalable in order to have a meaningful impact. Multifamily modular is also a more complex undertaking than single-family. Utility connections must be run through multiple floors and multiple units, which means more offsite work. Plumbing and electricity can be added at the factory but connections in the building and from the building to the street must be done onsite. Ultimately, developers of affordable housing need to give serious attention to modular housing. This type of development is not theoretical - it is here and will revolutionize how we develop affordable housing. Forward looking developers need to begin adapting to this new business model.

HUD Publishes 2020 OCAF Rent Adjustments

On November 22, 2019, the Department of Housing & Urban Development (HUD) published the Operating Cost Adjustment Factors (OCAF) for 2020. These factors apply to project-based assistance contracts issued under Section 8 of the Housing Act of 1937 (the "Section 8" program) and will be available to projects having an anniversary date on or after February 11, 2020. Contract rents are adjusted by applying the OCAF to the portion of the rent attributable to operating expenses exclusive of debt service. OCAFs are calculated as the sum of weighted component cost changes for wages, employee benefits, property taxes, insurance, supplies and equipment, fuel oil, electricity, natural gas, and water/sewer/trash using publicly available indices. Average expense proportions were calculated using three years of Audited Annual Financial Statements from projects covered by OCAFs. The nine cost component weights were calculated at the state level, which is the lowest level of geographical aggregation with enough projects to permit statistical analysis. This type of data was not available for the Western Pacific Territories, so the data for Hawaii was used as the best available indicator for these areas. The national average OCAF is 2.2%. The lowest increases are found in Missouri and Oklahoma, both with an OCAF of 1.8%. The highest OCAFs are in Hawaii and the Western Pacific Islands at 3.4% with Massachusetts and Rhode Island having the highest in the contiguous 48 states at 3.3%. The list for all the states was published in the November 22, 2019 Federal Register and owners subject to OCAF should obtain a copy of that document.

REAC Requirements for Emergency Call Systems

On October 11, 2019, the Department of Housing & Urban Development (HUD) issued Notice PIH 2019-25, which provides guidance on emergency call systems in public housing. The notice applies to all PHAs and localities that operate public housing. It should be noted that while the notice applies to public housing, the Uniform Physical Condition Standards (UPCS) of the notice apply to all HUD housing subject to REAC. PHAs are not required to install emergency call systems in any public housing property. However, systems may have to be installed as a reasonable accommodation. If a housing unit has call-for-aid pull cords, wireless electronic notification systems, or other similar emergency call systems, the systems must function as intended. All systems are subject to REAC protocols and must be tested during inspections. If the PHA has replaced an old call-for-aid system, any part of the old system that remains (e.g., the pull cord) will be tested and recorded as a deficiency if inoperable and does not function as intended. For this reason, when replacing an old call-for-aid system, all components of the old system must be completely removed. In order to be deemed operable, all the following conditions for an emergency call system must be met: The system must work as intended;The system sounds an alarm to summon help from the intended source, and/or actuates a signal, which may be visual, audible, or both; andThe system is available in each bathroom and each bedroom in dwelling units. All owners/agents with subject to REAC inspections should be familiar with this HUD Notice and the requirements relative to Emergency Call Systems.

2020 Census - What Apartment Managers Need to Know

2020 will be a U.S. Census year. Every household will be required to answer a census questionnaire. This includes renters, so landlords and property managers need to know the rules. Questionnaires should be mailed to individual households by April 1, 2020. If tenants do not respond to the questionnaires, they may receive a visit from a census worker. That probably will not happen until late spring or summer of 2020. Landlords and property managers in multifamily buildings have to allow access for census workers to buzz or knock on front doors of specific tenants who have not responded to the census mailing. The census worker may have to return a number of times to catch the person at home. They must be allowed repeated visits, but their requests for access have to be reasonable. If the census worker is unable to contact the tenant after repeated attempts, the landlord or property manager may be asked to provide demographic information about that unit. While there will be several parts to the 2020 census, only the 2020 Census and American Community Survey will be mandatory. You do not have to allow access for others. Obviously, the census process will bring out identity thieves and other criminals who will pretend to be census workers in order to gain access to your tenants. Here are some tips to help you confirm that a census worker is legitimate: Before you permit entry, request ID. Workers will be issued a government identification. The ID will have a photo, a U.S. Department of Commerce watermark, and an expiration date. You should cross check with government ID with a personal photo ID, such as a driver s license;You may call the National Processing Center at 1-800-923-8282. This is the only number that may be called to verify the identity of a census worker, so do not accept any other number from the worker;Ask them to tell you the specific name of the survey - cons don t always do their homework. It will be the 2020 Census or the American Community Survey;Request proof that they are carrying a confidentiality statement with them - they are required to read it to each person they interview;Make sure they have something with them to record data - most will have hand-held computers;They may carry a black bag with "U.S. Census Bureau" printed on it;Census workers will not request entry to a unit;Census workers will not request personal information or SSNs, but they may ask for general income data;Be suspicious of those who ask to "canvas" - knock on random doors, or need to meet with quite a few renters; andIf anyone demands immediate access without time to call to verify or otherwise threatens you - e.g., threatens to have you arrested - they are not legitimate. If a census worker cannot locate the tenant after multiple attempts, they are allowed to - and in fact are required to - contact the landlord or manager of the rental property to obtain the requested information about the tenant. Typically, providing personal information about a tenant to a third party is not something that you want to do since it could lead to a privacy lawsuit. However, providing a census enumerator with the answers to the questions from the census questionnaire regarding your tenants is an exception. The Department of Commerce has clearly stated that landlords and property managers will not be in violation of any privacy laws if they provide the requested information about their tenants to the census taker. In fact, if a landlord refuses to provide the census worker with the requested information about the tenants, the manager or landlord may be fined up to $500. The applicable law is Title 13 of the Code of Federal Regulations (CFR), Chapter 7, Subchapter II, Sections 221 and 223. The first question that the enumerator should ask is whether or not the apartment unit was occupied on April 1, 2020. If the unit was not occupied on April 1, 2020, there should be no further questions. Assuming the unit was occupied on April 1, 2020, you should provide the census worker with answers to as many of the census questions as possible. Two of the questions will ask about an individual s race, and the enumerators will be aware that you may not know this information. If you answer questions from a census worker regarding any of your tenants, you should let the tenant know about the conversation as soon as possible. I recommend filing this information away so that you will have access to it if approached by a census worker in 2020.

New Overtime Rule Issued by the Department of Labor

On September 24, 2019, the U.S. Department of Labor (DOL) announced a final rule to make 1.3 million American workers eligible for overtime pay under the Fair Labor Standards Act (FLSA). This is the first change in the overtime regulations in 15 years. The final rule updates the earnings thresholds necessary to exempt executive, administrative, or professional employees from the FLSA s minimum wage and overtime pay requirements and allows employers to count a portion of certain bonuses (and commissions) towards meeting the salary level. The new thresholds account for growth in employee earnings since the former thresholds were set in 2004. In the final rule, DOL is: Raising the "standard salary level" from the currently enforced level of $455 per week to $684 per week (equivalent to $35,568 per year for a full-year worker);Raising the total annual compensation level for "highly compensated employees (HCE)" from the currently enforced level of $100,000 to $107,432 per year;Allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level, in recognition of evolving pay practices; andRevising the special salary levels for workers in U.S. territories and in the motion picture industry. This final rule will be effective on January 1, 2020. These increases to the salary thresholds are long overdue in light of salary and wage growth since 2004. DOL estimates that 1.2 million additional workers will be entitled to minimum wage and overtime pay as a result of the increase to the standard salary level. The Department also estimates that an additional 101,800 workers will be entitled to overtime pay as of result of the increase to the HCE compensation level.

Rent Guarantors - An Alternative to Rejecting Applicants

Owners and managers of LIHTC properties are often faced with applicants who have less than desirable credit, income below the minimum required by the landlord, or no financial history. The common practice in the industry is to reject such applicants, thus limiting the available market for the units. Some owners will accept "gift" letters from parents or others as a way of ensuring that applicants have the income necessary to pay a property s rent, but this is a poor practice and almost never results in getting the rent paid if a resident falls behind. A better option is a "rent guarantor." A guarantor is someone who signs a legally binding agreement to pay the rent if a resident fails - for any reason - to make required rent payments. Most commonly, parents act as guarantors, assuming the parents are in a sound financial situation and agree to make the guarantee. A guarantor may also be an unrelated friend (this is very unusual), a work colleague, or a business. For example, a company seeking a highly skilled young worker may agree to serve as a guarantor for the worker s apartment. Government agencies also may serve as guarantors. Difference Between Co-Signer and Guarantor Co-signers generally sign a lease and have equal responsibility for payment of rent, while a guarantor is generally required to pay only when the lease-holder is unable to make the rental payment. A co-signer is at slightly higher risk than a guarantor since the landlord is allowed to immediately seek payment from a co-signer. The guarantor, on the other hand, is normally not responsible until the landlord exhausts legal methods for obtaining payment from the leaseholder. Nor does a guarantor have rights to access the apartment in the same manner that a co-signer does. This is why a co-signer is never recommended for a LIHTC apartment. State agencies may consider the co-signer to be a member of the household and require the counting of their income for eligibility purposes. Steps to Take When Considering Accepting a Guarantor From a landlord s perspective, it makes good business sense to examine a guarantor s finances. Consideration should be given to requiring the following documentation from a guarantor: Pay stubs: obtain two or more recent pay stubs. If pay stubs are not available (e.g., the guarantor is self-employed and does not receive a salary), obtain a copy of the most recent federal tax return.Two Bank Statements.Credit Check: This should always be done. When determining whether a guarantor can legitimately guarantee the rent, a minimum income for the guarantor should be required. Typically, a guarantor should be required to make at least 80 to 100 times the monthly rent. So, if your LIHTC rent is $1,100 per month, the guarantor should make at least $88,000 annually. Alternatives to the Guarantor Option There are guarantor services that operate in a number of areas of the country. These provide guarantees to landlords in return for a one-time upfront fee from the rental prospect. These guarantors will generally require that the applicant have good credit and an income of about 28 times the monthly rent (e.g., with a monthly rent of $1,100, the applicant will have to have a minimum income of $30,800 and good credit). However, from a practical standpoint, an applicant with these characteristics will probably qualify for tax credit rental without a guarantor so these services have limited utility for LIHTC owners and managers. Finally, guarantor agreements should be prepared by attorneys familiar with both state and local landlord/tenant laws. Such agreements must be carefully crafted both to serve the purpose of the guarantee (payment of rent) and to protect the interests of all parties. The use of a rent guarantor is superior to acceptance of "gift letters" or other techniques that are designed to qualify otherwise non-qualified applicants, but rarely result in actual payment of rent when a resident fails to make the required payment. When structured properly, a rent guarantor agreement can result in increased occupancy and provide housing for responsible applicants who may not otherwise qualify.

Novogradac Study Outlines Expected Income Increases

Novogradac & Company has released its study of expected increases in state median incomes for 2020 and 2021. Novogradac estimates that the U.S. median income will increase by just less than 4 percent in 2020 and 3.4 percent in 2021. This changes are important for affordable housing programs because they affect the income limits for resident eligibility and maximum rents for Low-Income Housing Tax Credit (LIHTC) properties. Increases in LIHTC and Section 8 income limits are limited to the greater of 5 percent or two times the change in the U.S. median income. Based on this, the cap for 2020 will be just under 8 percent and the cap for 2021 will be slightly less than 7 percent. The Novogradac analysis is based on the U.S. Census Bureau 2018 American Community Survey (ACS) data. This is the same data that HUD will use to determine the 2021 income limits for LIHTC and Section 8 properties, which will be released by HUD in the Spring of 2021. The Novogradac study also provides estimates of the change in state median incomes. There are five states that are estimated to have decreases in median income for 2020 (Alaska, Connecticut, Oklahoma, Vermont and West Virginia), but the income in each of these states is expected to go up in 2021. Three states are expected to have 2021 decreases in income (Montana, Rhode Island, and South Dakota). All other states are expected to have income increases in both 2020 and 2021. Since an understanding of potential income growth is important for project budgeting purposes, the Novogradac study may be useful to developers and managers of LIHTC properties. The Novogradac "Rent & Income Limit Estimator" is now available for purchase. Additional information on this tool may be found at the Novogradac website (www.novoco.com).

HUD Takes Aggressive Position Regarding Online Verification of Assistance Animals

On November 6, 2019, the Department of Housing & Urban Development asked the Federal Trade Commission (FTC) and Bureau of Consumer Protection to investigate websites that sell assistance animal documentation. These certifications - which are almost always bogus - have been the bane of housing managers for years, as applicants get past landlord pet rules by paying for an illegitimate verification of a disability and the need for an assistance animal. The letter from HUD, which was signed by HUD Secretary Ben Carson, provides a stinging rebuke to these websites and makes it clear that in most cases, HUD will not consider the verifications provided by such sites to be legitimate verifications of need. The letter states "the websites also may be selling assistance animal documentation to people who do not have disabilities substantially limiting a major life activity, enabling such people to claim that their pets are assistance animals in order to evade housing providers pet restrictions and pet fees. HUD shares these concerns." As the letter states, "under the FHA, assistance animals are not required to be registered or certified, nor, in HUD s opinion, does certification or registration provide any benefit to the consumer with a disability who needs an assistance animal." Perhaps the most telling statement in the letter is "Certifications, registrations, and other documentation purchased over the Internet through these websites are not necessary, may not contain reliable information, and, in HUD s FHA enforcement process, are insufficient to establish an individual s disability-related need for an assistance animal." (Emphasis added). This statement indicates that HUD does not consider such verifications to be legitimate, meaning that owners and managers generally do not have to rely on this type of verification for purposes of assistance animals. There are circumstances where a healthcare professional may provide services remotely, including over the Internet. But, as stated by HUD, this is only the case when "the provider has personal knowledge of the individual s disability-related need for the animal. Personal knowledge is knowledge of the type that health care providers ordinarily use for diagnosis and treatment." In HUD s opinion, the operators of these websites "lack the personal knowledge that is necessary to make such determinations." As described in the letter, most of these websites rely on online questionnaires, or, at best, a brief interview, prior to issuing the "certification." Finally, HUD stated that "These websites are also interfering with the rights of individuals with disabilities substantially limiting a major life activity under the FHA by selling documentation that people without disabilities can use to pass of their pets as assistance animals." While we cannot know whether the FTC will ultimately take action against these websites, this request from HUD alone will be a dagger to the heart of these shameless scams. It is also very good news for landlords who have been hesitant to reject these sham verifications for fear of being found in violation of fair housing law. The harsh language used by HUD - the federal fair housing enforcement agency - provides serious weight to the rights of landlords with regard to requiring verification of the need for assistance (especially emotional support) animals. It also goes a long way in protecting the rights of disabled individuals who actually need such animals.