How Multifamily Housing Pays for Itself
NAHB’s Local Economic Impact Model has been used in more than 280 areas around the country to assess the financial benefits that multifamily housing development brings to local communities, including new jobs and tax revenues. But before now, the model did not assess the fiscal cost burdens that such development lays on local governments, so it was difficult to answer the question of whether new multifamily housing pays for itself. NAHB economists recently completed development of a companion model to allow a comparison of the benefits and the costs.

Multifamily construction generates substantial economic benefits for the local area in which it takes place—including income, jobs, and revenue for local governments. It also imposes costs on local governments, since residents in the new apartments require basic services such as education, police and fire protection, and water and sewer systems.

The cost model’s general approach is to assume that local jurisdictions supply new multifamily housing units with the same services that they currently provide, on average, to existing multifamily units in the area. Those costs now can be compared to the revenue in order to answer the question of whether or not, from the perspective of local government, multifamily housing pays for itself.

The bottom line is that, in a typical or average market area, multifamily housing pays for itself within a few years as ongoing benefits accumulate faster than ongoing costs. Typical apartments generate more than enough revenue to pay for current government expenses in a given year. The surplus accumulates fast enough so that, even if local government undertakes all capital investment before any units are built, it can be used to pay off the debt entirely by the end of the fourth year.

Benefits in a Typical Metropolitan Area

To illustrate the typical case, the NAHB models are applied to a hypothetical area with the value of new apartments built, land values, local taxes, and local government spending per household set equal to national averages. The averages for taxes and local government spending are based on most of the roughly 88,000 local governments in the U.S.  

The one-year local economic benefits of building 100 multifamily units include:

• $5.3 million in local income
• $630,000 in taxes and other revenue for local governments
• 112 local jobs

These are one-year impacts that include both the direct and indirect impact of the construction activity itself, and the impact of local residents who earn money from the construction activity spending part of that money within the local economy.
 
The 100 new apartments also generate additional, annually-recurring local economic benefits including:

• $2.2 million in local income
• $384,000 in taxes and other revenue for local governments
• 47 local jobs

These are ongoing, annual benefits resulting from the new multifamily units becoming occupied, and the occupants paying taxes and otherwise participating in the local economy year after year.

More detail, including the characteristics of the multifamily units built (average value, property taxes, and construction-related fees) are available in the NAHB report, The Local Impact of Home Building in Average City, USA.

But What Does It Cost Local Government?

Information on the amounts jurisdictions spend on various functions is available from the Census of Governments, in which all state and local governments report their current expenses and revenues to the Governments Division of the U.S. Census Bureau. Average spending per multifamily unit is calculated based on most of the roughly 88,000 local governments in the U.S. (jurisdictions in a few anomalous counties where aggregate personal income is very low relative to total tax revenue were excluded). The results are shown in Figure 1.

Not surprisingly, local governments tend to spend more on education than any other single item. Even so, there are several factors present in most parts of the country that tend to reduce education costs per multifamily housing unit. A major one is simply the number of children present in the units. According to the American Housing Survey, there are only 37 school-aged children for every 100 households living in apartments in the U.S. (NAHB Multifamily Market Outlook, July 12, 2004). So education costs per multifamily unit are lower than costs per pupil simply because there is, on average, less than one half of a pupil in each multifamily household.

In addition to current expenses, providing services to residents requires that local governments undertake capital investment for items such as schools and other buildings, equipment, roads, and other structures. The size of these investments is estimated from a traditional economic model, where costs are a function of labor and capital. The results are shown in Figure 2. 

Comparing Costs to Revenues

To summarize the results, building 100 apartments results in the first year in an estimated $822,000 million in tax and other revenue for local governments (assuming the apartments become occupied throughout the year, and half of the ongoing benefit is realized during that year), $117,000 in current expenditures by local government to provide public services to the net new households at current levels, and $991,000 in capital investment for new structures and equipment undertaken by local governments. 

The analysis assumes that local governments invest in new structures and equipment at the start of the first year, before any apartments are built, and before any revenue from the construction activity (such as impact fees) is available. It further assumes that none of this demand for capital can be met through current excess capacity. These are generally conservative assumptions made to avoid understating interest costs, which are based on the assumption that local governments finance capital investment by borrowing at current municipal bond rates. 

In each year after the first, the 100 multifamily units result in $384,000 thousand in tax and other revenue for local governments and $233,000 in local government expenditures needed to continue providing services at current levels. The difference is an “operating surplus” that can be used to service or pay down the debt.

If the operating surplus is used first to service and then to pay down the debt, all debt incurred by investing in structures and equipment at the beginning of the first year can be entirely paid off by the end of the third year. After that point, future operating surpluses will be available to finance other projects or reduce taxes.  After 15 years, the apartments will generate a cumulative $6.2 million in revenue for local governments compared to only $4.5 million in costs, including annual current expenses, capital investment, and interest on debt (Figure 3).

More detail and a technical explanation of the cost model is available in these reports: The Local Impact of Home Building in Average City, USA: Comparing Costs to Revenue for Local Governments, and Comparing Costs to Revenue for Local Government: Technical Appendix on Estimating Capital Owned and Maintained by Local Governments.

Customizing the Model to a Specific Local Area

The  results discussed above were based on a hypothetical metropolitan area with local housing, income, and government financing inputs set equal to national averages. Results will vary from place to place, based on the values of those inputs. Local jurisdictions across the country vary greatly in terms of the services they provide, and how those services are financed.

If NAHB is provided with the necessary information on average values of housing units, land values, and construction-related fees, these models can be customized to a particular local area. The models can be used to analyze the impact of building on any reasonable scale, even a single project. However, the comprehensive nature of the NAHB models means that costs and benefits must be spread over a local area large enough to include the places where construction workers live and spend their money, as well as the places where the new home occupants are likely to work, shop, and seek entertainment. In practice, that generally corresponds to a metropolitan area as defined by the U.S. Office of Management and Budget, or a non-metropolitan county.

The models can handle any combination of single family and multifamily construction. Reports customized to particular areas often analyze a mix of housing types, as that is what most places require to accommodate residents of different income levels, different occupations, and at different stages in their lives and careers. The resulting integrated character of most residential development typically requires a combination of both types of construction.

For additional information about the models, questions about applying them to a particular local area, and the current pricing schedule, contact one of the following staff members in NAHB’s Housing Policy Department:

• David Crowe, Senior Staff Vice President, 800-368-5242 x8383
• Paul Emrath, Assistant Staff Vice President, 800-368-5242 x8449
• Elliot Eisenberg, Housing Policy Economist, 800-368-5242 x8398