Multifamily Housing Still Pays for Itself
Over the past few years, NAHB has developed models that can be used to show how multifamily development pays for itself. One such model estimates the financial benefits that multifamily development brings to local communities, including new jobs and tax revenues. (The results are summarized in the October issue of Multifamily Market Outlook.) A second NAHB model estimates the costs that multifamily development imposes on local governments for providing public services such as education, police and fire protection, and water and sewer systems. That model has just been updated as well. With the two updated models developers and builders can present a clear and reliable picture of the effect a proposed development will have on their metropolitan area.

First — A Recap of the Benefits

The October article showed that the one-year local economic benefits of building 100 apartments in a typical metropolitan area included

• $7.0 million in local income,
• $710,000 in taxes and other revenue for local governments, and
• 133 local jobs.

And, that the additional, annually-recurring local economic benefits of building the 100 apartments included

• $3.2 million in local income,
• $461,000 in taxes and other revenue for local governments, and
• 52 local jobs.

On the cost side, the updated model shows local governments what such a typical 100-unit apartment building will cost them in services. These costs can be compared to the tax and other local government revenue estimated in the first model. Such a comparison was last done in 2004.  Because this kind of information can be useful – even vital -- to developers and builders trying to get multifamily projects approved in the face of local opposition, it is important to update the analysis periodically. This article presents the latest cost update.

Costs in the Typical Case

NAHB’s approach to estimating local government costs is to assume that local jurisdictions supply residents of new multifamily housing units with the same services that they currently provide, on average, to residents in existing multifamily units. Information on the amounts that 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.

In order for NAHB to analyze a typical case, we considered average spending per multifamily unit as 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 on any other single item. In cases where local governments have an estimate of education costs per pupil, it may be worthwhile to point out some of the factors present in most parts of the country that tend to reduce education costs per multifamily housing unit. One is the number of children 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.   Education costs per multifamily unit are therefore 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, local governments invest in 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. 

Cost Compared to Revenue

As mentioned above, the cost and revenue estimates from the NAHB models can be combined to investigate the question of whether or not, from the perspective of local government, multifamily housing pays for itself.

The estimates show that in the first year 100 apartments are built in a typical metropolitan area, local governments in the area realize $940,000 in tax and other revenue (assuming the apartments become occupied throughout the year, and half of the ongoing benefit is realized during that year), $125,000 in current expenditures to provide public services, and $1.2 million in capital spending for new structures and equipment. 

The NAHB 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. We further assume that none of this demand for capital can be met through current excess capacity. These are conservative assumptions made to avoid understating interest costs, which are calculated assuming that investment is financed by borrowing at current municipal bond rates.

After the first year, the 100 multifamily units generate $461,000 in tax and other revenue for local governments and $251,000 in expenditures to continue providing services. 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 fourth year. After that, operating surpluses become available to finance other projects or reduce taxes. After 15 years, the apartments will generate a cumulative $7.4 million in revenue for local governments compared to only $4.9 million in costs (Figure 3).

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

More detail and technical explanations of the models are available on local impact section of NAHB’s Web site. 

Customized Studies

All of the results discussed above are based on a typical case 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. In particular, 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, the models can be customized to a particular local area.  The models can be used to analyze the impact of building at any reasonable scale, even a single project. 

However, the comprehensive nature of the analysis (especially the way it estimates ongoing annual impacts) requires a local economy large enough to include the places where construction workers live, the places where occupants of the new apartments work, and the places where both shop for local goods and services. Although the construction activity analyzed may be confined to an individual project, the impact will be spread over a larger local area.  In practice, the appropriate area will usually be a metropolitan area (defined by the U.S. Office of Management and Budget based on commuting patterns), a non-metropolitan county, or an entire state. Since the local impact model was initially developed, it has been successfully applied to over 350 metropolitan areas, non-metropolitan counties, and states across the country (the darker shaded areas in Figure 4).

Figure 4 

Areas Covered by NAHB Local Impact Studies

For additional information about the models, questions about applying them to a particular local area, and the current pricing schedule, visit the NAHB Web site or contact one of the following in NAHB’s Regulatory and Housing Policy Area:

• David Crowe, Senior Staff Vice President, 800-368-5242 x8383
• Paul Emrath, Assistant Staff Vice President, 800-368-5242 x8449
• Elliot Eisenberg, Senior Economist, 800-368-5242 x8398 [ return to top ]