Posts Tagged With: Housing

You Can Build a Skyscraper Anywhere in Davis Right Now

Update: Everything in this article about Davis is also currently true in the following cities:

  • Redondo Beach
  • Beverly Hills
  • Manhattan Beach
  • South Pasadena
  • Santa Monica
  • Anaheim
  • Oxnard

To get a full list, visit the HCD website, click "Compliance Report," and filter for "Compliance Status" => "OUT". I would also guess that San Francisco will make it onto this list, but not until much later in the year.

Right now it's legal to build a skyscraper anywhere in Davis, California (a college town outside of Sacramento). Unlimited height, anywhere in city limits, as long as you promise to dedicate 20% of the apartments to people with lower incomes. Well, it's legal in theory, no one has ever tested it. But you could be the one to test it! And hopefully make a boatload of money along the way, and help prevent more sprawl into wildfire zones.

Every eight years, every city in California gets an "allocation" from the state government for very low, low, moderate, and above income housing. Each city then needs to show it has a good plan - typically, a zoning map with some spare capacity - to meet the goals in the allocation. Generally this involves identifying sites in the city - places like empty lots, parking lots, abandoned buildings - and rezoning them for additional density.

Davis, California

There's lots of "cheating" - cities pretending that a site will turn into housing when there's no chance it will turn into housing. However, the state has in recent years A) cracked down on cheating by adding stricter requirements and B) set much larger allocations for each city, especially wealthier cities. So a lot of cities that have historically not welcomed housing are struggling this time around.

Davis (population 65,000, plus about 10,000 college students at UC Davis) is one of those cities - it is the wealthiest city in the area, and has for decades had a 1% cap on growth. This was not enough to meet its aggressive new goal of 2075 new homes. Davis submitted a plan to the state's Department of Housing and Community Development (HCD) for how it would meet the goal, but HCD said the plan was inadequate - it didn't do enough to advance "fair housing" (ie. it dumped all of the new housing in the lowest income parts of town), and HCD disagreed that the plan included enough sites to meet the allocation goal.

Because of this, Davis has what's called a "noncompliant housing element." This subjects them to a different state law that says, while your housing element is noncompliant, you can't legally reject an application for housing that offers 20% of the apartments for low incomes. That's any application, anywhere in the city. This isn't some loophole, this was the explicit intent of the (30 year old) law at the time it was written, and both supporters and opponents understood it.

So it's legal right now to buy any lot in Davis and submit a proposal to build a skyscraper on it.1 You would need to meet Davis's other rules - for example, if Davis has rules about parking or fire egress or whatever, you would have to abide by those. But any rules Davis had about density on a site would not apply. Crucially, Davis can't change the rules after your application. As long as you submit it now, while their housing element is noncompliant, they have to be bound by the rules on the books now.

The problem is that big buildings are expensive and the law has never been tested. If you built it you'd be looking at a legal fight for about 4-5 years. I think you would have a good chance of winning - the California courts have in recent years swatted down local NIMBYism at Vallco Mall, in San Mateo and in Los Altos. But you would still have to go through the process.

Why hasn't someone tested it? Because most developers are playing a repeated game with cities, housing applications have historically relied on a lot of goodwill to get through the planning process, and they haven't wanted to upset the apple cart for one big and uncertain return. So there is room for a brash outsider who doesn't care what people or planning staff in Davis think about them.

Here are some notes from Chris Elmendorf, a law professor at UC Davis, about the legal hurdles you'd likely face.

I know a lot of venture capitalists who hate California NIMBYism, care about climate change, and don't care much what opponents of progress think about them. This is a huge opportunity to do something really big, really valuable for the community and make a lot of money along the way. Also I would guess the return from this project is uncorrelated with the rest of your portfolio so would probably be a good source of alpha. I can put you in touch with talented technical people.

If you are interested in helping but don't have a lifechanging amount of money, a number of groups are auditing the Bay Area's "housing elements" this year (the deadlines are staggered, so the Bay Area cities come later) so cities aren't cheating their numbers.2 If you'd like to help, or to get involved, please donate to, or sign up with, East Bay for Everyone.

1 It's also legal in Redondo Beach in Southern California, and possibly additional cities in the Bay Area, soon.

2 Given how important this process is to getting cities to rezone for additional housing, you would hope that there were lots of professional organizations dedicating lots of staff time to analyzing Housing Elements and ensure compliance with the law. In reality there are a lot of volunteers who are spending their spare time writing letters and hoping for the best. One of the key Housing Element volunteers in Los Angeles County is a radiologist.

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John Elberling is Probably Cheating On His Taxes

Allen Weisselberg, the chief financial officer of the Trump Organization, recently got indicted by the New York DA for fifteen counts of tax fraud. The charges say they said he didn't report benefits as taxes.

If your company pays you a $100,000 per year cash salary, you will owe a chunk of that to the government. What if your company gives you a physical thing, like an apartment or a car? Well, you don't just get to skip taxes because you got part of your compensation in objects. Otherwise you could arrange for your company to pay you directly in groceries, apartments, flights, etc. and dodge taxes altogether.

Anyway, Weisselberg was getting the Trump Organization to buy him cars and private school tuition for his kids but he wasn't paying taxes on any of that in-kind compensation, which is why he's now facing criminal charges.

What if I told you that a well known figure in San Francisco housing policy has been doing the same thing as Weisselberg, for 20 years?

Part of the Moscone Convention Center construction project included the development of several affordable housing buildings. The organization that manages these buildings is the Tenants and Owners Development Corporation or TODCO. John Elberling has been the president of TODCO for at least the last 20 years. In addition to about $150,000 per year in cash compensation, TODCO's tax forms indicate that he has gotten about $10,000 each year in "other reportable compensation."

Elberling's reportable compensation

What is that? Well, a supplemental attachment has this explanation: "The organization provides a terrace room located at the Mendelsohn House Apartments for the President's personal use as required for his 'on call' responsibilities."

Why does Elberling have a top floor room reserved for himself in a low-income apartment building in SOMA? It's hard to answer that. He's not the property manager — TODCO pays another company to manage all of their properties. He's not the only high-ranking employee in the organization - they are not developing any new apartment buildings1, and they have a CEO and several other staff members.

Here's a more interesting question. How does a "terrace room" - an 8th floor apartment in SOMA - only count as $10,000 per year in compensation? When I moved to SF in 2011, I paid $800 a month to sleep in a closet about a foot wider than a twin mattress - with a tiny window. Elberling was paying the same price for a full apartment on the 8th floor in a hot neighborhood. This is the greatest deal in the history of SOMA real estate.

My guess is that TODCO is charging Elberling the same price as they would charge their tenants, who earn incomes below the San Francisco median income. Elberling's income is not low by any definition, though. He's made over $140,000 per year in cash compensation every year since 2002, per the same 990 forms. Further, San Francisco does not let you apply for a deed-restricted apartment if you own another home. Elberling does own another home, in Sebastopol.

The IRS says you have to value non-cash compensation at the market price. In other words, if TOCDO were to rent that apartment to a random person off Craigslist, how much could they get for it? On Craigslist right now a 1 bedroom apartment around the corner that has a city view is renting for $3725. It may not be apples to apples but this would put the non-cash compensation around $44,000 per year, far higher than the $10,248 per year Elberling is claiming.

Some employer-provided lodging is exempt from tax. For example, many firefighters live at the fire station, because they are on call at all hours of the day and night. They don't need to pay taxes on the market rate value of their lodging. The IRS has a test to determine whether lodging should be included in income. Elberling's apartment does not meet the conditions of the test: since he is not a property manager, he could do his job just as well living in a room at the Marriott. Furthermore, if it was exempt from tax, TODCO should be valuing the compensation at $0, not $10,000. The fact they are putting $10k for the room on his W2 indicates they think it is a benefit.

Now it is possible that Elberling is getting a W2 from his employer that indicates his top floor room is worth $10k a year, and then declaring and paying the correct market rate on his own taxes. It's possible but seems very unlikely. TODCO has no reason to not include the market rate number; it doesn't cost them anything.

How much has Elberling been underreporting his taxes? We can estimate this by using the historical housing data collected by Erica Fischer. A one bedroom SOMA apartment rented for about $1500 a month in 2002, and rents for about $3700 today. Using a straight line average this indicates Elberling has failed to declare about $450,000 worth of income on his taxes, going back 20 years.

What can you do about it? The IRS is super underfunded right now, and does not investigate many cases of tax evasion, which benefits many rich, unscrupulous people. Still, they may take an interest if enough people report the same issue. You might also put pressure on the City of San Francisco to refuse to renew any contracts it has with this organization. Maybe if Elberling were forced to pay the full freight of taxes on his pied-a-terre, he would be more likely to move out and TODCO could offer the room to a low-income senior resident instead. That would be worth doing.

Several TODCO board members did not respond to requests for comment. The tax firm that prepared TODCO's 990 forms did also not respond to requests for comment.

1. The first question of TODCO's FAQ says that TODCO "develops housing." TODCO has not developed any new housing in over 20 years and has no plans in the works to develop more. The FAQ answer includes a link to "learn more" about their plans to develop housing that goes to a 404 page.

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Housing by the numbers

There's a pretty famous software engineering slide called "Latency Numbers Every Programmer Should Know." I thought I would write an equivalent for housing construction, since a lot of these statistics can be hard to estimate. The goal is to make it easy to do a ballpark estimate of the impacts of a particular proposal. For example, Emeryville has a $50 million affordable housing bond on the ballot, and California has a $4 billion housing bond. How many housing units would each allow to be built?

  • Housing units California must build every year to meet population/household growth: 180,000, according to the California Department of Housing and Community Development. California currently has 13 million homes; spread evenly, each city would need to grow their housing stock by about 1.4% per year.

  • Housing units California has built over the past decade: About 64,000 per year.

Chart of housing
production per year

  • Cost to build a single housing unit: This depends on a few things:

    • cost to buy the underlying land

    • how much you pay construction workers. Labor groups push for "prevailing wage," a living wage established by the state government. The prevailing wage in Los Angeles is around $43 per hour, while the median wage is around $25. If projects don't pay prevailing wage, unions will sometimes file lawsuits alleging that projects violate CEQA - an environmental quality law. The lawsuit will then be dropped if the project agrees to pay prevailing wage.

    • environmental regulations in new construction, anything from gray water / solar requirements to CEQA.

    • the amount of time it takes to get through the application process, and the amount of local opposition. In San Francisco it is not unusual for an application to take 10 years from end to end.

At the low end, you might be able to build an apartment building for $250,000 per unit. At the high end (San Francisco) it might be $600,000 or $700,000 per unit.

  • Square feet per unit: A studio might be as low as 300 square feet. A two or three bedroom apartment might be 1200 square feet. A single family home might be 2000 square feet. A mansion might be 5000 square feet.

  • Square feet per employee, for office space: Anywhere from 120 to 200 square feet per person. This disparity means you can build office space for more workers on the same lot than you can build space for people to live.

    For example, if you hear that Brisbane wants to add 2,200 housing units and 4 million square feet of office space, you can assume at the high end that 4 million square feet is 33,000 commuters, and at the low end that it's 20,000 commuters.

  • Construction cost per square foot: In the Bay Area, $400 per square foot. Modular housing may be able to reduce these costs, by building housing offsite in more friendly environments, then shipping fully constructed units to the site.

  • Cost for the State of California to build 180,000 units per year by itself: At $250,000 per unit, $45 billion; at $400,000 per unit, $72 billion. The state budget is $190 billion this year. AB 71 would have raised $300 million for housing by repealing the state mortgage interest deduction on second homes. This measure would have raised about 0.4% of the required yearly amount, but failed to get a vote in the Legislature last fall.

  • Parking required per housing unit: Anywhere from 0 to 2 spaces required per unit. In some parts of San Francisco you are not required to build parking spaces at all. Belmont, where I live, recently revised its parking requirement per unit down from 2 spaces per unit to 0.5 per studio, 1 per 1 bedroom, 1.5 per unit above that.

  • Cost to build a parking space: Above ground, about $22,000 to $27,000 per space.

  • Cost to build an underground parking space: About $60,000 per space.

  • Cost to get a mortgage: Anywhere from 20-30% of the purchase price for a down payment, and then a loan for the remaining amount with an interest rate between 4% and 7%, depending on your credit score.

  • Cost of the median home: $1.5 million in San Francisco, $1.3 million in San Mateo County. Starter homes/condos are at least $700k-800k.

  • Property taxes: About one percent of the purchase price of the home; if you pay $1 million for a home, you pay $10,000 per year in property taxes. Thanks to Prop 13, your property tax can increase by a maximum of 2% per year. (Home values have increased by much more than 2% per year.) This leads to absurd situations like side-by-side homes, one of which is paying $2000 per year in property taxes and one of which is paying $13,000 per year in taxes.

  • Rate of return for a multifamily apartment developer: Anywhere from 5% to 10% to be able to qualify for a loan from a bank to build the structure. Of course, in downturns like 2008, developers might lose all of their money. The historical rate of return for the Dow Jones Industrial Average is 7.75%.

Thanks to Scott Feeney for reviewing a draft of this post. What other statistics are you curious about? Send me an email:

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