Don Tishman's Real Estate Development and Investing Solutions

Thank you for the many comments I received about the Affordable Housing post. I was suprised and very pleased.

To continue, imagine if Congress passed a law prescribing the same daily dress for everyone in this country.

This law would define everyone’s exact same clothes regardless of their ages, genders, climate conditions and occupations.  This program would be administered by employees of the government who had little or no training or experience in the clothing industry. These government employees would be  given a handbook containing the new law and the regulations that implement the law. Their job is to carry out these regulations. Further more, the manufacturers of this clothing would have to pay their employees 25% more than was standard in the clothing industry. Naturally, this additional cost is to be passed on to the purchasers of this clothing. 

I will leave it to your imagination to picture the turmoil that would ensue. First the the clothing designers, then the fabric designers and manufacturers, then the clothing companies, the retail stores, fashion magazines, and finally the furious, outraged ladies of America would raise loud and strident objections. There would be two  chances of this bill passing Congress: none and never.

Can not happen here? This is exactly what happened in 1936 when Public Housing was proposed. There were no voices raised on behalf of the unemployed and homeless except for the advocates of housing for the many American families that could not afford any available housing. The Republicans in Congress were outraged at these advocates attempt to pamper and overindulge these shiftless, unproductive households. The objectors ignored that this shiftless, unproductive group represented more than 30% of our population. The advocates were scared by these tactics.  Thus the criteria established for this much needed housing became the most minimal housing possible. The result was these folks in desperate need of housing for their family were considered just above being criminals.     

The maximum size of each room was fixed for every Public Housing housing apartment in the U.S. Heretofore room sizes set minimums never maximums. There was  no cost limitations except Congress allocated a fixed sum for the total to be spent on all Public Housing developments. Today as was true during the Great Depression, apartment maintenance have a secure long term job, working inside. On the other hand construction workers are seasonal employees who as a result are paid much higher wages then building maintenance workers. Nevertheless, not only was it ordered that all construction was to be done by union members, it was further  mandated that maintenance workers in public housing had to be paid the same wages as construction workers. Public Housing pays higher wages to maintenance staffs then anybody else in the U.S. Imagine what this did to the operating cost of Public Housing! Worse yet, the tragedy is that most of these construction unions barred African-Americans from joining their unions. So African-Americans were denied employment in both the building and maintenance of their homes. Suddenly, Depression era architect, hungry for any business, saw some  light at the end of the tunnel, public housing! Architects compensation for these housing developments was based on a % of the construction cost. This was very basic,simple housing dictated by Washington generated regulations. So all the architect had to do, was read the regs and design one apartment that was repeated over and over again. As a result where you were in America, all public housing looked the same. 

When I first was appointed to our local Housing Authority, public housing was still segregated by race in many areas. During this period, many local housing authorities ran their developments like the residents had committed a crime 

Obviously, this was a solution that created much needed housing for many American families. Later affordable public housing for the elderly became politically correct. Why? This was viewed as housing for white,middle class elderly. While family housing was viewed as African-American housing. At HUD public housing offices, these became code words: elderly public housing meant white, family housing meant black.

There still are millions of American families spending at least 50% of their income for housing. The maximum % for housing allowed by home loan lenders is 30%. A higher % is seen as unmanageable. Rent control is not the answer. We must offer the developers of affordable housing a chance to make a reasonable profit.  Then American ingenuity will then produce affordable housing.  
We must learn from the errors of the past. First, being poor is not a crime.  This housing must be designed for local conditions. We can not have Washington bureaucrats setting national specifications for housing. We now have uniform building code standards throughout the U.S.-the International Building Codes. Many of the jurisdictions using these codes have added  code changes based on local conditions.

We must eliminate the giant bureaucracy at HUD, FNMA, etc. They are merely substitutes for a welfare program. Today HUD and FNMA are major multi-family lenders. FNMA and Freddy Mac own about 50% of all U.S. home mortgages. The Constitution’s draftsmen never contemplate our Federal government assuming much of the U.S. real estate estate risk. This present system is great for lenders that make the loans, get a fee and then transfer all the risk to our Treasury.  We need a system that will allow lenders to make a loan with a reasonable profit while assuming the real estate risk. The lenders’ shareholders are demanding higher earnings. American ingenuity will make this work. The lenders will innovate a risk sharing arrangement in place of the Treasury. 

No more segregation for the low income. Heaping social problems on other social problems exponentially increases these social problems. 

We need better education for all American children. We must have both parents accept the responsibility of their family.

In Chicago, the Christian Brothers have opened and operated San Miguel Schools in the inner city for at risk students. Despite these schools being located where the crime rate is particularly high, the results are mind boggling. A similar result has been produced by the Christian Brothers and others in many other cities throughout this country.  Most of these young people entering the 6th grade had a 2nd grade reading ability. By the time they graduate from 8th grade they have a 10th grade reading ability.   Many of their neighbors with the same reading difficulties dropout of school and become serious community problems. Many of these inner city kids are now attending college.

More in our next installment

Some years ago, I was Chairman of a large Public Housing Authority. Then it  seems obvious that although Public Housing provides shelter for low income folks, these developments concentrated  many resident many social problems. This was not then and today a healthy environment for these families. In many cities, drug dealers have taken over the control of Public Housing communities. Although the local governments have agreed in an agreement with the Federal government to provide police protection for these communities, in many communities this is not done because of the tremendous cost for bringing these chaotic environment under control.  

The Public Housing legislation was passed in the 1930′s when there was almost 33% unemployment.  The Congress assumed that these families were middle class households who would be housed for a short time. Reality is many families in Public Housing have lived there for many generations. This has never been temporary, stop gap housing.

Although the need for low cost housing is a pressing need for the Public Housing residents, these families have many equally pressing needs that are ignored.  These families need to live in a safe environment where the residents do not live in fear for their family’s lives. Their children must realize the importance of getting a good education and work hard to attain this education. Fathers of these children must assume their responsibilities. 

When I was Chairman of the Housing Authority, the local welfare officials had offices in the various communities. These officials acted as if the the residents were law breakers and watched their very move. One of my acts was to order the welfare officials out of these low income communities.  I have found that when you treat folks as if they are bad news, they will not disappoint you.  Alternatively, we put women residents in charge of security. The results were awesome.  

Much has been said of Pruitt-Igoe project in St.Louis. The designers of this development were two world class architects: George Hellmuth and Minoru Yamasaki. The buildings were the ultimate in modern architecture. There were over 10,000 residents in 35 acres, or about 286 persons per acre. The residents were from rural areas, many of whose former homes had no plumbing. Initially Pruitt-Igoe worked. Then a fight on the Housing Authority between a Teamster leader and the then Director caused a chaotic situation.  The tenants were encouraged to stop paying their rent. Finally, the St. Louis Housing Authority did not have sufficient funds for basic maintenance. Anarchy resulted and the buildings became unlivable. Finally the buildings were blown up. When these building were designed, the restrictions demanded a slum site. The RESTRICTED development budget demanded very high density, remember the users of these apartments were rural families who had lived in one floor shacks.  It is long been a fundamental in real estate developments that the projects are designed for the users.  One design and specifications for every users of public housing by  Washington bureaucrats and Congress is a certain recipe for disaster. The results speak for themselves. 

For several years I taught a course about the fundamentals of real estate to senior executives of HUD.  Each time I was flabbergasted by their ignorance of the most basic fundamentals. These executives were making real estate decisions for the nation with no knowledge of the basics.  No wonder public housing and HUD housing is such a calamity.  The same can be said of FNMA which has many former HUD officials calling the shots. The Obama Administration can save the nation from more excruciating financial calamities and millions of dollars by by getting rid of this bureaucracy responsible for these fiascos. 

To add insult to injury, these officials hold the low income community in contempt. We need to solve these urgent social problems with a package that covers the whole picture. Every American deserves a chance to share in the Great American Dream. 

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Pieter Coetzee sent in this very good question. I hope this will help him.

The current cap rates for income producing real estate are calculated and kept by several groups who need these to operate their businesses. The first in commercial real etate firms. Many of these brokers specialize  in specific type income properties. It may be only  shopping centers, or apartments, or office buildings, or a combination thereof. The national commercial brokers, typified by Grubb and Ellis, have a wealth of cap rate records. The next group are commercial real estate lenders. They keep these records generally from appraisals they require. Next is commercial real estate appraisers, probably M.A.I.’s. In some areas such a NYC, there are commercial real estate periodicals that sometime list these.  The local chapter of NAIOP is a great place for you to meet many of these “keepers of cap rates”.

THE QUESTION MOST ASK IS WHEN WILL THIS  RESIDENTIAL MALAISE BE OVER? 

Residential real estate in each market is different. Why?  One of the factors that most effects these local markets is employment. If employment is increasing, we assume that many of the new employees will be folks that move into this market, thus increasing the local demand for housing. If the employment is static, there will be little change in the housing market demand. On the other hand if there is a loss of jobs in the local market, many will move to find employment, thus adding units to the housing market. This can depress the housing market.

If the local housing market is a strong market for second home buyers, local employment will not be as strong factor in housing demand. These type buyers are depending on excess disposable income to purchase housing with.  In times like we now face of recession scares, these second home buyers probably will be very reluctant to commit for a long term purchases until they feel that  the economic bad news is over. 

Another factor that has a very strong effect on all markets is the credit conditions of the local lenders. Now lenders throughout the U.S. have so tightened their conditions for home loan that it is very difficult for a buyer with good credit to obtain a satisfactory loan. This is causing great problems to sellers of both residential and commercial real estate. 

This is the great bottleneck in real estate sales today. Until loans to purchase real estate are available without these very difficult requirements, real estate sales will not improve.