Everyone knows there is a housing shortage in Bloomington-Normal — 7,500 units at last estimate. But not everyone agrees on what to do about it.
Twin City leaders hold different views on whether or how government should be involved in breaking the logjam of factors that has slowed the pace of new construction.
High construction costs, higher interest rates, workforce shortages, bank wobbliness and desire to reduce risk of bad loans are among the factors slowing construction. You might argue, so what? Developers just need to pony up a little more cash at the start to satisfy banks.
Except it’s not just a little cash. The economics of new development are in question as well. It's not simple. Say you are trying to build a project and are seeking a yield of 7%. On a hypothetical $1 million project, that would be a cash flow of $70,000 a year.
"Not a ton of money. And when your debt is costing 8% and you are building to a 7% return on an asset, you are losing money. And then when you lever it, my debt is costing eight and I'm averaging at a seven, and three quarters of my capital stack is at eight, how do I average out to a seven? My equity return is like 1-2%," said developer Drew Mitchell of Holladay Properties.
Mitchell asked, who will invest in a real estate deal with 1-3% percent return when a CD will offer a 5-6% return right now?
"So, this is why the wheels are falling off the bus and why you are not seeing a lot of development. Yeah, you can put down more money. It's kind of you lose a little bit on one and make it up on volume. It doesn't work," said Mitchell.
More upfront money doesn't solve the problem that currently makes real estate construction a tough lift, he said. The default setting for the government sector has been that if there is demand for housing, the marketplace will take care of it.
But the marketplace isn't.
Government's role
So, what can government do to make it easier for developers to take a leap on a project? We'll get to possible incentives in a bit. First, non-monetary things.
The Twin City community has known there's a housing shortage for a couple years, Municipalities have welcomed specific projects, yet government hasn't been active in a systemic way. Normal Town Council member Kathleen Lorenz can be a swing vote on some proposals. She said it takes a while for the community to shift paradigms.
"This is a community that really hasn't seen significant residential building in probably 10 years. And so, we fire it back up thinking it's 10 years ago and it's a completely different landscape," said Lorenz.
The kind of housing people want is changing, she added — it's not just two-story, 3-4 bedroom "Bloomington beige" homes anymore.
"A priority area I seem to hear over and over from lots of different sources is 'workforce housing.' What does that mean? That means entry level or near entry level," said Lorenz.
In the rental market, she said developers are tackling high-end and luxury that are beginning to come online. But workforce housing is not as popular because the profit margin is low per house. Lorenz said there is a missing middle and a real shortage of low-income rentals.
"I think it's getting down more to that $1,000, maybe even $1,200, maybe even just under $1,000, right? This is a person who's got a steady income. They've got a job. They just want some nice options to choose from," said Lorenz.
Missing middle also is a term-of-art among Realtors and developers that encompasses duplexes, tri-plexes, even eight-plexes. Lorenz said opinions still vary whether the marketplace will go for that, on top of the financial factors slowing the response.
"I'd love for developers to come forward with new ideas and stretch our, maybe even our ordinances," said Lorenz.
Developer incentives
In fact, the McLean County Regional Planning Commission is looking at that issue right now. Commission Director Ray Lai said ordinances can make it easier for developers.
"The main thing is to be more flexible and open, to allow different types of housing ... a maybe a little higher density in certain districts that are designated single family. And also, maybe a more flexible minimum lot size so there can be compact single-family homes. There can be more on a single piece of land," said Lai.
Other items to consider include allowing smaller lot sizes or even accessory dwellings near an existing house. That study will likely kick off a conversation among elected leaders.
Tom Crumpler is a frequent swing vote on the Bloomington City Council. He said that dialogue needs to be communitywide.
"We cannot just say, 'Oh well! We'll just go on with business as usual!' I think we need to find developers in this community to really think about helping us solve this problem," said Crumpler.
It could be a spring and summer conversation this year, according to Bloomington City Manager Tim Gleason.
"When we talk about affordable housing, infill opportunities, we will be considering everything and are looking at everything to be considered by this council," said Gleason.
Normal Mayor Chris Koos said it needs to be deliberate and happen in a broader context of what the community thinks it should look like in the future. That could push the planning horizon further out, and Koos said perhaps from a direction you would not expect.
"It'll probably come out of our futuring update that's starting now around sustainability. We're updating our sustainability plan, and that plan is not what most people consider sustainability — environmental, energy, climate change. All that is there, but so is housing," said Koos.
Gleason agreed it's an involved conversation across a lot of interests .and requires a longer process.
"We really have to know what we are talking about, see the successes in other communities, maybe even some of the failures that didn't work there but could work here. This is something that has to be well vetted and thought-out, many people involved in the conversation before I lay it before the council to consider," said Gleason.
Gleason, Lorenz, and Crumpler all said they're not sure the community is late in having the conversation — it just takes time.
Once you start facilitating development with looser ordinances you may have a perception that people of varying income levels will be living near or next to each other. Existing neighbors can get hinky about it real fast. The community saw that with the Carden Springs project in Normal and is seeing it again with the proposal for the Essex complex at Beech and Shelbourne in Normal. The idea of a couple hundred apartments plunked down in the middle of amber waves of single-family homes got so much push back, the developer pulled the proposal.
"So as we re-awake and start seeing dirt being moved and you hear the word apartments, that just seems like...we've never done that in Bloomington-Normal. I've lived here for 30 years. Why are you doing that?' People understandably get concerned and it's different. That's why we have to have dialogue," said Lorenz.
She said the community has held systemic and systematic conversations before on an issue, and the result was the community-wide mental health action plan. She said that model can succeed again.
The financial calculus
Okay, now let's talk about money.
Even after local governments make it easier to place new apartments in existing areas, the financial calculus might not. The theory goes, to really make larger multi-family developments plentiful in Bloomington-Normal...WHERE the city and town WANT development, municipalities have to put their finger on the scale and make it worth it for developers — while at the same time require financial transparency, so they know profit margins are healthy but not obscene.
Gleason said there's a whole menu of incentive options available.
"You get as creative as you possibly can," he said.
Municipalities could absorb some of the costs developers traditionally pay. Lorenz said she hears from developers who say when they go to banks for loans, they get discouraging messages about paying for water and sewer lines construction and new streets.
"They're saying we can support you and finance you on your vertical structures, but not on the horizontal. So, the banks in their need to be risk averse or to be wary, are not a inclined to finance the stuff that you don't see," she said.
Three banks declined to provide interviews to WGLT on the subject.
Depending on what the incentives are, Crumpler of the Bloomington council is on board with city backing.
"I could support, given with the right fiscal plan, the city investing in green space or also partnering to bring sewers and other utilities as part of that setup," said Crumpler.
What if that's not enough?
"Some communities will even go as far as being the bank for infill type of improvements," said Gleason. "A lot of times you will also see where the communities will be the guarantor to a local bank where you set up some sort of program not dissimilar to a first-time buyer."
In some communities, property tax volatility is a risk. Big rate changes happen from year to year. That's not necessarily the case in Bloomington-Normal where property tax rate increases are generally minimal and governmental bodies tend to get increased revenue from the rise in property values.
But Holladay Properties developer Drew Mitchell said municipalities can share property taxes with a developer over time to soften the impact of a tax bill.
"One of the ways that they provide an inducement is to actually buy down the interest rate to help the developer and utilize future proceeds from say real estate taxes, or a Tax Increment Financing District (TIF). Those could then be used at the front end of the project to negotiate a fixed lower rate on a project," said Mitchell.
Another way to reduce the risk of investment, Mitchell said, happened in Portage, Indiana where his firm built two speculative industrial spaces in 2008-09. They got a financial partner, a life insurance company, that took what's called a "put option" of $13 million plus a 5% markup. Mitchell said if things had gone sideways, the insurance company would have owned an asset at replacement cost.
"I could see Bloomington or Normal say...'Hey we need cold storage here.' What if the community or the airport authority or somebody buys a cold storage asset and they're basically getting it at cost where a developer is motivated to create additional value beyond cost by identifying a user and bringing that use into the building and having them start paying rent," said Mitchell.
Incentives
Bloomington, Normal, and McLean County have created a standard package of incentives for business development. Crumpler said such a model for residential construction could be a conversation starter for developers and worth part of the broader housing discussion.
"I do think we need a template so that if someone wants to come in everyone starts with a level playing field. And if their plan can really benefit the city, there can be a negotiation for other incentives. That, to me, is the most equitable way to go," said Crumpler.
Some leaders think a standardized incentive package might not work well for residential development.
Mayor Koos of Normal said every residential project is different and municipal goals may be different in different locations: infill in one spot, affordable housing in another, big multi-family in a third spot, or a traditional non-suburban neighborhood with small lot sizes instead of a sprawling suburban lot. He said town leaders have to consider the site and the time a project comes forward, not just apply a cookie cutter package.
"What's your goal? What issue are you trying to solve? Does that incentive benefit the community in the long term, or is it just a short-term benefit, an opportunistic benefit for a developer," said Koos.
In fact, Koos is not convinced incentives for residential construction will make a difference at all.
"We're a little reluctant to do that given the fact there is huge demand right now for housing. So, I don't think the fact that we're not incentivizing it is what's causing it to not be built," said Koos.
In fact, he said the community has talked about incentives on a couple residential projects and the funding gap was just too steep for the town to back.
Mitchell of Holladay Properties said, though, housing is economic development — just like a new business.
In many communities, there is a stigma associated with offering incentives for rental construction. The theory is those people are not buyers, and are not necessarily invested in the community. Mitchell said that's not so. He said they're really all the same people just at different stages of life. And if they live elsewhere, they will spend elsewhere and continue living elsewhere when they are ready to buy.
Mitchell said where communities do not realize the value of having a range of housing and try to stimulate what they want, over time they end up with lower quality housing across the board.
"And actually, this creates a negative feedback loop because it allows your existing housing stock and rental housing stock to decline because you are not really seeing new product which then forces existing stock to keep sharp," said Mitchell.
There also are studies that show building market rate housing stimulates the amount of affordable housing in the community as people play musical apartments and move up in quality as they can afford to do so.
Mitchell said when new housing does come, it almost always stimulates consumption of goods and services. One example he said is in downtown Westmont, Illinois. He said Westmont was missing out on new transit-oriented residential development going on along suburban train lines to Chicago. He said they created a TIF and housing was eligible for tax support. There was a huge spin-off effect in the business sector.
"They had something like 30 commercial vacancies in their downtown and they are down to like five," said Mitchell.
An argument against incentives, though, runs this way: that intervention may not be necessary because interest rates are coming down and with long lead times on construction, the marketplace may in fact take care of the issue. Mitchell said there is some truth to that. Interest rates may come down.
But communities that are deliberate are the ones that are getting housing and the ones that do not target it are not. Itasca, for instance, resisted incentives for years and got nothing, he said, until city leaders saw the light. And there is a way to finesse the issue with conditional incentives.
“You could have a but-for argument inside of your incentive," said Koos. "At project launch and at certificate of occupancy, let's reassess. If interest rates have come down the need for inducement is lower. Let's actually provide for that in our redevelopment agreement."
In some cases, a catalytic project doesn't launch because of uncertainty about assessed value hikes, he said. To mitigate that, risk redevelopment agreements can structure the abatement to give back more if the tax assessments are higher than anticipated.
Elected leaders said the biggest gulp and hesitant pause among all the potential incentives for residential projects is using Tax Increment Financing District [TIF] money for such projects.
"Ooooh. You had me until that one," said Lorenz of the Normal council in response to a list of possible incentive tools. "I'd have to know more about that TIF one. We've had a lot of success with TIF, but it is also one of the more controversial ones."
Developer Mitchell said Bloomington-Normal leadership has a history of being forward looking, but it may be they just haven't used TIF that way before. Mitchell said sometimes a lack of precedent is the precedent.
"I think it should be contemplated. In the community, what's our need. Is it housing? is it attracting businesses? TIF is intended to be a hyper-targeted way to invest dollars that are generated in the future in whatever the community need is," he said.
Gleason said the school districts, Unit 5 and District 87, must be part of any discussion.
"They definitely have to be at the table and a conversation would have to occur before we would ever talk about that publicly because there are very real impacts to the school districts," he said.
That said, Gleason said there are ways to share revenue and to make schools whole so they don't miss out on growth in property value, even as more students come in, generated by the new development.
The regional planning commission 'Regional Housing Recovery Plan' will be done sometime in March. As the community conversation proceeds, really only one thing is certain. It's complicated.
