The High Cost of Nonprofit Housing

The plan to spend $13 million in public funds to renovate an 84-unit SRO already in better condition than most city-leased SRO’s would be shocking if it were not typical of the grossly inflated costs of San Francisco’s nonprofit housing. In recent years, $23 million was spent to acquire and renovate a 140 room SRO on Sixth Street and $14 million to renovate a 200 room SRO on Turk that had previously undergone two multimillion dollar rehabs.

The going rate for nonprofit SRO’s has become $200,000 a unit, and this is for renovations, not newly constructed units. Meanwhile, market-rate developers are building new one-bedroom condos for less than our nonprofits are spending renovating 120 sq ft rooms without kitchens.

How is this possible?

Let’s start with the biggest misconception: that nonprofits pay higher labor costs. The truth is that most large (20 plus units) condo projects in San Francisco are built with either union labor or at prevailing wages. Labor costs are not responsible for the private/nonprofit discrepancy.

Nor is the difference attributable to significantly higher nonprofit acquisition costs. While nonprofits lack the ready cash to swoop in on particularly good deals, the savings to private developers on purchases rarely exceeds $1 million.

The time-consuming nonprofit bidding process does raise the cost of development, but not by much. Private developers also bid jobs, and while they are not bound by the complex regulatory scheme governing nonprofit projects, this distinction does not account for the massive price difference between the two types of projects.

With labor, site acquisition, and regulatory costs not that different, why do private developers build so much cheaper? The two big reasons are that nonprofits often lack incentive to restrict costs, and engage in projects that would make no economic sense in the private development world.

Consider the spending of $13 million to renovate 84 hotel rooms.

The hotel in question has marketed itself to tourists for years, and has long been well-maintained. The quality of its living conditions equals if not exceeds that of most hotels currently leased by the city.

A private purchaser of the hotel might spend money on cosmetic upgrades, but would see no reason to do a major gut rehab of the hotel. But San Francisco is greenlighting this massive renovation, and will spend as much renovating hotel rooms as a private developer would spend building an equivalent number of new studio apartments.

Coincidentally, a private owner has recently completed an entire gut rehab of an 86 room SRO, a project that included the building of an additional floor of occupancy, full interior and exterior painting, and the installation of a new elevator when none previously existed. While this job did not pay prevailing wage, it was completed at less than 20% of the cost of the amount budgeted for the renovated 84 unit nonprofit hotel.

The only apparent reason for spending millions on unnecessary renovations to SRO’s is its consistency with past practices. A succession of Mayors has allowed nonprofits to spend as many millions as they want on each project, so there is no incentive for cost containment or for foregoing the gutting and “upgrading” of perfectly good housing.

It’s hard to imagine how the nonprofit can even figure out how to spend $13 million renovating an 84-unit hotel. Perhaps Beyond Chron should have a contest on who can best come up with ways to spend such a sum.

With money no object, nonprofit groups spend lavishly on “soft costs.” This includes project administration, architectural and engineering fees, and similar expenses, all of which are much, much higher in the nonprofit sector.

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