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Putting the Private Sector to Work in Providing Housing For The Poor
by Richard L. Cravatts, Ph.D.
23 February 2003

A close look at the Baltic (named after the Monopoly game's low cost property), a model of how government can help ease, rather than constrict, affordable housing creation by helping the private sector do the right thing.

Can the private sector be motivated to help build housing for the nation’s poor? If government and non-profit housing organizations help modify regulations working against the creation of such housing, the answer may be yes.

Boston-based non-profits, for instance - including the Pine Street Inn, Caritas Communities Inc., and the South Middlesex Opportunity Council - have recently demonstrated that the creation of SROs (single-room occupancy units) provides a much needed and valuable product for individuals who otherwise might end up in the ranks of the homeless. The problem is not the scarcity of potential renters; instead, the long waiting lists of individuals eager to rent these low-cost accommodations points to the need for new solutions to creating this form of affordable housing—a task that is clearly beyond the capacity of non-profits working on their own.

Single-room occupancy units are one of the last forms of affordable living space available to the inner-city poor and transient. Unfortunately, their benefits were long unrecognized by social scientists and urban planners, who saw them as dangerous and degrading to tenants, undesirable to neighborhoods, and generally unwelcome in urban renewal plans. They were hastened out of existence nationwide by both federal and state policy beginning in the 1950s. Between 1974 and 1983 alone, some 896,000 housing units renting for less than $200 a month, many in SROs, were lost to demolition or conversion into coops.

Moreover, tightening fire and building codes had made the prospect of building new SROs impractical and unprofitable, particularly given the stringent requirements for minimum living-space square footage, parking, and cooking and toilet facilities commonly included in local zoning and health bylaws.

One innovative solution to the problem of creating SROs was found in San Diego in 1984, and it may serve as a model of how “entrepreneurial” government can work in partnership with the private sector to create a vital type of affordable housing. Hesitant to extend a moratorium on a small number of existing—but decaying and unsafe—SRO units, and squeezed by development pressures to change the face of older neighborhoods where SRO housing was located, San Diego policy makers were persuaded to let a private developer provide a model by which new SROs could be built. That project came to be known as the Baltic, an SRO named after the cheapest property on the Monopoly game board.

In a thorough and engaging case study written at Harvard’s Kennedy School of Government, Andrew Jack and David Kennedy described the Baltic as “a four story, 207-room building with a density equivalent to more than 700 units an acre. The rooms were only 120 square feet each, but each contained, in addition to a bed and storage space, a microwave, a large sink with a garbage disposal, and a toilet (partitioned but not closed off from the rest of the room). Communal showers were on each hall.”

Most significant, though, was the final per-room cost: “Construction costs—including land—were consequently very low, only $14,868 per unit.” Even the Baltic’s below-market rents in the $200 to $285 range would therefore be sufficient to cover costs and allow the developer a profit.

The developer, Chris Mortenson, was happy to pay for the property himself, except for two concessions he eventually received from the city. One was a relaxation in the way the existing building codes would be interpreted and enforced. Tiny rooms with adjacent open toilets and partial kitchens might have been acceptable to SRO tenants, but they were expressly forbidden by existing California codes—as they are in Massachusetts. Only after much negotiation did the developer and the city come to terms with that problem: They designated and made legal a new type of dwelling unit—a “living unit”—which was something in between a hotel-sized room without a kitchen and a larger, residential-sized room with separate kitchen and toilet facilities.

The only direct subsidy from the city was a low-interest second mortgage given to help complete the project’s permanent financing. In return for that participation, 20% of the Baltic’s units were set aside for poorer tenants at reduced rent levels—capped for the life of the loan.

The Baltic model illustrates how government can help ease, rather than constrict, affordable housing creation by helping the private sector do the right thing. A key factor in that equation is flexibility in interpreting zoning and building requirements. That means, for instance, that existing regulations defining acceptable density—the number of units on a certain sized parcel of land—should be modified, given high land costs for the developer and the critical need of housing units for the very poor who otherwise might be homeless. City parking requirements that mandate that minimum numbers of parking spaces be provided for newly-constructed residential buildings can also be re-evaluated, particularly since such rules drive up land acquisition costs, reduce the total quantity of residential units, and might be inappropriate for a target group of residents least likely to own automobiles.

The Baltic model is favorable to one in which the housing market is regulated and an owner’s right to use, renovate, or build a property is legally restricted. And the important lesson of the entrepreneurial marketplace has historically been that investors will more readily enter the market when government regulations enhance—rather than diminish—the prospect of profitability.

Email Richard L. Cravatts

Richard L. Cravatts, Ph.D., writes frequently about real estate development, housing creation, and other public policy issues. He has been published in the New York Times, the Wall Street Journal, and the Boston Globe.