Affordability implies financial complexity
[Continuing a discussion begun in yesterday’s suspenseful post!]
Watson found himself fascinated by the capital stack diagram:
“It seems complicated,” he said finally.
“It is complicated,” agreed Holmes. “More so than even is suggested by the simple diagram. Recall that each type of money will come from a different capital source. Each capital source will have its own eligibility criteria, award rules, application protocols and forms (unless they are farsighted and cooperative enough to create a single one-stop application form).”
Everything in triplicate!
“A mountain of paper.”
“Not merely paper. Each capital source must be financially and administratively compatible with the others. If there are multiple affordability rules, the owner must comply with them all. The same for eligibility, rent caps, affordability covenants, and so on.”
The only viable properties are those inside the small central area.
Indeed, Holmes concluded, in terms of conforming each financing source to the others, it is less a stack than a fully integrated network, every element in contact with every other.
All these sources of capital relate to each other.
More sources and more boundaries also increase the property’s soft costs: processing times (meaning carrying costs), transaction costs, application fees, and professional service fees. All of these things mean that, compared with conventional housing:
Affordable housing has higher percentage soft costs
Some of this, concluded Holmes, is the byproduct of government regulation; more of it is simply the cost of using complex financing, which in turn is the essential consequence of affordability.
Watson was skeptical.
“Can it not be simplified?”
“I believe not.”
“Doesn’t that make affordable housing finance inefficient?”
“Efficiency is quite a three-pipe problem.”
“Efficiency.” He drew the word out slowly. “A most complex subject, doubtless worthy of a future monogram. Tell me, Watson, about which do you wish to be efficient? The use of capital? The long-term property value? Targeting of the affordability? Transference of risk to the private sector? Compliance with program rules? Enforcement? You know, the absolute most efficient charity is to hand ten dollar bills on the street — but is that the most effective?
You never know to whom you’re actually giving money.
