Regulation: Over 30 Percent of the Cost of a Multifamily Development

Regulation imposed by all levels of government (whether local, state or federal) accounts for 32.1 percent of the cost of an average multifamily development, according to a new study conducted jointly by the National Association of Home Builders (NAHB) and the National Multifamily Housing Council (NMHC).  The study is based primarily on a survey of multifamily developers from both organizations.

The results show that well over 90 percent of multifamily developers typically incur hard costs of fees paid to local governments, both when applying for zoning approval, and again when local jurisdictions authorize the construction of buildings.  But the study also shows that government regulation often imposes costs in other ways as well.

Among the regulations covered by the NAHB-NMHC analysis, the cost was highest for changes to building codes over the past 10 years, accounting for 7.0 percent of the cost of developing the property on average. No one would argue against standards for basic soundness and safety of structures, but building codes have been in place for decades, and have expanded well beyond this.  There is now a separate code devoted to energy conservation, for example, and NAHB has criticized particular changes to this code for limiting flexibility and driving up costs without improving energy efficiency (sometimes to the benefit of specific product manufacturers).

Many local governments require new development to conform to community design standards (for example, streets, sidewalks, parking, height of buildings, landscaping, and architectural design). These standards impose added costs if they require more than a multifamily developer would normally provide.  These beyond-ordinary development requirements were the second most costly type of regulation, accounting for 5.9 percent of development costs, on average.  The chart below shows the average costs for the various types of regulation covered in the NAHB-NMHC study.

In the chart, the “other” category includes Interest on refundable fees charged when site work begins, the value of land that the developer must dedicate to the government or otherwise leave unbuilt, the cost of so-called affordability mandates imposed without any incentives to offset the cost, and a “pure” cost of delay (i.e., how much the delay would cost even if regulation imposed no other type of cost)

As mentioned above, on average these costs sum to 32.1 percent of the cost of developing a new multifamily property. One-fourth of the time they reach as high as 42.6 percent.  For more detail on each type of regulation, as well as a complete description of the NAHB-NMHC survey and methodology used to estimate the costs, please consult the full NAHB-NMHC study.



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