Square Footage

Concern

Proposing more than TCAC’s minimum square footages will disadvantage a project because the additional square footage will increase costs, thereby increasing the need for credits.

If no adjustment is made to offset the higher cost of building more square footage applicants will propose units with minimal bedrooms and minimal square footage.

Focusing the tiebreaker on credit efficiency without adjusting for square footage would be unfair to family projects and skew development behavior.

Background

Over the past four years unit have averaged 787 sf, which is 26% higher than the TCAC minimums (if all units proposed the minimums, the weighted average would have been 627 sf). Currently the minimums are 450, 700, 900, and 1,000 for 1-Br through 4-Br units respectively.

As one would imagine, residential square footage has a strong correlation (67%) with total project costs (see regression results below). A simple linear regression found that square footage can explain 44% of all cost variances and that each square foot increases costs by $347 on average.

However, this analysis assumes that every square foot costs the same which is not true. Kitchens and bathrooms are more costly per square foot because they include fixed costs like the sink, stove, cabinets etc. It may be wise to perform a regression on the square footage of a unit above 500 (a quick run indicated $267 per foot above 500).

It may also be wise to speak with general contractors about the true additional cost of providing larger units. Anecdotal information from experts can point researchers to truths and not just statistically significant findings. That said, it should be noted that more square footage doesn't just increase direct construction cost, it also effects indirect development costs like insurance, interest, and land.

Adding square footage doesn’t just add costs, it also adds revenues and expenses. Revenue go up because rents from units with more bedrooms are higher. Expenses go up because there are higher maintenance costs. It may be wise to not fully neutralize the cost differential between projects with differing square footage per unit, thereby accounting for the slight increase in conventional debt that can supported with the increase in net operating income (NOI). 

Adjustment

An adjustment module in the denominator would be appropriate to accurately neutralize the negative affect larger units have on the tiebreaker.

If a project proposes less square footage than the state average its denominator should be increased by the costs it saves to make it comparable to the average. There is no need to put a limit on this because the TCAC minimums will prevent extreme behavior.

If a project proposes more square footage than the state average its denominator should be decreased by the incremental costs to make it comparable to the average. Because there are natural motivators to provide less square footage (get more units on the site) and because the adjuster will account for added NOI there may not be a need to police the upper bounds. However, an upper limit such as 30% above the minimums could be employed.

As mentioned earlier the adjuster should be calibrated to account for the additional cost less the additional supportable debt. However, if policy makers wanted to incentivize the use of smaller units to save costs and materials state wide, the adjuster could be calibrated to slightly incentivize smaller units.

Pros: If implemented, an adjuster for square footage would increase fairness amoung housing types and prevent the unintended consequence of developers proposing less square footage than the market justifies.

Cons: Square footages will need to be checked at placed in service and negative points awarded to developers that deliver less than their application promised.

Recommendation

Include an adjustment module to the denominator to offset the net effect of increased cost and increased supportable debt for deviations from the average square footage per unit.