The Feds’ Tentative Steps to Legalize Mixed-Use Housing Don’t Go Far Enough

Apartment-style housing with ground-floor retail used to be a staple from small towns to big cities. But strict federal lending rules have made them nearly impossible to build or renovate. Photo: Wikipedia
Small apartment buildings with ground-floor retail used to be a fixture of small towns and big cities. But federal lending rules have made this type of housing very difficult to build or renovate. Photo: Wikipedia

For a long time, apartment buildings with ground-floor retail were the building blocks of America’s cities and towns. Combining housing and commercial uses is also essential for walkability and affordability, enabling people to travel shorter distances for their daily routines and get around without driving. But in most of the country today, it’s practically impossible to build or reinvest in this type of housing.

The federal government is the biggest mortgage lender. And the vast majority of its loans support single-family, suburban-style housing. Graph: Regional Plan Association
The federal government’s support for suburban single-family housing dwarfs its support for urban, mixed-use housing. Chart: Regional Plan Association [PDF]
A major obstacle is federal lending standards. The Federal Housing Administration, HUD, Fannie Mae, and Freddie Mac all limit the share of commercial space in residential projects eligible for federal loans. These standards, in turn, dictate which projects are viable in the private real estate finance market.

The upshot is that it’s very difficult to build or rehab low- and mid-rise mixed-use housing projects. Federal standards not only limit the supply of new mixed-use housing, but also prevent lending in distressed neighborhoods suffering from disinvestment, many of which are in cities or inner suburbs filled with older building types that don’t conform to the single-use model the financial industry is accustomed to.

Last week, the Federal Housing Administration proposed new lending standards for mixed-use condominium development, but experts say they don’t go far enough. (You can comment on the proposed rule until November 28.)

Under current rules, FHA loans are available for mixed-use condo projects where the commercial component is 50 percent or less of the floor space. The agency may now lower that ratio to 20 percent or raise it to 60 percent, depending on what it thinks the market will support. FHA notes in its press release, however, that “in the near term” it probably won’t allow a ratio higher than 50 percent, in order to protect the “residential character” of condo projects.

John Norquist, former president of the Congress for New Urbanism, said 60 percent would be an improvement, but he thinks the feds should stop playing guessing games about what mix of commercial and residential will make projects viable. “I just wish they would focus on underwriting standards that are more directly related to creditworthiness of the individual,” Norquist told Streetsblog via email.

While it’s somewhat encouraging that FHA is at least reconsidering its rules for condo projects, a bigger issue is the restrictions for rental buildings, said Richard Oram, a small-scale philanthropist who advocates for reforming federal lending standards. Current rules limit federal financing for multi-family rental buildings to projects with less than 35 percent of the space devoted to commercial uses.

That means rental buildings may need to be 10 stories high to qualify, if they have a storefront on the ground level. Smaller developers often can’t deliver at that scale. Cities end up with big developers building big projects, according to a recent report from the Regional Plan Association. Areas suited to low-rise or mid-rise mixed-use projects lose out.

Rising rents in walkable areas indicate that mixed-use rental housing is not the risk that federal rules make it out to be, said Oram. But if federal regulators refuse to sanction these projects, that exacerbates the shortage and the affordability problem.

“You shouldn’t have to meet these arbitrary formulas to get through the gate,” he said. “They think it makes it simpler, but it doesn’t produce what the market wants.”

  • Greg Costikyan

    A tangent, but Uncle George’s is no more, alas.

  • Jason

    So an obvious question based on (I’m sure that picture was put there intentionally to lead people into this): is this part of what’s driving so much ground-floor retail in NYC becoming banks and chain stores/restaurants? That they’re the only ones who can afford not just the rent, but doing without federal money to rehab the spaces? (And likewise all the empty ground-floor retail due to lack of federal loans?)

  • Michael Lewyn

    If 35 percent of the floor space is devoted to commercial use wouldn’t that be more like 3 stories than 10?

  • Is varies program by program and in many cases is less than 35%.

  • Jake Wegmann

    If there is an underground parking garage then conceivably the commercial space could occupy the entire footprint of the building. Residential units have much stricter requirements for getting natural light into all of the rooms, which makes the parts of the building that contains them thinner. By contrast the middle of the retail space doesn’t have to be near a window. Picture, for example, an “E-shaped” residential structure lying on top of a concrete box, filled with retail (a grocery store let’s say), that occupies much of the lot. Under that scenario, you might indeed need 10 stories to keep the commercial share under 35%.

  • bxcyclist21

    I know. It was as authentic a Greek restaurant as one could get. Went there a few times over the years and a good friend of mine worked there for years.

  • PL73

    There is nothing that would prohibit state economic development offices for stepping up here; however, there seems to be a fair amount of empty 1st floor retail space, which gives rise to the impression that it isn’t all necessary.

ALSO ON STREETSBLOG

Federal Regulations at Odds with Demand for Urban Housing

|
The real estate market is undergoing the most rapid period of change in a generation — and the shift is decidedly urban. A succession of recent studies have found there is an under-supply of urban-style housing — attached and small-lot, single-family homes — on the scale of about 13 million units. On the other hand, […]

Apartment Blockers

|
Alan Durning is the executive director and founder of Sightline Institute, a think tank on sustainability issues in the Pacific Northwest. This article, originally posted on Sightline’s blog, is #9 in their series, “Parking? Lots!” Have you ever watched the excavation that precedes a tall building? It seems to take forever. Then, when the digging […]

The Federal Government’s Smart Growth-Inspired Landlord

|
Robert Peck says he’ll gladly pay more to locate office buildings near transit – the time saved commuting makes it worthwhile. Peck isn’t any old office manager. He’s the commissioner of the GSA Public Buildings Service, also known as “the landlord for the civilian federal government.” He’s in charge of acquiring office space for all […]

Federal Housing Administration Clears Way for More Walkable Development

|
Over the last five years America has seen an historic housing downturn, but the prevailing trend hasn’t sapped demand for walkable, urban development, especially in many larger metros. Until recently, however, Federal Housing Administration regulations made it difficult for developers to provide the kind of housing consumers are demanding. Now, thanks in large part to the […]

HUD Expected to Loosen Restrictions on Mixed-Use Financing Soon

|
As Smart Growth America showed us earlier today, the costs of sprawl are high. So it’s a bitter irony that federal rules have made it more expensive to build compact, mixed-use development by tightly limiting the share of commercial space in projects that receive financing from the Department of Housing and Urban Development. Fortunately, those […]