May 2, 2016 Tim Colen

48 Hills Explains How Real Estate Finance Works, Sort Of

An article written recently by Tim Redmond in 48 Hills (“Why developers can’t cry poverty”, March 27th) examines Prop C, income taxes and housing affordability. He claims that real estate development in San Francisco is vastly profitable and developers shouldn’t complain about the City’s fees and exactions, that they’re bluffing. He can’t be faulted for his outrage about our insane housing prices – who isn’t appalled by SF’s worst-in-nation housing affordability? But, his understanding of how housing gets built in this town and how it’s financed is perhaps a little undercooked.

Mr. Redmond’s certainty about development’s grotesque profitability comes from an economic analysis of transit impact fees assessed on new housing that was prepared last year by Seifel Consultants for the SF Planning Department. The calculations he found for “target return on total development cost” range across the building prototypes, (small to large, various locations, rental vs. condo, etc.) and go from 19 to 29 percent. This is defined as the estimated total return, spread over the life of the project, that an outside investor would require before putting up high-risk capital. Sounds like a lot, but, it deserves scrutiny.

If a project could be built in one year, a 19 to 29 percent return would be pretty dramatic. However, over two years, it’s half that amount, over three years a third, and so forth. Mr. Redmond somehow neglected to annualize the target return. Since it’s extremely rare for any sizable project to be completed, start-to-finish (including pre-development, entitlements and construction) in less than four years, the total returns begin to look fairly pedestrian as an investment. Many projects endure delays and hiccups and routinely take six years to complete, so the annualized total return is reduced still more. By comparison, the Standard & Poor’s long-term average annual return for stocks is about eight to nine percent, comparatively higher and a much safer return.

With its extreme building costs, high-priced land and and constantly changing land use policies, building in San Francisco is seen by investors as very high risk. Mr. Redmond failed to consider that real estate investors have many other options and always opt for the best risk-adjusted rate of return. They can invest in other types of projects in other places. San Francisco is just one city.

Five years ago, no one was investing in housing development and production came to a standstill. We seem to have forgotten that dozens of projects went bust and the Mayor’s Office of Housing had to refund many millions of dollars in fees collected for defunct projects, almost wiping out its budget. If residential development in SF is as lucrative as 48 Hills insists, shouldn’t they advocate for the City and everyone to invest in it too? Sounds like free money!

Photo Credit: Sharon Mollerus


Tim Colen

Tim is a Senior Advisor to SFHAC and the former Executive Director. His passions, in no particular order, include urban environmental issues, politics and baseball. A really cool future job would be comparative studies of cities around the world. He can be reached at

Stay Up to Date

Get weekly updates with housing news, HAC updates, and more!