But What About Multiple Family Housing: Does it Pay for Itself?

This Advisor column was originally published in August 2011.

My last posting in this space challenged the commonly held notion that the cost of providing local governmental services to single family homes exceeds the revenues that those uses generate for the local government; i.e. that single family homes do not financially support themselves. That post produced quite a bit of response, but not so much on my arguments.

Rather, the response was directed at whether multiple family housing supported itself even if single family dwellings might support themselves: Aren’t multiple family dwellings a drain on local governmental finances? In one jurisdiction, the perception that multiple family uses are more costly to support than single family uses has actually led to a raging debate over whether the city land use policy should discourage multiple family uses.

In this article, I will revisit my earlier comments and focus on whether multiple family dwellings are more costly to support than single-family houses. As in the last posting, this article is only intended to challenge the accuracy of the common perception that multiple family housing pose a significant net financial burden and is not intended to be an exhaustive analysis.

Appropriateness of the Question

The question of whether multiple family housing is more costly to a jurisdiction than single family housing misses the most important point regarding my earlier comments on single family housing. The argument over whether particular uses support themselves or not is like fitting a round peg in a square hole.

The fiscal structure of local government is not based on matching income streams with service costs by land use. Generally, local governments exist to serve people irrespective of where they live, play, shop, work, travel, or visit within a jurisdiction.

Furthermore, local governmental services should be provided equally on the basis of need for the service irrespective of socio-economic or demographic characteristics. Local governmental revenues are generated on the basis of the entire community depending on the location of taxable value or activity, or the incidence of fee based services. These revenues are then reallocated throughout the community based on when and how the need for service arises. Applying the notion that the services provided should be related to where revenues are generated would result in better services being provided to the wealthier areas of a community than the lower income areas.

Net Costs and Revenues of Multiple and Single Family Dwellings

Setting the appropriateness of the question aside, the common perception that the net service costs (costs minus revenues) of multiple family dwellings are substantially greater than single family residences is not necessarily accurate, and multiple family dwellings may not be as much of a drain on local governmental finance as commonly perceived. Indeed, newly constructed developments may actually be more financially beneficial than many older single family neighborhoods. It is not easy to determine the exact balance between the revenues generated and expenditures required by multiple family uses since the amount of revenues generated, and expenditures needed, will vary substantially between individual multifamily developments, depending on the interactions of a series of complicated factors as described below.

Cost Side of the Equation

Multiple family and single family uses can exert different types of demand or need for local governmental services and the costs of providing these services to each type of use will vary accordingly. In some cases, such as the costs of providing school services, the costs associated with an average single family use is greater than with the costs associated with a multiple family use.

For other types of services, notably emergency medical services, the reverse may be true. In still others, such as police services, the differences are not at all clear and depend on a variety of factors. In all cases, the differences are related to the particular type of multiple family development involved and the particular demographic the development serves, as well as how various multiple family complexes are managed. Condos may result in different service costs than apartments require.[1] Apartments serving students will be very different than senior housing. Well managed complexes can do much to reduce the need for police and other services, while poorly managed complexes may increase the demand or need for services.

School Costs and Emergency Medical Costs

The cost of providing education is the greatest category of costs among all types of local governments. While I argued in my last article that it is not really appropriate to include school related costs when comparing the cost of serving residential uses[2] (which have children) with non-residential uses (which do not have children), school costs are very relevant when considering whether multiple family dwellings are more costly than single family dwellings since they both have children and exert a pressure on schools services.

The cost of providing school services is directly related to the number of children. It is well established that single family dwellings average more children than multiple family units. Consequently, school costs associated with single family dwellings would, on average, be much more costly than multiple family housing per unit. This difference can be very substantial, especially in comparing single family uses with multiple family dwellings that primarily serve older age groups.

The relationship of dwelling type to emergency medical costs is often the reverse of school costs. Since a substantial portion of multiple family dwellings are occupied by senior citizens and the elderly, multiple family uses would be expected to generate a significantly larger number of calls for emergency medical calls. [3]

Capital Costs

Capital costs are a significant proportion of total local governmental service costs and can be anticipated to be between 20 and 30 percent of the annualized costs of supporting new development.[4] While there can be significant debate over whether multiple family dwellings are more expensive to serve with ongoing services than single family dwellings, research and the literature is fairly clear that higher density development such as multiple family uses substantially reduce the costs of serving each dwelling unit with capital facilities.

This is most obvious in those facilities that are linear in nature (such as streets, water lines and sewer lines), since lower residential densities (common for single family neighborhoods) require that these lines and streets be extended over greater distances to serve each housing unit versus the relative efficiency of serving higher densities (in multiple family structures). These savings can be very substantial in the case of infill development where there are existing adequate facilities already serving the area. (There are significant exceptions to this; most notably redevelopment to higher densities in an area with inadequate facilities to support such higher densities, and in the case of high density sprawl where high capacity streets and lines must be extended at some distance to serve a dispersed pattern of multiple family complexes).

The costs of providing capital facilities to multiple family developments, makes the location of the development a major, if not the most important, factor in determining the costs of supporting multiple family development. Infill or redevelopment will often (but not always) be far less costly to serve than a new outlying multiple family development.

Police Service Costs

One of the more controversial cost factors in serving multiple family dwellings is whether these uses increase the costs of police services. Police departments and officers often assert that multiple family dwellings require a higher level of police services than single family neighborhoods. This assertion is usually based on the number of calls that may be generated by some multiple family developments (often apartment complexes).

There is no question that the young adult age groups tend to generate more per capita police calls than families or older age groups. Since these young adult age groups tend to reside in multiple family dwellings, some multiple family dwellings could tend to generate more police calls. (This problem can be very significant in poorly managed apartment complexes that do little, if anything, to manage the inappropriate behavior of occupants within the complex). However, these age groups would probably still generate a similar amount of calls if they were dispersed in single family dwellings instead of concentrated in multiple family dwellings.[5] Unless the housing needs of these groups were not allowed at all in the community, these police responses would still be needed, irrespective of the dwelling type.

While I have often heard this concern from police officers, I believe it is driven more by perception than reality. Since multiple family dwellings concentrate people in a few locations, those few locations generate a lot of calls that are on the mind of police officers, while the same number of calls over a dispersed pattern of houses do not stand out in an officer’s mind. In spite of the perception, the actual rate of calls per housing unit or person on average may not be significantly higher for multiple family dwellings than the general population. (In the few times in my career that I have been able to generate the data for making a comparison, I have found that the call rate on a per capita basis in multiple family dwellings to be roughly comparable to the population at large).

Fire Protection Costs

A fire in a multiple family structure is often a major event attracting much attention and lasts long in our memories. As such it may appear that they are expensive to serve with fire protection services. This perception may have some validity in terms of older structures built before modern fire safety measures, particularly sprinklers, were required in our building codes. These modern measures have dramatically reduced the exposure to fire loss in these large structures and such risk might be comparable to single family structures (and might even be less since most jurisdictions do not require single family structures to be sprinklered). For all types of uses, the risk of fire tends to be less in newer structures compared to older structures.[6] As in the case of police protection, how an apartment complex is managed can make a significant difference: complexes that are well maintained with attention to reducing hazards will create less demand for fire services than those that are not well managed.

Revenue Side of the Equation

As in the case of costs, the revenue generated by multiple family uses may be underestimated relative to single family uses.

Property Taxes

It is commonly perceived that single family dwellings generate more tax revenue per unit (in the form of property taxes) than multiple family developments generate. This is not a very accurate perception.

The largest determinant of housing value (among many) is not the type of structure, but the age of the housing unit. Typically a newer structure will have significantly higher values than older structures. It is not uncommon in virtually all communities to find the relative value of new multiple family units to be greater than housing values of homes in older single family neighborhoods. This variation in value can actually be rather dramatic in communities that have both older neighborhoods and areas that are suitable for high end condominium development.

While single family dwellings have generally been of higher tax value than individual multiple family dwelling units of a given age (multiple family dwelling units built in the 1950s would tend to have lower values than single family dwellings built in the 1950s), these historical differences are lessening as the housing market shifts to higher end condominium development. The difference between the value of a new single family dwelling and a new condominium unit is lessening all the time and it is not uncommon to find new high end condominium units being higher in value than new single family units. However, since apartment units tend to still have lower values than condominium units, the average value for new multiple family uses might continue to be less than new single family development.[7]

While it is common to look at revenues and costs on a per unit or per person basis, it sometimes useful to look at revenue generation on a per acre basis. An important aspect of a city’s financial health is its fiscal capacity and fiscal capacity is usually measured in total tax base in the community. The more intensely the community is developed the greater its tax base. The greater the tax base the greater the potential revenue stream that a local government has. The greater the revenue stream the greater the ability of the jurisdiction to respond to changing circumstances and needs. In this fiscal capacity sense then, multiple family development has a substantial financial advantage over single family development since multiple family structures generate far more revenue than single family structures on a per acre basis. As in the case of capital costs, the intensification of development by higher densities generates far more revenue than the same property would generate if developed in single family residences.

Other revenues

Generally, the more income a household has, the more the household is likely to spend, therefore, it is reasonable to correlate the generation of sales taxes with income levels. Consequently, there may be differences between the potential sales tax revenues generated between the various dwelling types, since the average household income of single family dwellings is usually higher than that of multiple family dwelling units. However, as the housing market continues to shift to condominiums, the income differences between multiple family uses in general and single family uses are probably becoming much less. Since households with lower incomes tend to reside in older dwellings, new developments are likely to generate more sales tax revenues than older developments.

Other revenues (e.g., from municipal utilities) are probably generated at about the same rate for single family dwellings and multiple family dwellings. For example, water and sewer rates generally are driven by amount of usage and should be designed to capture costs. While for most utilities, rates may vary between single family uses and multiple family uses, this variation is based on differences in consumption patterns between the two uses (multiple family dwellings usually have less lower water consumption, often due to requiring less landscape maintenance). Since, each unit or structure is charged based on its actual consumption, utility rates should recover costs of providing the service.

Conclusion

There is no clear answer to the question of whether multiple family uses are more costly to support than other uses. The answer depends on the interaction of a variety of factors many of which cannot be easily estimated in advance and difficult to measure in practice.

In terms of the net financial burden imposed on a community by different residential uses, the age of a structure is a greater factor than the dwelling type. Older structures generate far less revenue and tend to require somewhat higher expenditures, at least in fire protection. Both new multiple family and single family development generate more revenues than older structures and, in most cases, probably tend to financially support the services that these units require, especially when compared to older structures.

Another very important factor in whether uses support themselves or not is the location of the development, regardless of its use. As I noted in the article on single family uses:

“Whether particular uses support themselves or not depends more on the location and circumstances of those uses. Like most planners, I ardently believe that sprawling single family dwellings do indeed not support themselves, but am persuaded to believe that well-sited (such as infill) housing may more than “pay for itself.” Similarly, poorly-sited commercial development can be very costly for local governments.”

Well-sited infill multiple family developments might very well be more cost effective and better able to support the full array of local governmental services than poorly-sited single family developments.

At any, rate fiscal policy should reflect the basic purpose of governments to serve all people on an equal basis, irrespective of where they live within a community. Developing fiscal or land use policy on the basis of whether various uses are perceived to support or not support themselves distorts this purpose and tends to favor some people (usually the more wealthy) relative to others. Such policies tend to undermine the basic purpose of local government to serve all of its residents equally irrespective of their wealth or social status.