Feeling the Impact: California Developers, Cities Adjust to Loss of Redevelopment Funds

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At Jamboree Housing Corporation, a nonprofit developer/owner, President Laura Archuleta is beginning to feel the pain from the elimination of California’s local redevelopment agencies (RDAs) and the large pot of gap dollars they once provided for affordable housing. She’s scrambling to find other sources of gap funds to make new low-income housing tax credit deals pencil out.

Of the total funding sources for LIHTC projects developed by the Irvine-based nonprofit over the last five years or so, redevelopment funds from RDAs accounted for about $100,000 per unit on average. Counting all developments that have received redevelopment funds in Jamboree Housing’s entire portfolio of 7,000 units stretching back to 1990, the average RDA subsidy has been about $25,000 per unit.

“We were really tied into working with redevelopment agencies,” says Archuleta. “So [the loss of redevelopment funds] has had a significant impact, including the mindset of how are we going to go forward and help communities meet their affordable housing needs.”

Jamboree Housing still has some prior commitments of RDA resources for new projects. But some projects that will utilize land committed by RDAs will no longer get the redevelopment funds that were expected. “Those deals will take longer to put together,” says Archuleta. “Instead of getting done in 2014, we won’t be able to break ground until 2015. Or they’ll be restructured to a smaller development…I think in 2014, 2015 you’ll see smaller projects developed and fewer projects.”

Jamboree Housing has also faced challenges on some RDA commitments. On one project in Riverside, for example, Jamboree Housing had to forfeit a 9% housing credit award when the state Department of Finance challenged the RDA land transfer commitment. A week later the nonprofit got the green light, but then had to re-apply for tax credits in the next funding round.

 

Terminated by State Legislation

State legislation enacted in 2011 – and upheld by the state Supreme Court – resulted in the termination of California’s roughly 400 local RDAs in 2012. For decades they were a key source of land and subsidy dollars for affordable housing projects, required to allocate 20% of their annual redevelopment funds – tax-increment monies generated in redevelopment districts – for affordable housing projects. Most recently this was about $1 billion per year.

Sources said the full impact from the loss of redevelopment funds isn’t likely to be felt until 2014 or 2015. “People are still finishing quote unquote old redevelopment deals,” says Ray Pearl, Executive Director of the California Housing Consortium, an affordable housing industry group. He said the full impact will be felt “when all that investment is finally gone and there are no more redevelopment deals.”

The loss of RDA funds “has certainly made it more challenging to develop affordable housing in California,” says San Francisco attorney Ofer Elitzur, a partner at Cox, Castle & Nicholson LLP. “It’s changed the model that a lot of developers had pursued over the years…It’s required developers to search for other sources and build more efficiently or just pursue other opportunities.”

 

Declining RDA Support

The impact is already clear in the pattern of recent 9% federal housing credit awards by the California Tax Credit Allocation Committee (see chart).

Share of Projects Receiving 9% Federal LIHTC

Awards from CTCAC with Redevelopment Funds,

By Funding Round
1st Round 2011 64%
2nd Round 2011 54%
1st Round 2012 34%
2nd Round 2012 28%
1st Round 2013 19.5%
Source: California State Treasurer’s Office

 

“We’ve seen a decline in projects with RDA funding and expect that to continue,” says Bill Ainsworth, spokesman for California State Treasurer Bill Lockyer. He provided figures showing a steady decline in the share of awarded 9% projects receiving redevelopment funds from 64% in the first round in 2011 to 19.5% in the first round of 2013. In the latest round, just 8 of 41 projects getting 9% awards had redevelopment funds.

Some believe the loss of redevelopment funds may lead to larger credit awards in the future to compensate for the absence of these once-substantial funds and reductions in other gap sources.

Developers of proposed new LIHTC projects are continuing to go after traditional sources of gap financing, such as federal HOME program funds. They’re also trying less common sources, including local housing trust funds, which a few California cities have, and a state program that helps fund housing units occupied by persons with mental disabilities. Another new source is the Golden State Acquisition Fund.

Multiple headwinds are compounding the challenges in California. These include repeated cuts to annual funding for the HOME program, few if any remaining multifamily housing funds from voter-authorized state general obligation bond issues (Propositions 1C, 46), and uncertainty about the legality of local inclusionary zoning ordinances. Some California communities have suspended their ordinances, including on the rental housing side after the Palmer decision. Some municipalities, though, continue to enforce their inclusionary zoning ordinances, which have produced a significant amount of affordable for-sale and rental housing in California. Under these ordinances, localities require developers of new single-family home subdivisions or market-rate apartment projects to provide a certain minimum share of the new housing units as affordable (e.g., 15%), on-site or off-site. Alternatively, they can provide funds or land for this purpose. Often, other developers construct the affordable units using these funds or the land.

California developers are responding in a variety of ways to the loss of redevelopment funds.

For example, USA Properties Fund, Inc., based near Sacramento, is looking at diversifying by developing more mixed-income and 100% market-rate apartment projects, according to President & CEO Geoffrey Brown. In fact, the company is working on its first market-rate project since the mid-1980s.

At the same time, Brown says the firm continues to try to develop new tax credit projects, and is restructuring older existing LIHTC projects of its own and acquiring older developments from other owners and renovating them.

USA Properties Fund typically used redevelopment funds for new construction projects utilizing tax-exempt bond financing and 4% housing credits. With redevelopment funds gone, Brown suggested these projects will be tougher to do because they generally need more gap dollars than 9% deals. An irony is that California has lots of available tax-exempt bond authority.

According to Brown, USA Properties Fund is spending more time on acquisition/rehab projects because the funding gap for these is not as big as for new construction projects and because of opportunities that present themselves, such as to restructure older projects.

Irvine-based Related California, while continuing to develop affordable rental housing, is “ramping up” its development of mixed-income and market-rate residential properties, says President Bill Witte. But he said this is more a function of the company’s corporate business plan and of emerging opportunities – amidst California’s strengthening economy – than it is a response to the loss of redevelopment funds.

 

Impact at Local Level

An example of a municipality hurt by the loss of redevelopment funds is the City of San Jose. With roughly one million residents, San Jose is the second-largest city in California and the 10th largest in the U.S. It’s also a high-cost and affluent city. But despite a median annual household income of $105,500, “we have a lot of people living in poverty,” says Leslye Corsiglia, Director of San Jose’s housing department.

She indicated that the city needs to produce many more affordable rental units, but has few resources now to help make this happen. In the past, San Jose relied heavily on redevelopment funds from the local RDA (about $40 million a year) to facilitate the production of new units. “By far, for us it was the largest source of revenue,” says Corsiglia.

Even worse, the city hasn’t had any redevelopment funds to distribute for about the past three years because it’s been required to pay more than $60 million in housing funds to the state. In addition, San Jose has seen reductions in its annual HOME funds to $2 million and in CDBG funds to $7.8 million. Finally, a city inclusionary zoning ordinance passed in 2010 has been under legal challenge by home builders and was suspended for rental housing side after the Palmer decision.

Corsiglia says the city receives some cash flow annually from repayments on existing housing project loans made by the former RDA that can be recycled into new projects. The amount can vary but is generally around $7 million a year. In addition, the city has been able to build some new units with funds received from transactions restructuring Year 15 tax credit properties.

According to Corsiglia, city officials are exploring other possible new revenue sources for affordable housing, including a housing impact fee or an inclusionary fee.

 

Hopes for Dedicated New Source

Industry and municipal officials in California are hoping for a new statewide revenue source for affordable housing.

Advocates are pressing state lawmakers to pass the Californian Homes and Jobs Act (S.B. 391). This would create a dedicated permanent funding source for affordable housing projects from a new $75 document recording fee for non-sale real estate transactions (residential commercial, industrial).

Some estimate the fee could generate $500 million a year. “It would be a fraction of what we lost from the demise of redevelopment,” says Ray Pearl, “but nonetheless a huge step in the right direction.”

The powerful California Association of Realtors opposes the measure, however. In addition, although the state Senate has passed A.B. 329, enactment will require two-thirds approval by the state Assembly and the signature of Governor Jerry Brown, who signed the legislation ending RDAs and redevelopment funds for affordable housing.

Also pending are a bill (A.B. 1229) that would affirm the validity of local inclusionary zoning ordinances, and a bill (S.B. 1) that would authorize local tax-increment financing and require that at least 25% of the proceeds be earmarked for affordable housing. Each bill is through one chamber and pending in the other.