California Needs Brown to Trade the Train for Affordable Housing

California High Speed RailGovernor Brown does not like affordable housing. But, he does like the bullet train that will connect Los Angeles to San Francisco. The first leg will connect Bakersfield to Fresno. (None of my transportation consultant friends support the high speed train or the first leg.)

Further, the Governor believes that people that need affordable housing should move to the Central Valley. (Unfortunately, there are no jobs in the Central Valley and the Governor does not have a very good record regarding the retention or attraction of jobs to California.) Thus, this notion is a non-starter.

Brown killed redevelopment in the state, which was the primary provider of funds for affordable housing. Prior to redevelopment being killed, funds for affordable housing were sufficient to create 80,000 affordable apartment units. The funding came from local redevelopment housing set aside (Twenty percent of the annual tax increment generated.) and approximately $1.4 bn annually in tax credits.) Now, none of these funds are available and non-profit affordable housing entities are not being built.

In the fall of 2013, Gov. Jerry Brown vetoed AB1229, the “Palmer Fix” bill.

Now, State Senate President Pro Tempore Darrell Steinberg has proposed a plan that would set aside one fifth of the funds generated under a landmark clean air act be set aside for affordable housing.

CCSM Housing - Santa Monica Blvd & 26th

CCSM Housing – Santa Monica Blvd & 26th, Santa Monica

Affordable Housing in California

Since the 1970s, nearly 170 jurisdictions in California have chosen to use inclusionary or mixed-income ordinances to produce 80,000 affordable units at no cost to taxpayers. In 2009, an appellate court ruling, known as the Palmer Decision, forced cities and counties to suspend these successful programs for rental housing. Compounding this judicial result, Governor Brown eliminated all redevelopment programs, which provided the equity, that along with tax credits, funded these inclusionary and freestanding affordable apartment projects.

Most of these projects are occupied that have annual incomes that are eighty percent of the median income. In California, the median income in 2013 was $58,328, with 80% at $46,662. Thus, teachers, nurses, police and firemen, as well as administrative staff occupy many of the residences in affordable housing projects.

Without affordable housing, California will continue to price our workforce out of the market for rental and for sale housing. California ranks at the top of the least affordable housing markets in the nation.

In Los Angeles, Orange and Riverside Counties, the median rental rate for a two-bedroom apartment is $1,623. Housing should cost 30 percent of one’s income. In order to pay the median rental rate in southern California, an annual income of approximately $65,000 would be required.

The situation is even worse in northern California. For a two-bedroom apartment, the median rent is $2,006, which requires an income of approximately $80,000.

The percentage of home buyers who could afford to purchase a median-priced, existing single-family home in California was unchanged from the third quarter of 2013 at 32 percent, but was down from 48 percent in fourth-quarter 2012, according to C.A.R.’s Traditional Housing Affordability Index (HAI).

Home buyers needed to earn a minimum annual income of $89,240 to qualify for the purchase of a $431,510 statewide median-priced, existing single-family home in the fourth quarter of 2013. The monthly payment, including taxes and insurance on a 30-year fixed-rate loan, would be $2,230, assuming a 20 percent down payment and an effective composite interest rate of 4.43 percent. The effective composite interest rate in third-quarter 2013 was 4.36 percent and 3.50 percent in the fourth quarter of 2012.

The median home price was $352,450 in fourth-quarter 2012, and an annual income of $66,860 was needed to purchase a home at that price.

Community Corporation of Santa Monica

CCSM Affordable Housing - 15th + Broadway, Santa Monica, CA

CCSM Affordable Housing – 15th + Broadway, Santa Monica, CA

In Santa Monica, Community Corporation of Santa Monica is a non-profit affordable housing developer. Under full disclosure, I have been on the board of CCSM for ten years. While I am on the board, the opinions expressed here are totally my own.

In twenty-five years, CCSM has developed or acquired and rehabilitated 1,500 units. The average size of CCSM’s projects is 50 units, with four stories over two levels of below grade parking. We compete with private developers to acquire sites that are primarily on commercial/transit-oriented boulevards. The majority of the land CCSM acquires cost $300 per square foot or greater.

CCSM processes projects just like a normal project. In Santa Monica, the average processing time is four years. CCSM is just finishing a project that took seven years to obtain the permits. When CCSM constructs a 50-unit project, the projects generate 100 jobs for a year. Local architects design all of CCSM’s projects. Many of the CCSM projects, have won national design awards from AIA and others.

The demand for these units for these units is significant. CCSM cuts off the waiting list at 4,200 pre-qualified families. In most cases, these families have been on the wait list for five years.

For its newer projects, CCSM has developed a partnership with the Boys and Girls Club of Santa Monica, which run a series of after school programs.

Affordable Housing Caught in Redevelopment Crossfire

By signing two bills, Governor Brown killed redevelopment and with it, affordable housing. Governor Brown was able to confiscate $1.4 billion in funds held by the 425-redevelopment agencies. In addition, on an annual basis, $400M will flow to the state from the redevelopment agencies. At the moment, there is no money for affordable housing.

When redevelopment was first introduced in California, it included no provisions for affordable housing and instead focused solely on fighting blight. However starting in 1976, 20% of an agency’s annual tax increment was set-aside for affordable housing. With the governor’s successful dissolution of redevelopment, affordable housing is now counted among the most lamented collateral damage.

For decades, cities in California relied on redevelopment agency funding to contribute to their respective Low and Moderate Income Housing Funds; statewide, redevelopment generated roughly $2 billion annually for these funds. But the outlook for affordable housing now looks more uncertain.

An initial attempt to stanch the loss of housing funds through redevelopment was Senate Bill 1220, which attempted to raise $700 million a year for affordable housing through a real estate document recording fee. That measure failed to get two-thirds necessary for passage in the state senate, losing by two votes.

Affordable housing, of course, was not financed solely by redevelopment money. Federal money and inclusionary zoning also helped to add more affordable housing.

But cities were required to spend 20% of all redevelopment money on it. And redevelopment money helped non-profit developers acquire land and keep construction costs down.

Some cities adjusted early to the new reality. Some cities are looking at a linkage fee on new commercial and residential construction that would fund affordable housing. That kind of fee will provide some of the money lost after the end of redevelopment, but not all of it.

Non-profit affordable housing developers are among those wondering what’s next. The lost funding will not come from private sources. CCSM used to receive between $2 million and $10 million per project from Santa Monica’s local redevelopment agency, and the same was true for other non-profit affordable housing developers. CCSM and the other non-profits are wondering where that money will come from.

Government officials have acknowledged that redevelopment had its excesses, but point to affordable housing development and the economic development it provided as its successes. Redevelopment was the only program in the state that created affordable housing and economic development. Now, there’s nothing to replace redevelopment.

High Speed Rail Train

California Statewide Rail Modernization Map

California Statewide Rail Modernization Map

California High-Speed Rail is a planned high-speed rail system in the state of California to be run by the California High-Speed Rail Authority, commonly referred to simply as the Authority. The planned line would connect Los Angeles with San Francisco with future extensions south to San Diego and north of Sacramento. Initial funding for the project was approved by California voters on November 4, 2008, with the passage of Proposition 1A authorizing the issuance of US$9.95 billion in general obligation bonds for the project. This latest price estimate by the Authority for a Full Build option is $91.4 billion (in year-of-expenditure dollars), according to the 2012 Business Plan.

When people raise the specter of the high cost of rentals and home prices with the Governor, he suggests that people move from the urban areas, where the jobs are located to the Central Valley. Brown’s vision of current urban residents moving to the Central Valley and commuting to their jobs by high-speed rail reflects such a disconnection. As does his 2006 veto of Oakland’s inclusionary housing bill, and his 2011 veto of AB 1216, a critical affordable housing preservation bill.

Inclusionary Zoning

AB 1216 would have required that in all new rental housing, twenty percent of the units be developed as affordable housing. The legislation, which was strongly supported by the League of California Cities and many mayors, would have allowed locally elected officials to decide whether to require, as a condition of approval, new market-rate rental housing developments in their communities to include a small percentage of units with rents affordable to low- and moderate-income tenants or pay an in lieu fee. Governor Brown has often said that he does not see a role for state government in local housing. That is precisely why he should have signed the bill.

The Cap and Trade Law May Provide Funding for Affordable Housing

With billions of dollars forecast to flow into state coffers under a landmark clean air act, there is a battle underway over how to allocate the money. State Senate President Pro Tempore Darrell Steinberg, D-Sacramento, has been promoting his plan that includes setting aside one-fifth of the funds for affordable housing construction near transit hubs.

Steinberg’s plan differs from a proposal laid out earlier this year by Governor Brown, who suggested spending more on high-speed rail and didn’t include money for transit-oriented affordable housing development.

Starting next year, the state’s cap-and-trade program for major polluters will be expanded to include gasoline producers. That is expected to increase the price of gas by about 12 cents a gallon. But the requirement for the industry to buy carbon credits from the state is expected to produce more than $1 billion next year for clean air programs. The cap-and-trade law is expected to generate up to $5 billion a year by the end of the decade.

Steinberg, who will be termed out this year, said it was important to specify funding percentages for various programs so politicians and developers can plan projects knowing exactly how much money will be available. “This is the antidote to the feeding frenzy,” he said at a rally at the MacArthur BART station, where an affordable housing project is being constructed in the station’s parking lot.

The BART project was subsidized with state redevelopment dollars, but with redevelopment eliminated, transportation and affordable housing advocates are backing Steinberg’s proposal to set aside 20 percent of the cap-and-trade funds for transit-oriented affordable housing.

“With this proposal, we can begin to have true affordability. That means low-cost transportation right near affordable housing,” said Stuart Cohen of transit advocacy group TransForm.

Prospects for Affordable Housing

For affordable housing to begin to generate the amount of rental units that were provided to people in need, several things need to happen:

1. Governor Brown needs to become more enlightened and have a change of heart, which allows him to support affordable housing.

2. At least twenty percent of the funds generated by the state’s cap-and-trade program for major polluters must be set aside for affordable housing.

3. The legislature needs to muster the two thirds vote that would be required to charge a property transfer a $75 fee that would be used to fund affordable housing.

4. The legislature and the governor need to pass and sign the legislation necessary to support the inclusionary development of affordable housing in new rental projects.

5. New developments should be required to pay a linkage fee of $5 per square foot that would be utilized to support affordable housing.


Image Credits

High Speed Rail image via Wikipedia in the public domain

Statewide Rail Modernization Map via Wikipedia in the public domain

15th & Broadway CCSM Housing by permission.

Santa Monica Blvd & 26th CCSM Housing by permission.


Profile photo of Michael Russell About Michael Russell

The Russell Company

For 35 years, Michael P. Russell has served as a real estate developer, advisor and expert witness.

As a private and public developer, Mr. Russell has lead teams in the development of Howard Hughes Center and Bunker Hill, as well as Irvine Ranch, Playa Vista, Reston, Warner Center, Douglas Park and Amerige Heights. He is a specialist in the clean up, master planning, entitling and redevelopment of decommissioned aerospace facilities—always trying to leave the Earth better than the way we found it.

Mr. Russell has served as an advisor on over 300 consulting assignments across the United States. He has specialized in mixed-use developments, including Century City, Bunker Hill, Reston, Denver Tech Center, Colony Square and Illinois Center.

During his career, Mr. Russell has bought or sold over 30 properties, including over 1,000 acres, more than two million square feet and 500 units, with a value in excess of $500M.

Mr. Russell serves law firms, financial institutions, corporations, landowners, buyers, sellers, developers, architects, contractors and other participants in the real estate transaction, finance, development and brokerage aspect of real estate.

As an expert witness, Mr. Russell has served in over 25 cases.

Mike serves on the board and heads the real estate development committee of Community Corporation of Santa Monica, which is a non-profit affordable housing developer. Over the last 25 years, CCSM has redeveloped or developed 2,200 units and numerous AIA and other design awards.

A graduate of the University of Southern California, Mr. Russell earned his Bachelor’s Degree in Political Science and his Masters Degree in Urban and Regional Planning, with an emphasis on real estate. Rotary International, Ford Foundation, U. S. Public Health Service and the Department of Housing and Urban Development supported his education.