Jon Webb’s Affordable Housing Primer (part 2)

by Jim Washburn

Jon Webb

What’s the Foundation for Social Resources’ role in creating low-income housing?

We’re buyers of apartment complexes, almost always with a profit-motivated partner. They take the risk in acquiring the land and they provide the guarantees to lenders for the construction period, and we provide social services and property tax relief for the ownership. California is possibly the only state where the property tax relief is codified in the constitution. There are revenue and tax code provisions that require a partnership to have a non-profit as a managing general partner in order to obtain property tax relief. That’s now the second-largest source of subsidy behind getting tax credits for the production of housing.

Our profit-motivated partners are usually corporations, but they’re generally smaller, entrepreneurial corporations. An exception to that is AIMCO with which we’ve partnered on several projects. AIMCO owns over 400,000 units and might be the biggest landlord in the country.

You have properties in California, Oregon, Hawaii and Ohio. Can you give a couple of examples of how they get done?

A pretty typical one would be Warwick Square, a 500-unit complex in Santa Ana. The major cost of the rehab was in redoing all the site work, putting on new roofs, etc. We also built a learning center there that’s operated by Project Access, a non-profit we started.

A more complex process was involved in Tara Village. We bought it 14 years ago utilizing a tax-exempt bond that is peculiar to non-profits and hospitals, called a C-3 Bond. After ten years of ownership, we sold it to a limited partnership that we’re also partnered in. It was essentially a refinancing, using bonds and tax credits, and allowed us to lower the rents. (You can read much more about the project here.)

Who handles the day-to-day management?

For the most part, third-party property managers who are experienced in providing services to owners provide the on-site management. Because the rules in complying with Section 42 are so arcane—there’s a thick handbook to adhere to—it takes a certain kind of property management company to want to do that. Also, the rules are fairly draconian, and if you don’t follow them, the partnership can lose credits you’ve taken on your income tax and make you pay it back plus penalties.

Where do the rents go?

To the property owner, the partnership that owns it. The partnership is typically a limited partnership, with a non-profit managing general partner and a profit-motivated general partner. Together, those two might own one percent of the profit and loss and the taxes, and then 99 percent is sold to the limited partner, and that might be Chevron, Chrysler Corp, or a group of investors which is arranged through syndicators.

They own 99 percent of the profit and loss, but the cash flow is split differently. Usually it’s 80 to 90 percent to the two general partners and only 10 to 20 percent to the limited partners. Because they’re interested in the tax losses and tax credits, they disproportionately allocate those losses to the investor. Let’s say GE owes a million dollars in tax this year. If they invest a million in low-income housing, they have zero tax liability, and they get a little return. Plus they can put it in their brochures: see, we support affordable housing. And they are, because the profit-motivated general partner, who took the risk on acquiring the land and providing guarantees, will end up with no money in the deal.

For the last several years (until this year) the biggest buyers of tax credits have been banks and other financial institutions like Fannie and Freddie. Because those institutions have no need for tax credits now or for the foreseeable future, the markets for tax credits has fallen dramatically. Where last year an investor might be willing to pay more than a dollar for one dollar’s worth of tax credit, today you’re lucky to get 85 cents. That, together with tighter underwriting, means an affordable deal is harder than ever to make work.

Are there any programs for the poor that don’t also benefit the rich?

Nope.

What’s the biggest hurdle to there being a sufficiency of affordable housing?

The cost of producing an affordable unit has skyrocketed well over the cost of inflation. It’s a combination of things. The cost of land has gone up dramatically. There used to be a rule of thumb when I was buying land for market-rate development that you couldn’t afford to pay more than $10,000 per unit for it. Now, they’re asking $50,000 to $100,000 per unit for the land, and you have to pay it and figure out a way to make it work. Construction costs are way up. City fees are always going up, which might add $20,000 or more per unit in school fees, roads, sewers and such.

Those costs have changed everything. Fifty years ago, if you were a carpenter with a pickup truck and tools, and you knew a guy at the bank, you could get a loan, buy some lots, and build houses. Now it’s almost entirely a big company game. It’s just not possible to do it as an individual. It takes too long, takes too much money.

There’s a new 70-unit affordable apartment complex in Irvine, and it cost $31 million to build. That’s over $400,000 a unit. Fifty years ago, the house my parents bought in Newport—twice as big as these units—sold for $8,000, and somebody made a profit on that. My mother wasn’t working and my father was a fry cook at Merle’s Drive-In at the corner of PCH and MacArthur. He was probably making 75 cents an hour, but the mortgage was only $35 or $50 a month. It’s a completely different world now.

Time for some acronym soup. What role, if any, does HUD play?

In the mid-to late ’70s when the project-based Section 8 was at its peak, HUD directly subsidized about 200,000 units per year. Their current program only subsidizes some 15,000 units. Today HUD chiefly has a role as an insurer of loans. They have a substantial rehab loan, the 221(d)(4), another that’s similar for non-profit owners called a 221(d)(3) and one, a 202, that finances senior housing through a direct loan to non-profits. Most were created by the Roosevelt administration in the Housing Act of 1934. The bulk of what they do for both single and multi-family properties is provide a federal guaranty of the mortgage, where, if a private mortgage lender originates a loan and it eventually is defaulted upon, HUD makes good on it. They’ll pay the principal amount of the loan back to the originating institution.

They also still provide funds through block grants to county housing authorities, which in turn divvy some of that up to housing vouchers. This is the modern version of the old Section 8 program. In Orange County there are about 8,000 housing vouchers to be had. The last time they opened up the waiting list, 40,000 people applied for them. If you got one, you’re pretty damn lucky. But if you get a voucher and you don’t find a place to live within 90 days—a real problem with the housing market so tight—you lose it and it goes to somebody else.

They’re called sticky vouchers, because if you can get one, it will go with you wherever you move. Among high-income counties it doesn’t really matter, but there’s some fighting going on between poor and rich counties. This is a very approximate example, but if you can get a housing voucher in Mississippi that’s worth $200, if you move here it’s suddenly worth $1000 a month.

What about SCAG? I’d never heard of it, and now I read it has the power to dictate to cities how many houses it must build.

SCAG is the Southern California Association of Governments. They look at transportation and housing issues on a regional basis, doing studies that no one county could do on its own. I knew they made recommendations but didn’t realize they had the enforcement power they seem to be wielding today.

It is ironic that they’ve recently placed a huge, disproportionate burden on the city of Irvine to build more low-income housing when Irvine has created more low-income housing than any other city in the county. Santa Ana hasn’t produced any low-income rentals in 15 years, and fight it every time they’re asked to. The staff and counsel argue they’re already de facto the cheapest place in the county, so they’re not building any more.

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