California Struggles with $1.7 Billion Loss in Redevelopment Funding

By Michael Russo, Contributing Editor

When the California Legislature effectively zapped more than 400 redevelopment agencies (RDAs) on June 29, 2011, the primary subsidy for affordable housing disappeared almost overnight. Developers familiar with the market estimate that several hundred affordable projects were lost in the past 12 months when up to $1.7 billion in redevelopment funding simply disappeared.

The Mediterranean-inspired design for Royale Apartments in Westminster, Calif., capitalizes on the long, narrow parcel on Hospital Circle that formerly housed a medical clinic. Raising the building to accommodate a high water table, the designers introduced attractive landscape berms as camouflage and reduced the verticality of the facade with a modulated design. (Photo courtesy of AMCAL Multi Housing Inc., Los Angeles, Calif. Architect: Withee Malcolm Architects, LLP, Torrance, Calif.)

While this event may have been a blip on the screens of national developers, caution is in order for the multi-housing industry as a whole. Redevelopment agencies have been abolished in California, and it’s not a trend developers would like to see spread to the other 48 states.

“It was incredible,” says Dan Withee, AIA LEED/AP and partner with Withee Malcolm Architects LLP in Torrance. “I’ve never seen such a transformation. Redevelopment money is the primary way affordable housing gets built here in California, and the money is gone.”

Withee estimates that four or five affordable housing projects he is familiar with were affected. “These projects haven’t been completely abandoned, but the developers haven’t figured out how to subsidize them.”

On December 29, 2011 the California Supreme Court released its decision in California Revelopment Association et. al. v. Matosantos. In what represented the worst case scenario for redevelopment agencies, the Court upheld the legislation abolishing redevelopment agencies. It also invalidated a companion bill that gave redevelopment agencies the opportunity to continue in existence by remitting tax increment monies to the state.

California had one of the most aggressive redevelopment programs in the nation, with a minimum of 20 percent of tax increment financing funds earmarked for affordable housing. Arizona is the only other state in the U.S. that does not use redevelopment agencies.

“It was less a move against affordable housing than it was a consequence of the State of California’s severe budget problems,” says William Witte, president, RELATED California, in Irvine. “Affordable housing was pitted against education and other public services that were also in dire need of assistance.”

The loss of redevelopment funding will also be felt on large-scale, master-planned projects with unusual needs for infrastructure or environmental remediation. The private sector also relied heavily on redevelopment subsidies for low income neighborhoods with a high degree of poverty. Market-rate housing has not been affected.

With the huge spread between market rents and tax credit or affordable rents, it was relatively easy to set up a redevelopment agency and declare redevelopment areas in California.

“In fairness, there were probably places that didn’t need redevelopment agencies but had them anyway,” says Witte. Legislative battles ensued and opponents of redevelopment agencies in California won a complete victory. Click here for further information on the abolishment of redevelopment agencies in California.

Know your enemy
Redevelopment.us is the website of Municipal Officials for Redevelopment Reform (MORR). The group defines itself as “a growing network of elected officials and volunteer groups, all of whom are concerned about rising redevelopment abuses.”

MORR describes redevelopment agencies as “the nation’s worst abusers of eminent domain.” MORR also defines “eminent domain” with a twist: As when “…the government condemns perfectly fine properties not for public use, but for private development.”

MORR portrayed California’s RDAs as “rogue agencies, which have siphoned billions of taxpayer dollars away from schools and local infrastructure, and destroyed lives for ill-conceived projects that often never meet expectations or even come to fruition.”

Obviously, that doesn’t describe the senior housing projects featured on these pages. These developments have been a blessing for California’s rapidly expanding low-income elderly population.

“When one of these people living on social security gets into affordable housing, it’s a great thing to see,” says Withee. “It’s a fantastic opportunity for them.”

However, demand greatly exceeds supply in the affordable housing market in Southern California. A 60-unit, senior-affordable housing project designed by Withee Malcolm that opened on June 21^st had more than 1,000 people on its waiting list. “The demand is so great that a fully funded redevelopment housing program still wouldn’t be able to completely address the current shortage in subsidies,” Witte says.

The poverty rate is California is among the highest in the nation, and the need for affordable housing will only grow more acute. The state’s population is expected to increase by an average of 400,000 per year, with the largest growth occurring in minority and immigrant communities that tend to need affordable housing the most, according to Witte.

Although about 30 percent of RELATED California’s portfolio is high-end, market-rate housing, the company has always been active in the affordable housing market. The developer’s efforts include new construction projects, acquisitions, rehabs of older HUD-insured properties, and other affordable housing opportunities throughout the state.

“We believe we will still find opportunities that don’t require as much funding,” says Witte. “There may be a shift away from new construction to acquisitions and rehabs. But what has happened in California has not been helpful to anyone in the affordable housing industry.”

Maurice Ramirez, executive vice president of AMCAL Multi Housing Inc. in Los Angeles, predicts an increase in the senior segment of the affordable housing market for a variety of reasons.

First, with the RDAs gone, there will be no mandatory apportionment of senior, family and/or workforce housing at the local level.

“The RDAs’ apportionment for seniors was typically smaller and it went faster,” says Ramirez. The next gatekeeper is the federal tax credit program, which has an apportionment set-aside for senior housing. “As these tax credits get eaten up, it may create a backlog of senior affordable housing demand,” says Ramirez.

Senior housing is often a favorite among developers in the affordable market, as it tends to get less resistance from communities than other forms of affordable housing. However, AMCAL’s affordable housing developments are financed primarily through state and federal low-income tax credits and bond financing. The application and selection processes for this funding is, of course, extremely complex and highly competitive.

On the local level, bond issues, assessment and infrastructure financing districts, public-private partnerships and other miscellaneous tools for financing affordable housing still exist. But even taken together, they cannot easily replace redevelopment subsidies.

“The dust needs to settle here in California before developers can begin to stack the local funding needed to compete for the nine percent tax credits,” says Ramirez.

The state budget that California Gov. Jerry Brown signed on June 28^th will balance only if voters approve $8 billion in new taxes in November. So there are larger issues than housing subsidies looming in the State Legislature.

“By definition, affordable housing requires subsidies even if there is plenty of financing available,” says Witte. “The missing piece is the local subsidy to fill the gap and build these projects. In most cases, that gap remains.”

Affordable housing efficiencies
Withee Malcolm Architects continues to work with a variety of developers in Southern California on senior-affordable housing projects. The architectural firm also has a long string of awards in this market segment to show for its past efforts.

 

“A big part of successful affordable housing design is being more efficient on the elements of the project that are not visible,” says Withee. “We will economize on structural designs where appropriate. For example, senior-affordable residents don’t care if the plumbing stacks perfectly or if each unit is exactly the same size.”

The elements that do matter to senior residents are the quality of interior surfaces and community spaces. Withee Malcolm’s designs typically take full advantage of exterior areas, while providing sun protection for senior residents. “The outdoor spaces are a big part of the amenity package,” says Withee. “Seniors need to get out into the fresh air, walk and socialize. In a sense, that’s part of their health care.”

Inside the units, most seniors enjoy granite countertops in their kitchens and consistent surfacing materials on their floors. Withee Malcolm will often recommend simulated-wood vinyl flooring that tends to open up the living spaces from a visual perspective, while allowing seniors to move furniture around a lot easier. The use of throw-rugs is at the discretion of residents, but the architect specifically avoids carpet-to-vinyl transitions.

Ceiling heights in these developments are typically nine feet—up from the standard eight-foot ceilings in affordable housing units. California air filtration standards require MERV (minimum efficiency reporting value) air filters that are so large that designers have difficulty accommodating them in eight-foot ceilings.

“California’s energy usage requirements are so high that a senior-affordable unit typically meets LEED Silver certification just by meeting the new codes,” says Withee.

Withee Malcolm representatives attended the grand opening of a senior-affordable housing project on June 24 that qualified for a LEED Platinum rating. “The only thing that was done differently from the developer’s standard construction on this senior-affordable project was the solar panels on the roof,” says Withee.

At the same time, attaining the required structural cost efficiencies to make these senior units affordable requires considerable experience. Thanks to repeat business with developers like AMCAL, which has its own construction branch, Withee Malcolm has been able to refine its approach to senior-affordable design.

“After each project, we find out where we can improve and what could have gone better or more efficiently on the project,” says Withee. “We often find places where the builder can save on lumber costs or adjust building spans for greater cost effectiveness.”

Developers tend to hold onto senior-affordable projects longer than market-rate buildings for a variety of reasons. When this happens, higher up-front expenditures on certain items will pay off in lower maintenance costs down the road.

Withee Malcolm convinced one of its clients to use “hardrock” concrete in the corridors and decks of affordable housing projects instead of elastomeric-coated plywood. Concrete is considerably more expensive, but the improved drainage, waterproofing protection and overall longevity of the material make it cost-effective.

“With 3.5” of hardrock in these projects, it looks like you’re on the ground floor—on every level of the building,” observes Withee. “An elastomeric deck will last maybe five years before the sun gets to it, but nothing gets to concrete.”

Most developers working in the affordable housing market are also investing more money in sustainable design in order to qualify for tax credits. With more points awarded for sustainability, developers like AMCAL are aiming for LEED Platinum certification from the get-go.

“When you’re working with an architect that understands your financial constraints without minimizing the design, it really works,” says AMCAL’s Ramirez. “Thanks to a long-term relationship, we have learned how to maximize the design with the resources available.”

AMCAL’s new Mercado Apartments in historic downtown Perris, Calif., is a 60-unit LEED Platinum certified family-affordable development featuring Spanish Mediterranean exteriors, spacious two- and three-bedrooms floor plans and Energy Star appliances. The project’s achievements in sustainability also extend to its residents. A clubhouse, outdoor fitness facility and educational programs are all part of the Mercado experience.

Senior projects that work
The award-winning Canyon Creek Senior Housing project in Calabasas, Calif., was the first senior-affordable housing development built in the City of Calabasas, a high-income area in the southwestern San Fernando Valley. “Part of the downtown area is Old West oriented, so we had to adopt our affordable housing vocabulary for that project,” says Withee. “There’s no stucco on the building; just board-and-batten siding, shutters and beam construction.”

Developer Thomas Safran & Associates (TSA) naturally encountered concerns from Calabasas residents about a low-income senior development in their city. However, the building’s wide covered porch, balconies and picket railings helped to soften residents’ sentiments.

“With perseverance and determination, these types of senior-affordable communities can be developed,” says Andrew Gross, president of TSA Development Company in Los Angeles.

The design of another affordable senior housing community—Ontario City Center, in Ontario, Calif.—required a complex program of urban planning, and political and financial requirements. The challenges here were quite different than in Calabasas: the 91-unit building featured unusually difficult edge conditions on an infill parcel near City Hall and Ontario’s new Public Library. Public concerns also added programmatic hurdles that necessitated distinctive architecture, adequate parking, appropriate scale, effective management procedures and substantial amenities.

Within the constraints of a complex set of often conflicting requirements, developer The Related Companies of California delivered a dignified affordable housing community for Ontario seniors.

The Gateway at City Center is a mixed-use project with 86 senior-affordable apartments that became a catalyst for growth in the City of Carson. TSA developed a property that transformed a previously blighted, environmentally-contaminated brownfield site into a vibrant, mixed-use community that encourages walk-ability, commerce, and neighborhood activity.

Located across the street from City Hall and at the intersection of two major streets, Gateway provides safe housing for low-income seniors, while redefining the city’s civic core as a desirable place to live, shop, and invest.

TSA is also excited about two senior-affordable developments that will debut as early as August 2012, says Gross. Both projects are likely to get extensive media coverage when they open. Senior-affordable is a niche that stands out in California’s region-wide need for affordable housing. In addition to seniors, counties like Los Angeles have as many as 100,000 teachers, health care and public safety workers that don’t qualify for affordable housing, but are often priced out of the market. This may represent another opportunity for private developers.

Part of the affordability challenge rests in the gap between market-rate and affordable housing. The abolishment of redevelopment agencies has widened this gap considerably. “Even when municipalities give developers the land, it takes more to get senior-affordable rents low enough,” says Withee. “Cities are looking for ways to get these projects off the ground, but they’re having a really hard time of it.”