Mind the Gap

Finding new ways to fund affordable housing

Back Article Aug 1, 2012 By Robert Celaschi

Sacramento County will need an estimated 23,000 low- and very low-income housing units in the next nine years. The six-county region stretching from Yuba to Placer to El Dorado would need more than 41,000 units. But without the tax increment financing once provided by redevelopment agencies, city leaders are wondering where they’re going to come up with the cash to build.

California’s shuttered redevelopment agencies provided the “gap” financing that helped affordable-housing projects pencil out for developers. That gap can be anywhere from 10 percent to 50 percent of total costs, and now jurisdictions have to find new ways to deliver the goods.

“We lost, effectively, about $1 billion that was going toward affordable housing,” says Doug Shoemaker, president of Mercy Housing California, one of the biggest affordable-housing developers in the state. “And even with that amount, I don’t think many people would say we were solving the problem.”

The Sacramento Area Council of Governments estimates, for example, that within the next nine years Sacramento County would need to build about the same number of units that the Sacramento Housing and Redevelopment Agency created in its entire 30-year history.

Experts now are exploring strategies to restore tax-increment financing.

The model used by redevelopment agencies worked this way: A project area was created, developers built on it and the value of the properties went up. That pushed property tax bills up, too, and the extra revenue — the increment — went to the redevelopment agency instead of the city, county or school districts. Thus, the redevelopment agency had money to repay debt and re-invest.

With redevelopment agencies off the table, those local entities will now get the money they’ve been missing. The largest share goes to school districts, says John Shirey, Sacramento’s city manager and former director of the California Redevelopment Association.

“My point is this: If we are somehow going to resurrect tax increment financing, we should just say right off the bat that it will not include the schools’ share of a property tax dollar,” Shirey says. “That share has always been around 48 to 52 percent. You’d just better plan on having fewer dollars.”

Others agree that a little strategizing is worthwhile. La Shelle Dozier, executive director of the Sacramento Housing and Redevelopment Agency, says negotiating what is appropriate for the schools’ share and the impact on the state budget is necessary. Dozier says redevelopment works in areas that have significant numbers of school children, also bringing affordable housing benefits to schools.

State Sen. Darrel Steinberg revived tax-increment financing in his Senate Bill 1156, which cleared the Senate in May. It would allow cities and counties to set up Sustainable Communities Investment Authorities and use property tax-increment revenues for public works. They’d also be allowed to set a local transactions — and — use tax above the state’s 7.25 percent base sales and use tax.

Bond financing is another option. It’s been a source of redevelopment funding before but adds debt service to the general fund. The last redevelopment bond to pass was Proposition 1C in 2006, which supplied $2.85 billion for affordable housing, but voters weren’t battling a recession when it landed on the ballot.

“I said then — and many other people said the same thing — that it might be our last housing bond in California,” Shirey says.

Many cities have “inclusionary zoning,” requiring each new housing development to incorporate a certain percentage of affordable units — those that can be bought or rented for less than 30 percent of the consumer’s income. West Sacramento, for instance, pegs the inclusion at 20 percent. Developers can pay a fee in lieu of building the units, and the city uses that money to provide gap financing for affordable housing elsewhere.

But inclusionary zoning requires a market-rate developer to start a project, says Brian Augusta, director for the California Rural Legal Assistance Foundation’s Affordable Housing Project. That’s no good in a dead market; even in an up market, it doesn’t yield big volume.

“We can’t solve this by just doing a sprinkling of units,” Augusta says.

Federal funds have helped significantly. This spring, the Sacramento Housing and Redevelopment Agency gave a tour of the Villa de Novo Apartment complex in North Sacramento, purchased out of foreclosure and fully renovated with $3.5 million in funds from the U.S. Department of Housing and Urban Development.

“If we are somehow going to resurrect tax increment financing, we should just say right off the bat that it will not include the schools’ share of a property tax dollar.”

John Shirey, manager, city of Sacramento

But Washington, D.C., has its own budget woes, too, and, “The feds actually cut back on the amount of money they send to our jurisdiction,” Dozier says.

In West Sacramento, the allocation from the U.S. Department of Housing and Urban Development’s Home Investment Partnership program has been reduced almost every year for a decade, according to Aaron Laurel, the city’s revenue and grants manager.

State Sen. Mark DeSaulnier (D-Concord) penned Senate Bill 1220 this year in an effort to attach a $75 fee on each real estate transaction to fund redevelopment. It came up one vote shy of the two-thirds majority needed to pass the Senate.

One of the bill’s sponsors was the California Housing Consortium, based in Agoura Hills. Executive Director Ray Pearl says the vote was a victory of sorts because it put a majority of the Senate on record as supporting the idea.

The defeat might have been a case of bad timing. “With the demise of redevelopment, you need a little time for people to step back and look at the issue without connecting one to the other,” Dozier says.

DeSaulnier is expected to try the idea again.

Meanwhile, redevelopment agencies aren’t completely out of business. The SHRA, for example, can still count on about $4.4 million from the city and county. It’s nowhere near the former annual $27 million, but it would be enough for a project here and there. Plus, rehab is cheaper than new construction.

“There is no strategy you can identify that would address all the issues,” says Shoemaker of Mercy Housing. “Most people who know this field say you are going to have to have a range that will add up to addressing this problem overall.”

The downside is that California could end up with a patchwork of policies and levels of activity, Pearl counters.

Whatever the solution, speed matters. Laid-off redevelopment employees already have to find other jobs to put food on the table. In six months, much institutional knowledge will be gone, Dozier says. Private-sector players can’t sit idle for long either, says Rachel Iskow, executive director of the Sacramento Mutual Housing Association Inc.

“The longer that state and local governments take to figure out a solution to subsidize building this housing, the more we are going to lose capacity in the field,” she says. “If it’s years, we will have lost all this professional capacity. That’s what I think is frightening.”

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