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Post-Redevelopment California: How to Fill the Affordable Housing Finance Gap

BB&K In The News

BB&K Attorney Seth Merewitz Examines the Options

May 2012
Western Real Estate Business

By Seth Merewitz

With the demise of redevelopment in California, communities have effectively lost tax increment as a tool for assisting economic development, infrastructure improvements, and increasing, improving and preserving the supply of low- and moderate-income housing.

While the former redevelopment agencies statewide reportedly had more than $2 billion in their Low-Mod Housing Funds, any of this money not yet encumbered will not be available for affordable housing unless there is legislation approved at the state level. Moreover, the real property “housing assets” of the former redevelopment agencies may be transferred to the identified successor housing agencies, though there is ambiguity in the state legislation as to how a “housing asset” is defined, which may delay viable use of these properties.

This catastrophic blow to affordable housing financing adds to the challenges when the need is increasing. A report by the Southern California Association for Non-Profit Housing demonstrates that the City of Los Angeles is losing ground in trying to keep up with the affordable housing it needs to fill for existing demand and population growth. According to the city’s housing element guidelines, the city needs to produce more than 4,000 affordable housing units annually.

This situation is amplified in the smaller, more rural parts of California that rely on assistance to make projects viable. These problems are also exacerbated by cuts in federal and state programs that assist affordable housing. Many affordable projects may be lost as their conversion period nears and there are no funds to ensure that the affordability is continued.

So how will we deliver needed affordable housing throughout California in this post-redevelopment era? I suspect the solution will come from innovation in three areas: (1) product type and approval process changes; (2) non-traditional sources of funding; and (3) entrepreneurial efforts by local agencies.

Product Type and Approval Process Changes

The first change expected for the next generation of affordable housing projects will be efforts to modify the project types and approval processes to reduce costs at all stages of development. We can expect providers to make major efforts to ensure that project costs are reduced, from permitting to design, construction to completion, and ongoing operation and maintenance costs. This will also affect the financial expectations of investors, thereby reducing yield requirements, and contractors, lowering construction costs. It is also likely that amenities and services will be cut out of projects in an effort to enhance efficiency.

Non-Traditional Funding Sources

Affordable housing finance has always been an alphabet soup of sources, but now the sources themselves are in question. Given the lack of local funding sources (for both direct and matching funds), changes to tax-credit allocation requirements, and reductions in state and federal sources with contracting budgets, new and innovative efforts will be made. For example, governmental programs targeted at energy retrofit or greater efficiency may draw more attention as projects will be designed to follow whatever funding source is available. Moreover, we may see more community foundations and religious institutions attempting to bridge the gap as governmental programs are reduced or eliminated.

Local Initiatives

Communities that wish to continue to see new affordable housing projects have existing authority to assist projects in many ways, such as impact fee waivers and streamlined processing and approval methods. Additionally, as the economy returns and market-rate housing projects begin again, inclusionary zoning and density bonus laws can help generate new affordable units. Finally, with the loss of redevelopment agencies there will be more property tax received by local jurisdictions that could be set aside in an effort to assist future affordable housing projects if the local agencies wish to prioritize this money for this purpose.

Advocates for affordable housing need to search for new ways to work together to finance projects, but also to identify new partnership arrangements. These new public-private partnerships have the opportunity for communities to think about project delivery in new ways from land acquisition to financing. One example is the effort to monetize surplus property held by a local government, school districts or other special districts. It could help foster affordable projects if such non-performing assets could be leased or sold at below-market rate. These new efforts will take collaboration, transparency and willingness to evaluate new forms of project delivery.

Looking Forward

With this changing environment, the future is unclear. The need for affordable housing is growing, and there is broad support for continuing the work that was accomplished by the use of redevelopment tax-increment financing. However, at this time it is unclear where we will find either the tools to accomplish this goal or a secure, on-going funding source.

Those entrepreneurs who take advantage of this turning point to innovate and think beyond the confines of the conventional affordable housing project will continue to provide a solution to this community-wide need.

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