Roundtable: Housing Development Through the Eyes of Nonprofits

Now that each of you have projects completed or under construction, what were the major nonfinancial obstacles that affected the develop­ment of your projects? 

Ling: We have to contend with the gap between perception and reality. The reality is that every time we do a project we over-design, over-maintain, and over-manage it to create a pleasing project with net social benefits to the community. We only rent to the “stable poor;” 95% of our tenants are employed.

Yet the perception is that we dump low-income housing in the poorer areas of Santa Monica, that all of our tenants are unemployed, and that they bring in gang and drug problems. The challenge is in turning around this perception.

Huang: We’ve run into the same issues on infill housing. We try to deal with this by making our housing blend in with the existing scale and character of the neighborhood. If our buildings stand out, it’s because they’re designed and managed better than what surrounds them.

Rupp: For us, the process went remarkably well. It was extremely time-consuming, but we didn’t encounter any opposition. I do think it would be wonderful if the City had an SRO ordinance so that SRO’s could be developed “by right” in commercial or residential zones.

What about financial obstacles?

Huang: One of our biggest problems is that each funding source — local government, state programs, tax credit investors, and banks — emphasizes leveraging their fund with other funds. You get points for having a more complicated six-loan project instead of a one-loan project.

But each lender adds to the cost by adding design criteria, higher legal and transaction costs, and longer delays in closing construction loans while we try to get all of the lenders to agree on project loan terms. Then each lender indignantly asks why the projects cost so much.

Ling: Real estate development is a process of managing risks. Because we are a public purpose builder, our rents have to stay at a certain level, which artificially reduces the value of the project. There is no up-side po­tential to absorb some of the risks. 

So on the financing end, we have to patch together five or six sources of funding, which increases the likeli­hood of deals falling through. On the spending end, permits and fees may run up to $10,000 to $15,000 per unit, though we have been able to negoti­ate some fee waivers. 

Now that you’ve also gone through State bond financing programs such as Prop. 17 and 84, what have you learned that the State should consider in applying next year’s proposed bond measure from Sen. Roberti? 

Ling: One public issue is that Southern California has not been competitive in getting the money — we’ve only gotten about one-quarter of the bond money. Because the process is so competitive, the selec­tion criteria are just not sensitive enough to determine which projects should be funded.

Rupp: The staff at HCD focus heavily on development capacity, asking, who are these people, and can they really pull it off? The Northern California non-profit development community has a handful of larger non-profits who tend to do most of the deals, while in Southern California you have many smaller groups doing one or two deals. HCD staff is more likely to have long-standing relationships with the Northern California community.

Now that Los Angeles has approved a mixed-use ordinance, what opportunities will be available for non-profit housing developers to work with commercial developers? Are there real opportunities to “partner up?” 

Huang: We’ve been approached a couple of times, and what’s been dif­ficult is the ownership structure — how you separate out the housing from the commercial below. There are certainly opportunities for mixed-use, but many housing developers question why they should add even more complications to an already dif­ficult process. 

Ling: We’ve undertaken some mixed-use projects with the intention that the cash flow generated by the commer­cial element would help us borrow more money for the housing. What happened in reality was that the commercial market collapsed, turn­ing every deal on its head. A problem with the mixed-use projects we have done and with others I’m aware of is that the retail space is not anchored — they are boutique retail spaces which are hard to lease. 

Another problem with mixed-use partnerships comes from lenders. We went to eight different construction lenders on a mixed-use project, each of whom told us that they would not fund us unless we executed leases for most of the retail spaces. That makes it just about impossible to fund a project.

Perhaps in another market environment, these types of mixed-use projects might be a good idea. But because of the way the lending institutions are set up now, the banks that make residential loans are reluctant to make commercial loans for mixed-­use projects. 

To what extent should you mix market-rate and affordable housing? 

Ling: The City of Santa Monica is now facing the policy issue of imple­menting its inclusionary housing pro­gram. On-site inclusionary units will create a situation where $500,000 condominiums would go alongside rental units at $300-$500 per month. It will be a real challenge to manage such a diverse resident pool. 

Rupp: The problem is that you can’t get a loan because you can’t convince a lender that the market-rate units will truly be market-rate, and that there won’t be a higher vacancy factor. The concept of combining condominiums and rental units doesn’t fly because experience shows that the project will tend to tip toward apartments — you won’t find many people willing to buy into a building with very-low-income people. 

Given the current climate for com­mercial space, what are the opportunities for retrofitting older commercial structures for housing? 

Rupp: We are involved in retrofitting a three-story commercial building into SRO units in Skid Row. Our costs have not been significantly greater than a regular rehab project, and somewhat less than new construc­tion. If a building is structurally sound and has adequate light and air for residential uses, retrofitting can be economically feasible. 

Huang: Many downtown buildings are so large that funders face a choice between having one large project take up a large portion of the funds, or funding several smaller projects. Most of our projects utilize Low Income Housing Tax Credits. On our larger projects, we have to syndicate the tax credits ourselves. And in this economy, it’s getting very difficult to find investors for syndication.

Ling: For-profit developers who want to do affordable housing must realize that the public money out there has very severe and long-term restrictions. With the Tax Credit, even though the federal requirement is a 20-year set­aside, in order to be competitive in California, you need to agree to set aside the units for 55 years. 

What about joint ventures between for-profits and nonprofits? 

Rupp: It’s hard. When I was in Santa Monica, the City’s housing officials’ theory was that the private development community had expertise, could make the projects happen, take out a devel­opment fee and then disappear, leaving the non-profit in it for the long-haul. But the reality is that they don’t typi­cally have much more expertise with the product and the financing sources typically utilized, and they offer very little in the way of cost efficiencies once you add in their fee. We never saw it work successfully there. 

Huang: Sometimes there are shotgun marriages, as in the Marengo Block in Pasadena, where the RFP required in­volvement by a nonprofit. We even­tually agreed that we would do the affordable units as a separate project, and the for-profit developer’s contri­bution would be a predevelopment loan.

Ling: We all build buildings, but affordable housing is an esoteric field. It’s reasonable during this recession for them to look at affordable housing as a new market niche, but they would have a learning curve. First, they have to learn how to do Davis-Bacon pre­vailing wage jobs. Second, they have to learn how to do the public lending paperwork. And, third, in ongoing operations, they have to learn how to work with public housing authorities, on-going public reporting require­ments, and tenant management. 

For-profit motivation is different. A for-profit developer will walk away from the project when he realizes there’s no money to make. In contrast, we have a project where we’re having a hard time raising the equity — we’re willing to forego the developer’s fee, if necessary, to make the project work. A for-profit developer would have walked away already. 

Do you have any final predictions on where your own organizations and the non-profit community will be going during 1992? 

Huang: Since the Design Center is a regional organization, most of our projects are joint ventures with com­munity-based organizations, often very young groups. We want to get better at building their capacity, and we are currently in the process of looking for a community develop­ment director. 

Rupp: We’re going to keep doing what we’ve been doing — SRO development — but it’s going to be harder next year because there’s not as much money. Locally, the CRA’s cap has to be raised, which is a big issue for us because the CRA is an important lender for our projects. In State money, we’re in big trouble unless the bond issue passes. And on the federal level, there’s the re­newal of the Tax Credit. 

Ling: My prediction for 1992 is that money for affordable housing is go­ing to become scarcer at the state and federal levels, and that the process is going to become extremely com­petitive. 

For Community Corporation, we’ll be completing the projects al­ready on our plate and beginning new projects using local funds. The economy affects every sector. Com­mercial real estate took the first hit, but now projects dependent on government support are taking the next hit because there are fewer tax dollars available.