Tuesday, March 18, 2008

Affordable Housing In Los Angeles - A Real World Solution

Below is my essay on a plan for financially sustainable affordable housing in Los Angeles. It is written as a response to the head of the City of Los Angeles Planning Commission - Jane Usher - who wrote me a very complimentary letter to me about my article on the evils of SB181. Below are the links to those to stories and below that - is my article this week:

My first article: http://lacowboy.blogspot.com/2008/03/why-sweat-al-qaeda-when-sb1818-is.html

Jane's Response: http://www.citywatchla.com/content/view/1078/

My SB1818 Solution: http://www.citywatchla.com/content/view/1068/

Affordable Housing-A Real World Solution

By Brady Westwater

Dear Jane,

First, thank you for your kind response to my CityWatch essay on the Density Bonus Bill (SB1818).

While we have on occasion disagreed on the way to preserve the character of our neighborhoods while we build new affordable housing, we have always agreed on what we want our future city to be; a place where everyone can be adequately housed. Unfortunately, the way in which we chose to try and do this has divided us – and everyone else in LA – and this has created the disconnect that has prevented that goal from ever being achieved.

I also know we equally strongly agree it is no longer sufficient to say simply what we are against – but what it is we support. I equally strongly feel that someone such as yourself, who has in the past supported a government mandated solution, can help bridge our mutual divide by joining with neighborhood councils to support a new post-ideological solution; a solution that even free market, libertarian Angelinos who instinctively oppose any type of inclusionary zoning, might not just accept, but even embrace; a true solution to build meaningful amounts of affordable housing for the first time in our city's history.

In that spirit of radical pragmatism, I propose we create an overall
housing initiative that respects the free market and follows our community and specific plans. It also, though, must provide the necessary funding to allow not just a handful of affordable housing units to be built (which is – at best - all that any of the current proposals will provide) - but is also must be a long term meaningful solution that addresses the root causes of our housing crisis. We must work together to make housing more affordable for all Angelinos and not just a lucky few.

Now before getting into a more detailed examination of a possible solution, first a few bullet points about our present situation and about some potential solutions:

1. Increasingly, study after study demonstrates the lack of affordable housing in any city is tied to the overall lack of all kinds of housing, i.e. – if not enough market rate housing is built – then all housing will eventually become unaffordable.

2. Since it is unacceptable to have affordable – or any - housing that overrides the community and specific plans - or destroys environmental safeguards without any community input or control, we must develop a financial plan that will allow more affordable housing – and all housing in this city – to be built without unacceptable density bonuses.

3. To do that, we need to speed up the process of updating community and specific plans so we can create community approved plans that will allow housing providers the knowledge of what they can build on their land. We also need to streamline the permitting process so that projects that meet the community approved plans can be built without being tied up for years of red tape and political maneuvering.

4. We need to realize the only way to maximize affordable housing is to remove the burden from private developers. But that can only be done if we at the same time provide a new financial model for professional affordable housing developers to build far more housing than they currently building. We need to concentrate on real world solutions and not ideological posturing.

5. This new financial model can begin by turning the existing housing trust fund into a land buying trust to acquire distressed properties for resale to affordable housing developers. This trust, though, needs be precluded from buying any projects in which more affordable housing is destroyed than is being built – and their emphases should be on buying undeveloped – or severely under-developed sites.

6. All these housing developers should then pay back into the revolving fund all the money for the land either at close of escrow or upon the recording of either the construction loan or the permanent financing. The fund or a related entity should also develop a mechanism to help finance the housing projects in a way that would
have no net cost to the city.

7. Lastly – each of these projects has to be a combination of affordable housing and market rate workforce housing – with a retail
and commercial component when possible – to 100% fund the affordable
component. This then frees up the capital to build more such
mixed-income projects, just as the land trust would be paid back to
buy more land.

8. The goal of this program is to develop financially sustainable
affordable housing while also creating enough market rate housing to
bring demand and supply into balance in this city. All such projects
would be required to meet community approved plans.

Now, needless to say, making any of these proposals work in the real
(as opposed to the theoretical) world requires considerable thought
and debate. And for a more detailed consideration, we need to examine
the two major sets of subsidized housing initiatives that exist today
in the City of Los Angeles.

The first program is the existing housing trust fund and the second
programs are initiatives such as the existing and the new proposed
inclusionary-zoning (IZO) plans, including the just passed …
and now infamous … Density Bonus (SB1818) ordinance.

The existing trust fund is/will be $100 million dollars in city funds to help build new subsidized housing. It is well intentioned, but it will build comparatively few units since it calls for enormous public subsidies per unit and that will automatically dramatically limit the number of units that can be built. By definition, it will not begin to cover the shortfall of needed new affordable housing, even with its multiplier affect due to leverage and matching funds.

The second set of initiatives, the yet to be passed mandatory city wide
inclusionary zoning plan, along with some other existing inclusionary
zoning plans – including the now iSB1818 enabling legislation – will
also provide very few new units compared to the size of the demand. In addition, all these inclusionary zoning ordinances have the potential danger of having the reverse of their intended affect.

Mandatory inclusionary could easily limit the building of new housing
(thus creating city wide increases in the costs of existing housing), plus it will make the non-subsidized portion of the new housing more expensive as the developers have to recover the cost of subsidizing the 'affordable' units, particularly as the proposed density bonuses to make these projects fiscally feasible face considerable opposition from the neighborhood councils – even among councils willing to accept
subsidized housing. And with the current downturn in housing construction, it could stop almost all new construction – thus creating a far greater housing crisis in the future.

Government mandated inclusionary housing programs ignore the reality
that report after report has discovered; the more barriers a city puts in the way of housing being developed – the more expensive housing is in that city. So the irony is, the efforts made in this city to make housing more affordable, will only result in making it more expensive.

We have met the enemy of affordable housing – and it is us.

What these reports have convincingly demonstrated is that no program
which makes it both harder and more expensive to build housing (and more difficult to get financing) will create an increase in overall housing. This will, unequivocally, have the end result of less housing being built, rather then more, unless the entitlement process and rules are dramatically changed. And changing the rules to overrule our community and specific plans simply is not acceptable.

Therefore, understanding this, the current inclusionary zoning proposals - all allow for density bonuses for developers, lowered parking requirements, taller buildings than the land is currently zoned for, and reduced amounts of open space for each project – and most of these options are unacceptable.

And, if that is not bad enough, all of these proposals will also completely strip the local neighborhoods – and the neighborhood councils – of the right to have ANY say in what is being built in their neighborhood.

This demonstrates the danger of having city policy written by single issue, special interest groups and their lobbyists and lawyers.

Special interest groups invariably see their own private goals as being so important that no matter how devastating their projects or proposals have on the rest of society, they see their way as the only morally correct way.

NC's, however, should not allow any one single special interest group to dictate the future of our neighborhoods – whether it be the subsidized housing developers or market rate developers who are not dealing with the actual needs of the communities they are building within.

But we need to not just oppose bad legislation, but to also provide real world solutions when the city will not – or can not.

The first solution is to speed up the process of developing new community plans. We need to create the real zoning that Gail Goldberg has proposed and then remove politics from zoning and allow housing providers to get building permits within the community plan's guidelines in a fraction of the time it currently takes.

More than anything else, that will bring down the overall cost of housing in our city and it will make it easier to build housing that conforms to community endorsed community plans. That is the one – and the only – way to make housing overall more affordable in this city for the average person.

Housing providers should to be able to easily get building permits if – and ONLY if –they meet pre-existing community vetted community plans. Unfortunately, we are a long way from being able to do that. But that is exactly why new, enforceable community plans need to be one of our top priorities; both to protect our communities' integrity and to keep housing prices in check in Los Angeles

But while this will still not address the need to create more low income and workforce housing that will not be built by free market developers.

Fortunately, though, there is a way we can get that housing built, too.

The concept is two fold.

First we need to take the existing housing trust fund and turn it into
a revolving trust fund that buys land and resells it to affordable housing developers. And, strictly by chance – with land prices about to decline even
faster than housing prices - now is the perfect time to create this program.

As banks foreclose on unbuilt – or partially built projects – and
developable land becomes harder and harder to sell – we are at the
very beginning of a major buying opportunity for affordable housing
developers. And the best buys will come from sellers – and banks
– who need to sell a property – today.

I can think of no better time to create a 'vulture' fund to buy distressed properties.

However, to do that, there is one major obstacle in this process. The city moves at a glacial pace when it comes to doing… anything.

Therefore, a non-profit public private organization should be set-up
to buy land expeditiously whenever developers and/or owners have to
sell their property – immediately. And by being a non-profit, it will
be able to give tax deductions for full or partial donations of the
land. But more than anything else, this land trust needs to be created
with the sole mission of finding and buying bargain priced land anywhere in this city – the second it becomes available.

This land trust – since its sole job is to buy property - should be
run by hard-headed ex-businessmen who know how to buy land. No
politicians, no non-profits who might be re-buying the land the trust
acquires. We need people who live and breathe getting the best possible
deals on dirt. And they will be mandated to only buy undeveloped or
dramatically under developed properties – thus removing existing rent controlled apartment houses from their menu, which will remove the
unintended negative consequences of SB1818

But it is the second part of the program that makes the concept work.

Each project in this new program would be required to build a combination of subsidized (at varying rates and for varying income levels) AND market rate housing (which can be either for sale or for lease or mixed), along with retail and commercial components – when appropriate.

And if the land is industrial-zoned, part of the project could be used to create new jobs and if the parcel is large enough, part of the land could be reserved for park space.

The density for the project would depend on community plans and the nearness to appropriate transit (an upcoming essay on how to create a workable jobs/housing/transportation matrix will further address this).

But – again – any and all of these benefits will only be possible if the land is bought at the right price, hence the need for the land trust run by professionals in land acquisition.

And once the trust buys the land – it will put the land – or a portion of it – out to bid to housing developers who will then make proposals that need to go through a community review process. But since the project will need to meet the existing community plan and since a basic framework will need to be adhered to – there needs to be a limit on how much time that process could take. That way both the needs of the housing provider and the community can be met.

The basics of the community plan need to be followed; after that – it's whoever has the best track record at providing quality housing at the best price with the best overall result for the community. This gives the developers an incentive to create community acceptable projects so they can remain eligible for future land purchases.

Now why has this type of land trust and this type of development not
been done in the past?

There are several possible reasons.

First, it has been felt by some not be a proper use of public funds. to build market rate as well as subsidized housing. But by thus being able to build far more housing of all types in financially self-sustaining complexes, the greater supply will eventually act as a brake on the increase in housing prices, along with, in the long run, creating far more new affordable housing. This creates a far greater public good than just the building of subsidized housing projects. And even the market rate housing in these projects should emphasize workforce rather than luxury housing.

And, remember, LA has a huge supply of affordable housing units. They are just being presently priced out of many tenant's range by the lack of enough market rate housing being built.

Ironically, that market rate shortage is the biggest housing problem this city has right now. The lack of enough true market rate housing being built – and the inability for builders to build cheaper market rate housing due to all the red tape the city requires, even long after the appropriate zoning has been agreed upon – is what is destroying our affordable housing supply.

The second reason given by non-profit housing developers is that
lenders tend to shy away from this type of mixed income project,
particularly when very low-income units pass a certain percentage of
the units. And some existing lower income housing developers feel it
will be hard to lure market rate tenants/buyers into complexes with
lower income tenants.

But these subsidized housing developers can not have it both ways. They can not say that they cannot make these types of projects work – and then expect private developers to make a profit using this same formula. And with the gentrification of some of the toughest neighborhoods in LA – with heroin addicts sprawled on sidewalks and rampant gang activity – having some subsidized units in a project in a decent neighborhood is not going to keep people from buying or renting well-priced units.

The third reason given by non-profit developers is that lenders tend
to shy away from this type of mixed income project, particularly when
low or very low-income units pass a certain percentage of the units.
And there has been some historic truth to this. But there are ways –
which I will address later – in which financial controls can be
installed to make these types of projects easier sells to lenders –
and to greatly reduce the risk taken by the non-profit developers.

This is where the city and its housing fund and existing government financing programs can make the big difference.

First, possibly using the trust fund mortgages as collateral, the city
can in someway guarantee these loans with the appropriate financial
controls installed that will be discussed later. But that is only one
possibility and one, which may – or may not be – feasible.

Second, the city might issue bonds of their own to give the non-profit
developers lower cost loans due to the city's credit rating for the
parts of the project that might not be fundable though more
conventional sources. And, again, this has its pros and cons but it
may also be part of the solution.

Then once these types of projects develop a track record – and
particularly as each specific non-profit (or profit making) developer
develops their own track record – it will become easier and easier for
them to obtain financing.

Additionally, as these developers do more of these projects, they will
develop greater expertise on how to make this kind of project work.
And they can also then help unions, artist's groups, churches,
universities, co-ops of any kind and other community organizations
develop housing programs for their own members by contracting out on a fee only basis to such organizations.

Fashion workers can have condos near the Fashion District, city employee unions can build buildings, hotel & supermarket unions canhave scattered projects around the city and each college can have its own housing clusters.

These organizations can also band together with other organizations each having ownership of different parts of one project for its members and then have a fee only non-profit developers build the project.

There is no limit to the numbers of non-profit housing providers that can be created once we develop a core group of experienced developers to work with these non-profits. And with a built-in supply of buyers and tenants, these projects would be less susceptible to the vagaries of the market and would be able to build in down times when materials and labor are less expensive.

Lastly, the major problem of community resistance to subsidized projects will be greatly reduced by having all kinds of housing in these projects, making them a better fit in all kinds of communities – and more acceptable to both lower and upper income neighborhoods. Plus, by needing to keep their market rate tenants and commercial tenants happy, the owners will have to make certain their projects are
not creating any quality of life problems for the neighborhood

Meanwhile, by freeing up market rate developers to develop market rate housing without the expense of having to subsidize any of their units (unless they, of course, want to subsidize a percentage of their units utilizing tax credit financing who will now be MORE available to them assuming the non-profit developers can utilize other programs), they will not only build more housing, but they will be able to afford to offer their units at a lower prices.

Lastly, I am not even addressing all the other types of financing non-profit developers often use to make their projects pencil out that can still be utilized in these projects. All those types of subsidies are still on the table

And, of course, the more units that are built – the lower the prices will become. This will particularly happen if the increased housing production of all kinds finally brings the supply of housing into a balance with the demand for housing.

But with over three million people in this city, we can never, ever build enough affordable housing to meet the demand. I repeat, never. Ever. Under any circumstances.

It is simply too expensive to subsidize enough NEW housing to meet the needs of people who make substantially less than the median income, particularly when so many hundreds of thousands of existing older units can meet their needs.
And it is also a completely wasteful use of our recourses with all the other needs of our society.

The only long-term solution is to create enough new market rate
housing to stop the gentrification of lower-priced neighborhoods.

It is just that… simple.

Now… as for how to deal with the risk on all these projects so they can become more credit worthy – and protect the long term financial viability of the non-profits, there are several ways of dealing with this. But rather than deal here with the minutiae all of them, I will address just four of most important built-in protections.

First, while the community has to have a strong role in selecting which developer gets each project – the first look needs to come from the Trust that buys – and sells – the property. They need to first narrow down the list to qualified developers with established financial track records and proven expertise in these types of projects. And if any community supported group – or – God help us…
'politically connected' group can't make that initial cut – they can still team up with a proven developer. This gives us a first level of protection.

Second, as the original trust fund loans are paid off, a certain amount might be kept in short term securities to cover any of the mortgages should they go into default. And each of the projects – as long as the city is still on the hook for the mortgages, might have a signed quit claim which would allow either the city or the overall development company to take over the project, if necessary, should it
go into default.

In addition, each loan guarantee (should a city loan guarantee be a
part of the project) would be pre-negotiated with the lender to expire
after either a certain net income is generated or the mortgage is paid
down to a certain level. That way the city will not be on the hook for
too many properties.

But these are just suggestions for a much longer discussion that needs
to be held.

Third, while some groups may need short term financing, many non-profits are capable of buying the land out right (once the city has bought it at the 'right price") – and the city's financial involvement will only be very short term then before the money gets paid back – and re-lent out again.

But it is the fourth protection that is the big one.

When each project is finished, ONLY the market rate units (and any
commercial/retail spaces) will be leased or sold. The subsidized units will only be leased or sold AFTER the market rates units that subsidize them are sold or leased.

This way the developer will know what numbers of units can be subsidized – and at what rates they can be subsidized. This guarantees that each project will be financially self-sustaining.

Later, as rents go up on the market units, they can further subsidize
– if necessary – the other units. Or they can re-rent out formerly
market rate units at subsidized rates as they become vacant after the
rents rise in the other market rate units.

But, again, initially, no below market units would be sold or rented
until the project is guaranteed to be financially viable. And if the
market is trending downward, an additional level of security might be required.

Then there is the final, possible kicker in this project – and it could be a big one.

All these projects might have 15-year mortgages – for two reasons.

First, whenever market conditions change and the housing market crashes – interest rates usually drop, and the projects can be refinanced – and they can be refinanced with 30-year mortgages with lower payments if need be - to keep the project sustainable.

So even while that kind of severe rental rate drop is an unlikely
event, it does give each project a further fail-safe mechanism to keep the projects solvent.

But the real advantage of the 15-year mortgages is that in 15 years –
each one of these projects will be fully paid off.

Totally free and clear.

With zero mortgage payments.

In just…15 years.

At that point each project can either be refinanced to build more
projects, or all of the renal units can be made very affordable – or, more likely – a combination of these two options.

The end result is not only a self-sustaining, self-replicating original housing fund – but also providing long term financing for much larger amounts of affordable housing – with a huge cash infusion into the program starting 15 years from now, and continuing for every year after that.

So rather than many programs in which housing becomes less affordable
after the mortgages have been paid off – under this program – the
housing will become more consistently MORE affordable over time. Now
can you imagine what LA would be like if this type of thinking had
taken place in the 1930's or the 1950's?

The most shortsighted aspect of much subsidized housing is that some of it will become non-subsided in the future. Here – exactly the opposite would be true. Not only will the original units always remain affordable… forever– but also the ability to create more subsidized units will increase.

A true long term, financially sustainable – albeit, partial – solution to our housing crisis.

But it is just one of the policies that need to be adopted to make this a city with livable neighborhoods, abundant, affordable housing and a city where owners will out number renters. And while increased density is wrong for most of the neighborhoods in this city, we need a handful of more dense neighborhoods both to
prove the needed housing, to reduce suburban sprawl –and – equally
importantly – to create the great urban cores that can only happen
within areas of considerable residential density.

The other parts of the puzzle can be solved by creating a RX Zoning
overlay of our existing zoning code to voluntarily preserve the
quality of life in existing neighborhoods (and that proposal will soon
appear in CITYWATCH), by greatly increased density in areas such as
downtown that are appropriate and by passing a new condo conversion
ordinance to allow tenants to buy their own units.

And then there's greatest home building opportunity in the city's history which can be done in conjunction with the re-greening of the LA River Downtown along existing hard rail lines that lead straight to Union Station (and a self-financing plan to do that soon to appear in CITYWATCH).

Except, of course, the city in its ever infinite lack of wisdom – has just banned all housing along the LA River throughout Downtown Los Angeles.

But that's another battle for another time.

For now, we need to save the quality of life in our city's other neighborhoods by first stopping SB1818 and then by making a commitment to create a financially self-sustainable affordable housing program that can provide affordable housing within our existing zoning guidelines and our existing community and specific plans.

So Jane, are you ready to team up with the NC's on finding a common solution on the affordable housing crisis? Are you interested in working with us on this?

I'll be looking for your response in the next CITYWATCH.

(Brady Westwater is a writer, a long-time downtown and neighborhood council activist and Chair of the LA NC Congress Economic Development Committee. Westwater is a regular contributor to CityWatch. He can be reached at: bradywestwater@gmail.com)


Anonymous said...

Theres no such thing as affordable housing in Los Angeles County anymore along with the high cost of rents. Take the Antelope Valley for example where I live. The rents are sky high, and the wages for jobs are nearly the same when the rents were lower. How can the increases be justified when the cost of living as increased? Its becoming harder and harder for people to live and theres no easy answers. One idea is that the people don't have to buy those overpriced homes.

Aunt Alice's Nutshell News said...

enjoyed this alot