California’s plan to close the middle-income gap begins with market-rate housing


In April, a 507-unit Class A multi-family building in Glendale called Altana sold for $ 300 million a record for largest multi-family transactions in California this year to date to a partnership between Waterford Property Co. and the California Statewide Communities Development Authority.

The partnership plan? Lower rents, not raise them.

Through a program available through the CSCDA, partnerships between private entities, the CSCDA and cities can purchase newer high-end multi-family buildings like the Altana, which opened in 2017, and convert the units into housing. moderate income, affordable for those making between 80% and 120% of the median income in the region.

Courtesy of Standard Communities

Union South Bay Apartments in Carson, which Standard Communities and CSCDA purchased in July.

The CSCDA is the largest joint authority in the state and is very active in Southern California, but two other JPAs have created moderate-income housing programs that similarly fund this type of project. One, the California Community Housing Agency, started in 2019. In total, the three bought 6,000 units in 20 buildings, the Los Angeles Times reported.

Although the program has taken off, it is not without its critics, who fear that these transactions will benefit the private parties involved in measurable ways but that the public benefits will be less fixed.

“The program as it has operated in other places would present risks and costs to the city, while offering only modest gains in affordability,” wrote the director of the economic development office, director of the housing and finance director of the city of San José in a statement. note to the mayor and city council following analyzes by municipal staff and third parties of the funding models of CalCHA and CSCDA.

Purchases are 100% financed by tax-exempt bonds. The joint powers authority issues them and they are bought by investors. CSCDA chief executive Jon Penkower said the buyers are large institutional mutual funds and large tax-exempt bondholders, including Franklin, Vanguard, Nuveen and PIMCO. The proceeds finance the purchase of the property that will be converted into moderate income housing.

Various private partners, such as Waterford and Standard Communities, team up with CSCDA to serve as a so-called program administrator on projects, although JPA’s name is on the records. As the JPA is a government entity, it is exempt from property taxes.

“What we’re doing is monetizing the property tax exemption. That’s what creates the grant, ”said Penkower.

This allows the partnership to reduce rents for low-income tenants on program properties and keep them below the market rate. Supporters of the program have stated that without this element the program will not work.

In a February 2021 memo from HR&A Advisors, which was hired by the City of Long Beach to assess a potential transaction there under the CSCDA program, HR&A asked whether the reduced rents were a significant discount from the market rate and noted that tenants with the most extreme needs were those who qualify as low income.

But those who use this program have said that there are many sources of funding to create housing for low-income people, like the low-income housing tax credit. Sources of funding for social housing are more difficult to find.

Waterford Property co-founder and head of acquisitions and development, Sean Rawson, whose company deals with both affordable and market-priced housing, said it was difficult to find ways to fund projects at moderate income, whether it is a basic project. or an acquisition.

“What is so unique and fascinating about this program is that it really is the first source of capital that we have seen to be able to provide housing for low-income households,” said Rawson.

The need for moderate-income housing is real, and supporters and critics of these programs agree. A 2021 report from the California Housing Partnership found that statewide, about 42% of moderate-income households were overcharged or paying more than 30% of their income for rent.

The CSCDA program was created in 2020 but has already been used in some notable sales in Southern California. The CSCDA, in partnership with private real estate companies, has processed $ 2.1 billion in 12 properties since the program’s inception in 2020 and is working to close a handful of additional deals across the state. To take advantage of its social housing program, cities join the CSCDA and then decide whether or not to approve individual transactions as proposed.

Real estate consultants who have prepared reports for cities considering transactions under the program say they have received numerous inquiries from municipalities interested in the program, looking to increase their stock of labor-intensive housing. Los Angeles is considering it, and there are CSCDA projects in Carson, Anaheim, Glendale, Pasadena, and Long Beach.

Reserved area

Courtesy of Waterford Property Co.

The Altana in Glendale

As mainstream buyers retreated to the sidelines to see how the market had shaken during the coronavirus pandemic, those working on CSCDA-sponsored deals said the program had become more attractive, particularly around Los Angeles. Of the 12 properties that CSCDA has helped convert to moderate-income housing, 11 are in Southern California.

“This period was a great window of opportunity for this program,” said Chris Cruz, CEO of Standard Communities, Essential Housing.

Class A projects that had been built with anticipation of higher rents were leased at a 10% or 15% discount, and no conventional or market rate buyers waited to buy them, Cruz said. The traditional buyers of these large multi-family projects at market prices were not budging, as in other sectors.

“That, coupled with low interest rates, has allowed us to be quite competitive,” said Penkower.

Of the top 10 multi-family deals in California this year to date, four have been purchased by CSCDA as part of its moderate-income housing program, according to data and research from CommercialEdge. Of the top sellers in LA County for the same period, five were made to CSCDA through the program.

CBRE Executive Vice President Dean Zander, who specializes in multi-family housing and has worked on some deals under the Moderate Income Housing Program, said these deals are having an effect on the region’s overall multi-family market. of Los Angeles because they are effectively removing those properties. housing stock at market price, reducing the overall supply which, coupled with demand from tenants, drives up rents. These sales also set new price benchmarks that other owners want to achieve when they sell.

“In a way, they benefit homeowners, even homeowners who don’t participate in the program, by kind of increasing the prices they can charge for their properties,” Zander said.

Uncertainty around the multi-family market has faded, which may make it more difficult for CSCDA partnerships to find deals. But those who use partnerships said the program can keep investors competitive.

Zander said there were certainly more aggressive investors in the market than there were six months ago, with many also considering the same high-end and larger properties that these programs are targeting. Generally speaking, Zander said, bond buyers may go a little further on pricing than a traditional buyer, but traditional investors can move faster than these partnerships, and sometimes speed is more important to. seller.

Still, Rawson said he was optimistic about the partnership’s ability to lock down the properties.

“I think for sellers it’s just about finding the right buyer, and we’re strong buyers,” Rawson said. “We have a very captive investor base of municipal bond investors looking to invest in the workforce housing space.”


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