The City Council voted Tuesday to ask staff to come back with more information about how it could use tax-exempt bonds to purchase buildings to reserve for middle-income renters.
In Los Angeles County, the average median income is $80,000 for a household of four; households of four would qualify for these units if they made between $64,000 and $96,000 annually. (For a full list of median income by household size, click here.)
Long Beach and other cities have been trying to increase the region’s housing stock for middle-income earners, which often is not attractive to developers because it does not come with financial incentives like low-income housing, and does not attract high-dollar rents like luxury housing.
The city last year explored a pilot program with the state in issuing $144 million in bonds to purchase the 216-unit Oceanaire luxury apartment building Downtown and rent its units out at lower rates.
As part of the deal, Waterford, the operator of the building, stayed on as a project administrator and is set to receive $11.5 million over the next 15 years through fees derived from rent payments, and the city could opt to buy the building at the 15 or 30-year mark.
However, Long Beach and other taxing agencies will not collect property taxes on the property for the length of the deal, something that consultants warn is one of the drawbacks with these types of deals.
A November letter from CSG Advisors, HR&A Advisors and the California Housing Partnership to California governments outlined the pitfalls of these types of deals as more and more have cropped up around the state:
- The bonds issued are not rated, which means creditors have not determined risks and value of the bonds, as well as the probability of default.
- Many of the provisions of the agreements to date are not enforceable by the local government, like the amounts charged for rent and the length of those discounted rents.
- The repayment of bonds depends on rents increasing.
- And there is often no entity legally responsible for the property, leaving tenants with no one to turn to for issues regarding repairs and other issues are among the issues cited in the letter.
The way that the bonds are structured is risky, the letter said, and pointed to a 2019 project in Santa Rosa that has already not met revenue projections and has led to talks to restructure the bonds less than two years into the project.
The letter provided multiple examples of how similar financing to the Oceanaire deal, with safer underwriting measures, failed or required a government agency to step in and take over the property. The letter noted that between 2016 and 2018, the Illinois Finance Authority purchased five portfolios of existing apartments for $170 million in bonds rated BBB or higher and all five defaulted by 2019.
Part of the issue is that the bonds issued do not require initial rents to cover the repayment of the bonds and actually require rents of affordable housing to increase in order to do so.
If rents do not increase to cover more than just the interest portion of the bonds, then the property could fall into foreclosure. In the case of the Oceanaire, if it fell into foreclosure, the city could have to make a debt repayment before it could sell the property, which could eat into the revenue generated from the sale that was supposed to offset decades of foregone property taxes.
“As organizations with decades of experience in housing finance throughout California, we think that deviating from the normal underwriting standards of all major banks and federal entities creates serious risks,” the letter said. “The greater the deviation, the greater the risk. We particularly think that relying on future growth in net operating income to repay debt is extremely dangerous.”
While the Long Beach City Council voted last year to enter into the pilot program with Waterford, it wasn’t the only entity that lost property tax revenue.
The county, school districts and local colleges that rely on tax revenue also will lose out on the Oceanaire project and others like it, the letter said, noting that the city’s share is often five to eight times smaller than other taxing entities that don’t have a say in the deal. Long Beach is projected to lost $8 million over the course of the pilot program, while other agencies will lose a combined $43 million.
Some recommendations that could ultimately be part of Long Beach’s policy going forward would be to charge a “host fee” paid by the bond purchasers that would recoup the city’s portion of property taxes.
The rents of any projects acquired through this process could also be linked to the state’s income limits, be no more than 30% of a household’s income, which is the federal standard for when one becomes rent-burdened, and be deed restricted for 55 years, all of which were absent from the Oceanaire purchase.
Oceanaire rents were standardized, with studios going for as low as $1,841 per month and three-bedroom units as high as $3,941 per month.
The city might also be able to count units acquired through this process and reserved for those making under 100% of the area median income as part of their Regional Housing Needs Assessment goals.
Long Beach has as a goal of creating 26,502 total units by 2031, with 4,158 of those units supposed to be for moderate-income households. Under Assembly Bill 787, which was signed into law in September, Long Beach could create 25% (1,040) of its moderate-income units through acquisition and deed restrictions.
The City Council is expected to receive an update on the policy within the next few months, when it could vote to approve guidelines for any future acquisitions the city makes of new or existing rental units.
State program could ease strain on moderate-income housing construction