Hoping to make up for the shortage of affordable housing in the state, some California government agencies are buying buildings, usually luxury ones, and doing the opposite of most real estate buyers. They’re lowering rents.
The programs target middle-income workers, including police officers, teachers and nurses, who earn too much to qualify for most traditional subsidized housing but still can’t afford a place near work, according to state agencies and private partners involved.
They are based on a unique financial model that includes local property tax subsidies. Supporters say the approach makes thousands of apartments across the state more affordable for those without high incomes, serving the so-called “missing middle” excluded from other affordable housing programs and left to the unrestrained real estate market.
At least three government agencies have launched these programs, cutting rents by double-digit percentages in places like Long Beach and Pasadena. In all, government agencies, known as consolidated authorities, have purchased more than 20 buildings totaling more than 6,000 units.
Questions remain about the long-term effects and underlying economics, including whether the cities, which must approve the deals and help guarantee rent reductions, will actually be reimbursed. Some also dispute whether the rent reductions are large enough to make the program worthwhile.
The Los Angeles City Council is awaiting a staff report on the possibility of annexation. In Northern California, the San Jose City Council declined to participate after city officials concluded that “the risks and costs of annexation … outweigh the potential benefits.”
Despite such concerns, programs expanded quickly during the pandemic as minimal interest rates made it easier to finance acquisitions and economic uncertainty meant fewer traditional real estate investors were competitors.
And for some renters who could afford housing that was previously unaffordable, they were a game-changer.
The most active authorities buying buildings are the California Community Development Authority, or CSCDA, and the California Community Housing Agency, or CalCHA, which launched its first program in 2019.
Rent levels vary by income, but in the properties they purchase, rent reductions across the board average about 10 percent of what the previous owner charged, with greater reductions for the lowest-income units, according to John Pencover, managing director of CSCDA. and Jordan Moss, founder of Catalyst Housing Group, the main private company working with CalCHA.
Local subsidies.
Middle-income programs, as patrons describe them, are more than just real estate deals.
Joint Powers Authorities, which issue and manage bonds on behalf of local governments that join as members, help fund programs for middle-income people. They issue bonds and use the proceeds to buy real estate and pay private companies to arrange financing and manage the buildings.
Because the authorities are government entities, they do not have to pay property taxes. These savings are passed on to tenants in the form of lower rents, and the bonds attract investors with interest payments.
The bonds have a maturity period of about 30 years. Once they are paid off, proponents say the city can arrange to sell the property debt-free or manage the property and take out a loan on the buildings. The proceeds from either of these transactions go to the city, which should mean the city gets more money than the property taxes they lost on, proponents say.
Cities can force a sale or refinance as early as 15 years after the bonds are issued, though that would make it harder to get their money back.
Each project is unique, but joint powers tend to serve households at the upper end of what is considered low-income compared to those with middle incomes, with about the same number of apartments reserved for each income group.
To move in, renters must apply and certify that their income is within the required category.
Authorities said tenants who earned more and lived in the property before the agency acquired it are not evicted and can renew their leases as long as they want. Once they leave, those units become income-constrained.
In some cases, once a building is purchased, the rents for some income cap units are not reduced and the market rate is charged, but proponents say that over time, the rent increase restrictions built into the programs mean that these units must become cheaper than they otherwise would have been.
Sometimes the programs also provided subsidized housing to people who could qualify for traditional low-income housing projects based on their income related to the cost of living in their neighborhood. In expensive Marin County, this includes Maher’s teacher, who benefited from both the typical rent reduction through the program’s subsidy and the special subsidy for teachers offered by Catalyst.
For low- and middle-income moving-in renters, the benefits of luxury apartment living are evident in buildings such as Oceanaire, a 216-unit complex in downtown Long Beach, one of six projects that Waterford Property Co., a private. real estate investment firm, is running for CSCDA.
The nearly two acres of prime downtown land features a local clubhouse with chilled wine machines and a 24-hour fitness center overlooking the pool.
In the ground-floor courtyard, residents can relax on sofas perched on walkways that protrude like peninsulas into a large shallow pond designed to evoke the Indonesian island of Bali.
Inside, the apartments boast 10-foot ceilings, quartz countertops and spacious balconies.
According to bond documents, before CSCDA purchased the building in March, it cost $2,592 a month for a one-bedroom apartment and $3,569 for a two-bedroom apartment. Now a two-person household earning $75,680 or less — the lowest income group served by Oceanaire — will pay $2,102 for a one-bedroom apartment and $2,366 for a two-bedroom apartment, a 19 percent and 34 percent decrease, respectively.