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Costs Limit Affordable Housing Developers’ Ability

Costs Limit Affordable Housing Developers’ Ability

Nonprofits Competing With Major Builders for Urban Sites As Firms Seek Land to Buy

By Mandy Jackson

High land prices and pre-construction expenses that add to the cost of San Diego County homes are amplified for affordable housing developers.

Since they can’t raise their prices to make up for big expenses, every dollar added to their budgets reduces the number of affordable homes they can build.

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“Land is a huge factor right now,” said Matt Jumper, the president and chief executive officer of San Diego Interfaith Housing, a nonprofit developer.

In Downtown San Diego, Petco Park and development around the new ballpark have led to major jumps in asking prices for Downtown land as well as property in nearby neighborhoods, such as Golden Hill, North Park and City Heights, Jumper said.

“It’s really had a ripple effect in some of these core urban areas,” Jumper said. “Our war chest is a lot smaller than some of these guys we’re up against.”

Major Competition

Nonprofits are competing with major national and international home builders , many of which are publicly traded entities , for urban sites as those companies run out of land to buy in the suburbs. The push for “smart growth” development , high-density housing near shopping, jobs and public transportation , is bringing homes, some of which are affordable, back to the urban core.

San Diego Interfaith is wrapping up construction on Metro Villas in City Heights. The $26.4 million project at 39th Street and University Avenue has 120 apartments for families with rents ranging from $435 to $820 per month, well below the market average of more than $1,000.

In North Park, the developer is preparing to break ground on a project called Renaissance in partnership with San Diego-based Carter Reese & Associates at 30th Street and El Cajon Boulevard. San Diego Interfaith and Carter Reese will build 14 for-sale town homes affordable to people earning moderate incomes, 96 senior apartments affordable to people earning low- and very-low incomes, and 24 market rate for-sale homes. The apartments, which will cost $19.5 million to build, will have rents ranging from $355 to $681 per month.

Jumper said the time frame involved in affordable housing development makes it difficult to keep costs under control. Projects are generally planned for two to three years before they are able to break ground, which adds hundreds of thousands of dollars to the cost of a project.

Before breaking ground on Renaissance, San Diego Interfaith has spent $1.5 million on consultants, fees and other expenses out of its own pocket, according to Jumper. The developer will earn a fee for its efforts at the end of the project.

‘It’s A Crap Shoot’

“In affordable housing, there’s not a lot of cash flow, so it’s a crap shoot if you get your fee back,” Jumper said. “We’re in it to make enough money to get the next deal going.”

The city of San Diego’s Development Services Department has a program to speed affordable housing projects through the planning and approval process. The program has stopped accepting new applications, however, until the department is able to hire and train more employees.

Brad Wiblin, in the San Diego office of Bridge Housing Corp., said the affordable housing expedite program has been a “huge success” because it reduces delays. Wiblin said most of the San Francisco-based developer’s projects take three years from the time a site is identified to the time apartments open two years of seeking approvals and permits and a year of construction.

Michael Galasso, the president of Barone Galasso & Associates, said, “I’ve been working on a project in Southeast San Diego for three years.”

The San Diego-based developer is planning 120 affordable apartments and 50 moderately priced homes for sale in cooperation with Carter Reese & Associates. Because the 10-acre site near state Route 94 on Euclid Avenue will have to be rezoned, Galasso said it will probably be two more years before construction can begin on the site.

“Financing is not the issue. It’s finding the appropriate sites and getting the approvals,” Galasso said. “We have lenders constantly asking us what projects we’re working on.”

At state Route 94 and Euclid, the Southeastern Economic Development Corp., the economic development agency for Southeast San Diego, helped Barone Galasso and Carter Reese acquire the land with money from $55 million in bond financing that the city’s redevelopment agencies made available in 2003.

“Banks are very motivated to lend to us, but it is a loan. It’s based on (city approvals) and permits being in place,” Jumper said.

“The hard part is not the banks, it’s the public agencies and tying up the tax credits,” he added.

A lot of the financing for affordable housing comes from tax credit financing. Through state and federal programs, municipalities can issue tax credits, which investors receive in turn for lending low-cost money to an affordable housing project. The investor benefits from a tax credit and the revenue from the loan.

National City-based Neighborhood National Bank received $5 million in New Market Tax Credits in 2003. The bank planned to use the tax credits to raise $50 million to $60 million it could invest in affordable housing and other economic development.

Neighborhood National will soon fund its first project out of the federal program that promotes reinvestment in inner city communities. However, it has loaned other funds during its seven-year history to affordable housing projects through other tax credit programs.

Bob McGill, the chairman and CEO of the bank, said, “We fund a considerable amount of housing in the affordable range.”

Most affordable housing development is in the form of apartments. However, McGill said that when all of the land, planning and construction costs are added together, the projects are starting to make more financial sense as moderately priced condos than as low-priced apartments.

Bridge Housing’s Wiblin said the developer’s projects usually have three or four funding sources bank financing, tax credits and tax exempt bonds, and low-interest loans from the city.

“There’s really an amazing array of resources available. Right now is a really good time to do what we’re doing in terms of financing,” Wiblin said. “Not every deal is getting funded, but the efficient ones are.”

He noted that before San Diego dedicated $55 million in redevelopment funds to affordable housing in 2003, California voters passed Proposition 46 in 2002, which provided $2.1 billion for housing statewide.

Additionally, building market rate housing or commercial space alongside affordable units, which Bridge Housing, Barone Galasso and San Diego Interfaith Housing have all done, helps finance the lower-cost homes.

In Logan Heights, Bridge Housing is working with the MAAC Project, a local nonprofit, and the Bronze Triangle Community Development Corp. on plans for 230 units of family rentals, senior housing and market rate for-sale homes, as well as 40,000 square feet of retail and office space. The 3.5-acre site is at 22nd and Commercial streets.

Galasso, a member of San Diego’s Affordable Housing Task Force, said the city should consider more new approaches for funding low-income housing. He said the task force came up with several suggestions that could have been implemented quickly while producing a significant boost to affordable housing development efforts.

For instance, the finance committee suggested that the San Diego City Council increase the amount of property tax gains that it sets aside for affordable housing. California law requires cities to spend at least 20 percent of their tax increment on affordable housing.

Galasso said the programs San Diego has created to boost affordable housing , the affordable housing expedite program and $55 million in bond financing , are temporary, Band-Aid measures. He said more permanent fixes are necessary.

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