San Francisco Business Times
By Blanca Torres | April 12, 2009
Bay Area affordable housing slammed
“It’s a real mess,” says Murtagh of EAH Housing. “We’re all treading water.”
For months, affordable housing developers kept construction sites rolling while market-rate developers dropped projects or went belly up. That is about to change as affordable developers’ oasis dries up.
Financing for affordable developments pulls money from several sources such as state funding, which is drying up, and tax credit sales to businesses, which no longer need them.
“This was going to be a terrible year even without the recession,” said Mary Murtagh, president with San Rafael-based EAH Housing. “It’s a real mess. There is all this opportunity to get projects done … and we can’t do anything. We’re all treading water.”
EAH has 12 projects in its development pipeline, half of which could end up in funding limbo.
Most affordable developments that have started construction have financing in place, but developers now fear that lack of financing will delay or kill projects that were ready to start construction this year. Another concern is that developers will not receive committed funds on time to repay construction loans for completed projects.
Ann Gressani, policy and communications director for the Non-Profit Housing Association of Northern California, said her group knows of at least 20 Bay Area developments that have stalled at various points in the development process.
Affordable housing developers experienced a boom in recent years after Californians passed state propositions 46 and 1C that together provided $4.95 billion to fund affordable housing programs. Those measures still have a few years to run, but in the short term, a budget crunch resulted in the state freezing $1.8 billion in funds it had committed for 800 affordable projects statewide. More than 100 of those are in five Bay Area counties.
Jennifer Sweeney, a spokeswoman for California Department of Housing and Community Development, said now that the budget has been passed, the state expects to release those funds, but has not determined when.
Another funding source is local redevelopment agency grants, but that source of funding has begun to decline in many cities.
Ripple from the banks
Developers bring in significant revenue from selling tax credits to companies which use them to offset their profits. Many buyers were banks that now have no profits to offset. At the same time, banks are cutting back on construction loans.
“The banks have been under pressure from other parts of their business,” said Jim Francis, senior vice president of community development finance for Union Bank of California. “It’s been very difficult for most of the larger banks to make new loans in commercial real estate even in an area like affordable housing that has weathered the storm so far.”
Union Bank holds $1 billion in affordable housing investments and has provided $2 billion in financing for those kinds of projects over the last 15 years. It is one of the few commercial banks still lending.
“(Union Bank) is in a very strong capital position and we think (affordable development) is a very good place to deploy capital,” he said. “Our returns have been good and predictable.”
Financial woes are already holding up projects in the pipeline that are otherwise ready to go, said Carol Galante, president and CEO of San Francisco-based Bridge Housing, who will depart soon to become a deputy assistant secretary at the U.S. Department of Housing and Urban Development.
“It’s always a juggle with the variety of funding sources and putting the layer cake together,” Galante said. “This double whammy of the state freeze of the funds and the tax equity dislocation in the market, those are two big earthquakes to a system that already relies on creativity.”
Bridge has nine projects under construction including sites in Oakland, Colma, Palo Alto and South San Francisco. One in Oakland, the 80-unit St. Joseph’s historic rehabilitation for senior homes, was supposed to start construction on May 1, but is now on hold for at least three months.
“The bank is hesitant to close (on the loan) and start construction,” Galante said.
Berkeley-based Resources for Community Development is in the middle of building four developments in Oakland, Pittsburg, Berkeley and Alameda, but has put the brakes on a fifth project in Berkeley until state funds become available.
Dan Sawiflak, the firm’s executive director, said many developers are waiting on some money to come through from the stimulus package and other federal funding sources.
“We’re assuming that things are going to take longer — the system is changing,” Sawiflak said. “It’s kind of a dance between pushing stuff forward so you have them shovel-ready and waiting until the programs really shake out.”
The irony is that with construction costs coming down, land prices falling and demand for affordable units skyrocketing, many affordable developers are anxious to take on new projects.
“The tragedy is that this is the best time to build affordable housing I’ve seen in twenty years,” Murtagh said.
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