Imagine asking a landlord how much they want for rent and being told, it depends on how much you can afford.
The rent, the landlord says, is based on your income, not the highest amount we can squeeze out of you in a tight rental market.
A fantasy, you think. This couldn’t happen in California, which has some of the nation’s highest and fastest-growing rents.
But it turns out programs to help middle-income tenants do exist. And they’re proliferating rapidly across the state.
During the past 2 ½ years, 28 new workforce housing programs — the so-called “missing middle” of the housing market — have been created, with 21 of them cropping up this year alone.
What’s more, most of these income-restricted apartments are in newer buildings with pools and fitness centers, quartz countertops and new appliances — properties that otherwise command some of the market’s highest rents.
“We noticed an increasing middle-income housing crisis where the vast majority of our middle-income workforce won’t qualify for low-income housing and can’t afford to live where they work,” said Jordan Moss, founder of Catalyst Housing Group, an affordable housing provider that created the first workforce programs in the state. “We can’t have fully functioning communities if we can’t house our workforce anywhere near the communities they serve.”
Nonetheless, not every city is jumping on the opportunity to take advantage of this new housing model.
During the past year, the city of San Jose studied the program and opted not to participate. Oakland and San Francisco reportedly passed as well.
The city of Long Beach approved one income-restricted apartment complex in March, but only as “a pilot project” after a city consultant raised questions about possible financial risks to the city, building upkeep and a lack of third-party oversight.
Since property taxes get waived for these projects, one affordable housing advocate questioned whether the rent gets lowered enough to justify the cost to the taxpayers.
Matt Schwartz, president and CEO of the California Housing Partnership Corp., also questioned whether the program is bailing out troubled properties with high vacancy rates and whether there’s enough incentive to maintain the buildings properly.
“I wish people would take a deep breath and take their time and kick the tires much more on these transactions,” Schwartz said. “How much benefit is being gained and for what benefit in return?”
Long commutes
The need for middle-income housing has long worried business groups and housing advocates who say rising costs are forcing teachers, police, firefighters, nurses, office and retail workers to make longer and longer commutes to their jobs, creating more traffic congestion and pollution.
High housing costs also impact employee recruitment and retention and have even been blamed for California’s recent population drop as low-income and young workers flee the state in search of more affordable homes.
A 2019 study by the California Housing Partnership found residents with median household incomes can’t afford modest two-bedroom rents in six coastal California counties, including San Francisco and Los Angeles, where monthly rents average about $2,800 and $2,000, respectively.
While there are billions of dollars in tax credits and rent subsidies to create affordable housing for the low- and very-low-income households, there’s little public support for middle-income tenants.
“Tax credits in itself were not going to be the solution to our state’s housing crisis,” said Moss, of Catalyst Housing.
Under the workforce housing program, an agency called a “joint powers authority,” or JPA, made up of cities and counties across the state, sells bonds to finance the purchase of apartment buildings. Once they buy the buildings, the JPA lowers the rent and limits about two-thirds of the units to middle-income tenants, or those making between 80-120% of their median income. For a family of four, that’s an income of $80,000 to $96,000 a year in Los Angeles County and $106,700 to $128,050 in Orange County.
The rest of the units are leased to lower-income tenants who make less than 80% of the median.
In exchange, the building owners are freed from paying property taxes for the life of the bonds, ranging from 30-35 years. Once the bonds reach maturity, the host city can either keep the building after paying off any remaining debts or sell it.
As of Aug. 31, 28 projects had been set up in 17 California cities over the past three years, of which 21 were purchased this year. Three JPAs have spent almost $2.3 billion buying apartments, acquiring 8,130 units that are gradually being converted to income-restricted housing as vacancies occur.
More programs are in the works in cities like Pasadena, Orange and Costa Mesa.
For-profit real estate investment firms act as a go-between, finding and arranging the purchase of apartment buildings, then staying on as “asset managers.”
Rents vary by income but generally are limited to 35% of the tenant’s income. Rent increases also are capped at 4% annually.
“While there’s a loss of property taxes in the short run, the cities make (money) hand over fist in the long run,” said Ben Barker, financial adviser to the California Municipal Finance Authority, one of the JPAs involved in these programs. “If, at the end of the day, the city gets (title to) a project that’s free and clear — even assuming if there’s no appreciation — I don’t see any losers on these deals.”
Leaving the state
Part-time art teacher Victoria Dries was one tenant who got that “how much can you afford” response when she asked about renting at Long Beach’s Oceanaire Apartments.
Dries and her wife had decided to quit their jobs and leave California. They were struggling to pay their $2,600-a-month rent for a one-bedroom apartment following rent hikes and fluctuating work hours.
The couple hired a mover, put down a deposit, and made plans to relocate to Pittsburgh, where Dries has family.
Then, on a whim, they decided to ask about the rent at the Oceanaire, unaware the building had become a workforce housing project last March when a JPA bought the 216-unit complex.
The leasing agent said they would pay just $2,102 a month for a one-bedroom unit and $2,370 for a two-bedroom because they qualified for reduced rent.
Since Dries’ hours have increased this year, she could afford the bigger apartment. The couple is still saving $230 a month, or $2,760 a year.
“We were really considering packing up,” said Dries, 27. “I could never have fathomed myself and my wife in a two-bedroom apartment … in downtown Long Beach.”
In exchange for lowering the rents, the JPA — California Statewide Communities Development Authority, or CSCDA — will save about $1.5 million a year in property taxes on the Oceanaire, a consultant determined. Rent reductions will total about $1 million a year.
The city’s consultant estimated CSCDA, property managers and other entities will collect $20.8 million in fees during the project’s first 15 years.
Consultant’s concerns
Consultant HR&A Advisors raised numerous concerns ahead of the sale of Oceanaire, which was 29% vacant before the purchase.
The affordability benefits were modest when compared with market rents, the consultant wrote, especially since rent will be set at 35% of a tenant’s income rather than affordable housing’s traditional 30%.
Citing HR&A’s analysis, a staff report said the city isn’t guaranteed to make money on the deal either. Projections are based on the assumption that Long Beach’s rent will grow at least 3% a year — something that has only occurred in three of the last 20 years, the report said.
“There are likely situations where the city and other taxing bodies do not recover foregone property tax or make a profit,” the report said. It’s also uncertain the project will have enough money for major maintenance and renovation after paying $6.2 million in acquisition fees and almost $1 million a year in management fees.
Nonetheless, Long Beach city council members decided to give the program a try: “I’m happy to consider this as a pilot project only, so we can first analyze the impacts prior to setting any precedent for other developers,” said Councilmember Cindy Allen.
San Jose opted not to participate after taking a deeper look at the program. According to an April staff report, the rent would be “essentially market rate” for middle-income tenants in a city where average rents are almost $2,500 a month.
The city’s staff said it’s too soon to tell if this new model will work. They also worried the JPA would have “a perverse incentive” to prioritize bond repayment over affordability.
“It is not at all clear that the benefits of the products outweigh the risks and costs to the public,” the San Jose staff report said.
“This is new and scary to cities,” said Barker, the CMFA financial adviser. “Some cities say it’s too good to be true, so we’re not doing it. … (But) there’s tons and tons of leverages and mechanisms to make sure these are great projects.”
While cities get the building’s title after bonds mature, they’re not required to reimburse other taxing entities, like water, sanitation or cemetery districts, for their lost revenue.
But most cities are volunteering to make sure other taxing authorities are made whole, said Jon Penkower, managing director of CSCDA.
School districts don’t have to worry about lost revenue, in most cases, because the state makes up any shortfall in property taxes, added Troy Flint, spokesman for the California School Boards Association. But he thinks the program is still worthwhile, even in years where schools could lose some revenue.
“It’s a question of tradeoffs,” said Flint. “You measure the size of the loss against the benefit of more affordable housing.”
Schwartz said he’s not buying it.
“What do the taxpayers want out of this?” he asked. “Do they want to make it cheaper for people to rent places with granite countertops and swimming pools?”
There will always be critics, the CSCDA’sPenkower countered, saying there aren’t any other models to help the missing middle afford a home.
“This is making a difference. We’re seeing the outcomes,” he said. “I’d love to hear other ideas.”
Middle-income housing projects in California
— Santa Rosa: Annadel Apartments, 390 units, sold for $173.5 million in April 2019
— Fairfield: Verdant at Green Valley, 286 units, sold for $108 million in August 2019
— Larkspur: Serenity at Larkspur, 342 units, sold for $222.5 million in February 2020
— Livermore: The Arbors, 162 units, sold for $49 million in August 2020
— Carson: Renaissance, 150 units, sold for $66 million in December 2020
— Anaheim: CTR City Anaheim, 231 units, sold for $110 million in December 2020
— Walnut Creek: Stoneridge Apartments, 209 units, sold for $90 million in February 2021
— Anaheim: Parallel Apartments, 386 units, sold for $157.6 million in February 2021
— Anaheim: Jefferson Platinum Triangle, 400 units, sold for $161.6 million in February 2021
— Hayward: Creekwood, 309 units, sold for $128.5 million in March 2021
— Glendale: Next on Lex, 494 units, sold for $290 million in March 2021
— Glendale: Brio, 205 units, sold for $110 million in March 2021
— Long Beach: Oceanaire Apartments, 216 units, sold for $121.2 million in March 2021
— Anaheim: The Mix at CTR, 276 units, sold for $115 million in March 2021
— Antioch: Mira Vista Hills, 280 units, sold for $68 million in April 2021
— Dublin: Aster, 313 units, sold for $163 million in April 2021
— Monravia: MODA at Monrovia Station, 261 units, sold for $100.1 million in April 2021
— Glendale: Altana Apartments, 507 units, sold for $302 million in April 2021
— Carson: Union South Bay, 357 units, sold for $185 million in June 2021
— Pasadena: Westgate, 340 units, sold for $237 million in June 2021
— Pasadena: The Hudson, 173 units, sold for $98.1 million in June 2021
— Glendale: The Link Apartments, 143 units, sold for $81 million in June 2021
— Dublin: Fountains at Emerald Park, 324 units, sold for $190 million in July 2021
— Sausalito: Summit at Sausalito, 198 units, sold for $122 million in August 2021
— Huntington Beach: Breakwater, 402 units, sold for $185 million in August 2021
— Hercules: Exchange at Bayfront, 172 units, sold for $113.5 million in August 2021
— Dublin: Waterford Place Apartments, 390 units, sold for $208.5 million in August 2021
— Huntington Beach: Elan Huntington Beach, 214 units, sold for $134 million in August 2021
Sources: Catalyst Housing Group, California Statewide Communities Development Authority, California Municipal Finance Authority