The California Housing Partnership joins CSG Advisors and HR&A Advisors, Inc. in highlighting the urgent need for local governments to carefully weigh the potential pitfalls and opportunity costs associated with using property tax exemptions to finance the conversion of luxury apartments into government-owned middle-income housing in California. Joint powers authorities (“JPAs”) acting on behalf of profit-seeking private investors have been asking many local governments across the state to waive their property taxes – and taxes owed to other entities like public schools – to finance these real estate transactions with minimal independent analysis of the actual public benefits created versus the risks and costs incurred.
Our three organizations are jointly releasing this memo to spell out numerous concerns inherent to these types of proposals as currently structured. These JPA transactions are being pushed by profit-seeking parties who stand to reap large fees with minimal risk. Given the substantial investment of taxpayer dollars, these transactions should offer more than modest reductions in rent for luxury housing when those rents remain above median asking rent for the local community. There is no meaningful “affordability” or public benefit from getting a slight discount in a higher rent building when other lower-priced market options exist in the same region.
The joint memo lays out specific conditions and criteria under which local governments can prudently assess these proposals to ensure that the resulting projects using this novel and potentially risky public funding mechanism meaningfully contribute to solving local housing needs. Our primary recommendations include:
- The financial savings (or public benefit) from reduced rents should be greater than the total of foregone property taxes to all local governments.
- New rents should be set at least 10% below existing rents at the property.
- Bonds should only be issued to the extent that there is sufficient cash flow to pay back all debt on the property. Inflation should not be relied upon to enable repayment of the bonds given the extraordinary risks involved in these types of real estate deals. Bond defaults could otherwise easily lead to the loss of affordability on these properties, thereby defeating the stated purpose of these complex transactions.
The Partnership also strongly recommends that new rents should be set at least 20% below average market rents for the neighborhood, known as Small Area Fair Market Rents, so that real public benefits consistent with approved Housing Elements and Regional Housing Need Allocations are achieved.
By adopting the recommendations analyzed in this memo, local governments can meaningfully increase access to housing that is truly affordable to cost-burdened low- and middle-income Californians without taking undue risks.