August 30, 1996 - From the August, 1996 issue

Financing Affordable Housing: Fewer Dollars-More Competition

As federal Housing and Urban Development (HUD) local block grant funds and state tax credit funding for affordable housing continue to get chipped away, local non-profit developers are facing tougher competition for an increasingly limited pool of potential financing. As the story continues to unfold, TPR is pleased to present an interview with Bill Witte, a seasoned veteran of affordable housing development. Witte, a former Deputy Mayor for Housing in San Francisco, is a partner in The Related Companies of California, which develops multi-family housing in California.


Bill Witte: “To have an impact, CDB must… use its authority in combination with other public and private resources.”

Bill, as a for-profit developer working with Related Companies on affordable housing projects throughout the State of California, where are the market opportunities, and how do you evaluate them?

We are not 'for-sale' developers, but there continue to be opportunities, as the economy firms up, for 'for sale' homebuilders, although the larger opportunities are dominated by large or national homebuilders, and it is very difficult for smaller developers to play. There are some "niche" opportunities, particularly in older suburbs, in infill locations that smaller homebuilders are successfully filling now. 

On the multi-family side, where we operate, for the first time since the mid to late 80s, there are beginning to be some market-oriented new construction apartment opportunities in high-income, high-growth parts of the state, such as Silicon Valley, San Francisco and parts of West L.A. Finding land is difficult, but there are opportunities which we are pursuing. 

In the affordable housing game, while the need remains the same, the resources have shrunk—both in terms of local government and HUD funds, and in an increasingly competitive and limited tax credit arena. Developers have been looking more at apartment acquisitions, but the nicer properties have either been picked over or disposed of. 

There is increasing action among older properties in less desirable locations, in terms of acquisition and rehabilitation. Overall increases in rent are beginning to justify economic values even in these properties. There are, however, a number of potential complication—including relocating environmental problems, and more intensive property management. Expect to see greater public agency attention to properties like these. 

As a former Deputy Mayor for Housing in San Francisco, take a step back and share with us what the non-profits in 1996 are facing as they deal with a changing housing marketplace. 

They are facing the same thing that any developer in this realm is facing. Difficulty in finding appropriate sites, getting subsidy assistance and competing for tax credits. 

From personal discussions with non-profits in both the Bay Area and in L.A., I see more developers looking at acquisition of properties. Unlike a for-profit developer, non­profits may be able to justify an acquisition just simply to generate some cash flow for their operations. The goal in these cases is to preserve affordability rather than create it.

I also see non-profits looking to expand into small-scale non-residential development. They are doing anything and everything to diversify, because development opportunities are so few and far between. Currently, you see non-profits, particularly the established ones in the Bay Area, looking for opportunities not only outside their historic area of focus, but all over the state. 

As you said, the need has not changed. Rather, the need may be increasing. So when you look out a couple of years, what do you see in terms or how increased demand for affordable housing plays out in metropolitan areas in the absence of sufficient housing supply?

I fear an increasing jobs/housing imbalance, with jobs locating in newer suburban areas, and low income people concentrated in cities and other suburbs. Market realities suggest that, without commensurate improvements in infrastructure and "quality of life" variables, a disparity between established suburbs and economically depressed areas is likely to increase. The tax credit program, which is geared to working class families, has helped, and the market, which was overheated in the 1980's, has "corrected" itself, but I remain quite concerned. It will be interesting to see how a master planned community like Playa Vista deals with this issue. 

I would also be interested to see how the commitments made by Wells Fargo, for example, after its merger with First Interstate, in expanding its affordable housing lending, will play out and be leveraged with other resources in a targeted manner. 

HUD is pushing an initiative this year and possibly next year for urban home ownership zones which is supposed to mirror Enterprise Zones from a housing or home ownership point of view. But again, this is a "niche" program which alone cannot adequately address the need. 

You have the advantage of looking throughout the state and beyond the state for projects. But whatever the opportunity, you are working with government as a partner. Are there jurisdictional conditions that you seek out—that make for better partnerships? What are the political conditions that, when present, make a project more accomplishable, and what are the conditions that make it very difficult to accomplish?

As you suggest, they really are two sides of the same coin. First, there has to be a strong local consensus on the scope, 'approvability' and ‘financibility of the project. Too often developers respond to Requests for Proposals; for example, where no one has really thought about exactly what shape the proposed project should take. 

This is a recipe for a six-year or longer process which few developers can afford and even fewer would want, even if they could. The first condition is a clear, consensus, at the local level. 

The second thing is to ensure that the local government understands the appropriate market niche for a public/private development. Particularly in the eighties, every city that had a redevelopment agency wanted to recreate downtown San Francisco or Brentwood. Well, this is hard enough to do if you are in Brentwood let alone in San Bernardino or Santa Ana. 

Most government agencies have had to reduce their expectations in terms of what is feasible. But differently, if you are dealing with a city which is insisting on a Cadillac when a Chevrolet is all that is appropriate for that market, you are not going to get very far. 

In the plane that went down with Secretary Brown was the Executive Director and founder of BRIDGE Housing in San Francisco, Mr. Don Terner. Could you talk about what the impact of his passing has been for BRIDGE Housing? 

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I do not think that much has changed operationally at BRIDGE in the wake of his passing. Of more significance is his considerable legacy. BRIDGE has chosen to promote the number two person, Carol Galante, who was effectively the chief operating officer, to become the new president of BRIDGE. I believe the game plan is to continue in the same direction. 

Comment on his legacy. 

One of the things Don did over his career, both with the State and with BRIDGE, was close the perceived gap between so called market rate developers and non-profit and affordable housing developers. He helped popularize what has increasingly become a recognition of the need for and value of affordable housing in California with a wider range of developers delivering it. 

He helped break down many of the barriers of NIMBYism, and to demystify affordable housing to many people. In fact, he did not refer to it as "affordable housing" but as housing serving working people or people of moderate incomes. He helped show on a wider scale that it can be done successfully, of high quality, and be well managed. This has helped both the non-profit and for-profit community.

In the absence of any discussion in the Presidential campaign of housing, who carries the substance of Don Terner’s message forward; or, are we stuck with the jargon? 

Just as housing markets tend to be metropolitan area-wide in focus, the delivery of programs on both the land use side and financing side are focused at the local, rather than the state level. Although the State is a nice bully pulpit, this is far too large a state for state officials to be the standard bearers.

Look instead at cities where local elected officials have decided that housing is a priority. The City of San Jose is one example. Next to L.A., San Jose has the largest pool of tax increment funds in the state. Mayor Susan Hamner and the City Council have taken an extremely aggressive role in promoting the use of funds for affordable housing, mixed-income housing etc., in some cases going head to head and winning battles with homeowners associations. 

San Jose is a high growth area and there is a great need for affordable housing to support the jobs that are being created. It is a good example of a really active involvement by government in promoting affordable housing.

The L.A. Community Development Bank (CDB) is going to be issuing its first loans at the end of July and Andrew Cuomo is going to be out here in the late summer for the official opening of CDB. What is your take on the potential of CDB having an impact on both the residential and commercial/industrial life of these neighborhoods? 

To have an impact, CDB must look strategically at opportunities that are reinforced by an infusion of public funds, not just in real estate but in infrastructure or education. Inner-city neighborhoods have huge population and consumer bases that are currently undeserved. If CDB uses its authority in combination with other public and private resources, it can make a significant difference on a neighborhood by neighborhood basis. 

Let me give you an example of such a situation. The L.A. Unified School District is working on a proposal to develop a very large campus-style high school in the Temple/Beaudry neighborhood. Included in the overall proposal, is a retail shopping center and some affordable housing. 

Studies suggest that there really is a demand for services that could operate in that shopping complex. This shopping center would be an excellent way for the Community Development Bank to participate and help spur a lot of growth in an economically-depressed neighborhood. This growth would then reinforce the investment it made in the first place. 

In closing, I wish, that as a former public servant, you would comment on public and government service. Obviously public service has been demeaned for almost two decades. What impact does such criticism have on the quality of public service? On the public/private partnerships you are engaged in—on the people that stay or seek to get into public service and will be your partners? 

Let me focus on the narrow realm of housing and development. One of the reasons that I left government was precisely that. Things had become so bitter and divisive that it just was not fun anymore for me. At least there needs to be some type of passion or feeling that you are accomplishing things. 

One of the things that ironically can counterbalance this problem is the real estate recession, which has disgorged a lot of experienced real estate and related professionals into the market place. A number of these have found jobs in redevelopment agencies, housing authorities etc. That also reinforces what I believe is the future of those agencies. 

They are becoming more entrepreneurial, leveraging the assets they already have and thinking a little more like the private sector. There is beginning to be a greater marriage of private sector skills with public sector opportunities, and I think this will continue. 

The flipside is that government continues to be a whipping boy no matter where you area. In the next year, if the public can agree on the size and scope of government, practical solutions can be developed and implemented in a more cooperative climate.

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