Affordable Housing Can Be Expensive - Part 2

Last time we looked at the City’s attempt to build affordable housing in conformance with guidelines established by the State. We saw that the City can require developers to build affordable homes on site, which is what was done with Shea/Baker (187 units) and Baldwin (57 units). On the other hand, the City can require “in lieu” fees which the developers pay into a fund that the City can then use to create affordable homes. This was done with Brookfield and Trumark, who paid collectively about $1.5 million in fees instead of building on site. The purpose of this article is to determine what $1.5 million in fees received by the City can actually create in terms of affordable homes.

Given that they were building 200+ homes, under Scenario A (Build) Brookfield and Trumark would have been required to build about 30 affordable homes as part for their project. They requested and the Council approved Scenario B (Fees) which gave the City $1.5 million to spend on creating affordable homes. How many homes can the $1.5 million create?

We’re lucky because we can actually show what $1.5 million can buy. Usually when governments experiment we have only their word as to what will happen. In this case, we actually have a record. It can be argued that this is only one case and the past isn’t necessarily the best predictor of the future. But most people would agree that the past is a good predictor of the future and we need to look at the one and only time the City ventured down this path.

In 2011 the City decided to create 4 affordable units in an area of the City they considered relatively dis-advantaged. The City had a ridiculous theory that by rehabilitating one home in a problematic neighborhood this would turn the neighborhood around. In fact, almost all social science research shows the opposite is true. One bad home in a good neighborhood can start the process to bring down the neighborhood, but one improved home rarely if ever has changed a neighborhood positively. Nonetheless, with no research to back their belief and with considerable research to show that their efforts to change the neighborhood would be fruitless, the City jumped ahead and purchased a 4 unit building for $925,750. Jump forward 4 years and the City began the transformation to affordable housing by finding a buyer for the property who would purchase and then manage the property under the regulations governing affordable housing.

The buyer paid $100,000 cash down and then promised to pay $2,000 a year for 50 years, beginning 4 years after the date of purchase. This isn’t a mis-print! The City bought a property for $925,750 and then sold it for $200,000! Talk about your government at work!!

Some people might say the City lost $725,750 on the deal ($925,750 minus $200,000) but that would be too simple. In the 4 years since the purchase price, real estate prices in Lake Forest improved considerably. The $925,750 unit would now probably sell for in excess of $1 million. In addition, no one would think that $2,000 a year for 50 years is the same as getting $100,000 up front. Therefore, the promissory note that has a face value of $100,000 would probably sell on the open market for less than $30,000.

The real cost to the City is much more than $1 million.

In addition to losing (at the very least) $725,750 on the difference between the purchase price and the sale price, the City is required to spend $400,000 to rehabilitate the building and another $233,000 to relocate the occupants. Then there is another $25,000 in incidental fees (escrow, seller costs, etc.).

The bottom line is that the City will spend at least $1,383,750 to create 4 affordable units.

But that’s not all. These are merely the direct costs. There are tens of thousands of dollars of indirect costs, including extensive legal fees preparing the agreements and high level staff time negotiating with the multiple agencies involved.

A more accurate estimate of the true costs is far in excess of $1.5 million to create 4 affordable homes

Now take this figure and compare it to the money that Brookfield and Trumark gave to the City. In lieu of building about 30 affordable homes, Brookfield and Trumark gave the City $1.5 million, and with that amount of money, the City built 4 affordable homes. Let’s look at that again.

If the City had required Brookfield and Trumark to build affordable units on site, we would have created 30 affordable units. Instead the City let Brookfield and Trumark pay “in lieu” fees of $1.5 million, and with that money the City created 4 affordable homes.

What a great deal for Brookfield and Trumark.

What a terrible deal for the City.

What a terrible deal for the people who need affordable homes!

So our look backward gives us a good idea about the math of adopting different methods of creating affordable homes. In one method, 30 homes can be created relatively quickly, and in the other method, only 4 homes are created and the time and process is much more cumbersome. In our next article we’ll look forward.

ABOUT THE AUTHOR

Dr. Jim Gardner is on the City Council for Lake Forest. You can check him out on LinkedIn and/or Facebook and you can share your thoughts about the City at Lake Forest Town Square on Facebook. His comments are not meant to reflect official City Policy.

Dr. Gardner has office hours every Tuesday from 3 pm to 5 pm at the City Hall. In addition, he holds a mini town meeting every other month. The next meeting will be on May 16 at 2 pm at the Foothill Ranch Public Library.