The City of Long Beach is looking into selling tax-exempt bonds to finance the acquisition of residential buildings with an eye on renting units at reduced rates to middle-class residents.
The move comes as Long Beach and other cities seek to boost housing stock for middle-income earners, the Long Beach Post reported.
Critics have raised concerns that the bonds could be risky for taxpayers.
Proponents of public financing or subsidies for “workforce” housing intended for middle-class renters say they are necessary because too many developers are drawn to either build low-income housing with government incentives for that category, or build luxury units with high-dollar rents. Housing in between struggles to pencil out, and has come to be known as workforce housing, or the “missing middle.”
The Long Beach City Council has directed staff to study how it could use tax-exempt bonds to purchase buildings that could be set aside for middle-income renters. Middle income, for Los Angeles County, would be roughly between $64,000 and $96,000 a year for a family of four.
The problem, critics say, is that Long Beach and other cities have already tried such tactics for public housing – and have lost money on the deals.
Last year, the city teamed up with a state development authority, which issued $144 million in bonds to buy a two-year-old, 216-unit Oceanaire luxury apartment building in Downtown Long Beach. Its units are to be rented out at lower rates.
A project administrator will receive $11.5 million over 15 years through fees collected from rent payments. The city could opt to buy the building after 15 or 30 years.
The downside is that Long Beach and other taxing agencies will not collect property taxes on the building for the length of the deal. Long Beach is projected to lose $8 million over the course of the pilot program, while the county, school districts and local schools will lose a combined $43 million.
One option that may be considered by Long Beach planners would be to charge a “host fee” paid by bond buyers to recoup lost property taxes.
Such deals are risky, according to a letter to statewide governments last fall by CSG Advisors, HR&A Advisors and the California Housing Partnership.
“As organizations with decades of experience in housing finance throughout California, we think that deviating from the normal underwriting standards of all major banks and federal entities creates serious risks,” the letter said. “The greater the deviation, the greater the risk. We particularly think that relying on future growth in net operating income to repay debt is extremely dangerous.”
They provided examples of how similar financing to the Oceanaire deal, with safer underwriting measures, either failed or required a government agency to step in and take over the property.
Not only are the bonds not rated, they said, but provisions involving rents aren’t enforceable, while the repayment of the bonds depends on increased rents. Finally, there isn’t any entity responsible for the property, leaving tenants on the hook for repairs.
[Long Beach Post] – Dana Bartholomew