The City of San Jose handed $26.5 million to nonprofit developer First Community Housing to bail out two troubled projects, despite official concerns about its “long-term sustainability.”
The City Council agreed to lend the developer $13 million in December to prevent it from defaulting on a loan tied to a 130-unit homeless housing complex at 1144 South Second Street, the San Jose Mercury News reported.
In April, the council agreed to spend $13.5 million to buy a First Community property approved for 224 affordable apartments after the San Jose-based developer defaulted on a $30-million loan tied to 258 McEvoy Street. The sale is expected to close this year.
First Community Housing, founded in 1986, owns and operates 16 affordable housing properties in San Jose. The city has given the developer at least $87 million to build more than 1,900 affordable apartments.
The developer had tried to triple its housing production as development costs rose and public subsidies fell, leaving it “financially over-extended and unable to meet all of its financial obligations,” according to documents presented to the city in December.
Geoff Morgan, the organization’s executive director, quit last month.
On Dec. 13, the council unanimously agreed to lend First Community the first half of the $26 million to pay off a bank loan taken out to help build Second Street Studios, the city’s highly touted first permanent homeless housing site.
On April 25, the council approved another $13.5 million to buy the other First Community property that defaulted.
First Community also failed to pay its bills for another project in Santa Cruz.
The San Jose Housing Department said using city funds to help a struggling nonprofit developer isn’t unprecedented.
“When gaps exist in financing, we often step in, helping to ensure desperately needed housing is available to our most vulnerable residents,” the department said in a statement.
Richard Conniff, chairman of First Community’s board of directors, told the Mercury News that impacts of the pandemic, supply chain issues, rising construction costs and higher interest rates forced the nonprofit to cease moving forward with several large planned projects in which it had made “significant” investments.
Going forward, he said First Community plans to scale back its development plans and focus on managing its current properties. It will also sell some fully occupied projects.
“Any sales will be conditioned on the real estate remaining affordable housing with a high level of resident services for low-income residents,” Conniff told the newspaper in an email.
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The hiccup by First Community and its bailout by the city — whose financial troubles were not publicly discussed by the council — has raised eyebrows in the real estate industry.
“I hope the City of San Jose is transparent on this perceived bailout,” local land-use consultant Bob Staedler said in an email.
— Dana Bartholomew