Subsidy ‘Escape Hatch’ Is Major Threat to Low-Cost Housing

Times Staff Writer

Unlike other buildings in the run-down neighborhood, the Siejay Apartments at 1421 S. Hoover St. have grass, trees, flowering rosebushes--and subsidized rents. Joe Henshaw, a 70-year-old retired stock clerk, says he drove past the 72-unit complex for years, “wishing I could live there.”

Four years ago, he got in and pays only $224 a month for his one-bedroom apartment. If he had to leave, Henshaw said, “I don’t know where I would go.” Even the dilapidated buildings in the neighborhood, just west of downtown Los Angeles, charge at least $450 for a one-bedroom place, he said, and his only income is a monthly $650 Social Security check.

But local government officials and housing experts fear low-cost apartments such as Henshaw’s will vanish from the rental market as owners of federally subsidized housing buy their way out of government restrictions and start raising rents.

Under federal housing programs begun in the 1960s, developers who obtained federal low-interest mortgage loans to build low-income housing were given the option of paying off their mortgages after 20 years, thus freeing themselves of any rent restrictions.


The 20-year point or “escape hatch” for most of these privately owned buildings falls between 1988 and 2003, and no one knows how many of the estimated 645,000 apartments eligible nationally will be lost.

Federal Housing and Urban Development officials say that only 154,000 units are in projects whose owners are likely to prepay, but a report released last week by the National Low Income Housing Preservation Commission in Washington said that as many as 80%, or 523,000 units, are at risk.

California has 32,714 eligible units, more than any other state, according to the bipartisan commission, which studied the issue for a year. So far, two California owners have prepaid, both last year, in Vallejo and Alameda in Northern California.

The city of Los Angeles has 10,531 apartments in 149 locations eligible for prepayment over the next 15 years, according to Ralph Esparza, director of housing at the Community Development Department. Another 8,173 units, he added, could be lost because of expiring federal rent subsidies.


In Los Angeles County, the total number of units facing prepayment or loss of subsidies in the next six years is about 26,000, said Joe Carreras, senior housing planner for the Southern California Assn. of Governments. Forty-nine percent of the affected tenants are elderly, he added.

Siejay Apartments, where Henshaw lives, becomes eligible to prepay this month. Larry Jacobs, general partner of the company that owns the complex, said he wants to pay off his loan.

But federal officials will not let him. A two-year federal law went into effect in February, allowing HUD to delay a developer’s prepayment until 1990, unless the developer can show that there would be no economic hardship for the current tenants and that other low-income housing is readily available.

Jacob’s request to prepay was turned down because other low-income housing is not available, according to HUD spokesmen, who said it is unlikely that any owners in California will be permitted to prepay their mortgages in the next two years.


Legal Action Considered

Jacobs said the delay is unfair, adding, “We are considering legal action.” The 20-year escape hatch provided for by law was “an important factor” in his original decision to build the project, he said, because it meant “there was a way we could get away from being a HUD building.”

No one knows how many owners are as eager as Jacobs. Most of the city projects eligible for prepayments will reach their 20-year points between 1990 and 1994, and the bulk of the rental subsidies will not expire until after 1996, Esparza said.

Robert DeMonte, regional administrator of HUD, said he is forming a task force “to identify the properties, get in touch with owners, try to see what kind of solutions can be worked out.”


Jacobs, for one, contends that he cannot make money from the South Hoover Street property.

‘6% Return’

“All the owners are allowed to draw from this building on an annual basis is $5,400 a year,” he said. “The money invested 20 years ago was $90,000. They (HUD) will allow a 6% return on the investment. So that is all the owners are able to get.”

A prepayment crisis was not anticipated by federal housing officials when the programs were set up, Dirk Murphy, regional HUD spokesman, said. “Nobody contemplated any of the owners would want to get out, because the reason they were in was not for cash flow but tax benefits.”


The Tax Reform Act of 1986 changed the picture by taking away benefits such as accelerated depreciation and income sheltering. “Suddenly cash flow became the dominant issue,” Murphy said, “and when that happened they began to look at ways to increase their rents, and looked for ways to get out from (under) HUD’s control.”

The dilemma has also been aggravated by drastic cuts in funding for low-income housing during the Reagan Administration. The number of federally funded projects dropped in Los Angeles from 105 in 1980 to just one in 1986, Esparza said. Meanwhile, the demand for affordable units--rentals that do not consume more than 30% of a family’s income--rose 33%.

‘Not Looking to Displace’

Jacobs said he would like a federal rent subsidy program to make up the difference between the $256 monthly rent he gets for a two-bedroom apartment at Siejay and the $600 market value rent in the area. But he does not know if that will be possible.


“We’re not looking to displace anybody,” he said. “We realize people have to have places to live. We’re only trying to do something that’s more fair and equitable for the owners.”

Another developer, Goldrich & Kest, has about 45 projects, the largest number in Los Angeles, but has made no decision about conversions, said Carole Glodney, president of G&K; Management Co. “We’re in a wait-and-see mode.”

The state Legislature has passed legislation to require owners to give tenants at least six months notice if they plan to prepay their mortgages or terminate subsidy contracts, provide more low income housing tax benefits for owners and establish a statewide nonprofit organization that would raise funds to buy out these projects.

Blue Ribbon Committee


On a local level, the mayor’s newly formed Blue Ribbon Committee for Affordable Housing will be looking into this situation, said one member, Ann Reiss Lane of the Board of Fire Commissioners, “as one piece of the low-income housing crisis.”

City Councilman Robert Farrell, chairman of the Grants, Housing and Community Development Committee, has suggested several approaches, including setting up a nonprofit housing corporation and placing apartments under city rent control when subsidies expire.

The city is moving slowly on the issue, Los Angeles housing coordinator Gary Squier said. “We frankly have been resistant to coming up with local solutions because we feel it’s a federal responsibility.”

But planner Carreras of the Southern California Assn. of Governments said, “If nobody pays attention, it can become a tremendous problem in terms of unmet needs local governments will have to face.”