$125-Million Low-Cost Housing Plan Expected : Development: Federal agency, private firms would invest to build 4,000 dwellings in California.
Officials of a key federal housing agency and a nationwide nonprofit group are expected today to unveil a major plan by private corporations to invest $125 million to build 4,000 dwellings for very-low-income residents throughout California over the next five years.
The centerpiece investment in the plan is a milestone pledge of up to $10 million for 1990 by the quasi-private Federal Home Loan Mortgage Corp., known as Freddie Mac, which is “challenging” other corporate investors to make long-term matching investments.
Under the unprecedented multi-year effort, for every $2 million raised in California, Freddie Mac will invest $1 million, officials of that agency said Tuesday.
The funds are being raised by the nationwide nonprofit group Local Initiatives Support Corp., and will be added to the California Equity Fund. This pool of money funds nonprofit community-based housing developers who have been clamoring for scarce government money amid a statewide housing crunch.
Corporate investors become limited partners in each project but have no involvement in management or construction. They receive special federal and state tax credits for backing such projects, and can expect an annual return of about 10% to 15% from the credits, officials said.
Mayor Tom Bradley was expected to formally announce the program at 10 a.m. in a low-income area at 27th Street and Central Avenue where a 44-unit apartment is being built with Local Initiatives Support Corp. funds.
The announcement is seen as significant on two fronts:
It marks the first attempt in the United States to persuade private companies to commit major funding to low-income housing investments over several years, said Paul Grogan, president of Local Initiatives Support Corp. He said many lenders and mortgage experts hope the model that his group is creating will become the foundation of a new national housing policy.
Also, the commitment of Freddie Mac, a highly respected firm charged by the federal government with increasing the availability of mortgage financing, is seen as “a major coup,” Grogan said.
“Freddie Mac is a giant, giant entity and it is terribly significant that they are reaching out to support a grass-roots effort,” he added.
The program--from which funds will become available later this year--already has received $10 million in investments from Security Pacific Bank, $10 million from Great Western Bank and several million dollars from Avery International Corp.
That response “shows that the corporate community is ready to take some major new steps to tackle the affordable housing crisis in this country,” Grogan added.
Grogan said Local Initiatives Support Corp. has lined up about two years worth of investments and that his agency is in discussions with 12 major California corporations also interested in joining.
The funds will be meted out over a five-year period to neighborhood-based nonprofit developers who propose specific housing projects to the Local Initiatives Support Corp., and agree to keep rents affordable for 15 to 30 years. The group finances about 40% of each project and uses its huge investment pool to leverage other money from lenders and local governments such as the Los Angeles City Council.
Local Initiatives Support Corp., a spinoff of the Ford Foundation, created the investment pool in 1987 to take advantage of federal tax credits for affordable housing. By year’s end, the group will have completed 9,000 units of low-income housing nationwide.
It was widely anticipated that the involvement of Freddie Mac would spur investments from companies that in the past have avoided investing in low-cost housing.
Leland Brendsel, chairman and chief executive officer of Freddie Mac, said his corporation is pushing the five-year program because many areas of California--and other parts of the country--”are plagued by high costs of housing that have stretched us to come up with ways to really get the cost . . . down,” for both rental units and homes.
Nick Binkley, president of financial services for Security Pacific Bank, urged corporate leaders to understand that “this is an investment, and not a charity. . . . This decision does not belong in their foundation or in the hands of the do-gooders of their corporations, it really belongs in the boardroom and the offices of the chairman.”
Because the $125 million will be used as seed money to attract other investments and loans, Local Initiatives Support Corp. expects actual expenditures on housing developments to approach $350 million as a direct result of its five-year effort, Grogan said.
At that level, the program will rank behind only the federal and state housing budgets in California.
For example, the state spent only $172 million last year for low- and moderate-income housing programs, giving it one of the lowest expenditures per capita in the country, according to the California Coalition for Rural Housing, which monitors state budgets.
Today’s expected announcement comes in advance of a state legislative report, expected to be released later this week, showing that the need for such private-public efforts is growing as affordable housing demand mushrooms and government funding stagnates.
According to the report by the Senate Office of Research, a burgeoning poor population, combined with the failure of developers to build low-cost housing, has in the last five years created a “shortfall” of 501,979 low-income housing units in California.
Although the 4,000 units created in California are “not nearly enough” to address the massive shortfall here, Grogan said, “it is a very strong foundation from which to build.”
Grogan pointed out that Congress has earmarked the money raised through tax credits to benefit only very-low-income people, in large part because many other government programs fail to target housing funds to those truly in need.
California’s biggest housing subsidy, by far, is for home mortgage interest deduction. The deduction costs $86 per capita in California and benefits mostly middle-class and upper-income homeowners, according to state officials.
By contrast, only $27 per capita in housing assistance goes to renters, despite their significantly lower incomes and greater need.
In part because of this failure to target housing funds to those truly in need, Congress has earmarked the money raised through tax credits to benefit only very-low-income people.
Apartments constructed under the Local Initiatives Support Corp. program will go to families making less than half of the local median income, or less than $18,000 for a family of four in Los Angeles, said Anita Landecker, the support group’s director in Los Angeles.
She said rents would range from $200 to $600 a month depending on the number of bedrooms.
“We do a great deal in this society to subsidize housing for the middle and upper classes,” Grogan said. “We are reaching out to a population that has long been ignored.”
The California Equity Fund was created after the sweeping 1986 federal tax reform, which eliminated many longstanding writeoffs for investments in rental housing, but created the special “tax credits.”
Corporations were initially skeptical about the unusual program and were slow to invest. But local and federal officials say the program has, in the last two years, become a dramatic success story in the push to create housing.
James Montgomery, chairman and chief executive officer of Great Western Bank, said Local Initiatives Support Corp. differs from many typical government programs because the funds are awarded directly to community based nonprofit developers.
BACKGROUND
Freddie Mac, or the Federal Home Loan Mortgage Corp., is a quasi-private corporation created by the federal government to buy mortgages from lenders, repackage them and make them available in the marketplace. Its goal is to increase the availability of residential loans in the United States. Freddie Mac today is the nation’s largest purchaser of such mortgages.
