City May Buy Apartments to House Poor : Living Space: S.D. Housing Commission advances a novel funding scheme to buy 800 units for the needy.

When Wes Pratt moved to San Diego in 1976 to study law at UC San Diego, he settled into a $220-a-month apartment in a federally subsidized complex in Rancho Penasquitos. Pratt’s family later moved to another subsidized project in Clairemont, closer to where his wife worked.

The apartment houses--Penasquitos Gardens and Mount Aguilar--served as “transitional housing . . . that gave us time to find a house,” said Pratt, who arrived from Springfield, Mo., and is now a San Diego city councilman.

Pratt has fond memories of the apartment complexes, in part because one of his daughters was born while his family was living at the Clairemont facility.

But Pratt, a strong proponent of public housing who sits on the San Diego Housing Commission’s Board of Directors, now is worried that 800 low- and below-average income families living in two subsidized projects could be forced out of their rent-controlled apartments because of a federal government policy allowing a building’s owner to sell the projects or increase rents to market rates. It is a problem facing communities nationwide.

“Because I’ve personally resided in those particular projects I know the types of individuals who live there,” Pratt said. “The issue before us is a legitimate one. . . . They’re in danger . . . and San Diego could lose subsidized housing.”

The potential loss is even more critical in San Diego, which has one of the most expensive rental markets in the country, said Evan Becker, executive director of the San Diego Housing Commission.

As a result, the agency wants to buy the two complexes for $38.5 million.

The 800 units in question are among 3,000 in San Diego built during the late 1960s and early 1970s by private developers who were awarded low-interest federal loans.

Developers used the loans, some of which carried interest rates as low as 1% or 2%, to build rent-controlled housing for low-income families that didn’t qualify for traditional public housing because they earned too much money.

If the housing commission buys the facilities, each family will be asked to pay 30% of its total income in rent. That formula will cause rent hikes for some tenants but will actually reduce rents for others, Becker said. The housing commission hopes to offer federal rent vouchers to tenants who are unable to meet the 30% level.

Nationwide, an estimated 1 million people live in the 365,000 units built through the federal Housing and Urban Development’s loan-assistance program. Private developers built about 33,000 units in California alone, with most of the units clustered in the southern part of the state.

The loans were structured to be paid back over 40 years. But that changed when Congress decided to allow developers to

prepay their loans after 20 years.

When the first of those prepayments occurred during the late 1980s, housing experts grew concerned that the nation would be hit by a growing wave of loan prepayments and a subsequent wave of newly displaced low-income Americans.

The threat of prepayments has become a fact of life around the country.

The owner of the 200-unit Meadowbrook Apartment I complex on Paradise Valley Road in San Diego already has advised the housing commission she will prepay the federal government loan “in order to achieve the financial objectives of the investment. . . . The project will be operated as an investment property and current market rental rates will be charged.”

The planned prepayment at the Meadowbrook complex, however, is on hold because of a 1987 Congressional ban that put most prepayments on hold until this September.

Unless the ban is extended, prepayments are likely to occur around the country, public housing proponents fear.

For example, a loan prepayment is likely for a complex built at Venice Beach in Los Angeles, said Rich West, spokesman for the Washington, D.C.-based National Low Income Housing Coalition.

The property owner stands to make “a real windfall” by pushing out low-income residents and increasing rents to fair-market rates, West said.

That’s what happened in 1987 in the San Francisco Bay area city of Alameda. The property owner prepaid his federal loan on a 465-unit apartment complex and immediately doubled rents, said Buck Bagot, executive director of the San Francisco-based Nonprofit Housing Assn. of Northern California.

The landlord eventually agreed to gradually phase in the new rates and housing agencies arranged partial subsidies for some tenants. But the prepayment “definitely led to displacements and homelessness,” Bagot said.

Residents fought the increased rents at every step, according to Modessa Henderson, a 13-year tenant who was threatened with displacement. “If we got to go to the streets, we decided to go like lions, not like sheep,” said Henderson, who has been able to remain in her apartment despite paying $625 a month, up from $271.

Housing advocates maintain that failure by Congress to extend the prepayment ban will allow many apartment owners to prepay their loans and sell the projects--an option that could generate cash windfalls. Or, owners will be free to toss out the low-income tenants and rent the units at a fair market price that might be four to five times higher than current rents.

In either case, low-income housing proponents believe hundreds of thousands of American families will be pushed into homelessness.

The need for Congressional action is “critical,” West said. Allowing owners to prepay their loans “will affect the housing for low-income people for decades. . . . It would significantly worsen America’s housing crisis, and California is particularly at risk because a lot of these low-income units are in neighborhoods that are now quite desirable,” West said.

The likelihood of a loan being prepaid is directly tied to its location, Becker said.

For example, the owner of a low-income housing project in an embattled neighborhood such as Southeast San Diego probably wouldn’t be able to increase his or her profits by selling out or increasing rents, Becker said.

But that isn’t the case in Rancho Penasquitos and Clairemont, where the projects are in desirable areas, and real estate values have escalated dramatically since the late 1960s.

Becker said Al Malnik, the principal owner of the two properties, has the option of prepaying his loan next spring and either selling the projects or renting the units at a fair-market rate of $600 a month, double the current $300.

But Malnik has tentatively agreed to sell the two projects for $38.5 million to a nonprofit corporation to be founded by the housing commission. The nonprofit agency would be governed by a board that includes representatives from the public, the housing commission and the City Council.

Independent appraisals conducted for the housing commission and Malnik set the value of the two properties at between $23 million and $51 million, depending on when rent restrictions are lifted.

While Malnik has agreed to sell his properties, the deal hinges upon a complex funding package that includes state and federal loans as well as the proceeds from the sale of tax credits and tax-free bonds.

If completed, the deal would “allow us to obtain these units and rehabilitate them with low-interest state loans,” Becker said. “We believe it is more economical and efficient to do it this way as opposed to constructing 800 new units.”

But the high price has some council members, such as Mayor Maureen O’Connor and Bruce Henderson, concerned that the $38 million payment might be a “windfall” to Malnik that isn’t in the city’s best interest.

Malnik “may be clean as a whistle, but it would embarrass me to hand (him) this huge profit,” Henderson said at a recent council meeting.

O’Connor urged the housing commission to investigate the possibility of buying distressed properties from the federal Resolution Trust Corp., the government entity created to sell off assets owned by the nation’s troubled financial institutions.

The mayor also suggested the $47,000-per-apartment cost was too high because the units are 20 years old.

But Becker maintained the units are “in good condition . . . and they are in very good locations.” The housing commission intends to renovate the projects, when necessary, by using low-cost rehabilitation loans available from the state.

He said the proposed buyout is a cost-effective solution to the city’s growing shortage of affordable housing.

For example, the housing commission is paying “well over $100,000” per unit to build three- and five-room apartments in North City West, Becker said. The commission is also paying between $75,000 and $95,000 to acquire two- and three-room apartments elsewhere in the city.

The potential value of federally subsidized projects has not escaped savvy investors, who in recent years have been acquiring projects with the anticipation of earning windfall profits once the prohibition on loan prepayments expires.

That angers public housing advocates who argue Congress never intended the low-cost loans to generate such windfalls for developers.

“What’s really piggy is that these (developers) built projects with tremendous federal government subsidies, and there’s no way they could have planned on the cost of housing in California increasing by 600%,” said Bagot, the affordable housing advocate. “Now these folks are upset that we want to control unreasonable windfalls.”

Becker said that housing commissions around the country are looking to Washington for a solution.

However, the Bush Administration “has not come to the table with (a solution) because they’re afraid of how big the bill will be,” Becker said. However, housing experts cautioned that delay will only cause the price tag to increase.