City Explores a New Avenue in Fiscal Strategy : Investment: Glendale hopes that its contributions toward a senior citizens housing project will reap financial benefits later on.

When Glendale agreed last month to enter into a financially complex venture to build a subsidized senior housing project, it crossed a threshold from serving as a caretaker of federal tax dollars to a world of municipal enterprise.

The $2.1-million, 22-unit Palmer House project is the first to be built with the use of redevelopment property taxes. A “creative financing” scheme will combine those funds with federal tax credits and city-owned land that will be leased, rather than sold, to a developer.

Unlike traditional grants in which the city has simply doled out the money--forever gone once bestowed--officials are acting more like a business making an investment with the expectation of a return. Income from this development can then be used for future projects.

That way of thinking is a new approach to spending public dollars in Glendale.

“This is the kind of thing that cities are going to need to do to solve affordable housing problems,” said Marc Herrera, an administrator with Southern California Presbyterian Homes, developer of the Palmer project.

“It’s innovative, and it’s not easy. But I think this is the prototype of more to come.”

While the unusual structure of the Palmer project will probably never be duplicated, it at least reveals the city’s attempt to depart from the traditional into intricate new avenues of finance.

It also is seen as a way that the city may take greater control over the type of housing it builds, rather than conforming to rigid state and federal dictates.

“We need to make a bull decision,” Councilman Larry Zarian said before the City Council and Housing Authority agreed April 16 to help finance the Palmer House, to be built for low- and moderate-income senior citizens on two vacant lots at 549-605 E. Palmer Ave. “Hopefully, this is just the beginning of what will be done.”

Admittedly, the Palmer project will not work like a private development. The city expects to surrender $1 million of an initial investment of about $2.2 million. But the remainder that will come back in rents and interest payments will start the city’s investment fund to build a portfolio for future development.

“We’re talking about a variety of different strategies,” said Beth Stochl, city housing analyst. Possibilities include “equity sharing,” in which the city could help families acquire their first homes and later recover a portion of the appreciated value. “Land banking” is another strategy with business overtones being considered. The city would acquire land and retain it for future development after it is worth more.

More than two years ago, city officials made it a top priority to find ways to provide affordable housing in Glendale, not only for the 1,400 elderly people on waiting lists for 300 low-income units, but also for low- and moderate-income families and city employees who cannot afford to rent or buy a home in the city.

Glendale has accumulated about $4.7 million in a housing fund since 1988 under a state mandate that all cities set aside 20% of their annual tax increment from redevelopment areas for low- and moderate-income housing.

Annual payments to the fund will continue to grow as property values climb in the booming downtown redevelopment area, the only one in the city. The tax increment in Glendale has grown from $600,000 in 1972, when the redevelopment zone was formed, to $9.4 million this year. In the next four years, that figure is expected to jump to more than $16 million annually in redevelopment tax revenues--or $3.2 million a year to the housing fund.

The city is required to assign set-aside money to some project within five years of receipt of each increment. The project can be anywhere in the city.

But upon completion of the redevelopment project--scheduled for the year 2007--the city will no longer receive tax-increment money. Officials hope that by developing income-producing strategies now, the housing fund will be perpetuated indefinitely and the city will be able to break away from its dependency on federal funding for low-cost housing.

The goal of the Palmer House development is to keep tight control over the quality of the project by retaining ownership of the land while ensuring low rents with a city subsidy.

Here’s how it is to work:

The city will lend the developer $800,000 from its housing fund to help build the apartment development on land the city will lease to the developer for 55 years. The city has also set aside $979,000 from the housing fund to subsidize rents.

Southern California Presbyterian Homes, a veteran nonprofit operator of senior housing based in Glendale, will repay the loan at 6.5% interest over 30 years, instead of the 11% or more it would pay for private financing, said Brian Butler, city finance director.

The savings in interest lowers the cost of the development and, subsequently, the amount of rent subsidy required from the city, said Madalyn Blake, director of community housing and development.

In addition to fixed annual loan payments of $61,260, the developer will pay $42,000 a year to the city to lease the land--more than $103,000 a year in revenues to Glendale. That money will be put back into the housing fund for use on other projects, Blake said.

In turn, the city expects to pay to the developer an annual rent subsidy averaging $87,000 for 30 years to a maximum of $2.61 million. The amount of the subsidy is determined by the difference between the developer’s operating expenses and the income generated from below-market rents.

The subsidy will actually cost the city only $979,000 because the funds will earn 8% interest--what the city typically receives on its investments--while the money is being depleted.

The subsidy ensures that rents will be kept low--about $379 a month including utilities. Without either federal or local assistance, rents would be $600 a month or more, officials said.

While rents would be low, operating costs, estimated at more than $65,000 a year, actually would run disproportionately higher than similar for-profit developments because of the complexity of the agreement, said Herrera, spokesman for the developer. Annual audits, for instance, will cost $5,000, rather than $1,000 to $1,200 for a private development. Insurance, maintenance and utilities will each cost an estimated $11,000 to $13,000 a year, he said.

A key to the success of the package is that the project has qualified for $2.1 million in federal tax credits, which will produce $1.2 million in private cash for the development. The tax credits derive from the complex revision of the Tax Reform Law of 1986. The developer qualified for tax credits for the full cost of the development in a keen competition, then sold the credits at a discount to a corporation, as yet unnamed, which becomes a limited partner in the deal.

Because the developer is a nonprofit corporation, it could not use the tax credits directly. But large corporations, financial funds and syndicates can buy the credits, typically for 40% to 50% of the value, which can be used to reduce their income taxes over a period of 10 years, said Janet Falk, director of Community Economics, a nonprofit San Francisco firm that specializes in helping other nonprofit organizations obtain financing for worthy projects.

“It is very complicated,” said Falk, who represented Southern California Presbyterian Homes in applying for the federal credit through the state Tax Credit Allocation Committee. Generally, the buyer earns a rate of return on the investment of 18% to 25%--a hefty profit that accounts nationally for up to $300 million a year in lost revenues to the federal government.

Falk said the tax scheme “goes a long way toward making things work.” Basically, the tax incentive shifts the burden of financing low-cost housing from a federal expenditure to private enterprise.

“It doesn’t cost any less to build low-cost housing than regular housing,” Falk said. And dozens of cities and developers are scrambling for workable financing. Of 180 applicants for tax credits filed in California last year, only 91 were selected, she said. “The demand has far exceeded the supply.”

Southern California Presbyterian Homes barely qualified for the credits because each project is evaluated and ranked by points by a state committee. Extra points are given for projects for large, low-income families and the homeless, but not for senior citizens. Glendale’s pledge to support the project with city housing money provided the points needed to win tax credits, city officials said.

Falk called the credits for senior housing “one of the major ways that we can still raise funds for these types of projects.”

Eventually the city expects that the land that it is leasing to the developer will be worth $10 million. It could sell the land, renegotiate a higher lease or build a whole new project, depending on the real estate market half a century from now.

In that way, the city could be in a position to leverage income from its housing development almost the way a real estate speculator leverages investments. The return could be put back into a fund to develop more low-cost housing.

The city’s actual investment in the Palmer project so far is the $346,300 cost of purchasing the two lots in 1982 and 1988. The lease is based on their present appreciated value of $420,000. Contributions for street and utility improvements, the loan to the developer and rent subsidies will add another $1.8 million in costs to the city.

Although the project takes a significant chunk out of the city’s present housing fund--about $2.2 million of the $4.7 million set aside--officials said earnings will offset most of the expense. The project offers the added incentive of potentially greater earnings from appreciation of the city’s land.

“Although we are putting money out, we are getting money back on a continual basis,” Blake said. “It’s a beneficial way of doing business.”

Butler, the finance director, admits that the city “used a slew of consultants” to develop the Palmer House deal and said he is “not convinced” that such tactics will ultimately surpass the city’s traditionally conservative investment procedures.

“We are trying to leverage money, rather than using cash. It’s a matter of using less of our current reserves,” Butler said. “At least, that’s what we are trying to do.”

Previous city-sponsored senior projects built in Glendale, such as the 166-unit Casa de la Paloma and 97-unit Park Paseo, were at least partially funded with federal money from the Department of Housing and Urban Development--called Section 202 funding.

The Glendale Soroptimists expect construction to begin this fall on a 75-unit senior development called The Gardens, which will require about $1.3 million in city subsidies for amenities, such as balconies and pitched roofs, as well as off-site street and utility improvements. But the bulk of that $6-million project will also be funded with HUD money, officials said.

Availability of federal money has dwindled in recent years because of cutbacks in spending. Nationally, the number of HUD-funded units for low-income senior citizens approved last year was half the number built in 1987, according to department statistics. Last year, just 25% of the developers who applied for federal funds actually received money.

The Palmer House pact marks the first time that Glendale is helping build low-cost senior housing without HUD assistance. The 22-unit development would not even have qualified for federal money, which is only available for projects with 50 or more units. But officials said it is the sort of low-income senior housing that they would like to see more of--small-scale developments that blend into neighborhoods.

Blake said city staff members gained an education from working on the financing package. “What we are learning is that it is expensive to achieve affordability,” Blake said. “It takes a combined effort, such as tax credits and participation from financial institutions.”

How the Plan Is To Work LOAN: Glendale will lend the developer $800,000 to help build the apartment project on land the city will lease to the developer for 55 years.

PAYMENTS: Southern California Presbyterian Homes will repay the loan at 6.5% interest over 30 years. In addition to fixed annual loan payments of $61,260, the developer will pay $42,000 a year to the city to lease the land. That money will be put back into the housing fund for use on other projects.

SAVINGS: Savings in interest lowers the cost of the development and, subsequently, the amount of rent subsidy required from the city.

RENTS: The city expects to pay the developer an annual rent subsidy averaging $87,000 for 30 years to a maximum of $2.61 million. The subsidy is to keep rents low--about $379 a month including utilities.