Housing Project a Costly Lesson for Taxpayers : Policy: L.A.’s Casa Gloria was built for $233,000 a unit. Questionable decisions, inefficiencies of financing faulted.
For Hector Huezo and his family, Los Angeles’ new Casa Gloria apartment house has been a godsend. Where else could they find a sparkling three-bedroom, two-bath apartment for $353 a month?
But for taxpayers, Casa Gloria has been a lesson in the high cost of low-cost housing.
Each of its 46 apartments came with a $233,000 price tag, making the earth-toned building on a gritty stretch of Temple Street near Echo Park the most expensive affordable-housing project in California history.
For that kind of money, taxpayers could have bought the Huezos a house.
Casa Gloria became the costliest project because of a series of questionable decisions by city officials, such as requiring underground parking for tenants too poor to own cars and demanding a redesign to reduce a shadow on some dilapidated apartments next door.
But much of its cost was the result of inefficiencies built into the method of financing most low-income housing projects, which average about $165,000 per family unit in Los Angeles.
The federal government’s primary method of creating affordable housing is by issuing U.S. income tax credits to developers, who then sell them to investors to raise money--a method so wasteful that only half the federal money earmarked for a project actually goes into it.
Developers, mostly nonprofit groups, make up the difference by cobbling together loans from a dizzying array of banks and government agencies in a duplicative, time-consuming process that also adds to costs.
“If a person came down from Mars or even from Europe and looked at how we provide low-income housing, they wouldn’t believe their eyes,” said Peter Dreier, professor of public policy at Occidental College and former director of housing for the city of Boston. “It’s extremely inefficient . . . the most ineffective and unfair way you can imagine.”
Dreier and other critics of the tax credit system argue that it is unfair because it helps so few people when the need is so great. Each year tax credits help produce about 100,000 apartments at an annual cost to the Treasury of $2 billion to $3 billion. About 2,400 of these apartments will be built or rehabilitated in Los Angeles.
Meantime, the government estimates that 10 million of the 13.5 million low-income families who qualify for housing aid don’t get any.
When Casa Gloria was planned four years ago, there was no question but to use tax credits. “They may not be the best, but they are the only game in town,” said Carmelo Lacaya, a former Roman Catholic nun who heads the nonprofit organization behind the project.
Lacaya developed Casa Gloria at the urging of Gloria Molina, then the councilwoman for the area and now a county supervisor. She named the project for Molina, who had become a leading advocate for affordable housing on the council.
The neighborhood where it was to be built was a graffiti-scarred jumble of apartments, single-family homes and vacant lots just west of Downtown on the border of Temple Beaudry and Echo Park. The area was seen as the likely site of a boom in office and apartment construction, but then the recession hit and the jackhammers being used to build Casa Gloria were the only ones making any noise.
Lacaya’s organization, an offshoot of the National Assn. for the Hispanic Elderly, won a government competition for tax credits, allowing it to take one dollar off its tax bill for each dollar it invested in low-income housing. Since the nonprofit group had no tax bill, it followed standard practice by selling the credits to investors on an open market.
Lacaya’s group, El Pueblo Community Development Corp., sold the credits to Chevron U.S.A., receiving 58 cents for each dollar of credits. Market prices for credits have varied from about 40 cents to, currently, 60 cents on the dollar.
After El Pueblo paid a finder’s fee of nearly $300,000 to the person who lined up Chevron, and paid assorted other related expenses, more of the credit evaporated, leaving only 46 cents on the dollar. In the end, Lacaya’s organization was left with $4.4 million of the $9.7 million in taxes that the Treasury gave up so Casa Gloria could be built.
To supplement this sum, El Pueblo arranged to borrow money from a bank and various government agencies: the city Community Redevelopment Agency, the Century Freeway Housing Program and the state Rental Housing Construction Program.
Each required its own loan application, its own title insurance and its own audit, said Perla Eston, a former high-ranking city housing official who was hired by El Pueblo to help it negotiate the maze.
Such duplication is “stupid,” Eston said. “It wastes a lot of money and a lot of time,” she said.
One study estimated that the costs of arranging financing through so many agencies adds about $7,000 to the price of an average low-income housing unit.
Efforts are under way to eliminate some duplication. Leslie Lambert, the Community Redevelopment Agency’s housing policy director, said the Legislature has begun debating whether to combine state and local sources of funds into a one-stop loan center for developers in tax credit deals. But she said bureaucrats oppose the move--preferring the current system in which many government agencies can claim credit for funding the same housing units.
That is the bureaucratic spirit in which Casa Gloria was built.
“By committee,” said a frustrated Lacaya, who frets that, within the housing community, she is being tarred unfairly as a spendthrift because of the project’s record costs.
She blames city officials for the cost overruns because, as records show, they insisted on adding extras to the project.
Lacaya said she saw Casa Gloria as a simple, four-story, wood-frame structure consisting only of apartments.
But Molina insisted that it include space for stores, because there are few in the neighborhood, according to Lacaya and members of Molina’s staff.
City planning officials weighed in with demands that enough parking be provided to accommodate two cars for most apartments, even though most of the tenants would likely be too poor to have two cars.
And CRA officials insisted that the building be scaled down in the rear because it would cast too big a shadow on a row of run-down one-story apartments behind it.
To accommodate all these demands, Casa Gloria had to be repeatedly redesigned.
The architect lowered its height in back from four stories to three to lessen the shadow.
He raised its height in front from four stories to five so that the same number of apartments could be built.
Raising the front to five stories required that steel, rather than wood, be used for the frame to comply with the building code. Reducing the back to three stories meant that parking planned for ground level had to be shifted underground.
Lacaya said city officials seemed blind to the rising costs.
“The city does not have a streamlined approach to the development of affordable housing,” she fumed. “Its entire system is just encumbered with bureaucracy and inability to see that all these things that you throw onto a project cost money.”
For Lacaya, there was only one way around the higher costs: build fewer apartments.
But she was contractually bound to each of her many lenders to build 46 units.
So she went ahead with changes that added as much as $70,000 to the cost of each, records show.
Nearly six months after Casa Gloria opened, some results of these expenditures can be seen.
Tenants seem happy with their new digs.
“I am thankful for this situation,” said Huezo, a Salvadoran immigrant who won the chance to rent his apartment in a lottery that was held after more than 500 people applied in a week. Huezo, who earns about $1,000 a month as a clerk in a health food store, had been paying more to house his family of four in a South-Central studio apartment.
Chevron officials seem happy.
They would not say how much money they will make from their purchase of Casa Gloria tax credits. But attorneys who structure tax credit deals say investors commonly earn annual returns of anywhere from 15% to 25%. This year, as part of Casa Gloria’s continuing financing, Chevron will pump about $700,000 into the project in return for about $1 million in tax credits.
As for the wisdom of the city decisions, the commercial space remains unrented. It turned out there was no market for it. The parking garage is nearly empty. The tenants do not have enough cars to fill it up. And the three-story rear casts a slightly smaller shadow over the building next door than the four-story rear would have.
Molina declined to be interviewed about Casa Gloria. Her planning director, Carrie Sutkin, said neither Molina nor her staff realized that adding commercial space to the project would contribute to such high costs. “We were all surprised,” she said.
How to best address low-income housing needs continues to be the subject of debate among policy-makers. Should the federal government continue to use the tax code to stimulate low-income housing construction? Or would it be more efficient to directly subsidize developers or the poor?
When Congress last considered the issue in 1992, Casa Gloria was brought up by a handful of tax credit opponents as an example of runaway costs.
The Congressional Budget Office, in a separate study, concluded that the tax credit helps less than half as many poor people as direct subsidies would. The poor could use vouchers--like those given out to families displaced by January’s earthquake--to help pay market rents.
But more than 400 members of Congress sponsored a bill to make the tax credit permanent. It began as a temporary measure in 1986.
Housing policy analysts say one reason it is popular is that it does not require politicians to appropriate funds.
To hope for Congress to include $2 billion to $3 billion in the federal budget for low-income housing would be a pipe dream, said Anita Landecker, regional vice president of Local Initiatives Support Corp., a nonprofit organization that raises money from major corporations to invest in tax credit deals. “Politically, you’re not going to get it in these times.”
Besides, she said, tax credits have some advantages over direct subsidies. They involve major corporations in partnerships with many nonprofit developers, thereby interesting influential business executives in the welfare of the poor. And nonprofit organizations that rely on tax credits tend to produce high-quality homes that provide not only shelter but also “symbols” of hope for the revitalization of poor neighborhoods.
