The High Stakes of Affordable Housing

Looking out across a barren dirt lot in Camarillo where even the weeds seem to be dying, affordable-housing project manager Karen Flock is at a crossroads.

To her right is a well-manicured collection of two-story townhomes that Flock’s company, Ventura-based nonprofit Cabrillo Economic Development Corp., built in 1995 with the help of a key federal program. To her left, just steps away, is the empty lot she wants to turn into affordable housing for struggling farm workers and others.

But the modest 10-home project will have to wait until Flock’s company wins the lottery. Literally.

“In the old days, it didn’t work like that,” Flock said. “If you had a good project, it would get funded.”

Times have changed.

Under state Treasurer Matt Fong, the critical $75-million affordable-housing program that helped Cabrillo build the first complex has been transformed. Luck and wealth, not quality, are often the deciding factors in getting money now, say nonprofit builders and former administrators of the program.

These changes, most notably a lottery system for awarding key subsidies, have turned the program on its head. Critics say large developers have taken the lion’s share of this money away from nonprofit organizations that cannot afford the gamble of entering the lottery--and the result is affordable-housing projects that offer less to poor families.

“There’s a lot less thought involved in them, there’s a lot less experience on the developer’s part, and there’s a lot less care,” said Ronne Thielen, who served as director of the state program from 1991 to 1994.

Now, she said, “it’s just about making profits.”

But former committee Executive Director Don Maddy, who spearheaded changes under the Fong administration, said the policy changes have made the program more efficient.

Nonprofits Drop Out

“The No. 1 priority of this program . . . is to get the rents down to a level that people can afford,” he said.

Several established nonprofit builders have abandoned a process that they say is now unfairly weighted toward larger companies. Many Mansions, a Thousand Oaks-based nonprofit housing group, is one well-respected builder that has left the competition.

“We’ve given up on the process,” said Dan Hardy, the group’s executive director. “That door has been closed to us.”

The program is administered by an arm of the state treasurer’s office known as the Tax Credit Allocation Committee. The agency distributes about $75 million in state and federal tax credits to affordable-housing builders every year, staving off the shortages that force many families to crowd into substandard housing or make a painful choice between rent and food.

The credits usually are sold by the builders to investors at a discount to raise cash for construction. The investors, in turn, use them to reduce their tax bills.

Although generally thought of as a money-losing venture, affordable housing can be very profitable, especially in low-cost areas such as the suburbs--when the government provides heavy subsidies, experts say. Moreover, many companies getting into the business use their own construction firms and invest in tax credits themselves, keeping profits in-house and further cutting costs.

When the state program began in 1987, there was little competition for the credits, and of those involved, most were smaller builders--including nonprofits. As competition for the credits increased, incoming Treasurer Fong instituted dramatic changes in the program in 1996.

Foremost among those changes was a lottery that randomly selects projects from the pool of eligible applications.

Although state regulations mandate that a fraction of the money goes to each of four “set-asides”--including nonprofits--and each of several housing types, the lottery is seen as the most important hurdle to getting money through the program, which now funds roughly one of every five applications.

After two years under the new rules, former director Maddy said, the number of families served has gone up by 1,300, the average rent has dropped 17%, and returns of tax credit investments have grown by about 9%.

Some Developers Question Gains

But many nonprofit developers say they are skeptical of the program’s gains. Some of those apparent successes, they say, are the result of reduced services, lower quality and more projects in low-cost suburban areas.

“Just because you can build more units for less cost in less expensive areas doesn’t mean you’re addressing the needs,” said Dara Kovel of Mercy Charities, a nonprofit affordable-housing developer. Some projects, especially those in high-density urban areas, cost more to develop, she said.

The lottery system, which effectively began in 1997, is the only one of its kind in the country, according to the National Council of State Housing Agencies, which represents 49 state tax credit programs in Washington, D.C.

Even though regional quotas often affect which applications get funded, the lottery is in many ways the deciding factor in the new system. With the lottery, competitors for tax credit money find that luck, not project design, is often the deciding factor.

“The [tax credit] lottery is like the state lottery you play,” said program Executive Director Walter Liang. “The more chances you put into the program, the more opportunities you get.”

Housing giant Kaufman & Broad is one company that is playing the numbers, according to state records.

In the latest twice-yearly lottery, the company submitted 17 of the 74 applications to the General Pool, the program’s largest category. It netted four projects in the top 10 lottery picks.

Those projects, and three other Kaufman applications among the top 17 lottery picks, are strong contenders for the next allocation, which will be decided Wednesday.

Already in the works is a senior housing complex in a 43-acre Simi Valley development that the company plans to build using $10 million in tax credits.

Kaufman’s veritable flood of applications is its first major foray into the lottery process. In 1997, the lottery’s first year, the company received funding for one project out of six applications.

Even the president of Kaufman & Broad’s Multi-Housing Group Inc. has reservations about the new process. “I don’t think the lottery system is the best system for the state of California,” Michael Costa said.

Among the problems, he said, is that the system draws developers to sites that are less than ideal for residents simply because they would be easier, and cheaper, to propose for tax-credit financing.

Critics and supporters of the new system agree it helps companies that can afford multiple applications and have access to big bank financing, usually for-profit developers or nonprofits with significant for-profit backing.

In contrast, smaller nonprofits usually can ill afford to gamble with the money involved in meeting committee requirements, which can cost anywhere from $20,000 to $50,000.

Dave Latina, housing development director for Mercy Charities, said the changes have reduced the tax credit that housing offers low-income residents.

Unlike many nonprofits, he said, for-profit developers have little incentive to offer services--such as after-school programs, English as a Second Language classes, computer classes and child care--that many community-based groups offer.

A for-profit developer, on the other hand, is simply “looking to make its bottom line as big as possible,” Latina said. “It’s those type of things that a for-profit developer has no motive to do.”

The changing nature of low-income developments is not lost on John McCoy, a deputy administrator of the Los Angeles Community Redevelopment Agency.

McCoy said the agency, which depends on tax credit financing for about one-third of its low-income housing budget, has seen an increase in so-called “cookie-cutter” projects that offer fewer critical services.

“What’s getting funded is those projects that lend themselves to being able to be easily packaged,” he said. “That’s not going to be an inner-city, nonprofit site where you have a child-care center or computer center and all those things that are complicated to put together.”

Arjun Nagarkatti, vice president of Thousand Oaks-based AMCAL Multi-Housing Inc. and a supporter of the new system, denied that the new system created lower-quality housing.

But Nagarkatti agreed that receiving credits “has more to do with luck than with how the project stands, because the process is so competitive it does not distinguish between one project or another.”

Nagarkatti is putting that theory to the test. In the latest round, AMCAL submitted three applications for ostensibly separate projects that are on the same land parcel, involve an identical number of units and would net an identical amount of tax credit financing. Two of the AMCAL applications ended up in the top 14 lottery picks in the General Pool.

Maddy, who left as program director earlier this year to become chief deputy treasurer, downplayed the role that luck has in the new system, however. And he bristled at the idea that the lottery gives developers an unfair advantage.

“It’s [only] a theoretical advantage,” he said.

Maddy also rejected the idea of tighter regulations to weed more applications out of the pool, saying that the program has been tailored to meet so many goals--broken down by regions, housing type and target population, among others--that reducing the number of applications would impede its success.

“It wouldn’t accomplish our goals,” he said. “The more applicants you have, the more likely we’ll be able to get those outcomes.”