Power Costs Hit at Subsidized Homes for Poor

The gray carpet in Veronica Martinez’s San Diego apartment is threadbare and stained, the walls badly in need of fresh paint. But at her apartment and others like it, the energy crisis has put a halt to all but the most urgent repairs.

Martinez lives in a subsidized home, where utility costs are factored into rents. The rents are capped and cannot be raised, forcing her landlord and others at most publicly supported complexes to bear the brunt of spiking energy costs.

San Diego was hit first by the energy crisis last year. But as power bills soar throughout California this summer, affordable housing advocates fear the higher costs could capsize low-income housing developments and private landlords already operating on razor-thin margins--and discourage participation in new programs.

The Mercado Apartments, where Martinez lives, are owned by the nonprofit Metropolitan Area Advisory Committee Project and financed partly by federal tax credits. The complex is 110% over budget on natural gas alone, which is master-metered.

Residents pay their own electricity bills, but those, too, are figured into rents through a utility allowance set by the city’s Housing Commission. When the utility allowance is adjusted upward to reflect higher costs--as it recently was--the residents’ rent burden falls accordingly.

It’s a zero-sum game that will hit almost all operators of the state’s hundreds of thousands of rent-restricted housing units--nonprofits and for-profits alike. And it comes at a time when the state’s low-income housing shortage has already reached crisis proportions.

“If something is not done quickly, it’s going to affect the financial integrity of our projects,” said Ana Baiz-Torres, executive director of the advisory committee project, which is freezing salaries of on-site staff and scouring the books for other cost-cutting measures. “If you look a few years out, it’s potential catastrophe.”

Affordable housing advocates have begun to sound the alarm, and officials are taking note. State Treasurer Phil Angelides, who heads the state’s Tax Credit Allocation Committee, has asked his staff to study the problem and devise potential solutions.

“These are very tough projects to put together, and this will make it tougher,” Angelides said. “What would be a tragedy would be to stand by and watch some good affordable housing projects not make it financially.

“We can’t allow projects to start deferring maintenance and deteriorating in quality or go upside down, jeopardizing their very existence as affordable housing.”

The state committee awards federal tax credits to low-income housing developers, who then partner with private investors. Those investors pump a one-time equity injection into the project and get a 10-year tax write-off in return.

Already, the committee has added criteria to its selection process to give competitive advantage to energy-efficient projects. But Angelides said more radical measures will probably be necessary to stem serious damage to the industry. Projects that go belly-up would be taken over by lenders and investors and probably lose their standing as rent-restricted.

Because San Diego was hit first with steep electricity hikes last summer, it offers a glimpse at what is coming statewide. But the toll is already being felt elsewhere as a result of higher natural gas costs, although those costs have dropped in the past week. Broad electricity rate hikes that take effect in most of the state this month are expected to worsen matters markedly.

The crisis is affecting every corner of the complex world of government-assisted housing, from tax-credit properties like the Mercado, to public housing projects, to the Section 8 federal subsidy program. State officials and housing advocates estimate the number of such units in California to be 300,000 to 350,000.

Though the programs are each configured differently, they share one common trait: Rents--the key revenue stream--are capped by formulas that are tied primarily to income. Most of the so-called gross rents set by government agencies are supposed to cover energy costs, but the unpredictable spike in rates is throwing the system off kilter.

“It becomes the worst of all worlds,” said Tim English, chief financial officer of Los Angeles-based Alpha Property Management, which manages about 2,500 units in Los Angeles County. “Here we are in a very regulated business and one of the key cost components is going to be deregulated. We’re stuck with fixed rents and unfixed utilities.”

Though Alpha’s properties in Los Angeles will be protected from electricity rate hikes, others in Montebello and Duarte won’t, and all have been hit with more than 30% increases in gas bills. That means carpet replacement and plans to refurbish kitchens at some properties were placed on hold several months ago.

“The only maintenance we make sure to not defer is where it’s going to create an energy savings on the property,” English said.

The problem is not entirely new: The precipitous increase in energy costs in the late 1970s took a toll on federal housing programs that subsidized the debt service of developments, but not operating costs, said Richard Ravitch, co-chairman of the Congress-appointed Millennial Housing Commission, which is gathering data on the nation’s housing crisis. That led to defaults and a decline in the number of affordable units.

“Rising operating costs are a major issue,” said Ravitch, whose commission will report back to Congress on a wide range of housing problems next spring.

The problem has hit operators of affordable housing in a variety of ways. English’s privately developed units, for example, are in older, master-metered buildings designated as Section 8 projects. That means the owner pays all utility costs.

The Section 8 voucher program, however, operates somewhat differently. In those cases, strained public agencies such as San Diego’s Housing Commission are being forced to pay out larger subsidies to private landlords to cover the increase in rates. That takes matters from bad to worse in a system where needy families already wait two to seven years for vouchers.

“We’re going to be looking at helping fewer people,” said Pat Duplechan, director of housing services. “The waiting list will be [as long as] 10 years if this trend keeps up.”

In most buildings where residents are individually metered, utility allowances are factored in and subtracted from the maximum rent amount that can be charged. Many tax credit properties like the Mercado--which tend to be newer--are among those.

Tenants may be paying their own bills at those projects, but building owners are eventually the ones to shoulder the burden. It works this way: Utility allowances are set by hundreds of public housing authorities across the state to reflect local costs. Landlords must then subtract that allowance from the maximum allowable total when setting tenants’ rents.

As bills overtake the allowance, low-income tenants must first bear the brunt. Martinez, a mother of two small children, has seen her monthly bills climb from $15 to between $30 and $40 since last summer, and that’s with the 15% discount she gets through the California Alternate Rates for Energy (CARE) program.

That discount, for residents who meet certain poverty criteria, was increased this week to 20% by the state Public Utilities Commission.

To keep bills down, the Martinez family got rid of one television, restricted the children’s computer and video game activity and stopped using the living room light, relying instead on the pale glow from the kitchen. But some relief is in sight. The San Diego Housing Commission recently approved a 93% hike in the utility allowance for an average all-electric two-bedroom unit, from $40 to $77. A separate allowance for combined gas-and-electric units went up 72%, from $39 to $67.

That means the noose will loosen on tenants and tighten around the neck of the building’s owners as rents are adjusted downward to reflect the new allowance, said Shelly Skirvin, senior asset manager for the nonprofit group that owns the Mercado.

Either way, tenants suffer: Mercado resident manager Maria Osorio can do little more than explain the problem to residents living with torn carpets, faded paint and chipped stucco. She also helps tenants apply for the CARE discounts, because many eligible residents are unaware of the program.

The utility allowance increases are not restricted to San Diego, and more are likely as electricity rates rise. In San Francisco, gas utility allowances recently went up by 200%. That means a typical 50-unit development where tenants pay for utilities will now have to get by with about $50,000 less in yearly operating revenue, according to the Non-Profit Housing Assn. of Northern California.

If projects become insolvent, they will probably fall out of the state’s affordable housing portfolio, eventually renting on the open market with no restrictions. The energy squeeze is also expected to accelerate another trend: private landlords opting out of the Section 8 program and hiking their rents to market rates, housing experts said.

Construction of projects could also be jeopardized, because higher energy costs make it all the harder for developers to service their debt. For example, one 96-unit rental project in San Francisco currently in development had to shave $1.4 million off its permanent loan because of the recent utility allowance increase, according to a report by the advocacy group Housing California.

That amounts to a 21% drop in the debt the project could support. To make such deals pencil out, therefore, developers must seek more public subsidies and tax credits per project, and fewer overall will be built.

Already, investors who purchase low-income housing tax credits have begun to scrutinize projects in the pipeline more closely, said Ronne Thielen, executive vice president of Irvine-based Related Capital Co., which syndicates the credits.

Some limited remedies are in the works. Last March, the U.S. Department of Housing and Urban Development awarded one-time emergency funds to certain housing authorities--including Los Angeles’--to help cover higher energy costs at public housing projects.

HUD is considering temporary assistance to owners of Section 8 projects such as Alpha’s. The agency has also proposed some relief for the Section 8 voucher program, which is administered differently.

An interim rule published by the agency this week would allow housing authorities to set the voucher payments at 120% of fair market rent to account for higher energy costs. But the boost would be in effect only from July 6 through Sept. 30, a HUD spokeswoman said.

In California, affordable housing advocates are calling on PUC President Loretta Lynch to ease the strain on master-metered buildings. Those building owners are seeking to be reclassified from commercial to residential electricity users. The change would freeze rates as long as usage stayed below 130% of baseline--a program currently available only to residential customers.

Other ideas include making tax credits available for energy retrofitting of low-income housing, although that would take money away from new development. The most obvious solution would be an appropriation of federal or state funding to help building owners meet operating costs, said Julie Bornstein, director of the state’s Department of Housing and Community Development.

But some say the political prospects for such a bailout are dim.

“This is like dealing with a cancer. There’s no good way to treat it,” said Jeffrey Burum, a Millennial Housing commissioner and executive director of the nonprofit National Housing Development Corp., which helps preserve affordable units. “We have to look at what is the treatment that causes the least pain.”