GILROY
A split city council effectively denied $676,100 in much-needed capital for South County Housing, which could force the nonprofit builder out of business unless it can quickly sell six vacant townhomes in its stalled downtown development.
“Things are going to be a hell of a lot harder now,” President and CEO Dennis Lalor said after the council’s 3-3 vote Monday night.
Councilman Perry Woodward recused himself because he owns a townhome in the neighborhood, but Councilmen Dion Bracco, Craig Gartman and Bob Dillon voted against buying a 50-percent stake in four of the six unsold townhomes in the first phase of South County’s Cannery project at Lewis and Forest streets mostly because they said the money in a special housing fund could be better used on first-time home buyers who need loan assistance.
If the council had approved the bailout, the nonprofit planned to rent the four units through 2014 before selling and repaying the city, whose money South County needs now to help pay off $3.6 million of a $17 million loan from Union Bank that was due in December. Settling up would remove the lien the bank placed on the Cannery’s second phase last year to protect its loan on the first phase – known as Forest Park. And removing that lien would tip a critical domino by allowing the nonprofit to receive a $1.5 million state construction loan through the city to begin finishing the second phase – known as Alexander Place – which Union Bank has an additional $780,000 invested in, according to Lalor.
But none of this resonated with the Bracco, Gartman and Dillon. They collectively told Lalor and a handful of Cannery residents who showed up to advocate the bailout that spending $676,100 of the city’s Housing Trust Fund money on market-rate homes amounted to a misuse of the fund meant to prop up affordable housing. The Cannery’s affordable units are in its partially built second phase and unbuilt third phase. Money from the sale of market-rate Forest Park units was suppose to finance the affordable sections, but when the housing market crashed, so did those plans.
“I don’t think that this is the right purpose for this money. It was meant for affordable housing only – not for market rate homes,” Gartman said. “This council is not in the business of making developers money.”
But Cannery residents said it was about more than just money.
Nick Giorgi moved into The Cannery from the Bay Area with his wife seven months ago. He stuck out Monday night because the young urbanite is the demographic the council has talked about recruiting to the downtown area. He skipped an important work meeting Monday night to vouch for South County, but in the end he and his 16 neighbors who signed a petition lost to the “good ol’ boys club that had already made up its mind,” he said.
“When my wife and I saw what this city had planned for the downtown, we really decided this place had something, so I commute 35 miles to San Jose for work everyday because this is the place I really thought would become amazing,” Giorgi told the council. “It’s not too often that somebody from San Francisco decides to leave and go to a small town.”
Mayor Al Pinheiro and Councilmembers Cat Tucker and Peter Arellano also argued that this was not just an investment in South County – which held a disheartening auction last April to sell Forest Park and has shed its own work force by about 20 percent over the last year – but in the downtown as a whole. Allowing the Cannery to sit unfinished could drag down the area for years to come, they warned, and Lalor said the nonprofit has already invested $35 million into its flagship development of 210 units.
“It sickens me to see that project has stopped,” Pinheiro said. “Yet, we have the ability as a city to use funds to get that project going.”
Others ranging from former Gilroy Unified School District Trustee and Rosso’s Furniture Owner Jaime Rosso to downtown developers Gary Walton and Clorete Almeide stood up to support the project for the same reasons.
“Empty, abandoned properties have the most significant impact on property values,” Walton said. “The downtown already has enough problems, and I don’t think we need more blight.”
Gartman conceded that The Cannery was a fine project – just not one for the city to invest in.
“I understand it’s a cornerstone,” Gartman said, “but they can buy these homes if it’s that great of an investment.”
Tucker countered that the city has spent millions refurbishing the downtown throughout the years and that in these “special circumstances,” the city “should be willing to provide for the citizens in the community by allowing them to use the Housing Trust Fund money set aside for them.”
The city created the Housing Trust Fund in 1999 with seed money from the sale of South County Housing units. Restricted deeds on affordable properties require sellers to give Gilroy the first chance to buy the home and preserve its affordability, or else the city allows the market-rate sale and then collects a 50-percent stake in the equity.
Since 1999, city officials estimate that the fund – which began the fiscal year with a balance of $4.1 million – has received more than $4 million from the market-rate sale of 47 affordable units at various South County developments. Collecting interest on those millions throughout the years and distributing loans to first-time home buyers have augmented the fund.
Despite South County’s principal role in the fund’s history, Bracco said he still opposes the bailout because the money should help first-time home buyers buy houses and remove them from the bloated market – not purchase four townhomes so that South County Housing can satisfy its other debts and then continue to build out its Cannery Project, adding more unsold units to the city’s inventory.
“We already have 600 units on the market in Gilroy that can’t be sold,” Bracco said. “This money can help far more people because that’s what that money’s set aside for.”
Bracco referenced 33 first-time home buyers who have borrowed a total of $1,005,000 in Housing Trust Fund loans this fiscal year. Only four buyers borrowed from the city last fiscal year, and the city has historically issued about $250,000 in loans a year. Because of such low home prices, housing officials have said qualified home buyers are taking advantage of cheaper inventory. While this means more loan repayments, the slow sale of affordable-cum-market-rate homes means officials expect revenue from equity shares to shrink from about $550,000 to less than $160,000 this year.
