As the developer of the Westside Project, Community Services
Development Corporation would like to respond to the June 16, 2009
editorial regarding the Redevelopment Agency Board’s direction to
staff on the financing for the project.
By Brian Abbott
As the developer of the Westside Project, Community Services Development Corporation would like to respond to the June 16, 2009 editorial regarding the Redevelopment Agency Board’s direction to staff on the financing for the project.
First, to correct the record, the land acquisition cost was one-third lower than reported in the editorial. Second, the editorial board reasons that the housing collapse in San Benito County has caused a substantial increase in affordable housing that now makes the subsidy of the Westside project infeasible. A look at a few facts will dispel the fallacy of this argument.
Undoubtedly, housing purchase prices have become more affordable in relation to the inflated home prices prior to the burst of the housing bubble. The decline in home prices; however, fails to benefit the very-low income residents that the Westside Project targets. Very-low income means that a family of four earns no greater than 50% of the area median income, which today is $40,200 annually. Let’s look at what this means in practical terms.
Assume that a three bedroom, one and one-half to two bath home can be purchased for $180,000 and requires $25,000 of improvements, to ensure it meets certain statutorily defined housing standards, for a total acquisition cost of $205,000. Under the very unlikely assumption that a very low income family saved 3% for a down payment or $6,150, the family would need to obtain a mortgage of $198,850. The monthly mortgage payment would be $1,068 at 5% interest with a 30-year amortization. Add to that taxes and insurance and the monthly housing cost jumps to $1,382 not including maintenance and repair expenses. The monthly housing cost would require anannual income of $62,500, which is 55% above the maximum very low income limit. The $1,382 monthly housing cost is 60% higher than $861 monthly rent the same family would pay for a comparable rental unit at the Westside project. Factor in maintenance and repair costs the homeowner incurs and the monthly costs of ownership far exceed the monthly rent payment at the Westside project.
The $1,382 monthly housing cost means 41% of the very-low income resident’s annual income would go toward housing costs, which would deem them ineligible for a mortgage and exceeds statutory limits on the amount of income to mortgage payment for very-low income housing projects. Assume the City of Hollister provides a silent second mortgage of $50,000, meaning the family does not make a payment on the second during the time they live in the home. This would decrease the monthly housing cost to $1,089, which still places the home beyond the means of very-low income residents and is 26% greater than the rent the family would pay at the Westside project. The City would have to subsidize the purchase to the tune of $101,000 to bring the payment down to $873 per month including taxes and insurance.
Based on the assumptions we have explained above, there are sixteen homes currently on the market for $180,000. These homes require between $20,000 and $50,000 of rehabilitation with houses selling significantly below this price point needing repairs far above the upper limit of this range. Based on currently available homes for sale in the City of Hollister, a more realistic purchase price would be $250,000 for a three bedroom one and one half or two bath house, which is comparable to the majority of the units in the Westside Project. The City would have to provide a total subsidy of $146,000 to make these homes affordable for a very-low income family, assuming the home could be purchased at its list price.
Currently, houses at the $250,000 range receive approximately fifteen offers and sell above the listed price. The average time on the market for a decent home at this price point is ten days, although some sit for up to sixty days. Condominiums might be a less expensive alternative but only four are listed in the City of Hollister currently. These units range between $65,000 and $165,000 but are small units that are incomparable to the majority of the unit sizes at the Westside project.
Even if funding could be found to subsidize the purchase of existing housing stock, past experience in homeownership for very low income residents has found that nine of ten applicants do not qualify to obtain mortgages to purchase the homes. The Westside project targets these nine very-low income residents by providing high quality housing at a monthly rent affordable to them, ranging between $590 for a one-bedroom unit and $895 for a four-bedroom unit at current rates. At these rents, it is impossible to construct multifamily housing without a subsidy. The number of units to be built at the Westside makes it difficult for CSDC or the City to obtain other funding to defray the RDA contribution. Only when projects reach the size of between 75 and 100 units does other funding become available. There are not lot sizes within the RDA district that would allow for this number of units. The $7.4 million loan requested by CSDC is a significant sum whether in good times or bad but it is important balance this with what the community gains.
The loan amount translates into a $231,250 subsidy per unit that provides high quality housing at affordable rents in perpetuity. For example, over a fifty-year period, the subsidy amounts to $4,625 per unit annually. The Westside Project accrues other benefits such as building on land already within the City limits, the project would contribute toward the repayment of the bonds to construct the new sewer plant but this would not happen in the purchase of existing housing stock, and the rents paid by the residents provide income for CSDC to maintain the units and grounds without the resident being responsible, as with home ownership.
For some of the reasons stated in the response and others, it is an unfair to gauge the per-unit cost of purchasing resale housing against newly constructed multi-family housing. When this comparison becomes the bench mark to make decisions on whether to finance very-low income multi-family housing projects, the largest proportion of very-low income residents are penalized and excluded from living in safe, decent, and sanitary housing.
We are working with the City and another nonprofit housing developer to secure other funding that will decrease the contribution by the RDA to the Westside Project. In the end; however, the funding may not materialize. In this event, the community and the City must decide what priority to assign the provision of rental housing affordable to very-low income residents. Do we continue on a course of home ownership that addresses only 10% of the needs of very-low income persons? Or should we provide housing that meets the needs for 90% of very-low income families?
Brian Abbott executive director, Community Services Development Corp.
