A new battleground is emerging in San Diego’s housing crisis: the need to preserve thousands of older apartments with subsidized rent restrictions that will expire in the next five years.
Recent efforts to solve a severe shortage of affordable housing have focused on spurring new construction with financial incentives and looser regulations, but the city may dig itself a deeper hole by not also preserving existing low-rent units.
Preservation of the 7 percent of low-rent units at risk of disappearing over the next five years is especially crucial, because construction of such units began to sharply drop six years ago when the state eliminated redevelopment agencies.
Rent restrictions expire on such units because developers agreed to charge lower rents for a certain number of years – usually from 30 to 55 -- in exchange for tax credits redevelopment money or other financial incentives.
When the restrictions expire, the owners of the complexes can sharply raise rents up to market rate, or choose to demolish the older units and replace them with more upscale versions that yield even higher rents.
But there is a third option that local housing advocates and some politicians want to begin focusing on.
Apartment owners can choose to extend the rent restrictions for lengthy periods if they receive another government subsidy that makes preserving the units more financially appealing than tearing them down.
Figuring out how to make that happen as often as possible will be the focus of an April 18 forum that City Councilwoman Georgette Gomez has scheduled for the council’s Smart Growth and Land Use Committee.
“I want to know what kind of capital we need and who we need to partner with," Gomez said last week. "Let's start talking to the developers so we know how many are willing to work with us."
The forum was inspired partly by the council’s controversial approval last month of plans to demolish the 322-unit Penasquitos Village complex, where rent restrictions had expired, to make way for a 600-unit market-rate complex.
Critics say city officials and the San Diego Housing Commission missed an opportunity to preserve the complex by not engaging the property owner in discussions.
Echoing the sentiments of those critics and many local housing advocacy groups, Gomez said she wants the Housing Commission to shift some of its financial resources toward preservation and away from new construction of low-rent units.
"We need to have a conversation about how much money from the budget should be allocated for preservation -- right now it's not part of the budget," she said. “That makes it easier to say no when something like PQ Village comes up."
Such a shift in priorities could be unpopular with the local development community, which has been more supportive of city policies encouraging new housing construction.
Gomez said she also wants the city to hire a specialist to coordinate preservation efforts and, perhaps more importantly, compile an exhaustive list of housing units with rent restrictions due to expire in coming years.
"We don't have somebody keeping track of these projects and sounding the alarm," she said.
Stephen Russell, executive director of the San Diego Housing Federation, said evidence that there’s a glaring need for such a person is the uncertainty over how many units actually have expiring rent restrictions in coming years.
Russell said the most reliable source for local officials has been the California Housing Partnership, a nonprofit established by the state in 1988 to keep track of California’s housing stock.
The most recent numbers from the partnership show that 2,386 of the county’s 31,961 units with rent restrictions face expiration of those restrictions in the next five years.
The data show another 1,957 units face expiration dates in the next six to 10 years, leaving 27,618 units with rent restrictions that last longer than 10 years.
But Danielle Mazzella, a housing data analyst for the partnership, said those numbers only include projects with federal subsidies, such as tax credits or financial incentives from the U.S. Department of Housing and Urban Development.
So the list excludes rent-restricted units required under the city’s inclusionary housing policy, which mandates a certain number of low-income units in large projects, and the city’s density bonus program, where developers agree to rent restrictions on some units in exchange for being allowed to build larger projects.
Mazzella said the list includes most of the low-income projects built with state redevelopment money, because they also include federal tax credits as a funding stream.
But she said some of those projects aren’t included because they were constructed before the federal tax credit program was created in 1986.
So there are more than 2,386 units with rent restrictions due to expire in the next five years, possibly significantly more.
The hurdles to preserving such rent-restricted units are finding the right investors for a new subsidy and engaging the apartment complex owners long before the restrictions expire, Russell said.
"The key is bringing in new financing and there's all sorts of ways you can do that," he said.
Escaping the rent restrictions usually sounds great to many apartment owners, but their perspective often changes when other options are presented, Russell said.
Preservation is cheaper than new construction, partly because lengthy environmental approvals are not required.
So that makes it easier to find a deal that makes sense using either a new round of tax credit investments or new subsidies from the city or HUD, he said.
But it’s crucial for officials to explain all of these options to apartment owners early in the process.
"Not all property owners are equally sophisticated," Russell said.
An important role could be played by a little-known local federal nonprofit called the Local Initiatives Support Corporation (LISC), which provides money for low-income housing projects.
LISC, which gets money from banks under 1977 legislation that aims to encourage lending in low-income areas, has already begun engaging the owners of complexes with expiring rent restrictions.
"We're kind of a financial shock absorber when it comes to the creation and preservation of affordable housing," said Kwofi Reed, lending program officer for the local chapter of LISC in City Heights.
LISC has recently helped preserve two projects: 156-unit San Diego Square in downtown and the 80-unit New Palace Hotel in Bankers Hill.
"Sometimes it's the art of persuasion," Reed said. “Part of it is helping them understand they're not going to have to take a financial loss just because they sell to someone who is doing affordable housing."
Reed said, however, that preserving rent-restricted units will be much harder than years ago because about 70 percent of local subsidies for such housing have gone away since 2008.
That is primarily because of the end of redevelopment agencies, which were required to spend at least 20 percent of their revenue on low-rent housing.
But federal subsidies have also dwindled, or at least failed to keep pace with sharp increases in local market-rate rents, Reed said.
"The big issue isn't necessarily that the covenants (requiring rent restrictions) are going away, it's that there isn't enough money to refinance these projects," he said. “Because there's a shortage of money on the back end, not all of these properties are going to be able to be saved."
A potential solution to the funding shortage is a $900 million bond measure to build low-income housing that the Housing Federation is spearheading for the November ballot.
The proposal would raise taxes on city of San Diego property owners an average of $72 per year to pay for roughly 7,500 subsidized apartments.
Even with adequate finances, Reed said some of the apartment complexes won’t be preserved as low rent.
"If they are hell-bent on selling the property on the private market for the highest and best use, there sometimes can be very little you can do," he said.
Councilwoman Gomez concedes that point, saying she’d like the city to set a goal of saving a certain portion of rent-restricted units, perhaps 50 percent.
She also wants the city to establish requirements for the relocation packages displaced tenants will receive when such units revert to market rate or get demolished.
Relocation benefits for departing residents of PQ Village prompted months of rancorous debate before the council approved the replacement project on March 5.
Officials from the Housing Commission couldn’t explain last month why they didn’t pursue preserving PQ Village, noting that the rent restrictions actually expired several years ago.
Ann Kern, the commission’s senior director of housing finance and program development, said it was likely that the large size of the project made it too expensive. She also said state funding was scarce at the time.
She noted that 4,000 units with expiring rent restrictions have been preserved by the commission, but didn’t specify a time frame.
Richard Gentry, the commission’s chief executive, declined multiple requests for interviews last week.
Reed, the LISC official, said he doesn’t think the commission deserves criticism, contending it has adequately prioritized preservation.
"They've been ahead of the curve on this," he said of the commission.
The commission’s focus, which many say is appropriate, has been battling homelessness and spurring new construction of low-income units.
Their efforts are one prong of a far-ranging city campaign to shrink the local shortage of housing. Other initiatives include loosening restrictions on granny flats and expanding the city’s density bonus program.
The county’s regional planning agency says the region will fall 150,000 housing units short of the more than half a million units that need to be built by 2050 to meet projected population growth.
Losing a significant portion of the county’s nearly 32,000 rent-restricted units could make that deficit even larger.
More than 16,000 homes must be built each year to meet the targets, which is about 60 percent more than what was built in 2016.
While regulations on rent-restricted units vary, they are typically available to families making less than 60 percent of the county’s median income, which is $54,540 for a four-person household. Monthly rents for such units can’t exceed $1,364.