|Real Estate Speculation Scheme
Bites Back at City
December 2, 2005
Item E-1 on the Housing Authority Agenda and Item C-1 on the Richmond Community Redevelopment Agency Agenda for December 6 are to authorize a loan from the Richmond Community Redevelopment Agency to the Richmond Housing Authority to cover an operating deficit at the Westridge at Hilltop Apartment Complex. You may recall that Westridge was purchased by the Richmond Housing Authority in 2003 using low interest bonds for the purpose to, among other things “Create a surplus cash flow that the Richmond Housing Authority can use to supplement its Federal subsidy.:”
According to the current staff report, however, “…this asset is not producing enough income to meet debt service obligations.”
When this item came up in 2003, staff touted it as the world’s greatest investment and told us how smart they were to even come up with such a good idea. I was the only Council member to vote against the purchase, which I wrote about in a February 5, 2003, E-FORUM, City Moves Into Real Estate Speculation, February 5, 2003, copied below.
In 2003, I wrote: “If, for any reason, the project, under entrepreneurial public control, fails to support itself in the future, the City of Richmond General Fund will have to guarantee lease payment to a maximum of $1 million per year for a total of up to $14 million.”
At the time, I asked, “What were they thinking?” Obviously, they weren’t thinking at all. The City is the guarantor of this loan and will now have to make good.
City Moves Into Real Estate Speculation
In a City that has a long reputation for dubious decisions, Richmond may have trumped itself last night when eight of nine City Council members voted to make the City a real estate speculator by borrowing $35 million and tapping into $1.4 million of Richmond Housing Authority "Reserves" to purchase an aging 401-unit apartment complex known as Westridge at Hilltop.
The administration touted numerous objectives in making the purchase, none of which stand up to scrutiny or make any sense economically. Many are internally inconsistent. Supposedly, the endeavor will:
· Create low cost housing.
· Maintain existing market rate rents.
· Create a surplus cash flow that the Richmond Housing Authority can use to supplement its Federal subsidy.
· Allow seniors to rent housing.
· Create a growth in value of investment equity.
The mechanism that makes this possible are two sources of low interest bond funding that allow the Richmond Housing Authority to purchase at market value but keep the debt service sufficiently low to result in a positive cash flow. In essence, the Richmond Housing Authority is becoming a real estate speculator, betting that income will exceed expenses and that inflation will bring added value -- with profits ultimately plowed back into good things.
There are a number of flaws in this reasoning, some of which may prove to be fatal:
· No new housing will be created in Richmond. There will simply be a transfer of ownership from the private sector to the public sector. Which sector do you think has the best capability to manage a real estate investment?
· There will be no reduction in rents to make housing more affordable for anyone. The administration tried to make the case that Richmond "market rate' housing was already cheap by Contra Costa County standards, therefore maintaining the status quo rent structure was essentially "low cost housing."
· The administration claimed that City ownership would keep greedy landlords from jacking up rents, but at the same time they committed to maintain the existing rent structure, and the City's pro-forma showed annual increases of 3% per year to reflect inflation.
· The administration claimed that the housing would be available for 'seniors," claiming that the private sector was already discriminating against seniors or would do so in the future. It is already illegal in California to discriminate against seniors.
· The administration claimed that the value of the City's equity investment would increase, but this will never be realized unless the project is re-sold to the private sector, in which case the rents would surely rise to whatever maximum the market would allow.
· Under public ownership, the project will no longer pay property taxes, but the City plans to pay itself an equivalent amount -- if the money is there.
· If, for any reason, the project, under entrepreneurial public control, fails to support itself in the future, the City of Richmond General Fund will have to guarantee lease payment to a maximum of $1 million per year for a total of up to $14 million.
If, in fact, this housing investment scheme has any redeemable virtues, how much better it would have been to use $39 million dollars to build NEW housing units somewhere that fit into the City's economic development strategy -- like, say, the Macdonald Avenue corridor. This would actually INCREASE the housing stock (which helps moderate rents citywide), create jobs, and leverage other investments the City is making in challenged areas. It would also comport with Smart Growth and New Urbanism objectives, building housing near services and transit, enhancing walkability, increasing public safety and promoting better health.
What were they thinking?