Affordable Housing Developers Brace For Funding Hit As Pandemic Lingers

As the region and state's housing crises hit critical levels, traditional sources of funding for Bay Area affordable housing — from federal low-income housing tax credits to local subsidies — are likely to dry up, affordable housing developers say. 

California's affordable housing shortage has been worsened by the economic blows landed by the coronavirus pandemic. From 2023 to 2031, the Bay Area needs to produce almost 450,000 new homes, about 180,000 of which should be affordable, according to California's Regional Housing Needs Assessment. That goal comes with future levels of funding, both from government and corporate sources, potentially in flux. 

In San Francisco, the cost to build means affordable housing developers need local subsidies of more than $300K per unit, according to Curtis Development principal Charmaine Curtis. But she said the risk of market-rate development slowing and impact fees disappearing could hamper how much funding the city has to give once funds from sources like 2018's Proposition C are exhausted.

"The reality is that the city is not collecting a ton of money right now for affordable housing fees," Curtis said. “With rents having decelerated as much as they have, I just don’t see how there’s going to be a lot of market-rate development of rental housing, or even condos, occurring, with vacancy rates where they are, in the next couple of years at least.”

A slowdown in market-rate development also comes as municipal budgets have been gutted by pandemic relief services and a slowed economy: The crisis has already opened up a projected $1.5B budget deficit in San Francisco that its supervisors have scrambled to close. 

A bright spot thus far for some affordable housing developers, including Bridge Housing, is the value of federal low-income housing tax credits, or LIHTCs, remaining relatively steady after earlier turbulence. But difficulties with LIHTCs could also face headwinds to development in the near future.

"I do think that we may see a softening in the LIHTC pay-in rates or the amount per tax credit that the investors are willing to pay," Bridge Housing President and CEO Cynthia Parker said.

As large banks, which are often the buyers of LIHTCs, tighten their belts and continue to struggle through the pandemic, "if they don't have as great a tax liability, that will result in no appetite for the credit," Parker said.

For now, affordable housing production in the state has kept pace with previous years thanks to local and state measures passed in the last five or so years, developers said. Through 2018's Propositions 1 and 2, California voters approved a combined $6B in bonds for affordable housing subsidies. Local governments like Santa Clara and San Francisco County have passed measures in the last five years still funding new projects.

“The good news is that while it’s certainly not easy to develop and produce affordable housing, there have been policy changes to make it easier and local funding sources like Measure A in Santa Clara County to develop it," said Chris Neale, executive vice president of The Core Cos., a Silicon Valley developer.  

The Core Cos. itself is using funding from Measure A, a $950M affordable housing bond passed by voters in 2016, to help build its 361-unit Agrihood project in San Jose, which it expects to break ground on next year. About $375M of Measure A had already been committed across 27 different multifamily projects as of March, according to the county.

Even so, Neale and others say local funds only go so far, and that even those may run thinner and have been pummeled by constricted municipal budgets and a slowdown in market-rate and commercial construction. 

"At this point, we were fortunate in that many of the programs on the state level were funded prior to the pandemic and economic downturn, so the pots have been filled," said Larry Florin, CEO of North Bay affordable housing developer Burbank Housing. “The problem is they’re also one-time funding sources, so when they’re gone, you have to either come up with new money or the program goes away."

Since March, the federal government made a one-time allocation of $99M for disaster recovery with 9% federal tax credits to the state, which corresponds to a significant sum of about $1B in equity for projects, Florin said. But the competition for those tax credit and other state programs has been rising.

Unlike in San Francisco, Santa Clara County and a few other locales, the region's North Bay has fewer local subsidies available, making tax credit allocations from the state increasingly competitive.

Florin said California's Multifamily Housing Program, a crucial program run through its Department of Housing and Community Development, is "oversubscribed by orders of magnitude." He said pent-up demand has accumulated from the usual affordable housing developers, but it has also been affected by developers turning market-rate projects into affordable ones in efforts to get tax-credit financing amid a slowed market-rate sector. 

In Sonoma County, for instance, three of four Santa Rosa, California, projects awarded tax-credit allocations from the state this month were formerly market-rate projects, Florin said. The other was awarded for a Burbank Housing project. 

Especially competitive is the California Debt Limit Allocation Committee, or CDLAC, which allocates private activity bonds used to finance affordable housing and other projects. Dwell San Jose Managing Partner Michelle Morgan, an affordable housing expert, said demand for bond allocations outpaces supply at an unusual level right now, creating a "drastically changed outlook" for affordable housing development in the state. 

Before this year, a group of affordable housing organizations pushed for CDLAC to dedicate almost all of its over $4B private activity bond cap to affordable housing, but $600M ended up being allocated to the Virgin Trains project that will run from Las Vegas to Southern California.