'HUD is really missing at the table': Stalled Sonoma County project reveals affordable housing hurdles

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Santa Rosa project timeline

1999: Property purchased

2009: $11.4 million state bond money secured

2013: Planning Commission approves the project; City Council doesn’t

2018: Measure N fails

John Stewart is chairman of San Francisco-based The John Stewart Co., a builder and operator of affordable housing projects since he started it in 1978.

It has about 1,400 employees in five California offices, managing over 32,000 existing units and 17 projects, including a plan to transform the historic former cannery in Santa Rosa’s Railroad Square into senior housing. Stewart acquired the property in 1999, received project entitlements in 2013 and was set to receive $11 million in state money to help finance the project. However, the City Council opted that year not to move the project forward.

Over $4 million has been spent on groundwater cleanup and shoring up the brick cannery walls to be reused in the project.

Ahead of his speaking at the Business Journal’s May 29 Building the North Bay conference, we talked with Stewart about the environment for constructing affordable housing and transit-oriented development, both of which intersect at the Railroad Square project.

What’s the outlook for affordable housing?

In 1978, it was a (U.S. Department of Housing and Urban Development)-centric world. The federal government was heavily involved. They actually had large subsidies in the form of project-based Section 8 (rental assistance) or mortgage insurance.

There were more affordable housing units producing the United States in the late ’80s, early ’90s, than there are now. The quality of the housing, HUD’s architectural standards, were not good. There was a lot of stuff that was produced that was pretty schlock — early Texas penitentiary, we use referred to it as. But they were the major game in town.

That low-income housing tax credit program didn’t come along until the mid-’80s. And that was a tax-driven concept that was proffered by (President Ronald) Reagan. It has pluses and minuses: You can’t take the rents down to the same level of affordability you can with the Section 8 deals, but generally speaking, the quality of the product was better.

So we’ve done both. We’ve done HUD stuff, and we do low-income housing tax credits. As of late, some of the things that we’re working on entails a variety of sources. Things have gotten so difficult to finance, with the fact that HUD is really missing at the table; they’re not players anymore. They tend to focus on vouchers, not project-based subsidies. Most of the affordable product in the United States now is driven by the low-income housing tax credit program, and that requires a combination of public money and private money.

Everything that we are doing in Sacramento, San Francisco, communities in between and a couple projects in L.A., in order to make the projects go, cities have to provide gap financing, and we put in equity. The problem we have right now in the project that we’ve been working on in Santa Rosa is the city has no money.

You cannot put together low income housing tax credit project with 4% tax credits, unless the local town or city puts in a substantial subsidy, along with equity from the developer. You need both, or it won’t work.

Well, we have a lot of business now, because we’re working with a lot of communities that can match our equity. The predevelopment timeline used to be maybe 18 months to two years. Now, from the time that you actually have site control to the time that you actually break ground — get entitled, permitted, financed and closed — it’s typically three to four years.

Santa Rosa project timeline

1999: Property purchased

2009: $11.4 million state bond money secured

2013: Planning Commission approves the project; City Council doesn’t

2018: Measure N fails

If you’re lucky, because there’s often a lot of push-back on affordable housing, depending on what neighborhood you’re in. People do not necessarily welcome you with open arms when you say “affordable housing.”

But on balance for the industry, it’s a struggle, because there’s no real assistance in this administration. The HUD budget is a joke. They don’t provide the kind of financing they get things built. You’re really looking at the low-income housing tax credit program, if you want to do affordable housing.

And so far as market-rate housing, in San Francisco, the market is ridiculous. It’s the most expensive residential rental housing in the United States. You’re looking at prices in San Francisco that are in the neighborhood of $4 to $5 a square foot rental, about $4,000-$6,000 (a month) for two bedroom, two bath units. People are leaving the city because they can’t afford it.

In between, the people that are making substantial incomes of $200,000 and up — single, couple or DINKs (double income, no kids) — is this missing middle, which is what we’re beginning to get into. It’s very difficult to finance. That’s what’s happening here in San Francisco, New York. Boston, Chicago.

How much of a shortfall is there for Santa Rosa?

Huge. I’ll give you the figures in San Francisco. The gap financing from the city — we’re actually getting this — is over $300,000 a unit for 4% tax credit deals. And for projects that are middle-income — teachers, first responders, nurses — it’s over $400,000 a unit.

That’s counter-intuitive, because teachers, nurses make more than the people that qualify for the low-income housing tax credit. But you don’t get certain tax benefits, so it requires more of a public subsidy.

I’ve had the project since 1999. We have lost lots of money, but we love Santa Rosa. I think I’ve worked with six mayors up there. It’s been a labor of love.

The project is getting closer to possibly being financeable. It was a one time ready to go, entitled in 2013. And it had financing, because we had a $11 million grant from the state under (Gov. Arnold) Schwarzenegger. But in a last-minute change, the then-mayor Scott Bartlett and new members of the city council turned our project down, even though it had been entitled, and it’s been approved by (the city) Planning (Commission). That was a major blow to it.

It’s going to be senior (housing), all affordable. I think some of some of the neighborhood did not like the 100% affordable.

Bartlett had originally approved the project where he was the head of Planning Commission. When he became mayor, he changed his mind. In a 4-3 vote, they rejected the project. The economy was going south, and we’ve been struggling to get financing ever since. (The current cost estimate for the project is roughly $59 million, Stewart said later.)

The generic problem for every project in Santa Rosa is that you’ve got costs which are not as high as San Francisco, but they’re high. So you’ve got construction costs and labor availability that is struggling along with everybody else in the Bay Area. I would guess that construction costs in Santa Rosa are maybe 80%–90% of what they are in San Francisco. It’s hard to be as high as we are.

The current cost of producing affordable tax credit housing in San Francisco is between $600,000–$700,000 a unit. That’s cost.

Santa Rosa suffers from lack of labor, along with everybody else, and it also has very high construction costs that have gone up as the entire region has gone up. But what Santa Rosa does not have (is) the rising rents that occurred in Santa Clara, San Mateo and San Francisco counties. That’s why (landlords) are getting $4,000-$5,000 a month. That’s not true in Santa Rosa.

Santa Rosa doesn’t have as strong a market as San Francisco or the South Bay area, but it has cost which are almost as high. That’s the generic problem.

On my site in Railroad Square, I had two (issues). One, I when I bought it, I had to clean up an environmental problem, which took me about four years of approvals with the state of California, (North Coast) Regional Water Quality Control Board. We had to go down 18 feet, clean up (contaminants) floating on top of the aquifer. We had to take out some huge containers for heating oil, for what was a cannery. We spent $650,000–$700,000 around 2005.

It took me five or six years to go through the whole process, take down most of the buildings, which were gonna collapse one way or the other, and access the ground to a solve the groundwater issues.

In the process, we had to take down the old cannery building, but a historic society in Santa Rosa required that we keep certain walls — large walls 25 feet high — and that we keep the water tower and a canopy and a loading dock. And that really adds a tremendous cost for preservation. It’ll eventually, if we can ever get anything built there, will be very attractive.

We have done historic preservation before, and we support it. But there’s right now no money for the additional cost of the preservation. Because if you preserve the walls, you have to water blast them, you have to put in rebar cages in the back with concrete to support them, put into footings. It’s probably 6%–7% additional cost; I think it’s about it’s $4 million-plus additional, just because you have to keep walls and the water tower. And it also affects your design because you don’t have an open, tabula rasa site.

One of the (restoration) projects we’ve done is the old Southern Pacific Hospital in San Francisco on the panhandle, 250,000 square feet. We kept the old hospital and the power station and nurses quarters, circa 1911 and 1920. That was an adaptive reuse.

Another complication that we have on (the Railroad Square) site is that (Santa Rosa) requires that there’ll be a continuation of Fourth Street, leading down to the bike and pedestrian path along the creek. It makes sense, but it cuts our site in half.

We have a design for 110 units. It would be moderate-income with an affordable component. We’re also going to have special preferences for teachers and nurses.

Is the Santa Rosa site transit-oriented development?

It’s definitely a classic transit-oriented development. It’s an 8 iron, if you’re playing golf, away from the (downtown Sonoma-Marin Area Rail Transit) station. If you had working couples, they could get on the train and leave their car at home. It’s an excellent site for seniors.

Why did I buy this silly site back in 1999? We had done a transit-oriented development in El Cerrito, 130 units with 20,000 square feet of retail. A really crummy site, but we tore down what was there and put up brand-new buildings. It was a block away from BART. It was a home run: 71% of the people that lived on our project there, which was both market-rate and affordable, use BART every day.

So we were keen on TOD project. And when we bought (the Santa Rosa site), conventional wisdom then was that SMART would be an operation in about five or six years, 2005–2006. (SMART started carrying fare-paying riders in August 2017.)

It was a long bumpy ride, and they finally did get a bond passed after a couple failures. The train was 10 years late, but it’s finally happening, and that was encouraging.

I was very disappointed that the (affordable housing) bond issue (2018 Measure N) for $124 million didn’t pass. Had that passed, it was a chance to do tax credit affordable housing. But that means the city doesn’t have any money to help finance, affordable housing.

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