Cracking the Code on Affordable Housing
John Drachman, co-founder of Waterford Property Co., at the Jefferson Platinum Triangle Apartments in Anaheim on Aug. 26. Waterford is one of a number of private operators who acts as property administrator and runs buildings
Middle-income workers get aid from 3 California agencies
By Jeff Collins
Three California agencies say they have “cracked the code” for providing affordable housing for middle-income workers who are priced out of the communities they work in.
Police, firefighters, teachers, nurses and ordinary office staffers often face long commutes or pay more for housing than they can afford.
They earn too much to qualify for subsidized affordable housing but not enough to buy a home or comfortably rent.
A few years ago, coalitions of local governments called joint powers authorities began experimenting with a novel solution.
The JPAs buy newer apartment buildings, lower the rent and lease most of the units to moderate-income tenants, or those earning 80-120% of the median income. The rest are leased to low-income tenants below the 80% threshold. Existing tenants who earn more than the allowed amount continue to pay market rent but are replaced by moderate income tenants as they move out.
No property taxes are paid during the life of the bonds used to finance the deal. In exchange, cities gain title to the building when the bonds are paid off.
“These properties are run exactly as they were run before. They’re maintained at a class A level,” said John Drachman, cofounder of Newport Beach-based Waterford Property Co., which is managing six workforce housing projects in Southern California. “When someone comes into the space, we’ll income-qualify them, and that determines the rent. If you make more than 120% (of the median income), we won’t lease to you.”
In February, Waterford took over the Parallel Apartments and Jefferson Platinum Triangle in Anaheim’s Platinum Triangle district and since has leased 196 vacant units to moderate-income tenants. The buildings are now full.
A two-bedroom apartment at Jefferson PT that drew a market-rate rent of ff2,800ff2,900 a month now rents for ff2,361 a month to a tenant earning 80% or less of the median income, ff2,383 for someone earning 80-100% of the median and ff2,432 for households earning 100-120% of the median. That’s a savings of ff368 to ff539 a month, or about ff4,500-ff6,500 a year.
To put that in perspective, the middle income limit for a two-person household is ff102,450 in Orange County, ff76,800 in Los Angeles County and ff74,400 in the Inland Empire.
We sat down with Drachman in the Jefferson PT clubroom to learn how the program works. The interview has been edited for clarity and length.
Q: Who owns the apartments and how are they financed?
A: The joint powers authority that we work with, which is CSCDA, which is a quasi-governmental agency that was formed by the League of Cities, is the owner of the project.
Waterford acts as the project administrator. We run the full acquisition process, get approvals from the city and then oversee the asset management of the properties and the program after closing.
A: city will enter into an agreement with us. They will allow CSCDA to purchase the property with the caveat that the rents will be restricted by a certain percentage based on average median incomes.
It allows CSCDA to create tax-free municipal bond financing to purchase the project.
Q: How are you able to lower the rent?
A: There are two things that make that possible.
One is (we get a) break on property taxes because that’s about 30-40% of the operating expenses on a property like this.
And then two, we can raise municipal bond financing for the project, which right now is very inexpensive.
Q: How much are the property taxes for this building?
A: For this property, it was about ff1.6 million a year.
Q: Why does the program target luxury, or Class A, buildings? Why not buy cheaper properties?
A: Newer projects require less ongoing maintenance than older buildings. So these (bond) investors, while their cost of capital is efficient, they traditionally do not want to buy projects that require a lot of initial upkeep or initial construction. When it comes to construction, there’s risk.
When you think about it from the city perspective, this is really targeting a demographic of people who make that middle-income. And we want to be able to provide them a really high-quality living environment.
The other thing is, the city gets all the equity in the project once the bonds are paid off. Waterford does not have any equity in this project. Neither does CSCDA. The title transfers to the city.
The city will give up the property tax revenue. They’ll get the lower rent for middle-income tenants, and they will get the equity in this project once the bonds are paid off.
Let’s say it’s only worth what we paid, ff160 million. They will have given up ff48 (million)-ff56 million in property tax revenues, and now they’re
sitting on ff160 million in equity. And that’s if the value is what it is today.
Q: Who is renting these buildings?
A: It’s really essential workers. Teachers, firefighters, police, city workers, clerical workers and nurses. Union employees, (emergency) medical technicians, education related groups, people in the service industry. Here (in Anaheim), it’s a good amount of people who work at Disneyland.
Q: The city of San Jose rejected the workforce housing program. What was their concern?
A: It wasn’t offering enough affordability to justify removing the property from the property tax rolls. They (also) were concerned that after 30 years, the property could be in a really rundown shape when they get it back. I don’t think they wanted to be early in the program.
The city of Anaheim embraced this program early on. They believed in the merits of it.
Q: How do you make money on the deal?
A: We get paid fees for being the asset manager.
We could have acquired these projects as market rate projects. We would have bought it, increased rent, held it for three to five years and sold it for a profit.
Under this structure, it takes us longer to make the same amount of money, but it’s a 35-year bond. So it’s a nice income stream for us.
Q: How much do you make on a project like this?
A: We’ll make an initial acquisition fee. It’s usually something like 1% of the purchase price. (Then) we’ll make ongoing asset management fees that are standard within the industry.
Q: How much is that for this particular project?
A: 200,000 a year. It’s a good solid business for us, is really what it is.
The Jefferson Platinum Triangle Apartments in Anaheim. JPAs float bonds to buy such apartment buildings, then lower the rent and offer them to moderate-income tenants.