Buy Dirt...(Edited to Correct SB 9 and ADU Interchange)...

It is not just a song...

The piece by Eric Jaye yesterday marinated in my mind overnight. Combined with a few other pieces of information (the Assessor’s treatment of land and setting of taxes at a certain level, the Governor’s exemption from SB 9 yesterday, and the piece in the Wall Street Journal last week regarding federal supports for Section 8 vouchers), have led me to wonder or re-wonder, what is the “affordable housing financial model.”

First, I will go back to where I was when I thought we could get people who owned a home back into a new home for about $1800 a month, all in, for those without insurance but owned the land underneath. That model figured an $800,000 rebuild cost and a mortgage at 6% (current market rate, but maybe we could lower it to get people back into their homes). We factored in $100K for philanthropic “donations” to assist low-moderate income housing. We also used about $200K for “equity participation” from philanthropic/local organizations related to the appreciation of the home similar to the California Dream for All. Bringing that overall cost down to $500K, we could mortgage the amount for $1800 a month, and since the property tax was fixed on what the valuation was before, it was likely below $100 a month. $1800/month is a solid price if you could get it, but it would tax certain families for sure. It is less than renting in the Pasadena area a 1 or 2 bedroom apartment.

Now, if the Assessor question lines up with the legal position the taxable value will meet the current “cash value,” then it is a question of what the house now will be worth, which could climb in this scenario to $800,000, and be taxed at almost $1,000 a month, increasing the carrying cost to $2,800 a month.

The affordability model we were hoping for begins to break down considerably. Maybe we could use Section 8 vouchers as a potential supplement, but then you have the Journal Article, which indicated a 47% cut in those vouchers on the table. Developers are concerned about their future with this Administration and rightfully so. If you reduce the funds overall, then there is more competition for affordable housing supplements, where those funds will come from for those people currently on housing supplements, and what will happen remains to be seen.

Then I was thinking about a Community Land Trust (CLT) and if it purchases the land underneath. Let’s figure the average lot is about $500K for a Single Family Home. If you can combine a couple or “densify,” then you are in a position to maybe make the lot pay for itself. However, the tool relied on to make density happen quickly, SB 9, was taken off the table yesterday with the governor’s Executive Order, at least temporarily. Many will not know what SB 9 is, but it allows for greater density than ADUs. Will ADUs still be as prolific is a question.

The tools are becoming limited. Costs are climbing. As Eric Jaye from San Francisco argued yesterday, land costs are relative. Flooding a market with units does not necessarily drive down the cost, especially when the costs going into the unit are increased based on the market.

Anecdotally, just being in Toronto taught me the rules he is going by. Toronto and Vancouver are extraordinarily expensive real estate markets, but because in Canada mortgages reset every 5 years, rates have gone from 1% to 4% in recent years. Sky high prices are falling (though they are still unaffordable to many). It is about what the market can bear. The prices are falling because nobody afford the new rates increasing 4x in a year or two. Supply and demand work, but it is a question of what dictates that dynamic. Inventory is part of it, sure, but it is the ability to pay, and what the market will bear also figures very heavily into that equation. It was mortgage rates which has driven down the market and the fear of more mortgages resetting to levels people cannot afford to live in the home which are making people reconsider their costs, which are then driving up supply and pushing down prices. The lessons of 2008 exist and are re-emerging.

The bottom line is there is a convergence of these macro-themes happening here in Altadena. There is no “easy answer.”

I do not have it.

What I thought was a key piece- if you owned the lot and rebuilt by square footage may not be the case. I have heard conflicting information, but I have not seen anything official.

If prices climb, supplements like Section 8 vouchers are being cut, so we need to generate income elsewhere. It get why the government is looking to cut back Section 8 vouchers. It is cold but there is a policy reason. The incentive for builders is there is a tax credit to build affordable housing, an incentive which is now permanent and increased in scale and scope, but at the same time, once the units are built, is it to the government to then pay the rent for those units to the same developers? Perhaps a policy solution is (a) or (b)- you can build with the tax credits or you can have tenants get the vouchers? I do not know, but that is what the folks in Washington are signaling today.

I would rather have the vouchers to help us here than the tax credit (Low Income Housing Tax Credits or LIHTCs) for rebuilding Altadena.

Maybe we have to get a disaster exemption for LIHTCs because they are capped annually and cannot go over that amount for the entire nation, and allocated proportionally to each state. Furthermore, State has already allocated the credits to the municipalities (County and City).

Are LIHTCs part of the capital stack to lower the cost of construction and therefore get people back into their homes? For those unfamiliar with LIHTCs, they are already allocated for years out to developers and projects. Moreover, many LIHTCs are focused on multi-unit (i.e. densification) projects due to the cost/complexity of issuing the Tax Credits, which are now limited with the Governor’s Executive Order. Even if we did a massive LIHTC for Altadena, we would need a new pool to unlock that tool. LIHTCs also carry increased costs because there are requirements for construction which are not tied to regular construction projects.

Then there is the fact the “dirt” in many cases is all homeowners have for their net worth. If you “get a deal” on the dirt, regardless of who you are (developer or nonprofit) , are you then capitalizing on someone’s misfortune? If you give a “pre-disaster market price” you have now increased the cost acquiring the land and rebuilding. Some have mentioned having an “option” as an approach, where the land owner “rents” and then “purchases” the home at a later date and time by refinancing, but again, if you are on a fixed income or lower income, will the “option” ever vest? Is it not better to get the homeowner in free and clear or with an equity participation model?

As you can see, there are a lot of moving pieces folks. Advocates need to start thinking about how they can solve the problem. I still think the push needs to be 1,200 houses for LMI folks, which is about $960 million. If you now add in the land, you are looking at 1,200 lots at $500,000 or so, which is $600 million. Can we raise enough to afford philanthropic dollars for $600 million to remove the “land costs?”

I guess the $600 million is the piece a Community Land Trusts should be looking at. Can philanthropic organizations buy the underlying dirt and “lease” it out at reduced market rates, effectively calling it land rights? Maybe the lease is $1 a year until the house sells, which then resets the land value to pay back philanthropy? Could the County sustain a loss of revenue on the underlying “dirt?”

Alternatively, if the CLT had to pay market rate for the tax on the “dirt,” we go back to the beginning of the circle of finding who can pay the $7.2 million on the taxable value of the land annually or about $500 a month. I am sure the County would not want to lose the $7.2 million in revenue the land is worth. Then there is the house. Let’s hope we can find something official re square footage versus cash value…

Just spitballing here folks. Why we elect the best right?