It's All About the Money

Rebuilding Plans Start and End with Money

Time is ticking and we need to start getting the plan in place. April 14, 2025 represents the end of the governor’s moratorium on underpriced bids for lots. April 11, 2025 the West Side will put out its plan along the lines of what the Urban Land Institute already published. January 7, 2025 was the day this whole thing happened, 90 days ago. It is time to do something. We need to go. Altadena and the Palisades are asking for something, anything, and we do not need to to do what has always been done. It is time to think different.

The last post set the problem set- we have a whole lot of questions to work through to rebuild a city like Altadena (and the Palisades which has similar but not the same questions). Since starting the journey, posing the questions, and listening to responses, the hardest part has been separating out the “noise.” “Noise” is a term we use in politics to mean complications introduced by a policy question. Noise can be when voters or advocates rise up and get loud (we will do a post on that whole concept later), putting politicals in awkward positions. Noise can also be “ideas.” Ideas are the bane of policy makers. Ideas are what people bring to the table to try and get paid. Everyone knows a story of a person who had an idea and got paid. Our fire is no different. All I hear are ideas. Ideas take time and bandwidth. We need a “plan” not ideas.

The hard part is separating out ideas from “plans.” Plans are more concrete. Plans have a way to fund the “idea.” Plans are not “hope and prayers.” Plans have a way to implement. In the past, ideas got funded because the federal government would pay for the idea. Today, things are different. There is no government money. There are no “bail outs” as of now. Something has to change. Money is needed and money will drive the plan. The question is- where is the money going to come from? It truly is all about the money.

Let’s back up a little bit and understand what the “current course of action” is for disaster plans. Following Hurricane Andrew in 1992, the federal government began to ramp up its “follow through” on events (considering Florida was a swing state then, well, you can understand why). The government started to use funds to assist not only the clean up, but also the rebuild. 1992 was the first year of the Community Development Block Grant- Disaster Recovery (CDBG-DR) money. From there, the program grew.

Things really supercharged after Hurricane Katrina in 2005. The entire Gulf Coast was rebuilt using CDBG-DR money and related bonds/economic development zones. From there, the expectation became, every disaster would require a “Katrina Response.” The playbook since 1992 was very simple. The Federal Government would come in and save everyone. Piece by piece, the States would take the Block Grant money and “burden it.” Burden meant they could “take a vig off the top” of the money, usually 10-20% of the total amount. Disasters became profitable for governments. Fast forward to 2025. California requested $40 billion. That means, $4-8 billion to “administer” the money for various governmental agencies at least. That money was critical to the budget hole which existed at the State and especially at the City of Los Angeles (which is now $1 billion short on its budget).

So, here we are, the Federals saying “no” to any CDBG-DR money (or a fraction of the money requested). Any “idea” expecting federal money must be cast aside. So, what are the other options?

Let’s look at what the tools in the municipal finance elements are. Bear with me, it is worth it, and yes, it is tedious (imagine learning it yourself the first time). Remember, I am only a history major, policy wonk, not a financier. Some of these figures might be off by a certain limited extent, but they are within the ball park.

Tax Free Bonds

The next major way municipal (State, County, City) financing is accomplished is using “tax free bonds,” meaning bonds paying non-taxable interest. Usually these bonds have a lower interest rate than regular taxable bonds because the bond holder does not pay tax on the interest generated, thus create a lower borrowing cost. The problem for tax free bonds are they are “capped,” meaning there is a limit that a state can issue (a complicated formula, but suffice it to say, California is able to issue about $4 billion annually in tax free bonds for “private activities”). Since the cost of rebuilding will be way way more than $4 billion, and the $4 billion is for the entire State of California, there is only so much the State can do to issue such bonds.

Proposition 13

Another complication to the money problem is Proposition 13 (aka Prop 13). Prop 13 limits additional debt a municipality or county can incur unless it passes a vote in that community. Since there is a requirement for a majority, the likelihood of passing bonds and debt to refinance the rebuild is limited.

Tax Increment Financing (TIF)

The “hot” subject today in municipal finance is Tax Increment Financing or TIFs. These are bonds issued against potential tax increment increases. In other words, if you know your taxable income will go from $5 million to $10 million a year because of a property value change, you can “bond” a portion of that $5 million gap through Tax Increment Financing. You are basically borrowing from Peter to pay Paul. TIFs can be used for certain “pre-development” functions but the overall application to a project of this size is limited. Oh yah, one other good thing about TIFs. If we had gotten CDBG-DR money, we could have TIF’d the expected money coming in (allowing us to “pull forward” the money we would have gotten, but since there is no material CDBG-DR money, there is little benefit in pulling the money forward).

Cost of Private Capital

The cost of capital is expensive today versus 3-5 years ago. To borrow on the commercial market, there is a 6-7% interest rate at least. Additionally, if you want use private capital (i.e. have a builder finance the deal with their own “equity” instead of “debt”) for the entirety of project development, there is a “built in return” required for that money- up to 15% or more. Investors place money with Private Equity and other “alternative investments” to significantly exceed the return they could get by buying a bond.

So what can be done since financing is so critical to moving ahead? Nothing moves without financing.

There are a lot of pressures working against the current solution. Since financing is the key to any long-term solution, the question becomes what can you do to move the needle and find a source of capital or “stack” the capital to get where you want to go? No one solution can be used, but there is a big hole in the capital stack of significant money at a reasonable price.

Development capital stacks include debt and tax credits, but the undeveloped piece is “equity.” Equity means a “piece of the action.” How can we get the limitations out of our way and still find a path forward? Something different could be done, but what?

AB 797 and Community Reinvestment Act (CRA)

With the limitations on traditional capital sources in mind, there is a new source of capital which is virtually untapped and could address many of these supply concerns, if structured right. This new source needs to be unlocked, and if so, allows us access to the capital needed to fund the rebuild with the constraints above limiting our plans to fund solutions like insurance, housing, economic development, infrastructure, et cetera. First, we have to get the “pilot” off the ground. That is AB 797.

We have talked about AB 797, introduced by Assemblyman Harabedian in February of 2025. The bill, once you strip out its nuances, is really a new form of finance not requiring additional money from Municipal, State (bonding/guarantees) or the Federal government. In fact, it is an entirely new method of municipal finance. There is no debt, and yet there is no tax credit either so there is no detriment to a government (revenue or guarantees). It targets a very limited group of investors with a lot of capital that "should” invest in these types of projects. Because it is not a revenue “hit” for the federal government, getting federal “asks” to move the framework through will be far easier than the other requests already made.

AB 797 creates a security through the State to qualify for what is called the Community Reinvestment Act (CRA). CRA was created in the late 1970s to equalize lending to underserved communities. Commercial banks are required to set aside lending to CRA eligible projects or entities to obtain “credits” from the Federal Reserve, et al. When a bank wants to “expand” its footprint in a market, CRA performance is considered highly in granting that request. If a bank chooses not to comply with CRA, they are not penalized per se, rather, they are just not allowed to expand in a given market.

CRA has evolved since its inception. In 2022, banks originated about $280 billion in CRA eligible loans and projects according to the FDIC (the last year data is available). While $280 billion is an impressive number, it is down from 2020. At the height of COVID, banks originated $460 billion in CRA eligible loans (due to Paycheck Protection Plan, et al). In conversations with people in the CRA program, there remains more demand than supply of projects which can be funded. $180 billion is a lot of money as a “delta” to be used to fund a rebuild in California and beyond. It is that bridge that AB 797 fits.

AB 797 is the first bill in the nation to create a State-issued security to capture and allocate CRA funds for a specific purpose. For the fires, AB 797 has the intent of stabilizing the community assets (property plots) and ensure adequate prices are paid for lots being sold after the fire for those affected. It does not “mandate” anything. All it does is allow the State to parcel out funds to Community Nonprofits (with transparency and community accountability requirements) to offer a bid on properties. If a homeowner wants to sell, they can. If they do not, that is their choice too. The goal is to create a mechanism for people have options. The properties are then held in trust until the next stage of the recovery (the development) is decided and then disposed of.

AB 797, if it gets passed, will provide policy makers a new tool of low cost capital for properties and beyond. In fact, for CRA investments, the “hurdle rate,” the rate of return necessary to consider the investment successful, is far lower than the commercial market, and more in line with what tax free bonds would be. Moreover, the source of capital is without the guarantee of the government, and thus the tax payers. With this new model of financing, we can start to have the critical conversations of how an “idea” can be turned into a “plan.” With this new tool, we can begin to really delve into the “how” of the questions.