SF Needs to Build More Affordable Housing, But Funding It Just Got Tougher
Some state money, once a ‘cookie jar’ for builders, is now harder to tap, just as the city must add tens of thousands of new homes.
If all had gone well, 130 low-income families in San Francisco would have moved this summer into new homes that are walking distance from major BART and Muni lines, two grocery stores, and a high school. The Balboa Park Upper Yard project would have been a modest but important milestone for a city that desperately needs more affordable housing.
But a bureaucratic twist has delayed that victory: A major source of project funding, once guaranteed, is no longer so easy to get. And that has ominous implications for the thousands of residents who are stuck on the city’s affordable housing waiting list, as well as for folks still holding out for much-needed upgrades to their ailing buildings.
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For more than a decade, the Balboa Park project leader Mission Housing Development Corp., along with almost every affordable housing developer in the city, had unfettered access to special tax credits that paid for a significant chunk of their projects — in Balboa Park’s case, 30 to 40 percent.
These tax credits had so few California applicants that San Francisco’s requests always prevailed. “It was an unending cookie jar of cash,” says William Wilcox, the tax-exempt bond program manager with the Mayor’s Office on Housing and Community Development, known as MOHCD. “For 15 years there was no question you were going to get it.”
Financing a project in SF, especially affordable housing, is notoriously tricky, and these tax credits are a crucial piece of the financial puzzle. Or they were until about a year ago, when big changes to the program kicked in, making the field of applicants more competitive. Known as the 4 percent low income housing tax credit, the dollars from the program are in fact federal, but state agencies administer it.
At the start of the Balboa Park project in 2020, Mission Housing learned that the state rejected its application for the tax credits. That was a shock. According to MOHCD’s Wilcox, an SF project hadn’t been denied the credits since 2005. The Balboa project wasn’t alone; in 2021, fewer than 20 percent of the SF applicants that applied won the tax credits.
These rejections and delays have consequences. Wilcox mentioned four buildings that can’t finance rehabilitations anymore. In total, that’s more than 300 units across SF where residents must wait even longer for new elevators, windows, and other essential renovations. For new construction, officials are scrambling too, especially as the city is crafting a plan, due in January, to more than double affordable housing production.
San Francisco has struggled for years to build enough housing because of high production costs, byzantine regulations, and neighborhood resistance. Affordable housing isn’t more affordable to build than market-rate units. Concrete, steel, fixtures, labor — there are no discounts. So while San Francisco might be eager to build more affordable units, the disappearance of these tax credits puts that goal in jeopardy.
It’s more expensive here
While the change in the 4 percent tax credit program was sudden, it was also predictable. In 2018, California voters passed Propositions 1 and 2, which together pumped roughly $5 billion of new money into the state’s affordable housing coffers. Other California cities and counties piggybacked on those investments and started encouraging housing production on their own. Interest rates were low too. In other words, it was a good time to build housing, no matter where you were in California.
By 2020, the state was handling a flurry of new applications, and the agencies in charge decided to impose stricter criteria that would favor more cost-efficient projects. That was bad news for SF. One 2020 study by the Terner Center, a UC Berkeley-based housing think tank, found that some SF affordable housing projects cost more than anywhere else in California by a wide margin.
Despite the state’s good intentions to stretch the tax credit dollars, state Sen. Scott Wiener says the new criteria are a classic example of the government not thinking through the real-world implications. Wiener points out that some of the most expensive areas to build, like San Francisco, are also “the most desperate for affordable housing because the cost of living is so high.”
Mission Housing had to apply three times for the tax credit for the Balboa Park project. That caused a yearlong delay. Now the apartments are scheduled to start leasing in July 2023.
Sam Moss, Mission Housing’s executive director, prefers to see the silver lining: “The fact that we’re all competing now and it’s hard to get money means companies are building more affordable housing than they have built in history.”
Breaking the bottleneck
Turns out state officials knew that something was off. When the new tax credit criteria went into effect, officials quickly allocated $1.75 billion from federal COVID relief to provide grants to projects that have gotten other state funding, but missed out on the 4 percent tax credit. That helped out the San Cristina Hotel, a 58-unit building on Market Street for formerly homeless individuals. After its tax credit application failed, the building had no other recourse to fix its electrical system or add much-needed seismic upgrades.
But the emergency grant money will run out, and a longer-term fix is needed. State agencies are revisiting the changes that hurt SF in the first place. Here’s the key difference: They want to include a softer evaluation of a project’s “public benefit” in addition to its cost. Some of those factors include how cheap the units are relative to the market rate, or whether the units are located in a wealthy neighborhood. The idea is to give each project a score that will allow officials to compare, for instance, how a multifamily unit in Bakersfield stacks up against one in El Cerrito.
In a critical letter to state officials, MOHCD’s Wilcox asked the state to go further. He argued that the “public benefit” criteria should also account for the use of union labor, which San Francisco prioritizes and often drives up costs. That small change would help the city win more approvals, according to Wilcox, bringing SF a little closer to the old “cookie jar” days.
‘Sometimes people think that localities just fund these [affordable] projects on their own. There’s all these different layers.’ — William Wilcox, MOHCD
But the agencies have already voted on aspects of the proposed criteria, including a rejection of the unionized labor provision. At this point, more changes before the final approval in July are likely to be minor. Wilcox has other recommendations but acknowledges they aren’t likely to pass either. Still, he admits that what the state is now proposing would still be better for SF than the current criteria that focus heavily on cost — and which set the Balboa Park project back a year.
Yet another fix — a change to federal housing policy — crashed on the rocks of Congress last year, when the U.S. Senate failed to pass the Build Back Better bill, thanks to Sen. Joe Manchin’s recalcitrance. Within that omnibus bill was a much-anticipated change that would have doubled the number of California projects that receive the 4 percent credits. Affordable housing advocates will no doubt continue to bring this up. President Joe Biden even mentioned it again in his recent Housing Supply Action Plan, but he’s powerless until Congress acts.
California’s Wiener says he can’t change the minds of senators in Washington, but there’s work to do on the state level. For instance, lawmakers in Sacramento could make up for the lack of tax credit money by boosting rent subsidies for affordable housing tenants. Still, he acknowledges it’s not enough to help SF overcome the affordable housing gap.
If the federal government and the state can’t close the gap these tax credits have created, the city will need to step up. That isn’t a given. MOHCD has less than a third of the budget it needs to meet the city’s housing goals in the coming years, and Mayor London Breed and the Board of Supervisors are in a tug-of-war over how to close that gap. It’s a chronic condition that has ailed San Francisco for decades now.
“I think sometimes people think that localities just fund these projects on their own,” says Wilcox. “There’s all these different layers.”
When the tax credit revenue stopped coming in last year, the city got tripped up. SF officials may be trying to regain their footing and run faster, but the city is still hobbling.
Adam Echelman covers housing and development for The Frisc.
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