Central Valley government agency jumps into Sonoma County housing market

The new owner of Santa Rosa’s Annadel Apartments may have backed away from a deal to develop Sonoma County’s former community hospital campus on Chanate Road, but it is still aiming to expand in the North Bay.

The California Community Housing Agency, a government entity created by local officials in the heart of the San Joaquin Valley and staffed by Bay Area consultants, issued nearly $200 million in tax-exempt bonds to acquire the 390-unit Annadel complex south of Coddingtown Mall in April.

The agency won over Santa Rosa officials with the promise it would expand the supply of affordable housing at no direct cost to the city. As long as CalCHA owns the Jennings Avenue apartments, any new tenants moving into the complex cannot earn more than 120% of the area’s median income.

It arrived in Santa Rosa as the city was seeking to dramatically increase its affordable housing stock, which falls well short of state goals, particularly for Sonoma County’s poorest residents.

Even so, most of CalCHA’s proposed rents at Annadel are barely lower than what the average tenant was paying before its purchase. New renters can expect to pay up to 40% of their incomes to live in the 5-year-old complex, which boasts a wine bar, saltwater lap pool and fitness center with Peloton bikes.

To sweeten the deal for Santa Rosa leaders, CalCHA gave the city the option to buy Annadel after 15 years and offered to supplement the city’s affordable housing initiatives with surplus revenue from the apartments’ rents - once the bonds are paid off a few decades from now.

The unique deal gives Santa Rosa “all of the upside,” said Jordan Moss, a Larkspur-based consultant working with CalCHA on the Annadel project. He spoke in late July at a workshop hosted by the City Council in Petaluma, where the Central Valley agency and its consultants see more opportunities to issue bonds for affordable housing projects.

“This really was (a) first-of-its-kind transaction,” said Moss, founder of Catalyst Housing Group. “This had never been done anywhere before, this structure, the use of governmental bonds in this way.”

The pitch to Petaluma reflected the ambitions of a new, little-known agency headquartered in Kings County, about 250 miles southeast of Sonoma County. Despite the distance, the agency hopes to expand its footprint in the housing landscape of the North Bay and in dozens of cities and counties in the Bay Area and across California, including $115 million in bonds recently issued for a Fairfield housing project.

Healdsburg is on its radar. In August, Kings County supervisors approved $14 million in bonds for a future senior living facility at 16977 Healdsburg Ave., expected to break ground in early 2021.

CalCHA issues tax-exempt bonds as a government entity formed by the Kings County Board of Supervisors and the Kings County Housing Authority, which is overseen by the board of supervisors and staffed by a consulting firm, Walnut Creek-based GPM Municipal Advisors. For affordable housing projects like Annadel apartments, CalCHA’s bonds will be paid off by rental income over the next 30 years or so.

The same players in 2015 formed the California Public Finance Authority, or CalPFA, which has issued more than $1 billion in bonds, not only for affordable housing but hospitals, schools and a sports and equestrian complex in Southern California.

While Kings County supervisors are nominally in charge, they usually take less than 15 minutes to run through whatever agenda is before them when they meet, according to a review of more than four years of meeting minutes. An aide to the Kings County Board of Supervisors said the initial pitch for CalPFA came to the board as a complete package after consultation between GPM and a former county administrator.

The heavy lifting for CalCHA and its sister agencies is carried out by a handful of GPM consultants, who collect hefty fees with every new Kings County bond and each passing year the debt is being paid off. GPM also helps run the Public Finance Authority of Wisconsin, which has issued bonds in almost every U.S. state.

In Kings County, at least 65% of the fees for issuing and administering bonds go to consultants, with the rest staying with the Kings County agencies. Bonds worth more than $20 million result in fees of $35,000 plus a fraction of the amount over $20 million - in the Annadel project’s case, that fee likely topped $300,000, with at least $200,000 of that making its way to GPM.

Model rooted in late 1980s

While its predecessor issued bonds to fund projects, CalCHA has expanded the concept by using public debt to acquire properties and then retain ownership for itself.

This model has roots in the late 1980s, when two former Alameda County public servants worked with two influential California nonprofits to start a public agency called the California Statewide Communities Development Authority. It has issued over $50 billion of bonds the past three decades, generating tens of millions of dollars in consulting fees, according to a critical report by State Auditor Elaine Howle earlier this decade.

“Everything we did created a substantial amount of public benefit, and there were fees charged. That’s about what I can tell you of that,” said Stephen Hamill, who helped to form the communities development authority.

Moss, GPM staffers Michael LaPierre and Scott Carper, former Kings County Administrator Larry Spikes, and current Kings County Supervisor Joe Neves did not respond to numerous interview requests and messages over the past month to explain their interest in the Annadel and Chanate properties in Santa Rosa.

State law prevents entities like CalPFA from operating outside of Kings County, so CalPFA has slowly enlisted more than three dozen “additional members,” including Santa Rosa, Sonoma County, Rohnert Park and Napa, which do not directly control its operations. This has created a patchwork bonding territory that allows CalPFA to look outside the Central Valley for projects.

The participating municipalities assume no liability for the bonds and aren’t required to approve or deny any CalPFA or CalCHA projects - city and county authority is limited to a higher-level yes-or-no vote on whether bonds can be issued there.

Some of the bonds issued out of the Kings County agencies come with relatively high marks from credit agencies who gauge the risk of investing in debt based on the likelihood that the issuer defaults on its obligation.

But others, like the Annadel bonds, are unrated. Tucked into a nearly 500-page CalCHA filing with the Municipal Securities Rulemaking Board is a note that the unrated Annadel bonds “are subject to a significant degree of risk and are suitable for investment consideration only for those persons who are sophisticated and experienced in investments of this type.”

Need for affordable housing

CalCHA’s proposal to buy the Chanate property for $1 came with promised public benefits totaling $520 million in equity, cash and discounted rent, according to a June email sent by Moss to Sonoma County officials.

Gary Wysocky, an accountant and former Santa Rosa council member, evaluated the bid for a neighborhood group, Friends of Chanate, that opposed previous efforts to develop the property. He concluded the development would benefit CalCHA, but deprive the county of tax revenue and fail to help people who need affordable housing.

Wysocky said the county would lose out on substantial property tax revenue by selling to another government entity instead of a for-profit developer like Bill Gallaher, whose deal to develop the property was torpedoed in a court battle launched by Friends of Chanate. He also questioned whether the planned new apartments would be affordable to working people.

“Yeah, we do need more housing, but we need housing for our working class,” Wysocky said.

Annadel’s property tax bill was about $500,000 in 2018, but its new owner, a government entity, will not pay the city any taxes. Santa Rosa’s share of property taxes from Annadel was $46,900 in 2018 after school funding-related adjustments, said Erick Roeser, Sonoma County’s Auditor-Controller-Treasurer-Tax Collector.

The Annadel deal initially was supposed to involve CalPFA buying the apartment complex from its Arizona-based developer. Instead, Kings County went ahead and formed CalCHA, with Santa Rosa becoming its first member in February.

The resolution creating CalCHA approved by the Kings County supervisors in late January simply says the agency “will be created and empowered by law to promote economic, cultural and community development, which would in turn create jobs, increase the tax base, and promote opportunities for education, cultural improvement and improved public health, safety and general welfare.”

“If approved by your Board, this would establish another option for local governments in California to finance capital projects and will assist local governments in dealing with the affordable housing issue across the State,” a staff report said.

CalCHA’s website now lists two members besides Santa Rosa: Fairfield, where CalCHA recently bought a 286-unit apartment property for conversion into middle-income housing, and Menlo Park, where CalCHA is looking to buy a 195-unit apartment building for the same reasons.

The resolution approved by the Santa Rosa City Council in February noted the Annadel deal was the city’s reason for joining CalCHA.

Council members in October touted the apparent positives of the deal, namely the preservation of middle-income housing without any direct costs to the city.

Rentals with income limits

CalCHA doesn’t plan to kick out any current tenants from the Annadel, but vacant units will be subject to new affordability requirements as they become available, according to bond documents.

The Annadel’s one-, two- and three-bedroom apartments have been rented for $2,166, $2,566 and $3,159 on average, rates comparable to other Santa Rosa market-rate apartments, according to a study conducted ahead of the purchase.

A third of the units will be set aside for tenants making up to the median area income for their household size, or about $93,300 for a family of four in Santa Rosa, according to the U.S. Housing and Urban Development Department’s most recent income limits. Another third will go to low-income households (up to $86,400 for four), and the remainder will go to moderate-income households (up to $111,950).

CalCHA proposes charging tenants as much as 40% of household incomes - significantly higher than the 30% of income level threshold for complexes that receive assistance from Santa Rosa or the city Housing Authority. As a result, while some tenants may see rent decreases, others may seek spikes in their monthly housing bills, though the agency says it will cap rent hikes at 4% annually.

The agreement calls for CalCHA to “use its best efforts” to meet those income restrictions and allows the entity to lease out any unit that has been vacant for a month straight to tenants making up to 120% of the local median income limit. The agreement also contemplates multiple paths for its own termination, including the project’s sale in the future to Santa Rosa or another buyer.

Santa Rosa can’t enforce CalCHA’s affordability agreement for Annadel apartments because it isn’t part of that agreement.

And city officials recently acknowledged they have no idea how much money the city will receive under the deal.

“We do not have an estimate on the amount of surplus cash that we may receive from this project,” said Megan Basinger, the city’s housing and community services manager, in an email. She indicated the amount the city will receive “depends on the amount of debt service, operational expenses and project revenue.”

Consultant fees scrutinized

Regardless of how many truly affordable units there are at Annadel or how much revenue the city receives for affordable housing, the consultants who arranged the deal stand to be consistently compensated over the life of the bonds.

Most of the nearly $200 million in bonds covered the actual purchase, but there were millions of dollars in associated costs. That includes about $4.7 million in “costs of issuance” such as fees paid to GPM, deposits to various reserve funds, and $2 million for Moss’ Catalyst Housing Group, CalCHA’s partner in the Annadel deal.

Catalyst also is set to receive nearly $200,000 a year for as long as its involved as the project administrator, and GPM is in line to receive a portion of nearly $40,000 annually, according to a preliminary budget submitted included in CalCHA’s bond documents.

Still, in housing-strapped Santa Rosa, some residents might be thrilled to find a rent-restricted apartment at the Annadel apartment complex - a clear example of the public benefits touted by CalCHA’s officers.

But the fees its consultants receive for their government financing work drew a series of hard looks around the time of the recession. Articles in the Orange County Register in 2009 and the Los Angeles Times in 2011 highlighted the practice of the California Statewide Communities Development Authority, before the State Auditor’s office reviewed the financing model.

The auditor’s 2012 report identified conflict of interest concerns because the private consultants staffing special municipal bond agencies are profiting with each new dollar of publicly issued debt. Without a court ruling or new legislation, Auditor Howle wrote seven years ago, “we believe the legality of this practice is uncertain.”

A spokesman for State Treasurer Fiona Ma noted recently that projects like Annadel which provide for the “missing middle” income range fills “a critical niche in the State’s housing portfolio.”

But he questioned the lack of strict enforcement in the Annadel deal - as well as a provision that allows its affordability restrictions to dissolve if and when the project is sold.

“Local communities that consider these projects should ensure that the proponents of the projects are fully transparent and accountable,” said Ma’s spokesman Mark DeSio, “and that they are not developed in a fashion that leaves an escape hatch for developers and investors and that deprives the local communities of the full public benefits promised to them.”

You can reach Staff Writer Will Schmitt at 707-521-5207 or will.schmitt@pressdemocrat.com. On Twitter @wsreports.