City seeks new strategy to support ‘missing middle’

It’s a challenge that has long befuddled policymakers grappling with the housing crisis: How can they create incentives for the construction of housing units intended for rent by mid-range income earners?

In Menlo Park, the challenge weighed heavily on city officials with the March check-in on the city’s progress toward its regional housing need allocation or “RHNA,” a statewide benchmark that tells each city how many units – and at what affordability level – should be built to meet demand.

Between 2015 and 2023, Menlo Park should build 143 new housing units that are affordable for middle-income earners to meet its allocation. Only four such units had received building permits as of 2018, according to the city.

A new statewide agency, the California Community Housing Agency, or CalCHA, is proposing a new solution to help Menlo Park meet its middle-income housing allocation and move closer to addressing the lack of such housing in the community.

Jordan Moss, founder of the Catalyst Housing Group who has helped shape the new agency, faced a battery of questions from the city’s Housing Commission on July 10, but appeared to convince its members to push the City Council to sign on to the initiative. The Housing Commission voted 5-0, with members Meg McGraw-Scherer and Wendy McPherson absent, to recommend that the council join CalCHA and support the agency’s issuance of tax-exempt bonds, and to allow the city manager to work out a purchase option agreement with CalCHA for middle-income housing within city limits.

Rhonda Coffman, the city’s community development director on housing, said that she had been skeptical of the program at first, noting that it sounded “too good to be true.”

But Moss argued that, through a complex bond financing system, CalCHA could purchase multifamily properties, offer subsidized rent to middle-income tenants – typically households earning 80% to 120% of the area median income, or $129,150 to $164,750 for a family of four in San Mateo County – and still pay back its debts over 30 years.

In fact, he said, CalCHA is currently eyeing a 195-unit property at 777 Hamilton Ave. in Menlo Park that already has 22 units leased to teachers as workforce housing through a partnership between Facebook and the city, and could start making moves to buy it as soon as this week.

Typically, multifamily housing tends to get built for people at the high and low ends of the economic spectrum, Moss explained. Developers can access tax credits for building low-income housing, but must agree to rent a significant portion of those units to tenants earning typically no more than 60% of the area median income. Often, most if not all of the units in these developments are dedicated to low-income renters.

If a developer isn’t going for low-income housing, it is likely on the hook to bring in as much revenue as possible, so it builds high-end properties with lots of bells and whistles to attract a deep-pocketed clientele willing to pay a premium.

Caught in the middle, Moss said, are people such as nurses, firefighters, teachers, and civil servants who may earn too much to qualify for affordable housing, but not enough to afford those high-end properties.

The type of housing that is typically available to middle-income workers, the “naturally affordable” units, as they’re sometimes called, tends to be older or in less-than-pristine shape, and is thus targeted as “value-add” properties by investors. They face the risk of being purchased by new owners who kick out the existing tenants, rehabilitate the property, and then charge substantially higher rents to new tenants, Moss said.

CalCHA is a new joint powers authority founded in Kings County that now has a number of member cities and aims to use tax-exempt bonds to buy and preserve housing for middle-income earners. It’s taking on new members fast, Moss said, with jurisdictions in Sonoma County on board, and meetings or council presentations planned in the cities of San Jose, Oakland, San Francisco, Hayward, San Rafael and Santa Clara, as well as with Santa Clara County officials.

The agency made its first multifamily housing purchase earlier this year in Santa Rosa, investing in a new 390-unit building.

Bonds for a property purchase would belong to CalCHA and would be payable from the revenues the property generates, and the city could request a purchase option to buy the property between 15 and 30 years later. If the property at 777 Hamilton Ave. generates revenue, the city could also require that money be put toward its below-market-rate housing fund.

Current tenants living at the property who earn more than 120% of the area median income would be expected to pay market-rate rent, but wouldn’t be kicked out after the property is purchased. The exception would be for corporate housing – units rented by companies to provide temporary housing for employees – which a number of units at the property are now used for. Renters of those units would not be permitted to renew their leases. Overall, rent increases would be capped at 4% per year.

Housing commissioners raised questions about how tenants would be chosen, and several expressed a desire that current Belle Haven and other Menlo Park residents be given priority, as well as a desire for flexibility with tenant requirements. For instance, if a prospective renter doesn’t earn quite two and a half times the asking rent, or if he or she has a record of a minor criminal infraction or an imperfect credit score, that person shouldn’t necessarily be turned away, said Commissioner Nevada Merriman.

The purchase of 777 Hamilton Ave. could provide a way for the city to bring a property it sold several years ago back into its portfolio. In November 2012, the city sold 777 to 821 Hamilton Ave., a 2.1-acre parcel, to the Greenheart Land Company. It was required to do so when the state dissolved its redevelopment agency and had to dispose of its assets.

The City Council was expected to approve a resolution to join CalCHA as part of its consent calendar for the meeting on Tuesday, July 16.