City seeks to bail out fat-cat developer

The City of Oakland is negotiating with a fat-cat developer, who defaulted on an $800,000 city loan, to pay the developer up to $740,000 more to acquire a parcel valued at $950,000.

The City is willing to pay a premium to preserve the land for affordable housing. Neighborhood residents are not all thrilled with the idea. The root problem is that City rules concerning subsidies of affordable housing render viable only projects that are massive, cheaply constructed and high-density. Not many parcels are large enough and cheap enough to support housing under these restrictions; not many neighborhoods welcome such projects.

Rather than bail out developers who have City Hall contacts, isn’t a better solution to fix the funding restrictions so they support small-scale, well-designed affordable housing in a variety of neighborhoods?

Here’s the story: 3801-3807 Martin Luther King Jr. Way, corner of West MacArthur, used to house “Terry’s Sound House,” a TV repair shop, with apartments above and an old house nearby. Some years back the store closed – a long-time resident states it was because Terry allegedly murdered his wife – and the property lay vacant for awhile.

Along came the Broadway/MacArthur/San Pablo redevelopment area (“BMSP”), created in 2000. In the eyes of housing staff, the site was perfect for affordable housing: the land was relatively cheap, it was on the very edge of the redevelopment area, and in a neglected neighborhood of empty lots, drug dealers and run-down properties. Several iterations of housing proposals targeted the site, in combination with two adjacent empty parcels, one of which was City-owned and the other owned by Larry Taylor’s Community Development Corporation of Oakland ("CDCO").

In 2003, 53 units of senior housing were proposed, but were rejected for funding under the annual Notice of Funding Availability (“NOFA”). Enter Oakland Community Housing Inc. (“OCHI”), a non-profit that the City had previously funded $4,860,000 to for management of the California Hotel (residents of which sued OCHI in 2005 about rats and bedbugs). CDCO and OCHI proposed 33 units of senior housing on the two adjacent empty lots; 3801 MLK was left out of the proposal, which depended upon funding by HUD. The BMSP project area committee (“PAC”) approved the proposal.

The MLK Senior Homes project was denied funding in the 2004 NOFA, despite a letter of support from the PAC. In 2005, City NOFA funding was awarded but HUD would not fund the project.

In September 2006, OCHI and CDCO joined forces with mammoth regional developer AF Evans to form Grove Park LLC. In the red-hot housing market that prevailed at that time, this development team proposed building 60 units of affordable, for-sale housing on the three parcels. The City subsequently loaned the developers $800,000 under the “VHARP” program, to purchase the 3801 MLK site. At that time, the parcel owner was asking over $1,000,000 for the property, but the City did not have enough VHARP funds to cover the entire asking price. In January 2007, the MBSP PAC approved a project of 58 for-sale affordable units. Grove Park LLC borrowed an additional $740,000 from private sources to cover remaining acquisition and predevelopment costs. The City agreed that the private lender would have the first lien on the property and the City would have only a second lien.

By this time, the housing market was in a downward spiral. In March 2007 City staff did not recommend the project for NOFA funding, stating that it did not meet NOFA criteria. On March 20th, 2007, the City Council Rules Committee sweetened the pot by recommending that CDCO get $141,000 as a “forgivable loan” and that the City’s subsidy of the affordable units be increased from 40% to 50%. However, in May it was announced that the City Council did not approve the project for NOFA funding.

Subsequently, Grove Park LLC did not reapply for NOFA funding, and defaulted on the $800,000 City loan they had been given only months earlier. CDCO, meanwhile, stopped making timely payments, according to Housing staff, on a $52,000 site acquisition loan they had been given earlier to purchase the adjacent parcel. OCHI went bankrupt. CDCO is attempting to raise cash by selling a nearby parcel at 3881 MLK.

In January of 2008, the MBSP PAC voted to authorize staff to offer Grove Park LLC up to $740,000 more taxpayer funds to pay off the bank loan and, therefore, allow the City, as second lien holder, to take possession of the 3801-07 MLK parcel. In effect, therefore, taxpayers would be paying as much as $1,540,000 (the $800,000 original loan plus $740,000 more in cash) for a parcel whose market value had fallen to $950,000. The development team would walk with no loss whatsoever from the failed venture. Staff justified this proposal by stating that it was necessary to keep the three parcels assembled in order for future affordable housing at the site to be viable. The individual parcels were “too small to develop as a project on their own but would allow for a feasible project if combined with 3801-3807 MLK.” Staff separately opined that “small-scale affordable housing projects with less than 40 units are not very feasible to finance.”

Even Terry’s TV repair could tell us that there’s something wrong with this picture. Massive, cheaply-built low-income developments have been proven to be a disaster: witness the social problems associated with Acorn, Campbell Village and Cypress Gardens. City policy should be geared toward making small-scale, high-quality, affordable and inclusionary housing a success. Affordable projects should be architecturally noteworthy and built to last, gracing, rather than blemishing, their surrounding communities.