The new federal budget approved this month boosted tax credits for corporations that help finance low-cost housing but the move is unlikely to help a long-stalled 63-unit affordable housing project with a $5 million funding gap.
The four-story project, 100% affordable with ground-floor commercial space at 350 Ocean St., was approved unanimously by the City Council in 2012.
Since then, the cost has grown from $24.5 million to $26 million, according to Denise Carter, portfolio manager at The Pacific Cos. in Eagle, Idaho, which planned to demolish 22 aging bungalows on the 1.5-acre site.
Many have declared a housing crisis with median rent for a two-bedroom unit at $2,420 a month in March, up 4% from a year ago and higher than the statewide average increase of 2.9%, according to Apartment List, which tracks the rental market.
Yet a groundbreaking for rental housing at 350 Ocean St. is not in sight.
As millions of tourists head home from the Santa Cruz beach, they see boarded-up bungalows on a block where police have been called in the past six months for car theft, burglary and drug possession.
“We know it’s an eyesore. We would love to tear it down at our own expense,” said Carter, acknowledging the need for affordable housing in Santa Cruz. “Unfortunately we just can’t get the financing.”
This development “remains a critical project to meet our city’s affordable housing needs,” said Santa Cruz Mayor David Terrazas, who learned about the $5 million gap when he contacted Carter to discuss the issues.
He said the Santa Cruz City Council unanimously voted last fall to extend the permit for another two years with the option of immediately demolishing the boarded-up buildings.
Carter voiced concern about the city requirement to post a $1.4 million bond before demolition but Terrazas said it wouldn’t be required if the developer pulled building permits in conjunction with the demolition permit.
That’s unlikely due to the $5 million funding gap.
In 2016, the city red-tagged the bungalows for unsafe living conditions, forcing tenants to leave five days before Christmas, and required the buildings to be boarded up.
“We had no idea it would take this long,” Carter said.
She said the developer had applied “four or five times” without success for the sought-after 9 percent tax credits to close the funding gap.
“It’s so competitive,” she said.
The tax credit program, created during the 1986 tax overhaul and grown to $9 billion a year, was designed to offer a 70% subsidy to developers putting up new rental housing.
“With lower financing costs, tax-credit properties can potentially offer lower, more affordable rents,” according to an analysis by Mark Keightley of the Congressional Research Service.
Tax credits offset a portion of the federal tax liability in exchange for producing affordable multifamily rental housing; developers can use the credits or sell them to investors to raise capital.
The latest Congressional tax law overhaul cut the corporate tax rate from 35% to 21%, as of Jan. 1.
“That hurt us,” Carter said.
Lower corporate tax rates make tax credits for low-income housing less useful to corporations, which is why Sen. Maria Cantwell, a Democrat from Washington State, pushed to increase affordable housing tax credits in the March budget bill.
One of the tax credit rules is rents cannot exceed 30% of income for at least half of the tenants, creating a challenge for the 350 Ocean St. developer.
“The rents don’t support additional debt,” Carter said.
Terrazas said the city is “open to other opportunities to see that this project is initiated at the earliest date possible.”
Tribune Content Agency