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Anatomy of a Subsidized Housing Complex

PALO ALTO WEEKLY - Publication Date: Wednesday Feb 16, 1994
by Rufus Jeffris

Wendy Weitzel waited four years to get the small, two-bedroom apartment at Arastradero Park where she lives with her 7-year-old son.

That time passed slowly for Weitzel, a teacher's aide at a south San Jose school who helps emotionally troubled teen-agers cope with their problems.
"I called almost every month," recalls Weitzel, who in August will mark her fourth year at the low-income housing complex at 574 Arastradero Road.
Now Weitzel, whose rent is less than $400 a month, is among the 100 tenants of Arastradero Park wondering whether she'll be able to hang onto her apartment. The landlord who used federal tax breaks to create the low-income complex 20 years ago wants to sell, and the future of the building, and the level of its rents, is uncertain. If forced to find housing on the open market, Weitzel would likely have to pay more than double her current rent to afford the same size apartment.

Weitzel was just 8 years old in 1968 when Congress passed the legislation making subsidized projects like Arastradero Park possible. The Housing and Urban Development Act was adopted in response to a study showing that the nation wasn't providing its low- and moderate-income residents with enough housing.
The HUD Act was one of the first federal housing programs of its kind, a quick, affordable way to create a level of housing that the government couldn't build on its own. It was one of the most prolific housing programs of this century, producing 500,000 units nationwide in an eight-year stretch that ended in 1976.
Now, 20 years later, the deals that HUD forged with private developers to construct the housing are expiring. And many of those developers, including the one who built Arastradero Park, are looking to sell.

That prospect leaves Weitzel and the other tenants confronting an array of questions about their future. They want to know who will buy the complex, where the money will come from, whether the rents will change and whether they'll be able to stay.

"I'd be out on the street if I had to move somewhere else," Weitzel said.

The government has arranged a series of measures to protect residents like Weitzel against that possibility. But the process is long and complicated and, ultimately, offers no guarantee that Arastradero Park and other complexes like it will be preserved as subsidized housing.

In retrospect, some are questioning how great of a deal the federal government struck 20 years ago and whether those deals were the most effective way to provide low-income housing.

From the outside, Arastradero Park doesn't fit the drab cookie-cutter image often associated with low-income housing. Squeezed onto a narrow lot stretching from the entrance on Arastradero Road to Maybell Avenue, its six two- and three-story buildings sit in an attractive rectangle.

Residents step out of their front doors to a concrete path circling two grassy courtyards that straddle the laundry room. Small wooden decks jut from each unit. A small laundry room at the center of the complex doubles as a mail room and sometimes serves as a gathering or meeting place for residents. Across from it, a jungle gym and set of rings rise from a sand-filled recreation area visibly worn but still functional after two decades of use by children.

Several dozen healthy trees, including pines, redwoods, and willows, shade the complex. Gardeners come once a week to cut the grass, trim the foliage and tidy the grounds.

From a distance, at least, the complex's various shades of brown and tan paint appear to be in good shape. A closer inspection reveals the place probably could use a paint job. And sections of the laminated plywood siding are buckling and chipping.

Single-family homes border the complex to the east and across Maybell to the north. A luxury high-rise apartment building looms to the west. Open, metal-roofed carports stand along a driveway linking Arastradero and Maybell along the complex's western border.

Arastradero Park houses 100 residents. Its 65 units range in size from single bedroom apartments to four-bedroom, two-level townhouses.

Most tenants have lived there for at least eight years. Thirteen have resided at the complex since it was built. Seniors occupy about 10 units. Seven households are families of five or more people. According to a Palo Alto Planning Department profile, the typical tenant fits Weitzel's description: a low-income, working single mother.

Forty-nine units--75 percent of the complex--are rented to tenants who by federal standards are classified as making very low incomes. For a family of three, that means a maximum annual income of about $26,700. The lowest income hovers at about $3,000 a year for a fixed-income senior; the highest, for a family of four, reaches about $50,000.

Arastradero was built in 1974 by Sam Webster, a Palo Alto developer who along with several partners entered into one of those agreements with the federal government.

Insurance from the U.S. Department of Housing and Urban Development made it possible for Webster's group to borrow $1.2 million, or 95 percent of the project's $1.26 million construction cost. Webster had only to come up with the remaining $60,000. In return, Webster and his partners received a series of tax breaks. They were allowed to write off from their income the value of the complex as it depreciated over 20 years. And they received annually a 6 percent dividend on the total rental payments. The group also could borrow money against equity that accumulated in the complex.

But Webster claims the dividends that his group anticipated never materialized. And, acting on a clause in what originally was a 40-year agreement that allowed Webster to sell the property after only 20 years, he and his group decided to get out.

"It's been a pretty tough go," Webster said.

In November, Webster and his partners were among 25 landlords of federally subsidized housing in seven states who filed a lawsuit against HUD, accusing the agency of delaying implementation of a law enabling them to sell their properties early.

"We've waited 20 years," Webster said. "Now we're going to sell."

By other accounts, though, Webster and his partners didn't do too badly in the deal, and stand to score a hefty windfall when they sell the place they built for a little more than $1.2 million.

He and HUD in December of last year came to an agreement on the current value of the complex--$6 million. The price was based on prevailing market values.

Palo Alto City Council member Dick Rosenbaum, the council's liaison on housing issues, thinks the government negotiated itself and taxpayers a raw deal.
First, Rosenbaum said, the government uses taxpayers' money to guarantee loans for the project. Next, it gives Webster a 20-year tax shelter and other financial goodies. Then it allows him to sell at prevailing market rate. And finally, it agrees to put up the money for somebody else to buy it.

"There's a certain boondoggle aspect to it," said Rosenbaum, explaining that the government, using taxpayer's money, appears essentially to be buying the place twice.

"It was a program designed to build a lot of housing quickly," Rosenbaum acknowledged, but "from a taxpayer's standpoint it might not have been a smart way to proceed."

Lou Goldsmith, a founder and director of the Palo Alto Housing Corporation, which has built and manages many of Palo Alto's subsidized housing units, has a slightly different interpretation of what happened under the government's program.

Goldsmith doesn't disagree that owners like Webster got a good deal from the government, that essentially, they "are going to walk off with far more money than they ever paid."

But he doesn't blame Webster or other developers for making money on these projects. He points a finger at the government, which he says didn't need to be so generous in structuring these deals and should have sought tougher guarantees that the housing would remain affordable for a longer period of time.
"Possibly there would have been incentives, but they needn't have been as gross as they were," Goldsmith said.

"In a sense, I guess there's some truth to that," said Joan Hall, a spokeswoman at HUD's San Francisco regional office. "The important thing now is the government recognizes its responsibility to retain it as affordable housing, and there's a cost."

Goldsmith points out that the government's program was set up to provide affordable housing. And it did exactly that. Arastradero is one of 1,600 HUD-subsidized housing projects, with a total of 117,000 units, in California. All of those units, however, are eligible for conversion from low-income rental rates to market rate housing by the year 2008.

Early last month, Webster filed with HUD his notice of intent to sell Arastradero, making it vulnerable to just the kind of conversion that could also threaten the state's other affordable housing units.

As part of the government's effort to preserve projects like Arastradero as affordable housing, Webster's notice opened a six-month window in which tenants get the first shot at putting together an offer to buy the complex.

It's not necessary, however, that they go it alone.

Two weeks after Webster filed his notice, officials at the non-profit Housing Corporation gathered to discuss possible formation of an association with tenants in which the two together would make the purchase.

"We don't think there are a lot of competitors out there," said Marlene Prendergast, executive director of the Housing Corporation.

Should the Housing Corporation's efforts fall flat, however, and the tenants fail to come up with a plan on their own, sale of the building would be opened for another six months to any non-profit housing organization.

This would be the window of opportunity for either the Housing Corporation, acting alone, or some other non-profit group to step forward with an offer.
Although its role in preserving Arastradero Park as affordable housing hasn't yet been clearly defined, the city of Palo Alto would more than likely be asked by the Housing Corporation to provide a large chunk of up-front cash needed to make the transfer happen.

"We would like to keep that affordable housing," said Council member Joe Huber, who preceded Rosenbaum as housing liaison.

The Housing Corporation this year received through the city $10,000 in federal Community Development Block Grants to set up a program for educating and organizing tenants to take part in the sale. The Housing Corporation submitted a second application to the city two weeks ago seeking up to $400,000 in federal Block Grant funds for 1994-95 to cover the 5 percent, or estimated $300,000, down payment on Arastradero.

Part of that money would also pay for consultants to shepherd tenants through the twisted bureaucratic maze that accompanies these sales. The entire process could last up to 18 months.

Should all this prove unsuccessful, and both the tenants and a qualified non-profit group fail to make the buy, the building would hit the block on the open market.

"If HUD doesn't have the money, that's where it will go," Webster said.

Webster believes it's almost "99 percent certain" that the process will end during the initial six-month window. Of course, there's the little matter of finding the remaining $5.7 million, money which the Housing Corporation would owe after making the 5 percent down payment.

Finding that kind of money may not be as difficult as it sounds.

HUD is obligated to front 95 percent of the purchase price, in addition to money for rehabilitation, in the form of insuring a loan from a private lender. The process is similar to that which enabled Webster to build the complex in the first place.

There's one potential problem with this scenario. Since the agreements under this HUD program started expiring in the early 1980s, HUD has been blitzed by requests from owners who want to sell and get their money out.

Fortunately, the federal government wasn't completely shortsighted. It began setting aside money to purchase these projects, and slapped a moratorium on the number which could be converted to market rate. But like the savings and loan bailout and the expected bailout of the banking industry, questions have arisen about whether the government set aside enough.

According to one HUD official, the federal government when it created the fund, may have underestimated both the cost of the projects and the number of owners who would want to sell.

Hall insisted that in the case of Arastradero Park, getting HUD to guarantee a loan to complete the sale should not be a problem.

Although the Housing Corporation's initial involvement in guiding the purchase is comforting to Arastradero tenants, many still feel apprehension about what's going to happen to them when the sale is complete. And for good reason. Regardless of who buys the complex, the rents are going to go up.

According to a report by the Palo Alto Planning Department, the sale for some residents "may mean a significant increase over their current rent payments."
As it works now, tenants cough up enough rent each month to pay back the initial loan used to build Arastradero. A small portion also goes to operating and maintaining the complex. But the original loan is almost paid off and the $5.7 million loan that will be needed to buy the complex from Webster is going to require larger payments.

Translated into dollars, the city's report estimated that low-income tenants, say, in a four-bedroom apartment, could see their current $534 a month rent jump by as little as 10 percent, or $50 a month. Tenants in the same size unit, who don't exactly fit the government's definition of low income, could be hit by increases of as much as 100 percent.

After the sale of the complex, the government would continue to provide protection to some tenants, but not to everyone.

Those who qualify as low-income--a family of three making no more than $26,700 annually--do not now have to pay more than 30 percent of their incomes for rent. That help would continue. If the complex is sold and the rents go up, these tenants would receive federal assistance to cover the difference. And to lessen the blow, any increase would be phased in over three years.

But for tenants with slightly higher incomes--incomes that put them just out of range of government assistance--the anticipated rent hikes could spell trouble.
Suzie Brown, a tenant at Arastradero since 1978, is one of those residents who doesn't quite qualify as low income and might not qualify for government assistance when her rent increases. She's a single parent working for the Palo Alto Unified School District. She also holds down a job as a private tutor.
But Brown is putting her son through college. And between that, her rent of $416 a month and other living expenses, she has little left over at the end of each month. Although it's too early to predict how high rents will go for tenants like Brown, and whether she'll qualify for any government assistance, she worries about the expected increases.

"I think I'd have to move out of California," Brown said.

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