Can a Stalled Train to Las Vegas Speed Housing Construction in California?
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It was a big, ambitious plan promising jobs and pollution relief in a car-choked California: a high-speed all-electric passenger train linking Las Vegas to a Mojave Desert town, and ultimately Los Angeles.
To get the $8.4 billion Brightline West venture moving, global investment firm Fortress Investment Group wanted low-cost financing: specifically, $600 million of California’s precious private activity bonds. Because of federal rules boosting rail, the company could leverage that amount four times to $2.4 billion of bonds, which are meant for ventures for the public interest that are capped annually in each state by the federal government.
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Fortress won its entire request. But the firm, which also received private activity bonds from Nevada, failed to get enough investors on board and is postponing the project, which had been slated to open in 2024. All of its California bond allotment is now returning to the state.
On Nov. 18, a state committee chaired by Treasurer Fiona Ma will consider how to divvy up the $600 million. Many housing advocates and developers say every bond dollar should go toward alleviating California’s severe home shortage. The state has five of the country’s 10 most expensive residential markets, an estimated shortfall of 1.3 million affordable units, and several cities with sky-high homelessness rates. The Brightline project’s bond allocation would be enough to build or preserve about 2,600 housing units and fund about a third of projects that didn’t receive any bond allocation this year, according to an analysis by the nonprofit California Housing Partnership. Such initiatives include housing aimed at homeless families in the pricey San Francisco region and seniors in Orange County.
With demand from such builders far outstripping the debt allocation California receives from the federal government, projects that are ready to start construction are being forced to wait until there’s enough bonds. That’s leading to delays in new homes and raising the risk of even higher construction costs and expiration of government grants for the developers. And the coronavirus pandemic is only exacerbating the crisis.
“Given where we’re at, with Covid and families falling out of housing and the homeless crisis increasing, I don’t see how they can justify giving it to another type of construction or facility or service,” said Lois Starr, acting executive director of PATH Ventures. The nonprofit builder is hoping to get its bond request approved in December after an earlier rejection for its 111-unit rental project in Los Angeles County.
Ma has indicated that some of the allotment may go to applicants other than housing developers, however. Housing accounts for most of the state’s $4 billion of private activity bonds this year, and the state also needs to support waste and recycling facilities. “You can’t build housing without these types of infrastructure projects. If there’s no garbage, you can’t build. If there’s no water that goes to the housing, you can’t build,” Ma said. “There are other important projects in the state that depend on private activity tax-exempt bonds.” Fellow board member Controller Betty Yee said she supports some going to pollution control as well.
Governor Gavin Newsom’s representative Gayle Miller said in a statement that “the administration will continue to evaluate projects in the context of both the state’s need for a range of infrastructure investments and the state’s available resources.”
Competing priorities have helped maintain the state’s inertia in the face of its housing crisis. There certainly has been no shortage of dramatic statements about it: Newsom campaigned in 2018 on a pledge to build 3.5 million homes and the Democrat dedicated his State of the State speech this year to homelessness.
But dramatic action has yet to follow. State legislators earlier this year failed to advance State Bill 50, which would have forced cities to allow more homes around transit and in job-heavy areas. Production of housing in 2020 is at 110,357 as of November, on track to beat last year’s 111,284 units as the lowest since 2016, according to Construction Industry Research Board data. Homelessness has surged so much that the 16% increase in California last year offset the combined decline in other states.
This has occurred despite voters in recent years approving billions in bonds to support housing in their localities and as recently as 2018 for statewide ballot measures for veterans and homeless residents. This influx of cash has helped affordable housing developers with initial project costs as they navigate state funding programs, which are designed around the ultimate award of tax-exempt bonds.
After builders win over neighbors’ concerns and secure local approvals and other financing sources, they then apply for the ability to sell the debt, which draws additional federal subsidies through tax credits equal to about 50 cents for every dollar that’s borrowed. This used to be such an uncontroversial process that it was considered over the counter because there was more bond capacity than projects.
Late last year, requests for California’s bond allotment for the first time in 15 years started to outstrip what the state was authorized to give out because of the demand from housing developers. After earlier designating about $3 billion of this year’s capacity for housing, the state’s debt committee is using a scoring system to decide how to allocate the bonds in multiple rounds. While every non-housing project has had its request approved, some housing developers have not gotten their awards. That’s not because they didn’t qualify, but because they don’t rank high enough for certain criteria designed to spread out the resource amid the crush of projects.
“There are folks who have built very big pipelines and are now getting choked off,” said Matt Franklin, president and chief executive officer of MidPen Housing, which is requesting bonds for its apartments for the formerly homeless in San Jose.
Meanwhile, Ma, the treasurer, expects Fortress to return next year for bonds after it reworks its rail venture to make it more palatable to investors. The Brightline West project, she said, “will be a magnet for tourists, residents, jobs.”
For Carolyn Bookhart, director of real estate development at Resources for Community Development, that project shouldn’t receive an allocation ahead of addressing the housing and homeless crisis she calls “much more critical and time sensitive.” The nonprofit is awaiting bond awards for two projects totaling 230 units in Milpitas and Fremont.
“The current level of competition for bond funding needed for affordable housing is unprecedented, and requires an unprecedented level of bond allocation to address the current shortfall,” she said. “Reallocating this $600 million would really help in aligning the state policy to make sure that we’re building the affordable housing that the state’s really been pushing to do.”
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