Woodmark: a case study on how affordable housing gets built
Navigating the byzantine world of low-income housing development
This is Part Two of a series on the Woodmark Apartments in Sebastopol. Read Part One here:
Despite being issued a Certificate of Occupancy by the Sebastopol Building Department on Sept. 26, the Woodmark Apartments complex still does not have any tenants as of mid-December.
Over the past week or so, I have gained more information on how Woodmark and similar affordable projects operate and are funded.
How is Woodmark financed?
Like most large-scale affordable housing developments, Woodmark is a multimillion-dollar project. Owned by The Pacific Companies (TPC), a for-profit development company, and the nonprofit Central Valley Coalition for Affordable Housing, Woodmark is being developed in two stages:
Phase One, which includes 48 two- and three-bedroom apartments only available to farmworkers, was completed in September of this year.
Phase Two, which is expected to be completed in the next few years, will offer 36 additional low-income units that will be available to everyone, not just farmworkers. This will bring the total number of units at Woodmark up to 84.
Phase One was estimated to cost $25,341,252 in 2020 and was financed through a combination of loans and tax credits.
How do tax credits work?
The U.S. Congress created the Low-Income Housing Tax Credit as part of the Tax Reform Act in 1986, and in doing so permitted an agency in every state to hand out the credits based on their own set of criteria for eligible developers. In California, that agency is the California Tax Credit Allocation Committee (CTCAC).
In 2022, California received $2.60 worth of tax credits per resident from the federal government, bringing the total number of tax credits it could allocate to a little over $102 million for that year. It hovers around that number every year.
Developers compete for these tax credits, which are doled out twice a year by the CTCAC. Affordable housing developers, whether they are nonprofit or for-profit, then use those tax credits to attract investors to finance their projects.
“As you’re gearing up to go into construction, you will be going out into the market with that formal allocation of credits that you’ve received,” said Scott Johnson, an industry veteran and a former executive at three different housing nonprofits in the North Bay Area. “You will be receiving bids for those credits from motivated investors.”
The key to getting those credits for the owners of Woodmark was the relatively small ($1 million) USDA loan that was to be used only for building farmworker housing.
By getting that loan, Woodmark received “points” from CTCAC. Those points moved them to the front of the line to receive tax credits from the State of California, 20 percent of which are “set aside” for rural projects like Woodmark. (According to the USDA, Sebastopol is rural.)
According to multiple sources that I spoke with, companies that are successful in the bidding to receive tax credits from CTCAC are the ones whose projects will be consistently successful.
The tax credits lower investors’ tax liability, saving them much more than a simple tax deduction would.
“The motivated investors for credits these days are typically banks that have a big tax obligation,” Johnson added. “[Their investment] allows them to shelter some of their tax obligations.”
CTCAC gives out 9 percent tax credits and 4 percent tax credits.
The 9 percent application rounds are especially valuable and are “phenomenally competitive” to receive, according to Johnson.
“There’s a whole threshold of criteria that one must meet just to be eligible to apply for those credits, and beyond that there’s a whole rating and ranking scoring system that the state utilizes to make the final selection,” Johnson said. “Most of your equity—about 60 to 70 percent of your total permanent financing for a multi-million dollar project like [Woodmark]—will be on a 9% [tax credit] deal in the form of equity.”
A winning partnership: TPC and Central Valley Coalition for Affordable Housing
TPC is among the most successful affordable housing developers in the country. Clearly, its CEO, Caleb Roope, has figured out how to build properties efficiently and effectively. TPC built just over 3,000 in 2022 alone. (By comparison, Burbank Housing, Sonoma County’s most prominent low-income housing developer, has created just 3,200 homes in its 40 years of existence.)
TPC is vertically integrated, which means that they construct and design their buildings in-house instead of paying fees to other companies. And since TPC is so large, they reap all the benefits of an economy of scale. TPC constructs many of their standard units and building parts near its headquarters in Idaho before shipping them off to California or the other states where they do business.
But, more important than their workflow, the TPC team has been excellent at gaining access to the tax credits and tax exemptions that make building affordable housing development both possible and lucrative.
In the case of Woodmark, TPC was able to take advantage of these programs because of its partnership with the Central Valley Coalition for Affordable Housing, a nonprofit. This opens doors that would otherwise be closed to for-profit companies.
Central Valley was the entity that applied for the $1 million USDA Section 514 loan, which would not be available to a for-profit company without a nonprofit partner. That loan, according to Johnson, pushed TPC to the front of the line for the coveted tax credits.
Once people actually move into the apartments, Woodmark will unlock USDA Section 521 rental assistance, which subsidizes the units to bring in market-rate revenue to property owners.
Under California Revenue and Taxation code Section 214, TPC need not pay property taxes on the Woodmark property because of Central Valley’s status as both a partner and nonprofit.
According to the State Board of Equalization, nonprofit partners must have “sufficient management authority and duties in the partnership operations to qualify the property for exemption.”
However, as discussed in the previous article, it is unclear what active role Central Valley has played in the development or management of the property.
According to several industry insiders, there is a phenomenon—and known problem—in the affordable housing world in which nonprofits are taken on as partners and paid by for-profit companies simply as a means to receive the property tax exemptions, government loans and rent subsidies that are available only to nonprofits.
Insiders said that oversight of these nonprofit partnerships is not strong in the state.
Central Valley is a company with only four employees and a CEO who, according to ProPublica, makes over $500,000 a year, which is exceptionally high compensation for a nonprofit chief executive. Central Valley brought in more than $30 million in revenue last year.
Neither Caleb Roope of TPC nor Central Valley responded to the Sebastopol Times’ multiple requests for comment.
Why is Woodmark still sitting empty?
While I have yet to nail down a reason for this, Johnson said that the idea that Woodmark simply can’t find farmworkers “flies in the face of all empirical evidence.”
All of the sources I spoke with were surprised to see a project like Woodmark sitting empty. Since the apartments are so much cheaper than market-rate housing, there is typically a higher demand for such units than supply.
“There’s great economic self-interest for the developer to close on your permanent financing and your equity so that you can pay off your construction loan,” Johnson said. “By the end of the construction phase, you’re paying a load of carrying costs of interest on that loan. A certain level of occupancy is a key threshold that your financing requires. Typically on an affordable housing deal, certainly in Sonoma County in the Greater North Bay Area, you would have qualified applicants lined up and processed for eligibility, waiting for that [Certificate of Occupancy] to be received.”
That way, Johnson said, people can move in more or less immediately after the Certificate of Occupancy is received.
Who can move in?
Like other affordable housing projects, the apartments must be leased out to low-income individuals and families. In the case of Woodmark, that’s any household that brings in between 30 and 60 percent of the Area Median Income (AMI). As mentioned above, the 48 currently available units are restricted to farmworkers and their families only.
Because Woodmark is funded by USDA money, no undocumented immigrants are allowed to live there. Residents with a green card can apply so long as they have an alien number, and everyone must show paystubs that prove they aren’t paid under the table.
The property management company, Aperto, hosts a website for Woodmark, which uses generic images and features no real pictures from either the inside or the outside of the building. The same is true of a recent Craigslist post.
“If you can advertise the property, that would be great,” a woman in the leasing office said when I stopped by this week.
Woodmark Apartments is located at 7716 Bodega Ave. in Sebastopol. Prospective tenants can reach out to Aperto Property Management at woodmark@apertopm.com or 707-232-4139.
All great information! I remember in the previous article a study in the area being done for the demand from farm worker tenants. I wonder if that was legitimate. The nonprofit could be doing outreach and going to all the farms around here to talk to folks and gather interest. That they aren’t based in our community means they don’t have to care. There’s a real crisis going on and a pretty simple 3 bedroom family home is 900k on average in Seb. Plus a bunch of oak trees were cut down for these apartments that are now empty and not helping anyone. It’s out of control.
One more costly, ugly nail in the coffin of a town losing its charm and identity. There are for sale signs all over the neighborhood in anticipation of more noise, traffic, decreased property values, and other problems. And, yes, very concerning that little, financially strapped Sebastopol is expected to provide services for all these new residents.