Public Comment

The Double Binds that Beset Berkeley's City Council When It Tries to Address Affordable Housing

Steve Martinot
Friday November 06, 2015 - 01:36:00 PM

A sort-of townhall meeting, quaintly named “affordable housing 101,” is being planned for November 14 by the city’s South Berkeley “Idea Center.” One supposes it will be about how City Council will be providing affordable housing in Berkeley. That will be like trying to sail a small boat in a hurricane.

In Berkeley, around the issue of affordable housing, four antagonistic forces act on city council. There is Plan Bay Area, which requires Berkeley to develop over 3900 new housing units by 2020. There are the landlords who are raising rents inordinately on uncontrolled units, mimicking what is happening in San Francisco, and promising a similar mass dislocation of people. There is a crescendo of demand by low and middle income residents for affordable housing, so that those being priced out by landlords can find a place to live, and not have to leave. And fourth, there is the problem of housing developers being incorporated, meaning they will be constrained by their financing to build market rate housing whenever they can. In the middle of this miasma, the city of Berkeley has no way to force corporate developers to build affordable housing.

This is a terrible double bind for a city government to be in, unless it enjoys abandoning the people and getting payoffs from developers. If the bind that the city finds itself in is structural, then nothing will save it from accomplishing nothing. The people and the neighborhoods will remain unprotected and unaccommodated. 

To understand this political double bind, let us begin with the Plan Bay Area. 


1- Plan Bay Area  

This Plan was drawn up by ABAG (Assoc. of Bay Area Governments) and the MTC (Metropolitan Transportation Authority, a state agency), adopted in July 2013 and included in (up-dating) state law SB375 in April 2014. ABAG is not an elected body. It is a governmental structure that sits between the state government and the cities and counties. The theory it assumed, and wrote into SB 375, was that by building new urban housing, highway commuter traffic would diminish, with a lowering of greenhouse gas emissions. People would not have to drive in from the suburbs, and suburban sprawl would be contained. Thus, Plan Bay Area "allotted" a quantity of new housing units to each bay area city, to accomplish this move of suburbanites into the cities. (We will return to the political strategy this represents below.) 


2- The Rise in Rent Levels  

Rent level increases are a direct result of the Plan. The development proposed by the Plan will occur along major transit corridors, called Primary Development Areas (PDA). In Berkeley, these include University Ave., South Shattuck Ave., Adeline St., and San Pablo Ave. The majority of this housing (rental and condo) will be market rate (i.e. not “affordable”), and will appeal almost exclusively to higher income residents who can pay the rising market rates for housing. Yet it will be built in neighborhoods where property values are low, that is, in low income areas. That is because developers like to buy land where prices are low in order to maximize their gain, and that is to be found in low income areas. Therefore, the proposed development will push upward all property values in the adjoining neighborhoods, replace current stores and restaurants with higher priced stores, and displace lower income residents. 

The dislocation of low income residents will occur in areas adjoining the PDAs because, in anticipation of the rise in property values, landlords will start raising their rents, hoping to get a jump on the expected general shift in demographics toward the more well-to-do. Other houses will be bought by speculators who hope to profit from the general rise in real estate prices. The effect will be a general increase in the cost of living. 

As rents rise, residents will find themselves expelled from their homes (priced out) and forced to look for housing outside their neighborhood, often in distant suburbs. This is the first step in how new housing development destroys a neighborhood. 

The city is powerless to regulate or correct this situation, since rent control laws are barred by the Costa-Hawkins bill, passed back in the 70s. That means that council cannot come to the aid of long time renters now facing rents they can no longer afford. There are still apartments whose rent levels are regulated by previous rent control. But in 2014, Berkeley lost 36% of its controlled units when tenants vacated and the units went to market rate. 

In short, development causes a social crisis fairly rapidly because it dislocates people who thought their position in a neighborhood was fairly stable. In San Francisco, where this crisis is now in full swing, we see a demonstration of what the future holds for the east bay – unless some kind of movement arises to protect the neighborhoods. 


3- The Neighborhood Demand for Affordable Housing  

In neighborhood meetings all over town – West Berkeley, South Berkeley, Dowtown, etc. – the same fear and anger has been expressed. “We don’t want to be forced out. We need the city to build affordable housing so that we are not dislocated by this process of development. We are not against development, but we do not want it to destroy our neighborhoods.” 

This clammoring for affordable housing (affordable as defined by HUD, which sets rent at 30% of the tenants’ income) is a logical response to the crisis that rising rent levels impose. But it also represents the fact that neighborhood residents have no democratic access to the planning process. They have had no voice in what areas are proclaimed Priority Development Areas. And they have no voice in what each specific development project will be – that is, what it will demolish, what it will contain as housing units, and what it will look like. 

The city gives assurances that 20% of the units in these new buildings will be required to be affordable. But the city cannot enforce this condition. Under the Palmer Decision of 2009 (California Supreme Court), cities are liable for any loss of profit to landlords due to such rent regulation. Developers therefore have the ability to opt out of including affordable housing units. They can be made to pay a mitigation fee in lieu of affordable units, but they cannot be forced to build them. City council’s hands are tied in this respect. 


4- Building construction will be done by development corporations  

Corporations will build market rate housing, and back away from affordable housing, preferring to pay the mitigation fee instead. (The city will have to turn to non-profits to get affordable housing built.) This is not a result of greed (though it is a perfect breeding ground for it). It is inherent in the corporate structure itself, and its mode of financing its operations with debt, which place certain necessities on it. 

To finance its operations, a corporation borrows money. To get a loan, it has to put up collateral, just like everyone else. When a homebuyer buys a house, the house itself becomes the collateral for the mortgage, which is a loan. Publicly listed corporations can put up their own stock as collateral. A development corporation will put up the building being built. In the absence of sufficient collateral, the interest rate on the loan would be very high. 

This means that the value of the collateral has to be maintained to satisfy the lender (the bank). And collateral, whether of stock or buildings, will be subject to market forces. When stock prices drop, the corporation must make up the difference with cash or more stock. When real estate values drop, the developer must make up the difference or pay back the loan. To do the latter, the building (finished or not) will have to be sold. This is called recapitalizing the building, that is, turning it back into capital that can be used to meet debt requirements. 

Thus, the primary concern for a development corporation is the resellability of the project, as a condition for getting the loans needed without paying high interest rates. Affordable housing units, when included in a new building, hinder the ability to recapitalize because the affordable units are not on the market, but are governed by HUD regulations. That is, the value of those units is determined politically (according to the tenant’s income), rather than economically by the market. For low income families, this is a good thing; it allows many families to have a place to live. For corporations, it is a bad thing because it obstructs recapitalization. Therefore, they will prefer to pay mitigation fees rather than include affordable housing units. The mitigation fees add to the cost of production, but that cost can be passed on in a subsequent sale. 

Though the corporate preference for paying mitigation fees in lieu of affordable units makes a mockery of a city’s promise to include affordable housing, a city council prefers dealing with development corporations and market rate housing because building values will be higher, generating greater city revenues in taxes and other fees. It will supposedly put the mitigation fees in the Housing Trust Fund (HTF), from which affordable housing units can be financed. But in a rising real estate market, such as that engendered by the Plan Bay Area, those mitigation fees will not amount to much. 


5- The city has no assured way of funding affordable housing  

While the demand now is for hundreds if not thousands of affordable housing units, the most the city will be able to get out of corporate developers (under the present system) is a few dozen. If council has to turn to non-profits to satisfy the affordable housing need, it will have to raise its own money for financing purposes. 

The city says that the mitigation fees will finance affordable housing projects. Yet it has admitted that it has no way to enforce the payment of those mitigation fees. It can sue for non-payment, but can only do so on a project-by-project basis, which is expensive. If mitigation payments are not enforceable, developers can "neglect" to pay into them as agreed. And in fact, many have not been paid. Thus, when the city promises to use the fees paid into the HTF to build affordable housing, it is making a promise it cannot keep. 


In sum:  

The city council can do very little for the people in the realm of housing, in the situation created for it by the Plan Bay Area. The city is caught between the political necessity to build new housing, the fact that this necessity produces rent increases that the city is barred from regulating, the problem of mass dislocation of residents resulting from these rents increases, and the massive need for affordable housing that it creates, while being tied to development corporations whose interest lies in building market rate housing that will not satisfy that need. 

Caught between a political imposition by the state and an uncontrollable situation within its own neighborhoods, it is hemmed in by the corporate debt structure, the law (Costa-Hawkins), the courts (Palmer decision), and the political structure (ABAG) from protecting its citizens or meeting the needs of its residents. It is unable to supply affordable housing, to curtail rent increases, or to defend neighborhoods against massive development. City government is helpless, and therefore useless. 

This implies that electing other people to council will not change the situation. The problem is structural (a composite of the corporate structure, the debt structure, the legal structure, the fee structure of the city, and the market structure of housing properties). All these structures work together to prevent the city from defending the well-being of its people. 

From the perspective of city residents, if city council is useless, merely a source of empty verbiage, then it is the residents of the city who must take the situation in hand. It is the structure that must be changed. Either the city government can be liberated from the structures that imprison it, or it must be replaced. 


Why has this happened?  

Why has the Plan Bay Area imposed a requirement on the city of Berkeley (and on other bay area cities) that puts it into such a horrendous crisis? 

The theory behind building new housing is that new arrivals for elite jobs in the financial and information tech industries will live in town rather than the suburbs, and not have to commute. This will supposedly cut down on greenhouse emissions. There are two things wrong with this theory. First, ABAG’s prognosis about future population growth is based on computer projections, while the actual growth of Berkeley has been small over the last two decades. That means that ABAG’s Plan is actually focused on those who already live in the suburbs, and already have elite jobs (able to afford market rate housing). Second, the process of moving high income people into town will result in low income people being moved out of town, to become commuters in turn. So the net change in highway emissions will be negligible. 

But there is a larger political purpose. The US government wants the bay area to serve as a primary capital city for the Pacific Rim Economy. The structure of that economy is now being defined through the TransPacific Partnership treaty. It will favor corporate operations rather than people, and establish business conditions that will supersede local democratic decisions. For that purpose, finance, information technology, and transportation industries are being expanded here. Thus, the existing neighborhoods are targetted as expendible against the need to house the employees of those industries. 

For the people of the neighborhoods of this and other cities, either we organize and take over the planning process, shifting it to a local level, or the neighborhoods will be bulldozed by gentrification.