In affordable housing, let buyers beware?

Joel Davidson beamed when showing visitors through his Palo Alto home, but Kay Wright, after discussing her condo, also a “Below Market Rate” (BMR) property, couldn’t hold back the tears.

Both are longtime Palo Altans, now in their 60s, who worked professionally with children — Davidson as a recreation therapist at the Lucile Packard Children’s Hospital and Wright as a social worker.

The similarities end there.

Davidson is a recent BMR owner; he purchased his one-bedroom Barron Square condominium in south Palo Alto for $97,000 in 2005. He is confident and lively, his voice retaining a trace of an Eastern accent.

Wright, a gentle woman with soft features, purchased her Abitare condo in downtown Palo Alto for $100,000 about 20 years ago and it is now worth $120,000.

Davidson waited 18 years for his condo, and he’s thrilled.

“I’m just so appreciative to have a place,” said Davidson, who used to rent. “I think it’s a fabulous program.”

“I mean it’s just amazing to live in Palo Alto for that amount of money.”

For Wright, the joy of having her own place in Palo Alto has worn off.

“I deeply regret my decision,” Wright said recently.

While her neighbors sell their market-rate condos for $700,000 to $965,000, Wright won’t be able to get that much for hers. Due to deed restrictions, she would have to sell to another BMR program participant. That, she said, doesn’t give her enough money to move.

With several flights of stairs in her unit, Wright said she has already broken several bones.

“I think the intent of the BMR is a good one, but somehow the way this turned out has become extremely unfair,” she said.

When Palo Alto began its affordable-housing program in 1974, it was perhaps the first community in California to adopt an “inclusionary zoning” approach to address the rapidly rising price of real estate. The concept is straight-forward: All new housing developments should include some homes available for people with lower incomes. In theory, the city would then include residents of all incomes living together, their diversity fueling a vibrant social and economic mix.

Actually crafting a program, of course, was much more complex. How many residences should developers provide? Who should live in them? How much should they cost? And, perhaps most critically, what happens next?

Those questions have risen to the forefront again as the city grapples with the future of its program, which now has 179 ownership and 155 rental units, with about 145 more coming soon. Nearly all are in condominium developments.

The debate has stirred passions of current homeowners, who want fair treatment, financial freedom and respect. It has also raised a critical question: Is homeownership — with limited appreciation, restricted inheritance and refinancing rules, occupancy restrictions and potentially even discrimination — a good deal for the residents or the city?

“I think the intent of the BMR is a good one, but somehow the way this turned out has become extremely unfair.”

— Kay Wright, BMR owner

Palo Alto’s program began almost informally, with the city crafting deals with each developer, according to the Cathy Siegel, the city’s advanced-planning manager. Siegel, something of a BMR guru, has been tapped to share her knowledge with other communities as inclusionary-zoning provisions have become widespread, particular in high-priced areas such as California.

Initially, the residences were intended for school district and City of Palo Alto employees, she said.

“They used words like ‘low and moderate income’ in some of the early documents. I think they were looking at people that were kind of the edge of being priced out of the market,” Siegel said.

But after long, the preferences for teachers and city employees were dropped, Siegel said. It added unnecessary complexity, and delays, to an already Byzantine process.

By 1976, the city standardized the regulations — each development now had to set aside 10 percent of its residences for the BMR units. The Greenhouse on San Antonio Road, with 24 BMR units, was one of the first major projects under the program.

The program is managed by the nonprofit Palo Alto Housing Corporation, which maintains the waiting list, checks eligibility, coordinates with developers and coordinates resales.

Program founders showed foresight, Siegel said. They included deed restrictions, in effect for 59 years, to limit the selling price of the residence.

“The idea that Palo Alto held strongly when the program was established, one of the goals, was to make the units affordable over time … so the next buyer can still buy an affordable unit,” Siegel said.

Other cities, which established 20- or 30-year deed restrictions, have lost residences from the program, while the need for affordable housing hasn’t abated, Siegel said.

The first buyers’ residences appreciated in line with the Consumer Price Index (CPI), a measure of price variations developed for geographic areas by the U.S. Department of Labor. But in 1983, with inflation and interest rates soaring, pushing the CPI up to double-digit levels, housing managers watched as prices for BMR units approached those of market-rate properties.

So the city slashed the appreciation rates of any future BMR units. Any deeds signed after 1983 would only allow residences to appreciate by one-third of CPI per year, equal to about 1 percent per year.

A two-bedroom condo at Abitare, on Alma Street north of University Avenue, climbed from $87,000 in 1985 to $108,000 in 2007, for example. Similar units now sell for about $750,000 to more than $800,000.

In the mid-1980s, the city launched its affordable-rental program, Siegel said. Developers are required to provide BMR rentals when they build apartment complexes. The rental units are intended for lower income residents than the ownership BMR residences, she said.

“They used words like ‘low and moderate income’ in some of the early documents. I think they were looking at people that were kind of the edge of being priced out of the market.”

— Cathy Siegel, Palo Alto advance planning manager

In 2003, the city planners began revising the program’s policies but soon realized they faced an enormous task.

Problems related to restricted appreciation needed to be addressed. With limited appreciation and low incomes, many owners didn’t have enough money to keep their residences in good condition. And although the program’s managers realized early the program would not serve as a “stepping stone” for owners to purchase market-rate houses, the low appreciation had slashed the choices for residents, leading many to stay in their home even when it no longer met their needs — containing stairs or too many bedrooms, for example.

And BMR owners are required to pay all homeowners’ association dues, although they aren’t reimbursed by selling at a profit as market-rate owners are.

“When we pay homeowners’ fees, it’s just money out the window,” another BMR owner, who didn’t want to provide her name.

But that wasn’t all.

Over the years, the program had accumulated about 20 types of deeds, complicating administration and potentially creating inequity.

Some of the older residences also haven’t been kept up, planners say.

“Essentially our impression is that there is a lot of deferred maintenance,” Steve Emslie, the city’s planning director, said recently.

Marlene Prendergast, the Housing Corporation’s executive director, agreed. “This isn’t to say they are trashed. … (Residents) stay a long time.”

And with the low-appreciation formula, each time a BMR residence is sold, it gets more affordable in relation to the housing market. Buyers of new BMR units must earn between 80 and 120 percent of the Santa Clara County median income, which is now between $84,400 and $126,600 for a family of four.

But as the residence is sold and resold, its value slips, making it affordable even to relatively low-income families, who sometimes lack the money to keep up with maintenance.

These families, as well as other BMR owners, are also vulnerable to increases in homeowners’ dues. The city had to step in to provide loans for BMR owners at the Palo Alto Redwoods complex on El Camino Real and at Abitare in 2002, when both developments faced major assessments related to unit-wide projects.

In addition, sometimes BMR units were built with lower quality materials than other units, increasing the demand for maintenance, Siegel said. Developers have always been allowed to substitute “luxury” furnishings, such as marble countertops, for more standard fixtures, Siegel said.

“But sometimes they went too far, and it was really, really basic,” she said.

Wright said she has plywood-grade kitchen cabinets, and although she has no fireplace, her unit is topped by a chimney, to keep the complex’s exterior appearance uniform.

“Now, we don’t let them do that,” Siegel said.

Yet when the Weekly recently visited the Vantage development on East Meadow Drive, which is under construction, contractors knew immediately where the BMR units were.

In the past, developers also created BMR units that were smaller than the others or were clumped together in a less desirable location of the development, Siegel said.

Davidson’s condo, in the Barron Square complex off Maybell Avenue, is bunched with six other BMR units closest to El Camino Real. His building didn’t have air conditioning and units were smaller than in other neighborhood condos, Davidson said.

Even more troublingly in the program, some owners have refinanced their residences, sometimes for even more than they were worth, according to Emslie and Siegel. Deeds written before 1993 didn’t even require owners to check with the city before taking out a loan, and a survey recently revealed that 50 percent of owned have refinanced at least once.

“We’ve even had a situation where the homeowner told the lender what it was worth, and they loaned her quite a lot more,” Siegel said.

The city and the Housing Corporation have had to step in about four times to save BMR homes from foreclosure, Prendergast said.

“We haven’t lost (residences), but we have had to go into litigation to be tough on the lenders and title companies who may have screwed up,” Prendergast said. “It’s six horrible months, a lot of expense, and then the person’s probably out, which is sad. It’s really terrible when that happens.”

“When we pay homeowners’ fees, it’s just money out the window.”

— anonymous BMR owner

Another unforseen consequence of the program’s complexity is its own participants’ lack of knowledge. Several owners contacted by the Weekly said they still didn’t understand what full CPI or partial CPI was.

“There was so little information given when I bought my unit. I was just so home-buying naïve,” said a longtime BMR owner who asked not to have her name used. “There was no training, not like they do now. All they did was give me my deed and contract and say, ‘This is how it is.'”

She said she was satisfied until she learned that some BMR owners, those who bought before 1983, were earning three times the appreciation.

“There was no education at all,” said another BMR owner, who also asked to remain anonymous.

The city hired a consultant, Keyser Marston Associates, in 2004 to review the program. It published a 352-page report and conducted a survey of residents, which was completed by 124 residents, a 73 percent participation rate.

The survey found a majority of residents are satisfied with their experience, more than half are older than 60 years and more than 70 percent have incomes below $50,000, with 22 percent earning less than $22,000.

Only 18 percent said they “know for sure” how their resale value was calculated, with more than half who said they “know somewhat” or “don’t know at all.”

Thirty percent of residents said they “don’t know at all” the requirements of refinancing their unit. Nearly one-third of respondents said they weren’t completely sure of the rights and responsibilities as owners when they purchased their home.

Prendergast said she finds it hard to believe that owners really didn’t understand what they were agreeing to, although the Housing Corporation has bulked up its education efforts in recent years.

“What we did was go carefully over the deed restrictions and explain them in as plain language as we could,” Prendergast said. “We assumed that they would remember those things.”

“Granted, when you are buying a house it’s a scary thing. There’s all kinds of big words and it’s a lot of money, but the CPI was the lynchpin of the whole program. … They should have known,” Prendergast said.

“Granted, when you are buying a house it’s a scary thing. There’s all kinds of big words and it’s a lot of money, but the CPI was the lynchpin of the whole program. … They should have known.”

— Marlene Prendergast, Housing Corporation executive director

After years of finessing, policy changes finally bubbled up to the City Council in late March. The council approved some procedural revisions, but additional debates, cutting to the core mission of the program, were deferred until later this year. That’s when the city will begin working on the housing component of the Comprehensive Plan, its governing document.

The council already extended the term of deed restrictions from 59 to 89 years, a change the program managers hope will ensure the residences remain affordable indefinitely. It also plans to require increased education, having future owners sign a “plain language” deed.

And, the city plans to create a low-interest loan program to finance BMR-maintenance projects so owners can keep their units in tip-top shape.

The council also approved a $2,000 per year maintenance bonus, which will boost the home values of current owners earning only about 1 percent a year. When an owner decides to sell, if the residence is in good condition, he or she will receive $2,000 for each year since his or her purchase, Emslie explained.

But if a unit isn’t well-maintained, the owner doesn’t get the bonus. Several BMR owners said they are still not satisfied. One woman, who asked to remain anonymous, said the bonus did not account for the homeowners’ fees and amount of money she had put into her unit. Another owner said it would take more than the bonus’ value to refurbish her unit, which had shoddy materials to begin with.

But the BMR program may be in for an even larger shake-up.

Councilman Jack Morton said he doesn’t want to keep calling it an “ownership” program.

“I think because we use the term ownership there’s a real misunderstanding,” Morton has said. “BMR is in a way a contract that has restricted home ownership. You get assistance from a housing fund to go into a unit you couldn’t afford.”

“(The residents) thought a housing contract was an investment contract,” he said.

And Councilman Greg Schmid has said the city might be able to house more people if it moved away from the ownership model. Owners have the advantages of a usually fixed mortgage, rather than paying increasing rents indefinitely and they receive a significant tax credit for ownership, he said.

“I think it is worth looking at the question whether this economic benefit would be greater for a larger number of people if the city monetized the value of that ownership and turned it into a rental program,” Schmid said.

Councilwoman Yoriko Kishimoto said she had also considered the merits of an all-rental program.

“If you do go to the rental model, it’s much clearer who has the responsibility for maintaining and upgrading, which seems like a huge issue,” she said.

Yet that would require the city to purchase and manage the units, Morton said. Although all the residences are technically in the city’s program, ideally the city shouldn’t have to pay anything for them.

To address the inadequate appreciation, the council voted recently to ask staff to consider an entirely different formula. Rather than basing sale price on CPI, the prices could be pegged to Area Median Income, or AMI, which is currently used to establish eligibility for the program.

“CPI is only tangentially related to affordability,” Schmid said.

Emslie has said he favors CPI because it is less variable than AMI. The council will probably discuss that issue before June, he said.

Changing the home-price calculation formula wouldn’t affect current owners, who must stick with the language in their deed, according to the city’s attorneys.

Even without a comprehensive change, city planners are recommending the program shift toward encouraging rental residences, rather than ownership, perhaps even grouped together on land acquired from developers.

Developers don’t usually build many rental units because they can earn more by selling condos or houses, Siegel said.

Despite efforts to remedy the program, inequities remain. The few remaining owners who purchased between 1974 and 1983 continue to earn about 3 percent per year, compared to the 1 percent for post-1983 owners. One Greenhouse BMR owner paid $38,000 in 1975 for a condo now worth $146,800. But Jean Nolan’s comparable condo, which she bought in 1993 for $114,300, is now only valued at $132,300.

And future owners, some of the 500 families currently on the Housing Corporation’s wait list, could have their home values pegged to a completely different, income-based, index.

Talk of switching to a rental program even scares Wright, who fears the city might try to take her home.

And Morton’s assertion that “ownership” is the wrong word for the BMR residents’ situation infuriates them.

“We were told when we bought our home it was ours,” Wright said.

Prendergast understands the attraction of ownership. “In this country, there’s this little thing called the dream of owning your own home. It’s a very strong feeling that’s kind of amazing.

“You have your own castle.”

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