Larkskpur apartment complex meant for middle-income housing sold after project fails

Across the Bay Area, cities and counties have begun focusing on creating housing for middle-income people, not just the poorest of the poor. But now there is a warning from one small North Bay city that wishes it had paid more attention to the details of the deal.

In 2019, a company called Catalyst Properties approached the city of Larkspur with an idea. They convinced the city to pair up with a newly formed organization called California Community Housing Authority, or CalCHA, to create tax-free bonds as a way to purchase existing apartment complexes, turning them into middle-income affordable housing.

"CalCHA, when it purchases a property within a member jurisdiction's boundaries, the project becomes tax exempt," said Larkspur's mayor, Stephanie Andre.

That means not only are bondholder profits tax-exempt, but the complexes themselves no longer have to pay property taxes. So, in 2020, Catalyst and CalCHA purchased Serenity at Larkspur, a huge complex near the ferry terminal, for more than $226 million. And Mayor Andre said all of that money came from the borrowed bond funds.

"They certainly took on more debt than they should have," she said. "I also think that, because this novel structure was new at the time, I don't think that the cities and counties that joined it really understood how this was going to work."

Almost immediately, the project ran into trouble. Andre said, with some rents exceeding $3,000 per month, Serenity struggled to attract tenants because the rental formula they used was sometimes higher than even market rates.  

"This property was only 50 to 60 percent leased to middle-income tenants," she said, "which fell short of the goals that were in the bond document."

After five years, CalCHA'a debt exceeded its revenues, and a few weeks ago, it sold the complex to a company called Pacific Multifamily Investors, at a loss of more than 50 million dollars. And the complex has since been renamed as "Finch at Larkspur."  In a written statement, CalCHA attributed some of the project's problems to the pandemic adding, "In working with bondholders, it became apparent that the best route forward for the bondholders was to sell the Serenity project. Ultimately, the bondholders agreed to the highest offer from a market rate apartment owner."

That's right, the new owner is a market-rate landlord, which means there are no restrictions on how much they can charge for rent or who they can rent to. Mayor Andre said the city learned the hard way that middle-income affordability projects do not have the same regulations as low-income projects. And in many cases, she said, cities have little say about the terms of the contracts or its enforcement.

"None of that was ever brought back to the city of Larkspur for review or approval prior to the transaction," she said.  "That should have been part of the initial discussions."

Larkspur has since ended its relationship with CalCHA. In this case, the city had no money invested in the project, but they did lose out on about $15 million in tax revenue over the last five years. The mayor said the good news is that the sale of the complex will mean they will resume paying property taxes again. But she said there are other Bay Area cities that have entered into the same agreement with CalCHA, and she advises them to pay close attention to the details of the deal and not be distracted by the word "affordable."