With the demise of redevelopment in California, some cities are looking for creative ways to stay solvent. One idea is to leverage New Market Tax Credits (NMTC) to buy properties and become landlords. This acquisition fund concept was recently adopted by Civic San Diego (CivicSD), a nonprofit corporation that is a consultant to the city of San Diego on the wind-down of redevelopment.
I am supportive of finding new ways to fund redevelopment that are proper and legal. However, absent clear community benefits standards, I am not sure if the public interest will be served by a property acquisition-income fund. There are several reasons to be wary of funding schemes guised as redevelopment.
First, about the money. Redevelopment funds came from property tax increments. These were public funds, and the rate of property tax could only be increased by a vote of the people. For the acquisition funds, the money comes from rents, and these rents can be increased as much as the market will support, without a public vote. I am concerned that at some point, the public interest in keeping rents low may be compromised by agency’s proprietary interest in making money.
Second, about the decision-makers. In redevelopment, all land transactions had to be approved by the legislative body, elected by the people. The nonprofits’ decisions were advisory. CivicSD is now proposing to take on the role of buying, selling and renting property, with the final decision by an un-elected Board on individual land deals.
Third, about the regulatory framework. Even with all its shortcomings, redevelopment was governed by state law, which created standards for property disposition, owner participation and affordable housing. Now, there is no redevelopment law. These funding schemes are only governed by the rules of Wall Street. Any public benefit is filtered through the return on investment for the parties in the transaction.
Questions posed by pseudo-redevelopment funding schemes:
1) Who will subsidize the deal?
CivicSD is proposing to use New Market Tax Credit (NMTC) to subsidize the deal. In the last two years, CivicSD has received an allocation of $58 million in NMTC funds. However, since the use of a nonprofits’ own NMTC would be self-serving, and violate US Treasury rules, some other Community Development Enterprise (CDE) will have to loan its own NMTC funds. CivicSD would then use its own NMTC allocation for other projects, and use the other CDE funds for its acquisition projects. At this time no other CDE has shown interest in this scheme, and I would hope that there is no quid pro quo about funding each other’s projects between the CDE and CivicSD.
2) Would taxpayers be at-risk for toxic investments by the fund?
The City of San Diego is sole member of CivicSD, which will own the fund, which will create subsidiary Single Purpose Entities for each deal. Now if anything goes wrong with the land deal, like a bankruptcy, or steep loss, then CivicSD needs to guarantee that the risk/liability does not flow back to the city. It is concerning that the city does not formally approve the fund’s transactions.
3) Can the governing board of a planning body exercise prudence as a Fund Manager?
The board of CivicSD is primarily a design review body for downtown planning permits, and has recently been thrust into the role of approving NMTC projects. However, as the governing body of both the Fund Sponsor and the Fund Manager, this board will have the fiduciary duty with respect to the performance of the fund. The qualifications necessary to exercise a standard of care in approving different investment vehicles may vary depending on the fund, to higher standards of expert prudence. A board that decides on the color of a building, will now need to decide on the color of money.
4) Is there an organizational conflict of interest in investing in and permitting the same project?
CivicSD is a unique nonprofit, in that the city of San Diego has delegated land-use authority to it. We have overlapping jurisdictions between the funding qualified area and planning authority. It is therefore conceivable that we may be permitting a project that we are also investing in.
5) What is the public benefit?
Besides the return on investment for CivicSD, there are no quantifiable, measurable outcomes with regard to any other public benefit. NMTC funds come with community benefits criteria, some of which may be attached to specific projects. Program-wide however, there is therefore no way that the public can hold a nonprofit corporation accountable for jobs, affordable housing, or other performance measures. Redevelopment standards on affordable housing, prevailing wages, bonding and removal of blight no longer exist.
6) What is the benefit for the nonprofit corporation?
CivicSD wants to receive $2.5 million annually for a $50 million fund. A sample transaction in the accompanying report shows that there are substantial returns for CivicSD. In the illustration for a $8.2 million transaction, only $1.1 million of rehab can actually be categorized as a community benefit, with $1.1 million in transaction costs, financed by $2.5 million in NMTC subsidies and the rest in bank loans. There is a small equity contribution by CivicSD which could come from the City of San Diego’s Community Development Block Grant. This sample deal could yield an estimated $2.5 million for CivicSD over 30 years that could be reinvested back to other projects in the form of CivicSD equity. That is how the pool of $50 million could grow multiple times. As it becomes a commercial landlord, one has to question whether the charitable mission of the organization that is tax-exempt under IRS 501(c)(3) is maintained.
I do not know if there are other municipal CDEs in California attempting these schemes. Before CivicSD rushes to implement the acquisition fund concept, I hope the board gets an independent third-party review from persons that do not directly benefit from the fund, regarding the issues raised here. Our low-income urban neighborhoods are thirsting for investment, and they deserve better than a Wall Street scheme with little accountability.
Murtaza H. Baxamusa, Ph.D., AICP is a certified planner, writer and thinker. He develops affordable housing for the San Diego Building Trades Family Housing Corporation, and teaches urban planning at the University of Southern California (USC). He has over 12 years’ experience in economic development and sustainable urban planning, and has previously worked for the USC Center for Economic Development as well as the Center on Policy Initiatives. He has doctoral and master’s degrees in Planning from USC, and a bachelor’s degree with honors from the Indian Institute of Technology, Kharagpur. He serves on several nonprofit boards, including Civic San Diego, the San Diego City-County Reinvestment Taskforce and the Middle Class Taxpayers Association. He received the Ruby Award for Outstanding Advocate from the San Diego Housing Federation in 2012, as well as the John Lyons Memorial Fellowship, an honor that was read into the Congressional Record of the 112th Congress. The City of San Diego proclaimed June 17, 2008 to be “Dr. Murtaza H. Baxamusa Day” in recognition of his contributions to the city. He is a home-owner in Bay Park, and lives with his wife and two daughters.
John Lawrence says
What is the definition of New Market Tax Credits? Who defines the mission of CivicSD? It sounds like they can wheel and deal with no input from the public.
Dorothy Lee says
John, put zip code 92101 into the search window of this link
Here’s the gov link to explain NMTCs
In my opinion, Civic San Diego is the downtown establishment both inside and outside of the administration and “it” does anything it wants. Its mission is to stay in power, control power, and to become more powerful.
Jim Bliesner says
Good questions. They should all be addressed by staff and/or the board before going forward. They will eventually come up and then it might be too late.
bob dorn says
The #4 question being asked in the story above is, basically… Will Civic San Diego encounter a conflict of interest if it approves plans for a project in which it has already invested money? Mr. Baxamusa, when you say, “It is therefore conceivable that we may be permitting a project that we are also investing in,” are you disclosing a conflict of interest? Because, if you are, you must recuse yourself for voting to approve any such project, and so will the other officers of Civic San Diego, so far as I understand conflict of interest law.