A real estate developer who received $18 million in tax-exempt bonds from the City (in exchange for renting 20% of its units at affordable levels) is now – 24 years later – trying to double their rents. This move would effectively drive out the building’s low-income tenants, and breaches the contract the developer made with the City back in 1988. City Attorney Dennis Herrera filed a lawsuit on May 4th, and plans to get a court injunction later this week. The Geary Courtyard Apartments (at 639 Geary Street) were built after 1979, so as “new construction” under state law are exempt from rent control. But because the City helped underwrite its construction costs, 33 of the units were subsidized for 24 years. Now that the bond is paid off, Equity Residential (a Chicago-based firm) says they can jack up rents – although the terms of the contract clearly prohibit it. The implications of this case are deeply troubling about the future of affordable housing in San Francisco.
In 1988, during the Agnos Administration, the Mayor’s Office of Housing loaned $18 million in tax-exempt bonds to Geary Courtyard Associates – which helped finance the construction of 639 Geary Street. Located on Geary between Leavenworth & Jones Street in the Uptown Tenderloin, the 164-unit complex looks like a modern hotel – and has studios renting
at over $1,800 per month. But the catch has always been that 20% of the building (33 units) are for low-income renters at affordable rates.
If the complex was built under San Francisco’s Inclusionary Housing Ordinance (which didn’t pass until 2002), a certain percentage of the building would be permanently affordable as “below-market rate” units – with no subsidy from the City. But because Geary Courtyard was built before such a law mandated affordable units, the City literally paid the developer $18 million to make 20% of its units affordable. Over the next 24 years, the developer would pay back the bond – just like a developer would have to pay back any lender who finances construction costs – the major difference being, of course, was the bonds here were tax-exempt.
In April 2012, the developer paid off the bond – and now claims they are no longer obligated to rent out the 33 units at affordable rents. Equity Residential, the current property manager, gave these tenants (who are paying $889/month for a studio) a rent increase notice with two options: (a) sign a one-year lease, and pay $1,022 per month, or (b) take a month-to-month agreement and pay $1,125. After the twelve-month period expires, the landlord would raise it to “market-rate” – which would mean approximately $1,800 for the same unit, or more than doubling their rent.
The landlord claims the units were only temporarily affordable (for the life of the loan), and they could raise the rents to market-rate almost immediately. And that their gradual rent increase offer is a mere “concession” to help the tenants adjust.
But here’s why it’s illegal. Yes, the loan was paid back after 24 years – but Section 5(b) of the 1988 Agreement said the landlords would still have to rent to these 33 tenants at affordable rates until (a) they die, (b) they move out voluntarily or (c) the entire building gets condo-converted. Therefore, any tenant who was living in one of these 33 affordable units is still entitled to the same protection – until they move to greener pastures, or if the landlords want to condo-convert the whole building.
These are still very generous terms for the landlord, because they can wait out the last tenant (who will eventually move out) – and the building would then cease to have any affordable units. If this was a post-2002 project where the developer was required to set aside a number of below-market-rate units (with no financial help from the City), the next tenant would still be covered by affordability protections. In this case, however, only tenants in the 33 units who were there before the loan was paid off in April 2012 are entitled to the lower rent. Any future tenants will not be.
Of course, the stress and uncertainty of the current situation will likely drive a lot of these tenants to move out – which would thus remove the affordability protections.
City Attorney Dennis Herrera has sued the developer for breach of contract – and will go into Court next week to request an injunction. If the Court rules against the City, it would have deeply disturbing implications for affordable housing in the City.
Any housing complex built after 1979 is exempt from San Francisco’s Rent Control Ordinance (and state law bars the City from “grandfathering” new buildings after a number of years.) And while we have the 2002 Inclusionary Housing Ordinance, an awful court of appeal decision
in 2009 suggests that it can only apply to condominiums – and not new rental housing. Therefore, agreements like the one with Geary Court Apartments – where the City “pays” the developer for below-market rate units – is one of the only ways to build new affordable rental housing in the private sector.
If the Court refuses to honor the basic terms of the Geary Courtyard agreement that developers knowingly signed in 1988, it will make an already bad situation worse.