Cap-and-trade money replaces redevelopment funds for cash-short projects

By Anne C. Mulkern | 08/26/2015 08:20 AM EDT

Second of a two-part series. Click here for the first part.

National City in San Diego County was one of the last places in California to lock in redevelopment money to start an affordable housing project, just before the state abolished that revenue source.

The city of 60,000 people had enough to launch the first half of its planned development, using those dollars along with some state and federal cash. It could finance 109 units costing $41 million.


But National City lacked sufficient monies to build phase two, a desired additional 92 units. That meant turning away people on an eight-year waiting list for housing help.

Then earlier this year, National City found a new source of money: proceeds generated by California’s cap-and-trade program for reducing carbon emissions.

"It was pivotal," said Carlos Aguirre, National City’s community development program manager. "We were not going to do the second phase without it."

California’s cap-and-trade system requires some businesses to acquire and submit pollution permits covering their greenhouse gas emissions. Those allowances are sold at auctions, which have generated nearly $2.2 billion since late 2012.

The state now is allocating part of the proceeds to "sustainable housing," homes built near transit. Those developments must also offer units for lower-income residents. California so far has pledged nearly $122 million to 28 such projects.

In addition to helping fund homes located near buses, light rail and trolleys, the money is playing another role. It’s filling the gap left when redevelopment went away, several sources said.

"Any new funding source, there’s a lot of competition for it," Aguirre said. "Cities are salivating for funds because they’ve got a lot of projects in the pipeline, but they don’t have redevelopment funds to fill the gaps."

Governor eliminated redevelopment

Gov. Jerry Brown (D) and the Legislature last year agreed to dedicate 35 percent of cap-and-trade proceeds to sustainable communities and clean transportation on an ongoing basis.

The cap-and-trade money is important because developers typically can’t borrow enough to fully fund affordable housing, explained Aaron Laurel, economic development manager for West Sacramento. The projects earn tax credits, and selling those to investors brings in additional money. But often cities are asked to kick in help to get to the total, he said.

Redevelopment had provided about $4 million annually for West Sacramento.

"Without redevelopment now we don’t have those funds," Laurel said. "The cap-and-trade funding is hopefully going to be a nice backfill for that."

Taylor st. project
Artist’s concept of a proposed affordable housing project at Eddy and Taylor streets in downtown San Francisco. It will be partly funded with cap-and-trade money. | Photo by Annie Snider.

West Sacramento just garnered $6.7 million in cap-and-trade monies for a mixed-use residential and retail project with affordable housing. The city had originally planned to use redevelopment to help fund that endeavor, now dubbed West Gateway Place. The effort was delayed more than two years when the state blocked redevelopment, Laurel said.

Redevelopment before it was eliminated allowed city and county agencies to create special districts, then dedicate incremental growth in property taxes to improving those blighted neighborhoods. But after battles over how local taxes should be used, in 2011 state legislators banned redevelopment.

Brown signed that bill, and the California Supreme Court later upheld the move.

The dissolution of redevelopment agencies and the passage of the state’s climate law, A.B. 32, "were two separate and distinct policy decisions that were separated in time," said H.D. Palmer, deputy director for external affairs at California’s Department of Finance. A.B. 32 started events that led to cap and trade.

"While redevelopment (prior to its dissolution) had affordable housing as one of its broad components, the regulations governing cap & trade proceeds are much more narrow and limited to housing projects that can demonstrate reductions in greenhouse gas emissions — such as transit-oriented communities," Palmer said in an email.

Laurel, the development manager for West Sacramento, said it’s true that to obtain the cap-and-trade funds, cities and others must show how greenhouse gas emissions will be reduced. Under redevelopment, he said, there was more freedom, though his city had prioritized projects in urban areas near jobs and transit.

Mary Nichols, chairwoman of the state’s Air Resources Board, said numerous studies show that putting housing near transit and shopping gets people out of cars, reducing greenhouse gas emissions. Bill Magavern, policy director with the Coalition for Clean Air, agreed.

"We support housing that’s affordable for people of low and moderate incomes" being placed "near transit so people can have affordable places to live and get around without long commutes," Magavern said.

Money spreads throughout state

Legislation from the state Senate President Pro Tem Kevin de León (D) requires that one-fourth of cap-and-trade funds be spent in neighborhoods that are economically disadvantaged and subject to more pollution.

The state so far has given cap-and-trade money to sustainable housing projects in Long Beach, San Diego, a veterans village in Riverside, San Jose, Santa Ana, Emeryville, Hayward, Oakland, Los Angeles, Fresno and other locations.

Tenderloin Neighborhood Development Corp. in San Francisco captured $10 million for one project, a planned eight-story high-rise with 103 units for low-income households. Of those, 30 units are set aside for formerly homeless families.

The developer also received nearly $5 million for a second project. It will feature a five-story building and three-story townhomes. Twenty percent of the units will be reserved for formerly homeless families that earn 30 percent or less of the area median income. The project also has retail spaces and a pedestrian pathway.

Cap-and-trade money is "extremely important given the loss of redevelopment funding three-plus years ago, combined with the state’s virtual withdrawal until now in funding affordable housing for the last few years." said Don Falk, CEO of Tenderloin Neighborhood Development. "Cap and trade represents a really important re-entry into that part of the world."

National City won $9.2 million of the sustainable housing money. That made up the gap in funding needed for phase two of its project. That part will cost $38 million total.

The development will be located on 12 acres previously used as a public works yard. The city wanted to revitalize the area, spurring investments in other businesses "because of the spending power that the new residents have," Aguirre with that city said.

The homes will be adjacent to a park and less than a block to the trolley that runs to downtown San Diego, where people can connect to other rail lines. The trolley also runs to San Ysidro and the U.S.-Mexico border.

"It’s an all-in-one package really," Aguirre said.

Looks like tax money?

West Sacramento’s project receiving $6.7 million in cap-and-trade money will feature homes and upgrades to the surrounding area. About $2.6 million will fund 77 units of affordable housing, and $4.1 million will pay for streetscape improvements allowing better access for bicyclists and pedestrians and to access transit, Laurel said.

"It will help connect residents of the [housing] project to the surrounding community," he said.

Others consider the spending category inappropriate. Dorothy Rothrock, president of trade group California Manufacturers and Technology Association — whose members are obligated to participate in cap and trade — said that affordable housing is a category that traditionally has been funded with tax dollars. The state’s spending cap-and-trade proceeds there is problematic, she said.

"It makes it look less like a regular fee and more like a tax, which is illegal because they didn’t get a two-thirds vote," she said. California law requires a two-thirds vote for new taxes.

The California Chamber of Commerce sued the state’s Air Resources Board over cap and trade, partly on that tax issue. It lost at the Superior Court level but filed an appeal now pending.

Palmer with the state said that as a result of redevelopment agency dissolutions, cities have more local tax money to spread around.

"If affordable housing is the highest local priority for those new no-strings-attached funds that have flowed and continue to flow, then that’s a local decision — not the state’s," Palmer said.