Just in time for Christmas, the Newsom administration is preparing to dole out more than $500 million to build affordable housing, playing Santa to projects that promise to shelter low-wage school employees, veterans, farmworkers, people living on the street and other poor and middle-income Californians.

Like sleepless children on Christmas Eve, nonprofit developers across California are impatiently waiting to find out who will receive a cut. But everyone already knows that most will be left with empty stockings.

This is the second year the state’s housing department has bundled the applications for four of its low-cost loan or grant programs for affordable housing development into a “one-stop shop” application process culminating in a single nine-digit funding blast around the New Year.

Competition is even more fierce this year. In July, more than 100 developers backing 240 projects with a total of more than 20,000 proposed units applied to the Housing and Community Development department’s second annual Multifamily Finance Super Notice of Funding Availability — more commonly known by its cutesy shorthand, the “Super NOFA.”

The total amount requested by these near-ready projects: More than $3.5 billion. The state only has $576 million to award.

The funding mismatch is even more severe for the state’s premier loan program for affordable rental construction and rehabilitation and the biggest pot of cash up for grab in this funding cycle. For every dollar available from the Multifamily Housing Program more than eleven have been requested.

For nearly half a decade, the crux of the housing debate in California has centered on whether and how to remove barriers to the construction of new homes. This year state lawmakers churned out dozens of bills reining in “not in my backyard” activists, environmental litigants, local government regulations and other barriers to development in the face of a chronic housing shortage. Affordable housing development has been a particular beneficiary of that streamlining campaign.

Developers and housing advocates say the chasm between state funding available and the sums being requested point to a crucial fact about affordable housing: It’s expensive to build, it doesn’t pay for itself and that financial gap has to be plugged somehow. This fact is likely to shape the housing debate around California’s capitol in 2024.

“You cannot streamline your way out of this crisis,” said Ben Winters, vice president at Linc Housing in Long Beach. Linc applied for more than $75 million in low-cost loans for four projects, of which three are still under consideration, according to pre-qualification letters the housing department sent them.

“There’s a lot of opportunities out there for me to build affordable housing — a lot — because of all these new bills,” he said. “They’ll never get built if we don’t have the funding to back them.”

A calendar on the housing department’s website has the payout scheduled for December 2023 and January 2024. A department spokesperson said they did not have a more specific date.

‘Hoping to win the lottery’

If a developer wants to have any chance of winning the end-of-year funding bonanza, their project has to be pretty far along in the development. In most cases, according to housing developers with projects in the running who spoke to CalMatters, the land has already been secured, zoning issues have been ironed out and the building designs and much of the financing have been assembled. State funding is one of the final pieces of a lengthy and expensive puzzle.

“They’re just waiting to go, they just don’t have the resources,” said Mark Stivers, a lobbyist with the nonprofit California Housing Partnership, which advocates for affordable housing.

State low-cost loans and grants play an especially important role since securing some of that public support vastly improves a project’s chances of securing another: The Low Income Housing Tax Credit, the federal government’s workhorse affordable housing program.

Projects that don’t make the cut in this year’s funding round may be able to turn to other state or federal programs, but there aren’t many of those and all of them are also intensely competitive. In most cases, a project that misses out this round will have to be put on hold.

“You mothball it…you’re gonna wait until next year,” said Linda Mandolini, president of Eden Housing, an affordable housing development nonprofit that applied for $135 million to support ten projects.

That wait comes with a price tag — another year of payroll costs, of watching cost estimates tick up and of making interest payments on existing loans. It also gives other funders more time and more reason to reconsider their investment and pull out, delaying the project further.

“I like to say that my business model is that I hope to win the lottery. And I have to pay like a million and a half dollars for the ticket.”
— Rebecca Louie, president, Wakeland Housing and Development Corp

“We end up with maybe 9, 10 or 11 different sources of funding that we’ve patched together over the course of anywhere from three to nine years,” said Rebecca Louie, president of San Diego-based Wakeland Housing and Development Corp, which requested nearly $45 million for five projects, though only two are still in the running.

A project only pencils out if every one of those funding sources come together at the right time, Louie explained. That’s what makes the state funding so important, even if it doesn’t always make up a huge share of a single project’s funding.

“I like to say that my business model is that I hope to win the lottery,” said Louie. “And I have to pay like a million and a half dollars for the ticket.”

Delay also means waiting another year before an otherwise ready-to-go home for priced-out Californians can break ground.

More funding incoming?

The prospect of missing out on the state funding award is particularly concerning for affordable developers this year. California is facing a cash crunch, meaning housing programs won’t be able to rely as much on budget windfalls as they have in prior years. Though bond measures are likely headed for the ballot in November, the political prospects of voter-sanctioned borrowing are far from certain.

This will-they-won’t-they approach to funding is no way to tackle twin housing and homelessness crises that California survey respondents regularly name as a top priority, said Louie with Wakeland Housing. “It should be considered infrastructure and a really important part of a healthy economy and we treat it each year as if it’s a surprise that we still need it,” she said.

Since 2012, when state lawmakers and the courts nixed California’s “redevelopment” agencies, locally-funded entities tasked with funding infrastructure, public spending on affordable housing has come in fits and starts, one state bond measure or flush budget season at a time.

The last time the cause of affordable housing went before state voters was in 2018. Nearly half of the $4 billion in borrowing authorized by Proposition 1 went to the Multifamily Housing Program. That fund is now running low, which prompted state lawmakers last year to begin mulling a new bond for 2024.

That discussion was left on hold when the legislative session ended in September, but is sure to pick back up in January. Meanwhile, housing advocates in the San Francisco Bay Area and San Diego are planning to launch their own regional borrowing efforts, while a statewide measure is likely to make it easier to pass such campaigns.

The other side of the equation: Cost

Spending more public money on affordable housing is one way to produce more units. Another is to make it cheaper to build them in the first place. Lee Ohanian, a UCLA economics professor and right-of-center policy commentator, said the state isn’t focusing nearly enough on the second option.

“There’s only so many units, we can build at a million dollars a unit,” he said. “Just dumping more subsidies into a grossly inefficient system is just going to lead to more waste of tax dollars.”

Particularly budget-busting affordable housing projects often make headlines, but industry-wide cost data is hard to come by. That makes it difficult to diagnose where developers and policymakers should focus their cost-trimming efforts.

In 2020, the UC Berkeley’s Terner Center for Housing Innovation analyzed project applications to one of the state’s main subsidy programs. The key takeaway: Between 2008 and 2019, total costs increased 55% per square unit. The biggest cost drivers, labor and material costs, weren’t specific to affordable housing construction, but costs that affect the entire building industry.

Things have likely only gotten worse in the years since. The industry has been hammered with supply chain snarls and resulting material price hikes, soaring insurance premiums and, most recently, sharply higher interest rates.

Ohanian said more data gathering is needed, but the state can and should still focus on “​​low- hanging fruit regulatory reforms.” Those include continuing to make it harder for project opponents to use environmental laws and historic preservation designations to obstruct new construction.

Easier said than done, said Rob Wiener, executive director of the California Coalition for Rural Housing. The “bells and whistles” that add to the cost of building affordable housing in California — be it higher construction wages, enhanced energy efficiency requirements or fees to local governments — all benefit someone. Many of those beneficiaries have lobbyists on their payroll.

“There isn’t one interest group that wants to give up its share,” he said. “So who’s gonna take a haircut?”

Affordable developers can soon dispense with many of these regulatory concerns. Among the bills that state lawmakers passed this year and which are set to go into effect on Jan. 1 is one that would shield many urban projects set aside for lower-income housing from environmental challenge. Another would make it easier for courts to toss such legal challenges out of court. A third re-upped a prior state law that clears the way for all manner of new construction in parts of the state that haven’t kept up with their housing goals set by the Newsom administration’s housing department.

Those will all add to a broad trend that has made it easier for housing — especially affordable housing — to move forward across California in recent years.

“The good news is that we have been pushing all of the local jurisdictions to identify and move projects forward and that’s actually happening,” said Mandolini with Eden Housing. “Now we just have to figure out how to pay for them all.”

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CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.