In hot real estate markets like San Francisco, even the most frivolous of neighborhood rankings can move mountains of money. Speculative developers hear rumors and begin snatching up buildings left and right. In some cases, they pay fully in cash. They purchase buildings with rent-controlled or rent-regulated units, expecting to kick out existing low- to moderate-income (LMI) tenants and replace them with higher-paying ones. In some cases, banks have provided commercial mortgages to developers to buy buildings in so-called hot neighborhoods on the expectation that they will similarly kick out existing LMI tenants. A California watchdog group ran a successful campaign in 2015 to get one bank to stop making what it labeled “displacement mortgages” in San Francisco.
In 2015, 344 Precita Avenue in Bernal Heights found itself in the crosshairs. An online real estate brokerage had already dubbed the area as America’s “hottest neighborhood” in 2014. Supporters of Precita Eyes Muralists, which has been on the ground floor of 344 Precita since its founding in 1977, organized protests to discourage prospective buyers; some held fundraisers to help neighborhood residents purchase the building. Ultimately, the community-based Mission Economic Development Agency (MEDA) was able to purchase the building, and save the community arts space and its affordable housing units above.
The “Small Sites” pilot program from the city of San Francisco that provided the loan MEDA used to acquire 344 Precita Avenue is about to get a new and hopefully permanent home, at the San Francisco Housing Accelerator Fund (SFHAF), a new nonprofit that’s combining public and private dollars to support citywide affordable housing preservation and development.
“We expect a lot of the initial loans we do to be Small Sites stabilization loans,” says Rebecca Foster, executive director at SFHAF. “The hope is that will make [community-based developers] a more competitive buyer for these sites. They’re competing in some cases with all-cash buyers. It’s a very competitive market especially in places like the Mission District.”
Since Small Sites launched in summer 2014, at least 13 buildings (with a total of 78 apartments) have been acquired through the program, and another dozen or so buildings are in the pipeline. MEDA has been the biggest borrower in the pilot program so far.
There are several requirements for a building to be eligible for acquisition through Small Sites. They must have between five and 25 apartments, have a significant number of longtime tenants, and be currently under rent-control (or were at some point). There must also be some indication that if they weren’t purchased by someone focused on maintaining affordability, tenants would be evicted or would have to move out because of rent increases that put the building outside affordable housing stock. Evictions may already be occurring under existing owners hoping to do the dirty work first and then demand higher prices from speculators. The average tenant’s income for a building needs to be under 80 percent of the area median income; for a three-person household, that’s under $73,350 a year.
Crucially, to be eligible for the program, there must also be clear evidence that tenants are already organizing or would be willing to organize against new owners who would evict them. Tenant buy-in makes a difference, Foster says, because even after a Small Sites acquisition, rents will likely have to go up for some tenants.
“The deal is, rent control gets removed from buildings, but permanent affordability restrictions get put on,” Foster explains. “It means, for some, rents will go up based on income but not beyond where it would be affordable.”
It’s about balancing affordability with financial sustainability. Even the new community-oriented owners need to pay for upkeep of the buildings while also making payments on short-term loans for acquisition, rehab and maintenance. Once acquisition and any rehab and maintenance are complete, and the building is settled in at its new, still-affordable rent levels, affordable housing developers typically refinance any debt with long-term loans at very cheap rates from the city.
San Francisco voters have authorized several municipal bonds, raising hundreds of millions of dollars for affordable housing over the past few years. But those bonds raised capital only for long-term loans. Affordable housing developers like MEDA still need short-term capital to acquire or develop new affordable housing projects before being able to access those loans. That’s where SFHAF comes in.
“The housing accelerator fund would bridge to those long-term dollars,” Foster explains. “The idea was to create a public-private fund that would be a one-stop for pulling in capital from any different source, philanthropic contributions, individuals, grants, gifts, investments, corporate. There was a general consensus that there wasn’t one place where anyone could put their money to address the affordable housing crisis in San Francisco in a citywide way.”
According to Foster, SFHAF was conceived collaboratively by affordable and market-rate developers, community groups, residents, mayoral staff in housing and neighborhood development agencies, and other partners. It’s a component of achieving Mayor Ed Lee’s goal of building 30,000 new units of housing in San Francisco by 2020, with half of them accessible to “low, working- and middle-class San Franciscans.” The working group spent around two years looking at some best practices around the country, assessing how those might or might not work in San Francisco, and came up with a structure that would make the most sense in their context.
SFHAF has $10 million from the city (a one-time-only infusion, Foster says), and $7 million in loans from foundations (at very far below-market rates, and $5 million of that’s from Dignity Health Foundation). “[The $7 million] is a pretty important part of our balance sheet that helps us lend at the lowest possible rates,” Foster adds. SFHAF is currently aiming to raise around $30 million in debt on top of all the above, with Citigroup as the lead investor. It’s helpful to have a big name lead investor on board, Foster says, as it helps other lenders feel more comfortable opening up their balance sheets. (Citi Community Development also provided $500,000 to cover the cost of operations while the fund is still in its early days, raising capital and not yet making loans.) SFHAF is in conversation with several local and regional banks, among others, to come in as investors at this level.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.