A position reversal by Councilman Dion Bracco has effectively
allowed South County Housing to borrow $675,000 from the city to
save its signature downtown housing project.
A position reversal by Councilman Dion Bracco has effectively allowed South County Housing to borrow $675,000 from the city to save its signature downtown housing project.
After splitting over the issue three months ago, the council voted 4-2 Monday night to loan to the nonprofit and buy a 50 percent stake in four unsold townhouses in the first phase of South County Housing’s Cannery project near Forest and Lewis streets. Councilmen Bob Dillon and Craig Gartman voted against the proposal and Councilman Perry Woodward recused himself because he owns a home in the area.
South County President and CEO Dennis Lalor characterized the bailout necessary to keep the company solvent and keep the $100 million, 210-unit Cannery project alive. The money would give the nonprofit breathing room to collect state loans and build additional affordable units. The Cannery’s affordable units are in its partially built second phase and un-built third phase. Money from the sale of market-rate Forest Park units was suppose to finance the affordable sections, but when the housing market crashed, so did those plans.
When the council first voted, Bracco said he wouldn’t invest his own money in the market-rate homes and said the city should instead spend the money on first-time home buyers seeking loan assistance. Mayor Al Pinheiro and Council members Peter Arellano and Cat Tucker voted in favor of the bailout.
While the major details of the proposal remain the same, the company has since committed to paying 3 percent interest – 2 percent annually and 1 percent deferred until the end of the five-year loan term, according to city documents. The state also guaranteed South County $1.5 million in down payment assistance money for Cannery home buyers on top of a $1.5 million construction loan for construction of the Cannery’s second phase.
The city’s $675,000 loan will allow South County to take out another small loan to free it from the Union Bank lien that is currently on that second phase. South County will funnel some of its state money back to the city’s Housing Trust Fund – the same fund that the money is being borrowed from – to ensure first-time homebuyers still have access to cash.
“I can’t stress enough that this money cannot be used for anything else,” Bracco said. “Nobody in Gilroy who needs a house is going to go without.”
The city will be repaid when the four homes sell five years from now. To help encourage the council, Cannery resident Joe Laguna showed up Monday night, and Bracco pointed to the man as a chief influence of his reversal.
“That young man out there is the reason I brought this back,” Bracco said.
Officials started the Housing Trust Fund in 1999 with seed money from the sale of South County Housing units. Restricted deeds on affordable properties require sellers to give Gilroy first chance to buy the home and preserve its affordability or the city allows the market-rate sale and collects a 50 percent stake in the equity.
Under the terms of the loan, the nonprofit would manage and rent the four-bedroom, 1,590-square foot units at $338,023 each – down from $610,000 – through 2014 before selling and repaying the city. City projections show Gilroy would net about $157,000 from rental incomes, interest and the equity if the home values increase annually by 2 percent starting in 2010.
South County needs the loan – and the potential rental income – to help pay off $1.3 million of a $17 million loan from Union Bank that was due in December. That’s down from the $3.6 million South County owed in March, Lalor said. Since then, the company sold four townhomes and has another two into contract – which Gartman pointed to as evidence that the company does not need help.
The Housing Trust Fund
At least 33 first-time home buyers borrowed a total of $1 million in Housing Trust Fund loans this fiscal year. Only four buyers borrowed from the city last fiscal year, and the city has historically issued about $250,000 in loans a year. Because of low home prices, housing officials said qualified home buyers are taking advantage of cheaper inventory. While this means more loan repayments, the slow sale of affordable and market-rate homes means officials expect revenue from equity shares to shrink from about $550,000 to less than $160,000 this year.
Since 1999, city officials estimate that the fund – which began the fiscal year with a balance of $4.1 million, including a $3.1 million reserve – has received more than $4 million from the market-rate sale of 47 affordable units at various South County developments. Collecting interest on those millions throughout the years and distributing loans to first-time home buyers has augmented the fund.
