Call it a bailout, but South County Housing President and CEO
Dennis Lalor thinks $676,100 is a small price to save downtown’s
$100 million housing project.
GILROY
Call it a bailout, but South County Housing President and CEO Dennis Lalor thinks $676,100 is a small price to save downtown’s $100 million housing project.
City council members are split on the issue, but Lalor will likely tell them next month that the 30-year-old nonprofit affordable housing company could capsize unless it partners with the city to buy four of the eight unsold townhomes in the first phase of its Cannery project at Lewis and Forest streets.
With access to trusted lenders, lined-up buyers and below-market-rate prices, Lalor said he is confident the nonprofit can simultaneously sell the remaining four and then, along with the city’s money, repay Union Bank the $3.6 million its still owed on a $17 million loan that was due in December.
Settling up this debt would remove the lien Union Bank placed on the Cannery’s second phase last year to protect its loan on the first phase, known as Forest Park.
And removing that lien would tip the last critical domino for South County by allowing the nonprofit to receive a $1.5 million federal construction loan through the city to begin finishing the second phase, known as Alexander Place, which Union Bank has an additional $780,000 invested in, according to Lalor.
“Failure is not an option,” he said at South County’s Gilroy office last week. “Companies can evaporate and go away, but South County Housing can’t do that. And I think, relative to what the benefits are, this is a worthwhile risk.”
Not for Councilmembers Bob Dillon, Dion Bracco and Craig Gartman, who said during a study session last month they would not support a real estate investment at this time.
“I have to ask myself, ‘Would I invest my own money in this?’ And the answer is no,” Bracco said at the Jan. 12 study session.
Councilman Perry Woodward recused himself because he owns a Forest Park home, but Mayor Al Pinheiro and Councilmembers Cat Tucker and Peter Arellano sided with staff’s recommendation to purchase the townhomes, an issue the body will vote on at its March 2 meeting.
“I don’t think it’s a handout,” Pinheiro said Monday. “It’s probably not the most lucrative investment, but it pays for itself.”
Pinheiro also said it was not just an investment in South County – which held a disheartening auction last April to sell Forest Park and reduced its work force by about 20 percent over the last year – but in the downtown as a whole.
The nonprofit has already invested $35 million into its flagship development of 210 units, Lalor said, and city officials see it as a catalyst for development in an area that needs hundreds more residents before it starts humming.
“(The Cannery) is the cornerstone of our downtown revitalization plan, as it will help to establish a strong 24/7 population base that is essential to a vibrant and economically viable downtown,” Community Development Director Wendie Rooney wrote in an e-mail. “The completion of the project and sale of the residential units will help to stabilize the declining downtown real estate market and establish comparables for other, smaller downtown residential developments.”
If the city agrees to co-purchase the four-bedroom, 1,590-square-feet units at $338,023 each – down from an original asking price of $610,000 – then South County Housing would manage and rent them before re-selling in 2014 and repaying the city. City projections show Gilroy would net about $157,000 from rental incomes, interest and the equity earned on the homes if their values increase annually by 2 percent starting in 2010.
Estimates assume a zero percent change in value this year even though Gilroy’s average December 2008 sales price tumbled by 38 percent compared to December 2007, according to DataQuick, an online real estate resource that tracks numbers from the county recorder and assessor. Pointing to these most recent numbers, Dillon and Bracco rejected staff’s 2-percent projection.
“The city pays me to be a pessimist, and concerning the housing market, I can’t support this,” Dillon said.
Councilman Arellano, on the other hand, encouraged optimism and reminded his colleagues that the city could always hold onto the rental units until the market turned around.
“Everybody’s being pessimistic here,” Arellano said at the January meeting. “I’m going to be optimistic and say (the housing market) will bounce back in three years … Plus, this will help people, and this is what the money was meant for, for housing.”
Arellano referred to the city’s Housing Trust Fund, the potential source of the money.
The fund cannot pay for salaries and will drop from $4.1 million to $1.8 million by June if the city spends $676,100 – its share of the four townhouses. Developers such as South County pay into the fund when they sell properties, and individual home buyers continually borrow from and repay into the interest-earning account.
If the city kept its money, the Housing Trust Fund would have more for first-time home buyers – people Gartman said would be “left out in the cold” if Gilroy co-purchased the townhomes. Plus, the money would earn about $100,000 in interest as opposed to the hypothetical $157,000 staff expects the city to net with a 2-percent annual return, according to Haglund.
“People are skittish about decisions like this, and we don’t know the full scope of where the housing market will go from here,” Haglund said.
