Larkspur rethinks housing authority after bond default

A default on municipal bonds used to purchase an apartment building in Larkspur has caused the city to take a second look at its participation in the California Community Housing Authority.

The city joined the fledgling authority, which issued the bonds, in 2019 to foster the creation of more middle-income housing. But the default might result in income level limits being raised at Serenity at Larkspur, a 342-apartment complex at 700 Lincoln Village Center, making them less affordable.

That would be a bitter pill because Larkspur and other governmental entities, including the county and special taxing districts, initially sacrificed more than $2 million a year in property taxes when Serenity at Larkspur was purchased by the California Community Housing Authority, or CalCHA, in 2020.

Larkspur resident Dennis Gilardi said he was serving on the board of the Ross Valley Paramedic Authority when Serenity was purchased.

“The RVPA had to refund half a year of taxes, tens of thousands of dollars, to Serenity because they became tax exempt when the sale went through,” Gilardi said. “I said, this doesn’t smell right to me as a taxpayer.”

Critics of the CalCHA model have asserted that the discount that tenants receive on their rents is too modest to justify the loss of property taxes to local governments.

More recently, a reappraisal of property tax law by the California State Board of Equalization has led Marin County’s tax assessor, Shelly Scott, to reassign taxable value to the Serenity property. In March, Catalyst Housing, which is managing the property, was sent a $9 million bill for property taxes dating back to 2019.

Sandra Kacharos, a county finance official, said that Catalyst has not paid the bill and now owes an additional 10% penalty because it missed an Aug. 31 deadline. Kacharos said that if Catalyst fails to pay the bill by Nov. 1, it will incur an additional 1.5% per month penalty.

The authority’s problems aren’t limited to Marin. A notice of default was recently filed for Mira Vista Hills, a 280-residence property in Antioch purchased by CalCHA in 2021 for $68 million. In addition, two other authority properties — the 390-apartment Annabel complex in Santa Rosa and the 240-home Twin Creeks Apartments in Antioch have reported unscheduled draws on reserves recently.

In May, Larkspur City Council members Stephanie Andre and Scot Candell were appointed to an ad hoc committee to review the city’s membership in CalCHA.

“At recent council meetings, members of the council and the community have asked questions about the efficacy of the moderate income program at Serenity, particularly in light of reports that the bond-financing model may be experiencing distress,” Larkspur City Manager Dan Schwarz wrote in a report to the council at the time.

Andre said the committee recently began writing its report and expects to bring it to the council in two to three weeks.

“The committee has some views on this,” Andre said, “but I’m not authorized to speak about them until we issue the report.”

CalCHA is a joint powers authority created in 2019 with the aim of issuing government purpose bonds to buy residential properties and convert them into income-restricted housing for middle-income tenants — households that earn too much to qualify for affordable housing and too little to afford market-rate apartments.

Marin County, Santa Rosa and Berkeley are among its other members. CalCHA is allowed to purchase property within its member jurisdictions with their permission.

CalCHA typically works with a nonprofit partner to acquire the properties and the nonprofit subsequently manages the facility. As of 2023, CalCHA had purchased 14 apartment properties involving issuance of about $2.5 billion in tax-exempt municipal bonds.

In at least nine of those deals, it partnered with the San Francisco-based Catalyst Housing Group acquiring over $1.3 billion in high-end apartments. Catalyst’s founder, Jordan Moss, was instrumental in the formation of CalCHA.

Neither Moss nor CalCHA responded to requests for comment.

With Larkspur’s permission, CalCHA issued over $253 million in revenue bonds to purchase Serenity at Larkspur. As project administrator, Catalyst received an initial payment of over $2.2 million and there were another $4.8 million in issuance costs, including legal fees and an underwriter’s discount.

“The fees that went out of this when they floated these bonds were astronomical,” Gilardi said.

According to a regulatory agreement included in the offering, when apartments become vacant at Serenity they must be rented to households earning between 80% and 120% of the area median income for Marin County. That means a four-person household could earn between $149,300 and $223,900 a year.

Because of the default, however, Catalyst is considering increasing the maximum renters can earn to 150%, which would mean that a family of four could earn up to $279,900 per year.

The change was recommended by Century Urban, a real estate investment advisory company, which Catalyst was required to consult with because of the default.

At Century Urban’s recommendation, Catalyst is also considering working with bondholders to refinance the project by issuing a new series of bonds.

The reason Serenity is in default is that the revenue generated by rents is insufficient to cover the payments to bondholders.

In its evaluation, Century Urban wrote, “The property experienced a decrease in gross revenue due to releasing of existing market rate units to lower middle income rent tiers post-acquisition. The property’s revenue was further reduced due to an increase in bad debt charges and tenant rent defaults as a result of tenant COVID-19 financial hardship.”

The Century Urban report was written before Marin County sent Catalyst the $9 million bill for back taxes, and the bill was not mentioned in its report.

In a letter to Schwarz in March, Scott Carper, a CalCHA program administrator, wrote, “Serenity has absorbed nearly $2.9 million of uncollected rental payments and excess vacancies since the start of the COVID pandemic and the rollout of related tenant protections and eviction moratoria.”

“Assuming a sale of the asset upon the 2050 financing expiration, we estimate the city would receive approximately $180 million of net sales proceeds,” Carper wrote.

Gilardi maintains that the financial plan was flawed from the start.

“Even when they did the deal in 2019,” he said, “it was never was going to have the cash flow to make the debt payments.”