Redevelopment:  Pathway to a California Housing Renaissance?

Timothy L. Coyle
Consultant specializing in housing issues

On these pages I have consistently advocated for limited government interference when it comes to building the housing California desperately needs.  After all, housing markets function best when left alone to the private sector and the proper signals are left free to be sent – to builders and to consumers.

Rewards go to the developer who has some sense of the housing potential in a given market and is willing to take a risk.  He or she enters a market prospecting for sites, hopefully, in the right location.  Find the right location and housing type to go on it and the developer can keep the remunerative proceeds, the theory goes.  That depends, of course, on getting the proper signals from a (limited) local government – the right signals produce the most housing.  Finally, the signals to consumers that the completed housing sends are supreme and, the result is that the risk-taking developer is compensated. 

That theory notwithstanding – and with a clear preference for its limited role, today I’m suggesting that government can – and should – help with the state’s current housing supply problem.  California needs to bring back redevelopment.

Now, Sacramento legislators have demonstrated over and over again they are incapable of passing laws which carefully and thoughtfully address a full-blown crisis like the one which is hamstringing California right now.  Indeed, the Legislature’s “housing package” this year contains such construction-chilling proposals as mandatory discounts on new housing and a repeal of the state’s longstanding rent-control safeguards.

(Incidentally, the advocates for inclusionary zoning – the “affordability” discounts being mandated by certain legislation – boast that their program is a success for producing about 1,100 affordable units per year, or little more than 2% of the annual need.)

But, if there ever was a housing success for California to point to, it was (or is) redevelopment.

The state’s redevelopment law was premised on two important expectations:  1) that non-performing real estate assets could be re-vamped so they’d begin appreciating, throwing off new property taxes; and 2) those new revenues could be used to finance local infrastructure – and, importantly, new housing.

Born in the aftermath of World War II, redevelopment became the state’s economic development tool.  Redevelopment essentially meant re-using and improving non-performing real estate in neighborhoods by adding or rehabilitating buildings, making more marketable properties.  Fans of redevelopment said:  “We can profit off California’s growing population and the scarcity of land – meanwhile, helping revive our cities along the way.”  Indeed, redevelopment became the premier economic development tool of the state.

Following its early success, the program was amended in 1976 to require that 20% of its tax-increment revenues – those spun off by redevelopment’s commercial advances – be set aside for the production of affordable housing.

That change produced hundreds of millions of dollars each year for lower and moderate-income housing.  As recently as 2010, the state’s 400 redevelopment agencies generated over $5 billion in new property tax revenue, a billion dollars of which went into funding affordable housing.

Since the change in law – until 2011 when it was ended by the Governor and the Legislature – redevelopment built hundreds of units in downtown Los Angeles.  It did the same for parts of San Francisco, right here in Sacramento, throughout San Diego and all over the rest of the state.  Redevelopment funding even became a means of developers to acquire drug-infested rental properties in the Inland Empire and turn them around to become widely habitable properties.

Redevelopment dollars leveraged other private and public dollars – some estimates were that $1 billion redevelopment dollars became $3 billion when all was said and done; redevelopment dollars were flexible – assisting renters and first-time homebuyers alike; and because the funding amassed for housing could be used anywhere within the reach of the redevelopment agency (usually an incorporated city or county) it meant housing everywhere.

California needs to start anew with an improved redevelopment:

  • First, treat each new tax increment dollar as not a new dollar for Proposition 98 but a new dollar for the state – and, importantly, one that can be used to offset the cost of building local community infrastructure.
  • Second, like the old program, set aside a portion of that new property-tax dollar for the construction of affordable housing.
  • Third, to promote expanding the scarce housing capital, reward project applicants who demonstrate the highest degree of public and private funding leverage.
  • Fourth, do away with all state and local affordable-housing mandates and replace them with a regular, private exaction on developers.
  • Finally, to avoid some of the bureaucracies and inefficiencies of the past – and to lower the cost of administration – create only a handful of regional development corporations to handle the affordable housing funds.

All the while, redevelopment will be supporting neighborhood, community revitalization.

To my knowledge, there are currently no discussions regarding a replacement for redevelopment – nothing at all.  But, there should be.  It will spur new housing development and won’t cost the state a nickel.

And, that’s a long-overdue thing.

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