Did San Jose give a $26 million ‘bail out’ to a struggling affordable housing developer?

Since late last year, San Jose has authorized funneling more than $26 million to one of the city’s largest developers and managers of affordable housing in an effort to shore up its finances, even as local officials raised concern about the nonprofit’s “long-term sustainability,” city records show.

First Community Housing, which owns and operates about 16 properties in San Jose, is a crucial player in the city’s push to alleviate its deepening housing crisis. In total, the city has invested at least $87 million to help the nonprofit build more than 1,900 affordable apartments.

City officials, in documents presented to the City Council in December, described First Community Housing as having tried to essentially triple its construction pipeline in the face of rising development costs and a shortage of public subsidies, leaving it “financially over-extended and unable to meet all of its financial obligations” despite the inflow of public money.

At the recommendation of the city housing department, the council quietly agreed to lend the developer $13 million to prevent it from defaulting on a bank loan for a large homeless housing complex beset by water damage, fires and safety concerns.

Councilmembers later signed off on spending another $13.5 million to buy one of First Community’s properties after the nonprofit failed to secure enough funding to develop the site into a much-anticipated downtown tower to house hundreds of low-income and formerly homeless residents.

Across the Bay Area, developers are struggling to finance new affordable and market-rate housing projects in a time of widespread economic uncertainty. But the recent taxpayer-funded lifelines extended to First Community Housing — whose executive director left the organization last month — have raised eyebrows among some in San Jose’s real estate community.

“I hope the City of San Jose is transparent on this perceived bailout,” said local land-use consultant Bob Staedler in an email.

Staedler added he’s “very sad” to see First Community’s setbacks after working with the nonprofit to develop multiple projects years ago when he was a real estate manager at San Jose’s now-defunct redevelopment agency.

In a statement, the San Jose Housing Department said using city funds to help a struggling nonprofit developer is not unprecedented.

“When gaps exist in financing, we often step in, helping to ensure desperately needed housing is available to our most vulnerable residents,” the department said.

Richard Conniff, chair of First Community’s board of directors, said in an email the impacts of the pandemic, supply chain issues, rising construction costs and higher interest rates forced the nonprofit to cease moving forward with several large planned projects in which it had made “significant” investments.

Going forward, First Community plans to scale back its development ambitions and focus on managing its current properties — and sell some of its fully occupied projects to ensure it can “continue to provide safe and stable affordable housing” for its roughly 3,000 low-income residents, Conniff said.

“Any sales will be conditioned on the real estate remaining affordable housing with a high level of resident services for low-income residents,” he said.

Conniff said the former executive director, Geoff Morgan, chose to leave the organization after eight years at the end of June as it became clear First Community was shifting its focus away from development, with Morgan opting to “pursue affordable housing development elsewhere.”

The $26 million handed over to First Community represents a significant chunk of the city’s total affordable housing spending. Over the next year, San Jose Mayor Matt Mahan had proposed dedicating about $50 million in the city’s recent budget for affordable housing. The city also has tens of millions of dollars in other available housing funds.

On Dec. 13, the council unanimously agreed to lend First Community the first half of the $26 million to pay off a bank loan taken out to help build Second Street Studios, the city’s highly touted first permanent homeless housing project with more than 130 units at 1144 South Second St. The developer was at risk of falling behind on its monthly loan payments as operational costs at the site soared, according to city documents. The wood-framed “modular” complex was at one point hemorrhaging around $30,000 a month, in large part due to repairs for flood and fire damage and the need to bolster security after tenants raised safety concerns, according to the documents.

Then on April 25, the council approved spending the other $13.5 million to buy a First Community property that had until recently been slated for a 224-unit affordable housing complex. Rising costs and difficulties securing enough financing led the nonprofit to default on its nearly $30 million loan from a Google subsidiary, rendering the project infeasible, according to city records. The sale is expected to go through by the end of the year.

First Community also failed to meet its financial commitments for another project in Santa Cruz, the documents show.