The trouble with Turing: Milpitas’ new middle-income housing deal

“Strange things are afoot at the Circle-K.” 

This is a quote from the classic film Bill & Ted’s Excellent Adventure, when Ted “Theodore” Logan, played by Keanu Reeves, and William “Bill” S. Preston Esq., played by Alex Winter, see a phone booth time machine suddenly appear in the parking lot. Only in the case of the present story, it’s not the Circle K, but the Turing Apartments in Milpitas where odd things are happening. And it’s not a time machine that has appeared, but a general sense of dazed confusion.

You wouldn’t know anything was amiss by driving by these 371 luxury units, located at 1355 McCandless Drive, just a stone’s throw away from the Great Mall. By all outward appearances, this modern structure would seem to be just another new block of high-end housing, complete with a rooftop pool, fitness center, ping pong room, and pet spa. Rents range from approximately $2,200 per month for a studio up to $5,300 per month for a three-bedroom apartment. The current occupancy rate is around 96%. As stated on the website, “Each floor plan brings you unparalleled luxury without sacrificing on comfort.”

The five-story Turing Apartment building, owned by Lyon Living, is part of a new mixed-use community called “The Fields” (only two of the four planned apartment buildings are complete – Turing and Graham). The development will also feature a 200-room hotel and 123,000 square feet of ground floor retail space, including a Trader Joe’s that is currently open for business.

Over the past year, onlookers have reported council members and others coming by to tour the property, talking excitedly. A deal was in the works. The City was planning on buying the Turing Apartments and reducing the rents, effectively converting market-rate housing into middle-income workforce housing.

Ted: “So we could live there?!”

Bill: “Uh, dude, I don’t think so. We don’t have any money.”

Ted: “Ohhhhh, right…”

Sorry Bill & Ted, but you wouldn’t qualify for the Turing Apartments. However, you would qualify for “no-income” housing since you make 0% of the Area Median Income (AMI). This is also called “living in your mom’s basement.”

Bill & Ted: “Excellent!!”

<cue guitar lick> 

The deal became official on March 1, approved by a 3-1 vote, with Councilmember Evelyn Chua voting no and Vice Mayor Carmen Montano abstaining. A celebration was in order, yet very few cheered the result. Many of the City staff who had been working behind the scenes were just too tired. Amid the quiet hush, a local resident was overheard whispering, “March 1 is really a sad day for Milpitas. It’s when the council failed to protect the city.”

Ted: “Woah! No way!”

Bill: “Bogus!”

What exactly is going on here? To answer that, we actually need that time machine…

<cue flashback music>

It all started last May, when Councilmember Anthony Phan brought before council an innovative new program developed to help address the statewide housing crisis. In particular, it is intended to help the nurses, teachers, librarians, firefighters, police, and other workers who make up the service sector – those people who need to be near city centers but are being priced out and leaving the state in droves as a result.

Such people benefit from what is called “workforce housing.” Its focus is on those making between 80% to 120% Area Median Income (AMI), which equates to approximately $76,750-$105,480 for an individual living in the Bay Area (as defined by the U.S. Department of Housing and Urban Development (HUD)).

In 2021, California State Treasurer Fiona Ma declared, “As housing costs in the state have rapidly increased, many California communities find they have market rate rental housing suitable for higher income residents and subsidized rental housing for lower-income residents. Left out are middle-income households that cannot afford the former and do not qualify for the latter. These households are known as the ‘missing middle.’”

It was this “missing middle” that Councilmember Phan was concerned about.

Ted: “Dude, that’s just like our songs…there’s always something missing in the middle.”

Bill: “Yah. Our bridgework is most heinous.”

Councilmember Phan suggested that the Milpitas City Council consider a Workforce Housing Bond Program, touted as an inexpensive and low-risk solution requiring no subsidies, outside equity, tax credits, or grants. A participating City assumes no debt liability, and it’s faster than new construction. Recently built, high-quality properties can be converted to workforce housing within a few weeks once a City approves it.

In their article entitled “California Scheming,” appearing December 2, 2021 in Forbes magazine, writers Matt Schifrin, Isabel Contreras, and Rachel Sandler exclaimed, “Welcome to the most exciting innovation to hit the municipal-bond business in decades…Since 2019, more than $6 billion in muni bonds have been issued to acquire more than 35 upscale apartment buildings at nosebleed prices.”

The idea is this: a bond-issuing agency issues tax exempt bonds related to a specific apartment property. In effect, investors are loaning them money so that they can purchase the property. Once it’s acquired, the agency does not have to pay property taxes, allowing them to reduce rents for existing and future residents (typically a discount of $200-$600 per month) plus future rent control not to exceed 4 percent. After 15 years, the City has the option to buy the property. After 34 years, the property will be turned over to the City as is. In essence, the bond-issuing agency holds the property in trust for the City.

The City enters into a Public Benefit Agreement with the bond-issuing agency, in this case, the California Statewide Communities Development Authority (CSCDA), effectively becoming a member. The CSCDA, which is a Joint Powers Authority (JPA), currently counts more than 530 California counties, cities, and special districts as members. 

To quote from Forbes, “Since many smaller cities and towns lack the expertise to issue their own bonds, some states have passed a law known as the Joint Exercise of Powers Act. This allows counties and cities to band together to create a governmental entity known as a Joint Powers Authority, which in practice outsources their bond-issuance powers to private financiers…JPAs are often shell companies that are run by a handful of financiers and lawyers…The CSCDA was created in 1988, and has raised more than $65 billion through 1,700 different bond issues to finance everything from charter schools to sewer plants.”

There are also other little-known government entities that act in much the same manner, such as the California Community Housing Agency (CalCHA), made up of “municipal bond wizards,” according to Forbes. “Essential housing bonds issued by quasi-governmental agencies like CalCHA aren’t limited by state municipal volume caps and cleverly sidestep the bureaucratic red tape required for tax credit–based financing.”

The modus operandi of these Workforce Housing Bond Programs is for the bond-issuing agency to work in tandem with a project administrator. For the Turing Apartments, it is Newport Beach-based Waterford Properties, with 15 Southern California housing communities totaling over 4,000 apartment units currently under their care. Also on the project team is Goldman Sachs, acting as underwriter, and Greystar, as property manager – a global company with over 115,000 units under management in California alone.

Under the terms of the deal, 40% of the units will be available for 60%-80% AMI residents, 20% of the units for 81%-100% AMI residents, and 40% of the units for 101%-120% AMI residents. The project anticipates needing about 3 years to achieve this affordability mix, contingent on tenant turnover. No tenants would be forced to leave.

And voila, there you have it! Instant moderate income housing!

Ted: “Nice…”

Bill: “Yah…totally cool!”

Bill & Ted: “Way to go Milpitas!”

Hold on, fellas. Not so fast! Throughout the aforementioned yearlong proceedings, as staff analyzed the data and consultants were called in, several sticking points began to emerge:

1. The City of Milpitas would lose approximately $380,000/year in property taxes. Another $1 million a year would also be foregone by other taxing entities, including the county and community colleges.
2. After all is said and done, the proposed rents at the Turing Apartments, even after the reductions, will be higher than similar market rate apartments in Milpitas. (“It’s like getting a slight discount on a Ferrari and calling it affordable.” –Forbes)
3. While the City is not a party to the bond agreement, if something goes wrong, the City could still be named in a lawsuit.
4. The way the bonds are structured, less than 10% of the principal is paid down halfway into the life of the bond. These are known as turbo bonds.

To protect the City from any of these risks, City staff began to propose new language for the agreement. Ashwini Kantak, Assistant City Manager, was the project lead. Said Kantak, “There were certain assurances that we wanted included in the agreement that didn’t get it. For instance, there is nothing that really binds Waterford Properties to keeping the 40-20-40 affordability mix. Also, they are not required to pay down any principal on the bonds, which are not rated. They could go 30 years and just pay off the interest, which would leave the City with a big chunk of principal left to pay.”

Another important point is the fact that the CSCDA program uses higher income limits when defining qualified applicants. Most affordable housing programs in the state base their AMI on the California Department of Housing and Community Development (HCD) numbers. The CSCDA utilizes income limits as defined by the California Tax Credit Allocation Committee (TCAC), which can be $400 to $500 more.

It had become clear that this deal came with a high price. The Turing Apartments would be purchased and managed by the CSCDA/Waterford Properties Team, so the City would have no financial obligations or liabilities. However, the City would also have no oversight or enforcement power over the project. That’s a big ask for a City with a AAA credit rating (the highest degree of creditworthiness). Says Kantak, “This is all pretty speculative.”

A big part of the challenge for the City has been trying to decipher the legal and financial language of the bonds themselves, which only Waterford Properties founder Sean Rawson seems to understand. When doubt was voiced during one Council meeting, Rawson simply stated, “It’s a well-accepted program.”

Because this Workforce Housing Bond Program is so new, there are no proven successes or failures to learn from. Staff looked at similar proposals in other cities, some of which decided not to move forward because they felt that the modest discount on rents would never make up for the lost property tax revenue. Others have admitted that they felt pressured into accepting the deal and now regret it. 

For another example, we turn to Forbes: “In February 2021, the CSCDA, on behalf of the city of Anaheim, purchased a 386-unit apartment complex, Parallel, with amenities including a spa, a pet washing station and a basketball court. The seller, an NYSE-listed REIT called UDR, built the facility in 2018 and sold it to CSCDA, 95% occupied, for $156 million, booking a tidy $51 million gain. Goldman Sachs underwrote $181 million worth of muni bonds for the deal, tacking on an additional $25 million in debt.”

One thing is certain in the Turing Apartment deal: the project team and the seller all stand to make beaucoup bucks.

Bill: “Hey, that’s French! A most excellent language!”

Ted: “Oui, oui…c’est très fantastique!

Bill: “Mercy.”

Their profits come primarily through upfront fees. CSCDA will make $3 million, Waterford will be awarded a $2 million “project administration” fee, Goldman Sachs will make $5.2 million, and Greystar will be earning approximately $150,000 a year. In addition, Waterford will be granted a $5 million deferred development fee. Lyon Living will make approximately $232 million for the sale, based on a very generous appraisal. And of course there are the investors, earning interest off of the bonds at a rate of 5%-6%. This is extremely high for a municipal bond, which is usually set at around 2%.

You might think that this one deal would be enough, but Milpitas is merely the latest stop on their quest for gold. Per Forbes again, “So far, CSCDA, with help from developer Waterford Property of Newport Beach and others, has completed 19 deals backed by nearly $3 billion in bonds. According to our analysis of bond documents, CSCDA will make at least $135 million in ongoing fees if its 19 bond deals are outstanding to maturity. Waterford, which has been the sponsor of at least eight muni deals with CSCDA, has collected an estimated $18 million and could make more than $260 million over the life of the bonds.”

Ted: “That’s a lot of dough, and I’m not talking about pizza.”

Bill: “Did somebody say pizza?!”

Of course, making money is not a crime. But somehow it doesn’t seem right – using the housing crisis as a way to take advantage of desperate cities. The Milpitas City Council and City Staff have spent the past year poring over documents and analyzing data in an attempt to understand how exactly this Workforce Housing Bond Program works. At meeting after meeting, the project team presented, consultants conferred, items were discussed, and public feedback was heard, and yet still questions remain. Is this program really helping to create more moderate income housing? Perhaps. But at the expense of a community that is losing out on services paid for by public tax dollars. 

Meanwhile, wasn’t the whole point of all of this to provide “affordable” housing for those making roughly $80,000-$100,000? Instead, as stated, the rent reductions at the Turing Apartments will be minimal, and at the mercy of property manager Greystar, whose past record indicates a trend toward setting rents at sky high rates, often higher than what the market dictates. The project will not even qualify for the City’s required affordable housing goals, known as the Regional Housing Needs Allocation (RHNA). The passage of AB 787 does allow middle-income conversions to be counted for up to 25% of moderate-income housing quotas, so some units at the Turing Apartments may qualify for that.

<cue flash forward music>

As we return to the present day, hopefully you have gained a better understanding of what has transpired with the Turing Apartments, and the significance of the March 1 Milpitas City Council vote.

Ted: “Have we dude?”

Bill: “We have indeed, Ted. We have indeed.”

Ted: “Excellent!”

For City employees like Kantak, there are some positive lessons to be learned. They now have a framework for evaluating similar projects in the future, and other Cities are looking at the way Milpitas handled its negotiations as a useful model. In the end, the City managed to actually wrestle some compensation back from CSCDA/Waterford to offset the loss in property tax.

For Councilmember Chua, the lone voice of dissent, the whole experience has been very frustrating. “I just wanted to protect the city,” she says.

On that note, we must bid adieu. Take us out, guys.

Ted: “Fool me once…” 

Bill: “Shame on you.”

Ted: “Fool me twice…”

Bill: “Shame on me, dude.”

Ted: “Oh, and remember to be excellent to each other!”

Bill & Ted: “And party on, dudes!”

<cue end credits>