Debt drama pits California housing crisis against train to Las Vegas

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In California, the homelessness capital of the nation, affordable-housing developers have deluged the state with far more requests for tax-exempt bond money than the government can give, leaving some projects on hold.

But a private-equity firm's plan to build a passenger train to Las Vegas won’t have to wait.

On Jan. 15, state officials are set to give a Fortress Investment Group-backed company the ability to issue as much as $2.4 billion of such low-cost debt to subsidize the construction of a railroad shuttling southern Californians to the desert gambling hub. That has upset housing advocates, who say California should devote everything it has to alleviating a severe shortage of homes that has pushed up rents and led to sprawling homeless camps in major cities.

"We are in the greatest housing crisis of this state's history," said Matt Schwartz, president and chief executive officer of California Housing Partnership, a non-profit that pushes for the construction of affordable homes. "How can they possibly justify this?"

The conflict illustrates the competing priorities that states navigate as gatekeepers of a major corner of American finance, a consequence of the federal limits on how much they can borrow each year at tax-free rates on behalf of private businesses. That is forcing California to weigh the housing crunch against other long-term needs, such as boosting employment and supporting waste facilities to cope with the Chinese ban on most foreign garbage.

California officials say the Virgin Trains USA electric railroad will generate well-paying jobs in an impoverished edge of the Mojave Desert called Apple Valley, where the line will begin 90 miles northeast of Los Angeles. The company says it will spark housing construction nearby, as well as cut greenhouse gas emissions by taking drivers off the road.

"It's not just a train to Vegas, but it is an economic generator," said Treasurer Fiona Ma. "The High Desert is one of the poorest parts of the state. They have never seen any attention or assistance from government before."

State and local agencies routinely sell so-called private activity bonds for ventures that qualify for the subsidies. In 2018 alone, states issued $24 billion of them, according to the Council of Development Finance Agencies. Such debt issues are particularly important to affordable-housing developers who use them to secure tax credits that draw federal subsidies of about 50 cents for every dollar that's borrowed.

But only a certain amount of such debt can be granted in each state annually under population-based limits. Late last year, California's requests for the first time in 15 years started to outstrip what the state was authorized to give out, after lawmakers approved additional spending to jump-start home building. It has received about $9.7 billion of requests for the $4 billion it has been allocated this year; $8.4 billion of that from housing developers.

The California debt board has already given preliminary approval to granting some of last year's allotment to Virgin Trains' effort to make train travel in the U.S. hip and profitable. The line it currently runs in Florida was the first new privately financed inter-city passenger railroad in a century.

On Jan. 15, after reviewing an economic development plan required before final approval, debt officials are poised to award the company its full request for $600 million of California's allocation, which can be leveraged four times to $2.4 billion in bonds because of federal rules extending that special boost to railroads.

That gives the project "a lot of bang for the buck," said state controller Betty Yee, whose representative sits on the debt committee. "We wanted to take advantage of that because I don't know if we're ever going to see something like this again."

An economic analysis commissioned by the company predicts the project will employ thousands of construction workers and more than 600 people after completion, as well as remove carbon from the air by taking 2.8 million cars off the freeway annually after it starts running in late 2023. It envisions 1,800 housing units over a decade.

"Developing rail between Southern California and Las Vegas provides a tremendous public benefit beyond transportation by generating jobs, tax revenue and housing," Virgin Trains senior vice president Ben Porritt said in an emailed statement. "The environmental benefits are equally impressive."

But extending the financing to Virgin Trains means some housing developments will need to wait. Eight housing projects from San Diego to Healdsburg that asked for a total of $441 million of bonds didn't receive it in December. Cynthia Parker, president chief executive officer of non-profit developer Bridge Housing, said she is concerned that her affordable residence plans in Oakland and Los Angeles will be left out this year.

"The industry cannot respond to" the housing crisis without the bonds, Parker said. "You're going to have to stick to your guns if you set priorities."

No other state needs affordable housing more than California, which has four of the country's five most expensive residential markets. In San Francisco, the median home is worth about $1.4 million, according to Zillow. Nearly half of the residents in the Los Angeles area spend more than 30% of their income on housing, the biggest share in the nation, according to Harvard University's Joint Center for the Study of Housing.

Yet through the first 10 months of 2019, the state added about 90,000 new units of housing, half the amount needed annually. As a result, homelessness has soared. In 2019, about 151,000 Californians were homeless, a 16% jump from a year earlier that offset a decline elsewhere in the U.S., according to federal statistics.

"The need has never been greater, and the state's unprecedented housing crisis calls for an unprecedented response," said Ray Pearl, executive director of the California Housing Consortium, who vowed to continuing pressing "to ensure the state commits its resources to its highest, most urgent priorit

Bloomberg News
Affordable housing Affordable housing bonds California Homebuilders Housing market Multifamily
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