A city of Oakland deal with a private developer to turn eight apartment buildings into moderate-income housing has been delayed after tenant groups raised concerns about the impact it might have on existing residents and long-term affordability.

The buildings contain a total of 255 rent-controlled units, mostly near Lake Merritt and downtown, though only a portion would be part of the program initially.

According to the developer, Los Angeles-based Watt Companies, the deal would ensure that a significant number of units stay affordable for tenants who can’t pay market-rate prices but earn too much to qualify for most low-income apartments. Watt and city staff who’ve supported the deal say the program creates affordable housing for those middle-income people without placing a financial burden on the city or requiring the exorbitant expense of building new apartments.

But critics of the deal, including some tenants in the buildings and a local housing advocacy group, say the program would do little to increase affordability, instead removing existing renter protections and maintaining rent prices that are still untenable for many. The city would also lose out on property tax revenues.

Shola Olatoye, Oakland’s housing director, said the city hit pause on the proposal after listening to these concerns. In emails reviewed by The Oaklandside, she told staff that she’d propose the program again in early 2021, but this week she told The Oaklandside there are no immediate plans to reintroduce it to the council. 

“We needed to do more work, to be candid,” she said Monday. “I am working closely with my staff to take a step back from the current proposal [and ask], how does it protect long-term tenants? How does it interplay with rent control?” 

A complicated deal that hinges on a small city loan

Under Watt’s  program, which would be in effect for 55 years, units in the eight buildings would be reserved for renters who make up to 80% of the area median income (AMI). For a one-person household, 80% AMI is $73,100, and for a four-person household it’s $104,400. Rents would be capped at levels deemed affordable for that population by the federal government. For current tenants, participation in the program would be voluntary, but additional units would be ushered into the program as tenants move out and new renters arrive. 

In exchange for keeping rents at 80% AMI, Watt would be exempt from paying property taxes on the units.

In order to qualify for the tax exemption from the state, Watt is required to receive some public funding for the project. On Dec. 15, at the Oakland City Council’s last meeting of 2020, the council was set to approve a $5,000 loan to Watt. The nominal amount would have met the state’s minimum requirement for a public investment in affordable housing and enabled Watt to receive the tax exemption and launch the program this year.

“This project presents an opportunity to ensure long-term affordability at minimal cost to the City,” Oakland housing staff wrote in a report to the City Council at that meeting.

But just before the meeting was set to begin, the city pulled the proposal from the agenda.

Housing deal was in the works since March

Emails reviewed by The Oaklandside show that Watt first approached Mayor Libby Schaaf’s office in March 2020 to inform the city that the company was planning to purchase multiple apartment buildings. At the time, the buildings were owned by the Mosser Company, a major Oakland landlord.

“What is special about their operation is the emphasis on both preservation and private capital, without having to draw in any significant way from public funds,” a lobbyist for Watt told the city in the initial messages.

Max Levenstein, an executive with Watt, explained to city staff that his company intended to convert the buildings into affordable housing using private funds. Watt recently entered into a similar agreement with a Southern California government agency for a 600-unit complex, according to the city staff report.

Darin Ranelletti, who works on housing policy for the mayor, connected Watt’s lobbyist with the city’s housing department. Numerous emails over the next several months show that the city staffers were in close contact with Watt executives, examining possible funding structures and other aspects of the agreement.

Watt and co-owner Investco purchased the buildings in early fall.

Tenants first got a sense that something was changing in their buildings around November, when they received notices on their doors and via email from their new landlord announcing the affordable housing program and letting them know they could apply for it if they made under 80% AMI. The notices, from FPI, a property management company working for Watt, said the program would be optional but encouraged, and nobody would face consequences for not participating. All tenants were asked to submit income information, however.

Many of the tenants in several of the buildings had already started organizing last year while the buildings were still owned by Mosser. Calling themselves the People’s Tenants Union, they were concerned about what they considered unfair treatment of tenants during the pandemic. That history, as well as the frequent change of ownership at some of the properties, made tenants wary of the requests from Watt’s property manager.

“From the very beginning I was skeptical about, what is this, why are they wanting this information from tenants?” said Marissa Seko, who lives in a Van Buren Avenue building in Adams Point that’s part of the proposal. Seko, who’s had three landlords in her eight years there, said tenants have experienced slow responses to repair requests since the ownership change. “Based on interactions I’ve had with them, I suspected this would be something more for them, a tax writeoff, than something for tenants,” she said.

The People’s Tenants Union is affiliated with the nonprofit renter advocacy group ACCE. ACCE’s legal director, Leah Simon-Weisberg, said tenant advocates only heard about the proposed deal with the city the night before the loan was set for a City Council vote on Dec. 15. The organization asked the city to take the item off the council agenda.

“Eighty percent AMI is not really an affordable rent—those are almost upper-class jobs now, in the Bay Area,” said Simon-Weisberg. “This is not creating new affordable units. We shouldn’t be doing this ever in a rent-controlled building because it increases the incentives for people to buy those properties and push people out.”  

All units subject to rent control in Oakland are also covered by the “just cause” ordinance, permitting evictions only in limited cases. Some other units are covered by the ordinance as well, however, and there is currently an emergency moratorium on nearly all evictions during the pandemic.

Would the apartments be more affordable under this program?

Current rents in the eight buildings are 42% below market-rate on average. If the new affordable-housing program is launched, the average cost would actually increase significantly, according to the city. 

But according to the developer and city staff, rents would eventually be likely to increase even more for many of these apartments without Watt’s program. When Mosser put these properties on the market, the company advertised to potential buyers that the buildings could bring “tremendous future income growth” through the “natural rollover” of the current low-priced units. That’s because California law allows landlords of rent-controlled buildings to raise an apartment’s rent to market-rate after a tenant moves out. Watt says its proposal would ensure that doesn’t happen, by capping the amount rent can be increased when a new tenant moves in to 80% AMI. 

For example, the current average rent at a Lester Avenue building that’s part of the deal is $1,511, according to the city. The 80% AMI rent would be $2,107. Market rate is $2,698.

“The rent-restricted units will be tied to income growth as opposed to inflation which drives market rents,” Tracy Craig, a spokesperson for Watt, told The Oaklandside. “In general, average incomes rise more slowly than market rents, so, over the long run, this approach will result in greater affordability. Simply put, rents will increase faster without this program.” 

However, in their report to City Council, and in interviews with The Oaklandside, neither Watt nor city staff has shown proof or projections that the average rents under the 80% AMI program would end up being more affordable in the long-run than maintaining rent-control with occasional market-rate increases. 

In emails to Watt, the city asked whether the program could end up increasing tenants’ rents. “There are many units with rents lower than the allowable 80% threshold and it would defeat the purpose of preserving these units as affordable if existing tenants were to get a flood of steep rent hikes,” Brain Warwick, housing development coordinator, told Watt in October.

Watt repeatedly assured the city and tenants that the program would be voluntary, and that nobody will be expected to give up their current, controlled rents if they’re lower.

Under Watt’s deal, the city would also lose property tax revenue because the units will qualify for the state’s “welfare exemption” that allows nonprofits and religious institutions to forgo paying property taxes. Nonprofits like the affordable housing developer EBALDC have used the welfare exemption to build and convert affordable housing in Oakland in the past. Watt is a for-profit company, but it’s teaming up with a Sacramento-based nonprofit, Pacific Housing, which will have an ownership stake in the properties, making Watt eligible for the exemption.

City staffers estimate the lost revenue going to the city’s general fund would amount to $616 annually per unit that ends up part of this deal. County records show that the most recent property tax bills for the eight buildings amounted to $1.06 million total, though some of that money goes to the county, school district, and elsewhere. 

Affordable housing as an “attractive investment”

Whether or not this project comes to fruition, the approach—exchanging a below-market-rate rent guarantee for a property tax exemption at an existing building—could gain traction in Oakland, where city officials and developers often feel stymied by the cost of building new affordable housing. Unlike a traditional model of affordability, where governments subsidize housing construction or preservation, Watt’s plan would have private investors—who view affordable housing as a potential profit-making venture—put up capital to acquire units and convert them into below-market-rate rentals.

Watt presented its strategy to the city at two meetings in August and December. The Oaklandside obtained notes from these presentations through a public records request with the city. According to the notes, Watt shared that it intended to “flip” the affordable housing model, marketing it as an “attractive investment.”

“Team is taking traditional investment model approach–how to generate reasonable return on investment,” the notes say. “Our pitch to investment community–unlock value from welfare exemption…It’s a low risk investment by nature of rents being below market–almost always have ppl paying on time, very attractive from investment standpoint.” 

In the emails reviewed by The Oaklandside, there is discussion among staff of formalizing a city program facilitating this approach to affordable housing.

Olatoye, the Oakland housing director, said Oakland hasn’t been able to meet its affordable housing goals through the standard models alone. The city has to try “a multitude of tools,” she said.

“In general, we take seriously any opportunity that looks, on its face, to provide affordable housing for the city of Oakland, given the extreme needs of our neighbors,” she said. “This potential proposal really represents an emerging trend in the industry, of developers that are looking to provide affordable housing at the 80% AMI level, without a ton of public investment. Certainly from the city’s perspective, anything that stretches our investment further and protects residents is something we need to seriously consider.”

But the Watt deal may ultimately miss the mark, she said: “We are still very much in this period of evaluation.”

Simon-Weisberg, the ACCE lawyer, was more decisive. “It’s not good policy,” she said. The welfare exemption is meant for “mission-driven non-profits,” not for-profit developers, she said. 

“To have someone make a profit by not having to pay taxes doesn’t make sense,” said Simon-Weisberg. “You’re taking the equity out of the building and out of the community for other people to make money. When we don’t have a tax base, we can’t pay for schools, or maintain clean water.”

She said tenants should have been included in the decision-making process, instead of receiving notices without many details. 

“The tenants union has been asking the landlord to meet with us for a long time. We have several folks on rent strike” during the pandemic, said Seko, one of the renters. “If they really cared about tenants being able to afford their rents, they should have been proactively offering to forgive rent that was owed.”

Craig, the spokesperson for Watt, said the company has worked with individual tenants to make accommodations during the pandemic. 

In emails, Oakland’s Warwick said legal consultation should be provided to Watt tenants so they know the scope of what they’re being offered through the new rent program.

Watt’s Levenstein agreed: “We are not intending to ‘trick’ tenants into opting into something they are not comfortable with.”