How will legislative changes to avert California’s housing crisis impact city coffers?

Transcription:

Keeley Webster (00:03):
Hi, this is Keeley Webster. Today I have with me Larry Kosmont, President of Kosmont Financial Services. He founded the firm, a Minority Business Enterprise, 36 years ago. Larry, you recently rebranded your company to Kosmont Financial Services. Could you tell me about your thinking around that?

Larry Kosmont (00:21):
Yes, absolutely. And good afternoon to you, Keeley. The rebranding on Kosmont Financial Services simply focuses our name to what we do, which is a series of integrated services that involve real estate, economic development and finance. And the services around those are very broad based. They help public agencies and private sector developers engage in public private transactions, but they are typically financial and land use oriented. So the financial services name was to give us a broader context than just purely transactions because we are finding, as you will see in this conversation, that we have to be much more strategic about the implementation of projects in the context of land use, real estate, economic development, property surplus lands, and other related subject areas. So that’s the purpose of having a broader moniker, if you will.

Keeley Webster (01:20):
So you also worked as a city manager for several Los Angeles County cities Before launching your firm. Why did you make the decision to pivot to the private side? Any regrets?

Larry Kosmont (01:31):
No regrets. When I left city management 35 years ago, I was still relatively young. I really had an entrepreneurial streak in me and I enjoyed the public sector. I enjoyed being a very young city manager. I was a city manager at the age of 26 and in a very, very tough and challenged community, Bell Gardens. And what I learned in managing cities is that I really liked the entrepreneurial element of public and private transactions. So I was able to take the opportunity after running Burbank’s redevelopment agency and community development department to start my own company. No regrets. I like both sectors. And as it turns out, we advise over 100 public agencies, cities, counties, school districts, special districts. So I feel like I’ve never left the profession, I’m just able to service it in a much more holistic way.

Keeley Webster (02:28):
So there’s a lot going on this year in California. In the final days of the session, the governor signed a slew of legislation including 41 bills in a housing package. Has it been more difficult to track the changes in Sacramento post-COVID-19? So you can advise your clients.

Larry Kosmont (02:44):
We are at a very prescient time in the world of public private, of tax exempt financing. And it’s because we’re seeing a convergence of the pressures from a covid- transitioned economy, which is now facing recessionary impacts as well with higher interest rates converging with land use impositions that are driven by state policy, which has declared housing an urgency matter in California. So what I mean in English is that you have state policy on the right, you have covid impacts and a changing economy on the left. And in the middle you have a bunch of public agencies that are receiving literally dozens of new statutes every year having to deal with complying, executing on state mandates that directly conflict and also impact local land use control and local governmental operations. So that context of the stress between a changing economy and a barrage of state legislation, mostly geared to housing, but also geared to economic development tools with cities and counties and districts in the middle trying to figure out how to further their communities and stay ahead of their own challenges to provide local services and have a balanced budget. So it’s a very key time. And because of that, translating all of these in a productive, strategic way, it is clearly a challenge.

Keeley Webster (04:18):
There’s always kind of an interesting dynamic between Sacramento and local government. And Governor Newsom makes a point regularly in press conferences to point out that he was the mayor of San Francisco at one point, but he also sued Huntingdon Beach in order to enforce a program that they plan around affordable housing. So what’s your sense of the interplay between local and state government at this point? Do you feel like it’s still pretty friendly or do you think the cities feel like they’re being told what to do?

Larry Kosmont (05:03):
I think it’s like a dysfunctional family. Maybe it’s modern family, governance style, right? Because at one level we have this sort of joke at Kosmont that all of the public agency, local reps, city council members and mayors that start out in the local community and then go to Sacramento sometimes just lose any memory of the fact that they were a mayor or council member. And so we say that tongue in cheek, because what happens in reality is those individuals go up there and they are typically key leaders in their community, which is why they get elected. And then they realize that the state priorities and the dialogue behind that is much more complicated than just simply us versus them. And in that us versus them, there’s a loss in translation in the statutory frameworks that come out of Sacramento. We’ve seen it play out. I’ve been in this business 40 years and I see those disconnects.

(06:00)
Now on the other hand, you really have to give both the state and the governor their margin of support because they are facing a state competitive crunch because we’re losing a lot of our middle class and entry workers simply because there’s either no housing available or it’s not affordable. So you’ll hear the governor say, “Look, when 25% of Californians can afford to live here, that can’t be good for the state.” Well that’s right. But when you translate that notion and try and focus on housing and you try and fix the housing shortage solution by taking local statutes and imposing zoning solutions without local discretionary input, there’s a big breakdown there because the local communities feel, “No, wait a second, that’s our job. We’re in charge of our local communities, we’re beholden to our residents. We need to balance the issues of density and design and housing availability with basically the health and welfare of our local community.” Okay, let me just say one more thing though. When you look at that 10 or 15 or 20 year report card, whoever you’re grading, we are just not delivering these housing units. So the stress in the equation is we need more housing and it’s hard to get it done the way the rules are set up now. Now that’s not advocating for the loss of local control, it’s just articulating that this is a very tough dilemma for both sides of the government playbook. And that’s where we are seeing the stress right now.

Keeley Webster (07:48):
So now we’re gonna pause for a message from our sponsors.

And, we are back.

So state lawmakers have been pretty careful to not use one time money to create new programs. Do you think that is true for cities or are you seeing spending decisions that raise concerns?

Larry Kosmont (08:07):
Well, I think it’s a mixed bag. It, let’s put it this way, cities are under a lot of stress. They’ve lost a lot of productivity in their sales tax because retail in general is being recast and resized in the marketplace. Residential property tax for them, for local cities has been surprisingly productive because there’s been a huge escalation in value. The rate on property tax since Prop 13 is very controlled, but the margin of value has really escalated in this housing shortage environment. So cities have actually made up some of what they have not received in sales tax from the escalating valuations in property. However, they’re still beholden to a number of really important and pressing economic stress. One is the cost of pensions and pension fund support, and that has caused city budget a great amount of stress. The other is they have, the cities have land use policies that have relied on sales tax and sales taxes either flattening or eroding in front of their very eyes.

(09:18)
So the point is is that cities have been, I think, slower to recognize these trends in private investment, which then yield jobs and taxes than they need to in terms of making adjustments to their housing or land use policies. At the same time, the state and the feds have really showed up with a good amount of one time grant funds as a result of covid, the unique anomaly of covid. And so that’s kind of delayed a longer term perspective on spending because there’s been some early relief. I think the pain is really gonna come when this ARPA money and other covid resuscitation money, if you will, starts to dissipate. And that’s where cities and counties are gonna have to reconcile the fact that the private sector is no longer investing significantly in retail. It’s still making investments, but not in the same way, but is really focused on industrial and residential, which are uses that cities have not looked to as being accreted to their local economy. That’s gonna be the great divide in this next couple of years.

Keeley Webster (10:27):
So the legislation the governor signed last week, one of the bills actually would make it easier for cities to convert retail land that’s zoned for retail into residential. Do you think that will exacerbate the problem? Or do you think that cities might have to focus more on property taxes, which don’t rise as much as a result of Prop 13? How do you think that’s going to play out?

Larry Kosmont (10:57):
Well, it plays out very interesting. First of all, in this new world that we’re in, where goods can be bought from a digital phone or from any place that you currently are not necessarily in a store, in a physical premise, has changed the value of retail. In addition, the competition from the internet over the last 10 years, this is no new trend. This is really something we’ve seen happen over the last 10 to 15 years. That demand that gets satisfied from internet purchasing has changed the character of what makes retail successful today. It’s got to be service. It maybe has to be related to food, has to be related to entertainment, and it needs rooftops to support it. And so the interesting notion of where we are is that while the state has declared housing as an urgency matter, and so it’s in the process of laying out dozens of statutes that basically say, Look, you can’t discretionarily say no to housing projects that increase density and provide affordable housing in urban locations near transit.

(12:06)
But the interesting thing about that is the retail that we were once focused on locally needs those rooftops to help it thrive. We have less retail, more density, that’s a better formula than what we had before the post-covid, internet or digital world. So the irony of it is that, yeah, cities are having to deal with two things here. One is that housing is really not a loss leader anymore. It’s truly a growth driver, and retail itself is not as viable. We like to say that retail is not just retail anymore, it’s retail plus it’s retail plus services, it’s retail plus education, it’s retail plus entertainment, it’s retail plus food. And beyond that, the whole delivery system of goods, the consumer delivery system has emphasized the value of infield industrial, something that cities would run from years ago. So that equation says, Look, we have to reset our land use priorities. Doesn’t mean that we are going to be happy with density bonus statutes that impose or jam those densities down our local government throats. No, not happy about that. But there also has to be some recognition that the balance of housing, retail and industrial has forever changed in this new economy and was accelerated by two and a half or three years of a covid cycle.

Keeley Webster (13:38):
So do you think we’re gonna see a lot more distress going forward? And you mentioned that as ARPA starts to peel off that cities are gonna have to figure it out more. How far out, I mean, are we talking late next year or sooner than that?

Larry Kosmont (13:54):
Well, from a policy and economic development framework, the time is now, I mean the city officials and we are encouraging all of our clients. We have over a hundred public agencies and we’re saying, look at this lens. Now, understand that the whole backdrop has shifted, so let’s make some changes. Forget the pressure from the state for a minute. I mean, that’s coming and it’s coming quickly. Like Assembly Bill 2011 will start, it’ll become a new law in June or July of 2023. And that allows essentially ministerial approvals of the conversion of retail land or residential as long as it has the component of affordable. Whoa, that’s a whole different ballgame for cities. But to your point, this is the time to look at how to make those policies accretive to you locally. If you have a mall that is basically disenfranchised for whatever reason, it’s got some dark boxes or it has an enclosed mall that’s half empty, those parking lots, the resetting of those malls really becomes a value add to you; if one, you understand how to manage the policies of the state to your benefit.

(15:02)
Two, you figure out how to negotiate with the local owners of the pads in that shopping center. And three, you can communicate with your community to say, Look, life’s changing for us. We probably just can’t be a single family residential neighborhood with one big mall in the middle of it anymore. We probably have to figure out how to use our transit corridors, how to resize our park, how reuse our parking lots around retail, how to mix and blend uses a little bit more diverse in a more diverse way. So we capture the value of having more residential units and preserve the amount of retail and related services we want. So that’s the conversation that has to begin. Now.

Keeley Webster (15:48):
Is it happening though? That’s the question. I mean, is everybody jumping on this or do you think there’s some people who are just coasting on the ARPA money and they’re going to wait until things get bad to try to figure it out, or?

Larry Kosmont (16:00):
It’s a great question. I think it’s a little bit of both. This has been a wake up call with a snooze alarm that keeps getting hit. And what happens in local government. I’ve been involved in local government, as you know for a long time. We’re not early adopters in local government. One because we tend to be reactive to the larger motivating elements of an economy, private investment, job location, housing and so on. So we’re not typically early adopters, but we were getting a pervasive message now that things are changing it, there’s not a city official that doesn’t wake up in the morning and read an article about whether or not people are going back to work at the office or whether or not all the Sears are closing or whether or not retail is gonna survive in a new environment, is it gonna be something else? Those are the articles that they’re reading. Here’s the other articles that they’re starting to read. We’re starting to see applications locally of developers submitting non-discretionary applications pursuant to Senate Bill 35. Now we have AB2011 coming, and we’re seeing that these things are being fought out locally and that it’s hard to win these battles for the local government. So my point is…

Keeley Webster (17:21):
Larry, could you get in there and just explain what you said in terms of what that legislation is, and I mean, what kind of development are we talking about?

Larry Kosmont (17:30):
Yes. So basically the state is using a couple of different statutes, SB 35, now AB2011, coming forward in the next year, basically taking local zoning and saying that if you provide a certain amount of affordable housing, 10%, 15%, 20%, and by the way, there’s a whole schedule of how much and the type of affordable housing student versus senior versus very low. To the extent that you provide some component of that, you are eligible to receive a density bonus as related to the highest density in the community. And you can also receive an exception from certain policies that would otherwise prevent approval, like a parking exception or a setback exception or a height exception. So those components, SB 35 and laws like SB 35 are being pursued by developers selectively, I would say it’s not been an onslaught, but with the approval this year of both SB6 and AB2011, those are two additional essentially ministerial type processes that are being afforded projects that create jobs, use prevailing wage and labor components, and bring affordable housing to a community.

(18:57)
Those are additional non-discretionary projects that are being put onto the plate of local government, and they’re gonna have to accept those. My point is that the future is here. And so in order to work through the mandates of local government as it relates to residential density, that may not be preferred by every community, the idea is whether or not you can converge those policies with economic development strategies like special districts enhanced infrastructure financing district that can capture the value of this new private investment and give you the resources to invest in those uses and the infrastructure that you want for your community. It’s a trade off. I’ll take more housing that’s valuable. I’ll convert that value to a district. I’ll use the revenues from the district, from the tax increment to reinvest in the community and induce other private investment that I would rather have. That’s the trade off that is starting to happen. It’s early. It’s a new mindset for cities.

Keeley Webster (20:05):
So how long do you think it will take before everything the state and cities have done to solve the housing crisis really begin to have an impact?

Larry Kosmont (20:14):
Oh, well, I mean we’re already in sort of chapter four, right? Chapter one started probably three, four years ago when the state and regional metropolitan agencies like SCAG essentially started to accelerate the requirements in regional housing needs assessment studies and

Keeley Webster (20:34):
Well, oh, okay, so where I’m going with this is all of this stuff has been done over the last four years, and yet we have the same number of homeless people on the streets. So when does it start to actually, do we actually start to see an impact and fewer people on the streets? I mean, do you think that we’re on the verge of that, or do you think it’s going to take a couple more years, or?

Larry Kosmont (20:59):
I think it’s gonna take a couple more years. And here’s the reason why. Despite all of these statutory influences and these new tools, which take a while to matriculate and mature, the homeless problem is here now, and the cost per unit of providing housing for the unhoused is really high. The cost per unit of delivering affordable and very low affordable housing units is really high. These are housing units that in the world of land value, we call it residual land value can pay zero for land in a state where land is really expensive. And so the cost per unit to deliver whether or not you give a unit a ministerial process, which is shorter, quicker, less costly on the front end, that doesn’t change the fundamental economics that are required to deliver very low and low affordable housing units as part of any projects. So it’s gonna be expensive, it’s gonna be slow, because we have to figure out, not only are we figuring out how to process quickly, that’s the whole intent behind AB2011 or part of the intent or an SB6, but how do we fund it beyond that?

(22:23)
The notion is look, by opening up the procedural channels, all these units will get built because the market can support that maybe, yes, maybe in certain locations that are more suburban with land costs less, where a retail center is truly on its last legs that can work. But in a vibrant urban area where there’s other reuses and the market is proliferating and there are attendance out there, just giving that channel availability through zoning doesn’t mean that the money is going to be there and these units are going to convert at the rate that we want them to. That’s the issue. It’s still underlying economics.

Keeley Webster (23:00):
So do you think Los Angeles voters would be willing to approve another affordable housing bond given the progress made from tapping the current one?

Larry Kosmont (23:09):
I think it’s likely. I think it’s likely because they really, voters are impatient and concerned about the crime and the fallout of the homelessness. And I think that’s one of the big drivers in the dialogue. I also think, and I’m seeing this from, we’re in council meetings almost every Tuesday night up and down the state. I’m really seeing local leaders understand that to the extent they can’t provide affordable or moderate housing, that they’re really inducing the loss of their own children, of their own young adults who can’t stay in their communities. And so it becomes a very personal issue. And I found as a city manager over the years, that people tend to understand complex issues when they become personal. And I think when affluent communities in particular see their kids leave, because there’s no apartments to rent or there’s no houses they can afford, you start to see a motivation politically and economically to deliver some units that have a greater balance of product type. But this is not a quick conversation. It took us 30 years to get to this place, and it’s gonna take us another 10 or so to really start making, I think it’s a process, but you have to start somewhere. It’s definitely an urgency matter.

Keeley Webster (24:32):
All right. Well, thanks for joining us here today, Larry. It’s been great speaking with you about some of the issues facing California local government. And to our listeners, you can read more about the issues discussed here today at www.bondbuyer.com. I am Keeley Webster, and I have been your host here today. Thanks.

Larry Kosmont (24:50):
Thank you.