In the aftermath of the Great Recession, when construction cranes had disappeared from the San Francisco skyline and housing construction had ground to a halt, builder Patrick McNerney managed to do what few other developers at the time could: He scrounged up $120 million for two projects totaling nearly 300 units.
Using an obscure Department of Housing and Urban Development-insured program for multifamily construction, along with state money for site cleanup and low-income tax credits, the Martin Building Co. president constructed 196 units at 2235 Third St. and 94 at 178 Townsend St .“I pulled every possible financial rabbit out of the hat back then,” he said. Fourteen years later, he is about to do it again.
McNerney has managed to pull together financing to build a 303-unit 22-story tower at 1101-1123 Sutter St. on Lower Nob Hill, a project that will include 101 affordable units and the restoration of a historic auto repair shop and garage.
Martin Building is taking advantage of a California Housing Financing Agency mixed-income program that provides “competitive” financing for new construction multifamily housing directed at households earning 30% to 120% of area median income, which in San Francisco is between about $36,000 and about $144,000 for a two-person household. The state approved 13 out of 25 funding applications, and the Sutter Street project was the only applicant from San Francisco.
Originally, McNerney said he had entitled the project for 221 units in 14 stories and “went out searching for alternative funding sources.” In that process, he discovered a state mixed-income program, which he realized could work if he took advantage of state density programs to add six stories and 80 units of affordable housing.
“It’s this obscure program — when you get desperate, you start looking around and turn over every stone you can,” he said.
While the development at the corner of Sutter and Larkin streets is all one building — all the units will have access to the gym, hot tub and other amenities — it’s structured as two separate projects, with two distinct business entities and financing. The 101 affordable units will target households earning an average of 50% of area median income, about $60,000 for a couple or $75,000 for a family of four.
“The only way we could get access to the tax credits was if we bifurcated the building,” he said. “It’s two projects. We have two loans through HUD.”
The state program is providing Martin Building with about $54 million in tax credits and loans, about 25% of the cost of the $220 million development. A HUD loan is financing the rest.
The project faced some challenges, though, and almost went sideways in recent weeks because of a dispute about whether the project would be subject to a water recycling ordinance that applies to large buildings. The “non-potable water ordinance” requires buildings of more than 250,000 square feet to collect, treat and reuse gray water from sources such as showers and sinks for non-potable uses like toilet flushing and irrigation.
Adding the 80 affordable units put the project over the 250,000-square-foot limit, and McNerney said adhering to the ordinance would add $3 million to the project cost, about $10,000 a unit, and would kill it. He argued that it should be exempt because it includes so many affordable units. The ordinance doesn’t apply to 100% affordable projects.
“The problem for us is everything is so tight, we have so much affordable housing, we couldn’t bear any additional cost burden at all,” he said.
The exemption was initially opposed by Plumbers and Pipefitters Local 38. But the union’s president, Larry Mazzola, decided that the project — which will be built with all-union building trades — was too important to oppose.
“The bottom line is the construction industry has been just gutted. We have no work. I have 300 members on my out-of-work book,” he said. “I can’t stop a project of this size from going forward, not to mention the fact that the city needs housing desperately. We gotta do what we gotta do to get this thing moving.”
Mazzola said he didn’t want “to open the floodgates for every developer to waive the ordinance because then the whole legislation would be useless,” but was convinced that the extra $3 million would kill the project.
“I mean it was on the verge of not happening,” he said. “I can’t have 303 units not happen in this economy.”
On Monday the Board of Supervisors Land Use and Transportation Committee approved the water ordinance exemption as well to allow the some mixed-income developments to accept the state tax-exempt bond financing and tax credits, which are typically used for 100% affordable projects built by nonprofits, rather than mixed-income developments built by for-profit groups such as Martin Building.
Supervisor Myrna Melgar, who heads the committee, said she was conflicted about allowing the water ordinance exemption but doesn’t have a problem with approving the tax credits.
“Affordable housing is affordable housing — I don’t care who builds it,” said Melgar, who voted for both the exemption and the financing allowance.
District 3 Supervisor Danny Sauter said he is sympathetic to the environmental goals behind the water ordinance, but the project is worthy of an exemption.
“For me it comes down to the idea that there is nothing better for the environment than having 300 households living in the dense environment that is Lower Nob Hill, a few blocks from the Van Ness bus rapid transit,” he said. “It’s the single largest housing site we have in District 3 at the moment.”
