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Affordable housing developer defaults on loans, and gets investigated by the state

King City
King City
People driving through King City's main streets.

King City and a Los Angeles-based developer teamed up to get a grant that would allow them to build affordable housing for the city’s unhoused population.

Now, the state housing department is investigating the developer because it has defaulted on some loans.

KCBX’s Gabriela Fernandez spoke with CalMatters’ reporter Jeanne Kuang who’s been reporting on the investigation.

Gabriela Fernandez: So for people who don't know what the state's home key program is, can you please explain it to them?

CalMatters’ reporter, Jeanne Kuang: Yeah, home key is a program that the state started coming out [with] during the pandemic in 2020. Essentially, the state has a department of housing and community development that sends grants out to local city governments or counties or public housing authorities to fund the development of permanent affordable housing units for homeless people. Basically, the state takes the money and kind of gives it directly to local governments that have already picked out projects that they want to develop, including hotel and motel conversions. That's been the primary type of project that cities and counties have picked.

Fernandez: And, for your specific report, you looked into a developer called Shangri-La, and they were developing in King City, Salinas, Thousand Oaks, and San Bernardino. Since King City and Salinas is in the Central Coast, can you touch on what exactly is happening there with this developer?

Kuang: Lately, there's been some trouble in almost all these projects. Shangri-La has defaulted on their loans that they took out in those projects and that is putting those projects at risk of foreclosure. The ones in Monterey county, they all haven't opened yet, except for 1 in Salinas. So there's one in King City and two in Salinas that have not yet been opened and construction is halted on them. The future of these projects is up in the air right now.

Fernandez: So what is the developer saying is their challenge for developing all of these projects?

Kuang: They're saying that some of the defaults are technicalities. One of the things at issue here is that when you develop affordable housing, you have to make an agreement with a government agency to keep that housing as affordable to low income residents. That is filed as what's called a regulatory agreement, kind of a fancy term, but essentially, you have to put into the property records into the deeds legally, this is housing that is reserved to be low rent or reserved for residents under a certain income. So they haven't done that in all of these properties. And that's caused a lot of concern from the state government and local government officials. Now, the developer says that the government has been slow to approve those agreements and approve the affordability requirements so that they can record it in. And they're saying that that's one of the reasons that they're defaulting on their loans. They're kind of saying there's a whole host of reasons there, including the slowness of the state to record these regulatory agreements there. Now the state is saying they should not have taken out these loans without getting the regulatory agreements in place in the first place. So the developer and the state are kind of at odds.

Fernandez: How is this affecting the city's response to homelessness?

Kuang: I mean, King city is obviously, as, you know, a smaller city. They were hoping for this project to convert a motel into 44 units of permanent housing that would have theoretically been big enough to or enough spaces to accommodate the city's entire unhoused population. So I spoke with the mayor of King City, and they're very frustrated and disappointed that the project is halted and they're worried about it either being foreclosed upon or somehow lost because they had recently swept in an encampment and moved a bunch of people who are living in an encampment into a temporary motel rooms. Their plan was to get those people out of the motel rooms and into this converted permanent housing sometime this year. Now that's not happening anymore. So they kind of had to scramble and pull together other funding to keep those people temporarily housed in motel rooms until. Construction is hopefully one day able to restart again on the motel conversion. But, it is throwing a wrench into some of these smaller cities' plans to address homelessness in their communities.

You can read Jeanne Kuang's article here.

Gabriela Fernandez came to KCBX in May of 2022 as a general assignment reporter, and became news director in December of 2023. She graduated from Sacramento State with a BA in Political Science. During her senior year, she interned at CapRadio in their podcast department, and later worked for them as an associate producer on the TahoeLand podcast. When she's not writing or editing news stories, she loves to travel, play tennis and take her 140-lbs dog, Atlas, on long walks by the coast.
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