Housing Finance: Procedures and Costs for Developing San Diego Project
Were Reasonable (Letter Report, 07/25/97, GAO/RCED-97-190).

Pursuant to a congressional request, GAO evaluated the San Diego Housing
Commission's role in developing Knox Glen Apartments, focusing on the:
(1) process the Commission followed to develop the project; (2)
reasonableness of the project's costs compared with the costs of other
new and existing multifamily projects in the area; and (3) impact of the
project on the area's rental housing market and supply of affordable
housing.

GAO noted that: (1) the process that the San Diego Housing Commission
followed to develop Knox Glen Apartments was dictated, in large part, by
its decision to revitalize the site and by federal funding and local
requirements; (2) after purchasing the property and determining that the
existing structures could not be salvaged, the Commission used federal
funds to demolish these structures and constructed new affordable
housing on the site; (3) the Commission met with neighborhood
representatives, securing their approval of the project's design and
ensuring that this design met the requirements of the city and of the
Low-Income Housing Tax Credit Program; (4) in addition, the Commission
designated a nonprofit corporation to manage the project's development
and financing; (5) overall, the costs of developing Knox Glen Apartments
were reasonable; (6) the project's site-specific costs were high but
necessary to revitalize the site; (7) because these costs (for acquiring
the land, demolishing the existing structures, and complying with local
design and zoning requirements) were high and because the project
consisted mainly of large units, the average per-unit cost was about
$149,000; (8) the project's per-square-foot costs above the foundation
($39.55) were about average for new construction in San Diego at the
time, and the project's per-bedroom costs (about $40,300) were
relatively low for the California projects that received tax credits at
the same time; (9) the construction of Knox Glen Apartments increased
the supply of affordable housing in the neighborhood without adversely
affecting other rental properties in the area; (10) all of the units at
Knox Glen were rented within 2 weeks after the project was completed;
(11) an owner of three sizeable low-income properties in the area said
that he lost about six families to Knox Glen, but his vacant units were
quickly filled; (12) also, since Knox Glen was completed, a private
developer began to construct 23 single-family homes for first-time home
buyers across the street; (13) according to the developer, he would not
have built the project, and his bank would probably not have lent him
the money for its construction, if the structures that formerly stood on
the Knox Glen site had not been demolished; and (14) investigations by a
San Diego County Grand Jury, a Select Committee of the San Diego City
Council, and the Department of Housing and Urban Development's Inspecto*

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-97-190
     TITLE:  Housing Finance: Procedures and Costs for Developing San 
             Diego Project Were Reasonable
      DATE:  07/25/97
   SUBJECT:  Urban economic development
             Construction costs
             Federal aid for housing
             Housing construction
             Municipal governments
             Low income housing
             Rental housing
             Tax credit
IDENTIFIER:  Knox Glen Apartments (San Diego, CA)
             HUD Low Income Housing Tax Credit Program
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to Congressional Requesters

July 1997

HOUSING FINANCE - PROCEDURES AND
COSTS FOR DEVELOPING SAN DIEGO
PROJECT WERE REASONABLE

GAO/RCED-97-190

Housing Finance

(385672)


Abbreviations
=============================================================== ABBREV

  FDIC - Federal Deposit Insurance Corporation
  SDHDC - San Diego Housing Development Corporation
  HUD - Department of Housing and Urban Development
  CDBG - Community Development Block Grants

Letter
=============================================================== LETTER


B-277297

July 25, 1997

The Honorable Brian P.  Bilbray
The Honorable Duncan Hunter
The Honorable Randy "Duke" Cunningham
House of Representatives

In response to allegations of mismanagement and excessive spending,
you asked us to evaluate the San Diego Housing Commission's role in
developing Knox Glen Apartments, a 54-unit project consisting mainly
of three- and four-bedroom town houses located on Logan Avenue in
southeastern San Diego.  The project, which replaced an abandoned,
partially completed 116-unit complex, was financed with funds from a
variety of sources, including the federal HOME and Low-Income Housing
Tax Credit programs.  Specifically, you asked us to evaluate (1) the
process the Commission followed to develop the project, (2) the
reasonableness of the project's costs compared with the costs of
other new and existing multifamily projects in the area, and (3) the
impact of the project on the area's rental housing market and supply
of affordable housing.  You also asked us to summarize the results of
other governmental investigations of the Knox Glen project. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The process that the San Diego Housing Commission followed to develop
Knox Glen Apartments was dictated, in large part, by its decision to
revitalize the Logan Avenue site and by federal funding and local
requirements.  After purchasing the property and determining that the
existing structures could not be salvaged, the Commission used HOME
funds to demolish these structures and constructed new affordable
housing on the site.  From the start, the Commission met with
neighborhood representatives, securing their approval of the
project's design and ensuring that this design met the requirements
of the city and of the Low-Income Housing Tax Credit program.  In
addition, the Commission designated a nonprofit corporation to manage
the project's development and financing.  The president of the
nonprofit corporation is the Commission's executive director, and the
nonprofit corporation is staffed by Commission personnel on a
cost-reimbursable basis. 

Overall, the costs of developing Knox Glen Apartments were
reasonable.  The project's site-specific costs were high but
necessary to revitalize the Logan Avenue site.  Because these costs
(for acquiring the land, demolishing the existing structures, and
complying with local design and zoning requirements) were high and
because the project consisted mainly of large (three- and
four-bedroom) units, the average per-unit cost was about $149,000. 
The project's per-square-foot costs above the foundation ($39.55)
were about average for new construction in San Diego at the time, and
the project's per-bedroom costs (about $40,300) were relatively low
for the California projects that received tax credits at the same
time. 

The construction of Knox Glen Apartments increased the supply of
affordable housing in the neighborhood without adversely affecting
other rental properties in the area.  All of the units at Knox Glen
were rented within 2 weeks after the project was completed.  An owner
of three sizeable low-income properties in the area said that he lost
about six families to Knox Glen, but his vacant units were quickly
filled.  Also, since Knox Glen was completed, a private developer
began to construct 23 single-family homes for first-time home buyers
across the street.  According to the developer, he would not have
built the project, and his bank would probably not have lent him the
money for its construction, if the structures that formerly stood on
the Knox Glen site had not been demolished. 

Investigations by a San Diego County Grand Jury, a Select Committee
of the San Diego City Council, and the Department of Housing and
Urban Development's Inspector General found no abnormalities,
malfeasance, or incompetence in the financing or construction of Knox
Glen as a low-income housing project. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The HOME program, created under title II of the National Affordable
Housing Act of 1990, makes funding available to state and local
governments to develop and support affordable housing for low- and
very low income households.\1 Eligible activities include assistance
to qualified tenants, home buyers, and homeowners; property
acquisition; new construction; rehabilitation; demolition; loan
guarantees; and other expenses related to the development of
nonluxury housing.  The program's funding--an account with a line of
credit--is allocated by formula to participating jurisdictions. 

The Low-Income Housing Tax Credit program, created under the Tax
Reform Act of 1986, substituted tax credits for existing tax
incentives for the construction of low-income housing, such as
accelerated depreciation.  Under this program, an agency in each
state administers the state's tax credit allocation, and for-profit
or nonprofit developers build affordable housing projects.  The
California Tax Credit Allocation Committee administers California's
tax credit allocation. 

The Internal Revenue Code requires each state tax credit allocating
agency to evaluate proposed projects against a qualified allocation
plan that establishes a procedure for ranking the projects on the
basis of how well they meet the state's identified housing priorities
and are appropriate to local conditions.  The Code further directs
each state agency to consider the reasonableness of a project's
development and operating costs. 

The San Diego Housing Commission (Commission) is an independent,
tax-exempt public organization created by the San Diego City Council
in 1979 to advise the city on housing issues and to administer
affordable housing programs.  The City Council, which serves as the
city's Housing Authority, reviews and approves all of the
Commission's activities and programs.  In 1990, the Commission
created the San Diego Housing Development Corporation (Corporation),
a nonprofit organization authorized to act as the general partner for
tax credit projects.  The executive director of the Commission is the
president of the Corporation, and the same general counsel served
both entities through the project's construction.  The Commission
provides staff and services to the Corporation on a cost-reimbursable
basis. 

The Commission became involved in the Knox Glen project in late 1992,
after the mayor and a city council member asked the Commission to
purchase the abandoned property on Logan Avenue known as Greentree
Plaza.  This 3.2-acre property included 116 apartment units in six
buildings that were 65 percent complete when the builder declared
bankruptcy in 1987.  In 1988, the Federal Deposit Insurance
Corporation (FDIC) took over the property, boarded up the abandoned
buildings, constructed security fences, and periodically provided
security guards.  Despite these precautions, the property became an
"eyesore" and a hangout for gangs, and was plagued with arson,
trespassing, and vandalism.  (See fig.  1.)

   Figure 1:  Greentree Plaza

   (See figure in printed
   edition.)

Greentree Plaza was located in the Lincoln Park section of
southeastern San Diego, which an appraiser described in August 1995
as one of the "least desirable neighborhoods in the city." The
average household income in the neighborhood is two-thirds of the
citywide average, and the rate of violent crime is nearly twice the
citywide rate.  The Lincoln Park neighborhood is also the most
densely populated in southeastern San Diego, averaging about 17
dwelling units per acre. 

The neighborhood had opposed Greentree Plaza from the start, because
of its density and appearance.  After the developer declared
bankruptcy, the city responded to these concerns by issuing new
zoning and design regulations for an area that it designated at this
time as the Southeast San Diego Planned District.  The new zoning
regulations, adopted in July 1987, lowered the allowable number of
units per acre for the property from 29.04 to 17.42.  The new design
regulations, which applied to everything from parking to facade
design, set standards for constructing or altering residential,
commercial, and industrial property in the planned district.  Added
in August 1987, the new design regulations increased the San Diego
municipal code by 42 pages. 


--------------------
\1 "Low-income" is generally defined as 80 percent or less of the
median income for the area.  "Very low income" is defined as 50
percent or less of the area's median income, adjusted for family
size. 


   DEVELOPMENT PROCESS WAS
   REASONABLE GIVEN COMMISSION'S
   DECISIONS
------------------------------------------------------------ Letter :3

The process that the Commission followed to develop Knox Glen
Apartments was largely dictated by its decision to revitalize the
Logan Avenue site and by federal funding and local planning
requirements.  The Commission's involvement in the process consisted
primarily of meeting with neighborhood representatives to develop a
plan for the project and using the nonprofit Corporation to manage
the project.  Figure 2 identifies the principal steps in the
development process. 

   Figure 2:  Stages in Knox
   Glen's Development

   (See figure in printed
   edition.)


      COMMISSION DESIGNED PROJECT
      WITH NEIGHBORHOOD INPUT
---------------------------------------------------------- Letter :3.1

The Commission first met with neighborhood representatives after the
Mayor's June 1992 press conference to discuss whether Greentree Plaza
should be completed or demolished.  The meetings confirmed the
neighborhood's opposition to completing the development. 

According to the Commission's executive director, FDIC had maintained
that Greentree Plaza could be completed and rented and was asking
$2.45 million for the property.  However, several developers had
inspected the development and concluded that it was beyond repair. 
Eventually, the Commission negotiated a purchase price of $700,000
with FDIC and bought the property in February 1994.  The Commission
first met with neighborhood representatives to discuss the
development of a new project in January 1994. 

In March 1994, the Commission demolished Greentree Plaza.  To do so,
it used HOME funds, the only funds available for demolition,
according to the Commission.  Because the HOME program provides
funding only for activities related to the development of nonluxury
housing, the Commission's use of HOME funds for demolition was
consistent with its commitment to construct new affordable housing at
the site. 

Through additional meetings with community groups and in-house
discussions, the Commission produced a development plan for the Logan
Avenue site.  This plan served as the basis of the application for
tax credits.  The plan provided for 55 units, primarily with three or
four bedrooms to accommodate larger households.  (See app.  I, tables
I.1 and I.2.) The plan also included recreation areas, space for
community activities, and other amenities desired by the
neighborhood. 

To finance the project, the development plan proposed to combine tax
credits with HOME funds, a low-interest community development loan, a
commercial loan, and a deferred loan from the developer (see app.  I,
table I.3).  On August 1, 1994, the Commission submitted its
application for tax credits to the California Tax Credit Allocation
Committee.  The Committee evaluated this application against the
Low-Income Housing Tax Credit program's criteria, determined that the
project was eligible for tax credits, and awarded points for specific
features.  In total, the project received 105 points--ultimately the
cut-off score required to qualify it for tax credits at the time. 
The project received 35 points for targeting lower-income households
(see app.  I, table I.4), 25 points for agreeing to serve these
households for 55 years, 15 points for serving large families, 25
points for the amount of equity invested by owners in the project,
and 5 points for providing special amenities, including a community
center.  In September 1994, the California Tax Credit Allocation
Committee approved the Commission's application for tax credits and
reserved tax credits for the project. 

After receiving the tax credit reservation, the Commission continued
to meet with neighborhood representatives to secure their approval of
the project's design.  The city of San Diego requires proof of the
neighborhood's approval before it will issue a permit for a project's
development.  In addition, the Low-Income Housing Tax Credit program
requires certification that a project has obtained all necessary
state and local approvals before construction can begin.  In August
1995, a task force of volunteers representing key neighborhood
organizations approved the project's design, and in September 1995,
the city approved a permit for the project's development. 

The meetings with neighborhood representatives to obtain their
approval took about 4 months longer than planned.  These meetings
were time-consuming because the Lincoln Park neighborhood did not
want a repeat of its experiences with the Greentree Plaza
development.  For the new development, the neighborhood wanted the
least dense, most aesthetically pleasing complex possible.  For
example, the neighborhood held the Commission to a strict
interpretation of the 1987 zoning limits, negotiating a 1-unit
reduction in the original plan for 55 units.  At times, the
neighborhood also emphasized aesthetics over costs.  For example, the
neighborhood insisted that barrel-vaulted roofs be designed into the
structure in order to vary the roof lines.  Community leaders
believed that such a visually pleasing design would make the
development stand out as well as eliminate any reference in
appearance to Greentree Plaza. 


      COMMISSION CHOSE TO
      DESIGNATE THE PROJECT'S
      DEVELOPER
---------------------------------------------------------- Letter :3.2

In October 1995, the Commission transferred the title to the Logan
Avenue property, along with the tax credit allocation and the
project's debt, to the San Diego Housing Development Corporation.  To
create the legal entity necessary to develop the project and obtain
the necessary financing, the Corporation created the Logan
Development Limited Partnership (Partnership) and transferred the
project's title to the Partnership on December 1, 1995.  The
Corporation acts as the general partner and holds a 1-percent
ownership share.  Under this arrangement, the Corporation retains
control of the project, and the other partners provide the equity
funds to develop the project. 

Instead of transferring the project's title to the Corporation and
creating the Partnership, the Commission could have solicited
proposals from existing nonprofit developers and awarded the project
to the most qualified bidder.  According to the agendas for the
Commission's August and September 1995 meetings, the Commission
considered this alternative.  However, according to the agendas, a
solicitation could have caused a delay that could have resulted in
the loss of tax credits and required a reapplication in December
1995. 

The directors of two San Diego community development corporations
with experience in developing tax credit projects agreed that a delay
could have resulted from soliciting bids in August 1995.  They added,
however, that the Commission could have solicited bids before the tax
credits were awarded, and the chosen developer would then have
negotiated the project's design with the neighborhood and finalized
the development plan.  According to both directors and the executive
director of the San Diego County Apartment Association, the
underlying issue is one of policy--whether a corporation established
by a government entity with ties to that entity should be in the
development business and whether such a corporation can build as
efficiently as the private sector.\2

The directors of the two San Diego community development corporations
also expressed concern about the organizational links between the
Commission and the Corporation.  The directors noted that if the
Commission were to solicit bids in the future, their organizations
would have difficulty competing with the Corporation because the
Corporation has direct ties to the Commission. 

The first residents moved to Knox Glen in late October 1996, and all
of the units were rented before the end of the year.  (See fig.  3.)
Forty percent of the residents moved from within 2 miles of the
project, and the average distance moved was 4 miles.  As of March
1997, 88 adults, 123 minors, and a resident manager were living in
the 54 units, paying monthly rents ranging from $486 to $753 (see
app.  I, table I.5). 

   Figure 3:  Knox Glen

   (See figure in printed
   edition.)


--------------------
\2 A reference to the San Diego Housing Development Corporation's
role in the project's development, appearing in the agenda for the
Commission's July 18, 1994, meeting, seems to confirm the directors'
position that the Corporation's participation was more a matter of
policy than an action required to avoid delays.  According to the
agenda, the development plan recommended as the basis for the
application for tax credits provides for ownership of the project "by
a limited partnership, of which the San Diego Housing Development
Corporation (SDHDC) would serve as general partner, .  .  .  with
development by the Commission on behalf of SDHDC."


   COSTS OF PROJECT WERE
   REASONABLE, GIVEN ITS LOCATION
------------------------------------------------------------ Letter :4

The costs of developing Knox Glen Apartments were reasonable, given
the Commission's decision to revitalize the Logan Avenue site.  This
decision entailed high site-specific costs; however, when these costs
are excluded, the project's costs are reasonable compared with those
of other San Diego properties constructed at the time and of other
California properties that received tax credits at the time.  The
Commission could have saved money by building new housing or
rehabilitating existing housing elsewhere in the city, but it could
not then have revitalized the Logan Avenue site. 


      SITE-SPECIFIC REQUIREMENTS
      INCREASED PROJECT'S COSTS
---------------------------------------------------------- Letter :4.1

A project's development costs are usually closely linked to the
project's location.  Knox Glen's location--in an area affected by a
community plan and a planned district ordinance with strict controls
over the design of amenities--contributed substantially to its costs. 
Moreover, the costs of construction in San Diego are among the
highest in California, and the costs of construction in California
are among the highest in the nation. 

Knox Glen incurred site-specific costs that accounted for over 25
percent of its total development costs of about $149,000 per unit. 
These included the costs of acquiring land and demolishing Greentree
Plaza, of meeting the planned district's special design requirements,
and of complying with the municipal building code and other city
requirements.  For example, the planned district requires covered
off-street parking for at least 50 percent of a project's parking
spaces and at least 200 square feet of exterior usable open space for
each unit.  For aesthetic reasons, the district also requires that
structures be built with offsetting variations in a minimum of three
vertical or horizontal planes.  These requirements added
substantially to Knox Glen's costs, as table 1 indicates. 



                                Table 1
                
                    Knox Glen's Site-Specific Costs

                                        Site-specific costs
                              ----------------------------------------
Cost category                        Total      Per unit   Per bedroom
----------------------------  ------------  ------------  ------------
Land acquisition                  $807,800       $14,960        $4,840
Demolition                        $155,600        $2,880          $930
Off-street parking and            $793,800       $14,700        $4,750
 access\a
Exterior usable open areas\a       $38,850          $720          $230
Offsetting planes                 $154,000        $2,850          $920
 requirement\a
Off-site work\c                    $69,900        $1,290          $420
Fire protection\b                  $65,650        $1,220          $390
One-time school fee\d             $109,520        $2,030          $660
======================================================================
Total                           $2,195,120       $40,650       $13,140
----------------------------------------------------------------------
\a San Diego Municipal Code requirement for planned district. 

\b Uniform Fire Code and the City of San Diego Fire Department
requirements and ordinances

\c San Diego Uniform Building Code, Uniform Fire Code, City of San
Diego Municipal Code, Metropolitan Transit District Board
Requirements, and Southeast Planned District Ordinance. 

\d San Diego school district assessment. 

Source:  San Diego Housing Commission. 

We compared Knox Glen's site-specific costs with those of the Mercado
Apartments, another family-oriented San Diego tax credit project that
opened in June 1994, about 2-1/2 years before Knox Glen.  This
project--consisting of 18 one-bedroom, 60 two-bedroom, and 66
three-bedroom apartments; a community room; and a playground
area--won a number of awards and has been cited as the tax credit
project with the lowest per-unit costs in the city (about $92,000 per
unit).  (See fig.  4.)

   Figure 4:  The Mercado
   Apartments

   (See figure in printed
   edition.)

Although the Mercado incurred substantial site-specific costs, it was
generally subject to less restrictive and less costly requirements
than Knox Glen.  Located in a different section of San Diego, the
Mercado's site was zoned to allow denser, less costly development. 
Additionally, the Mercado did not have to comply with the planned
district's special design requirements.  And because the Mercado is
situated close to a trolley line, it did not have to provide covered
parking spaces or as many parking spaces per unit as Knox Glen. 
However, the Mercado incurred its own costs for off-site improvements
and for environmental remediation, which alone amounted to about
$200,000.  Overall, Knox Glen's site-specific costs were higher than
the Mercado's--a difference that accounts for a significant portion
of the difference in the two projects' per-unit costs. 


      CONSTRUCTION COSTS WERE
      ABOUT AVERAGE
---------------------------------------------------------- Letter :4.2

Because the costs of development often vary from site to site, much
as the costs of developing Knox Glen and the Mercado varied,
developers do not consider projects' total development costs
comparable.  Instead, they compare the per-square-foot costs of
construction above the foundation.  The specialist assigned by the
Commission to oversee Knox Glen's construction for the Corporation
surveyed a number of San Diego real estate developers in August 1996
to compare Knox Glen's estimated costs with those of other
multifamily housing projects under construction at the same time. 
His survey revealed that Knox Glen's above-foundation construction
cost of $39.55 per square foot was just below the average for nine
projects, whose above-foundation construction costs ranged from $34
to $45 per square foot.  (See table 2.)



                                Table 2
                
                 Above-Foundation Costs per Square Foot
                for Attached Multifamily Housing in San
                           Diego, August 1996

                                                       Cost per square
                                                           foot (above
Location of development            Number of units         foundation)
------------------------------  ------------------  ------------------
South County                                   230              $45.00
Poway                                          249              $42.50
Rancho San Diego                                \a              $41.00
Chula Vista                                    135              $40.00
Middletown                                      36              $40.00
Southeast San Diego                             15              $40.00
East County                                     15              $40.00
Knox Glen                                       54              $39.55
North County                                   344              $34.00
----------------------------------------------------------------------
\a Not available. 

Source:  San Diego Housing Commission. 

The Mercado's above-foundation cost of about $37 per square foot is
not significantly lower than Knox Glen's, given that the Mercado was
constructed about 2-1/2 years earlier.  In 1997, the same community
development corporation that built the Mercado proposed a new
138-unit tax credit project, to be designed along the same lines as
the Mercado.  The estimated cost of this project is about $39.50 per
square foot above the foundation. 


      CALIFORNIA'S COSTS ARE AMONG
      THE HIGHEST IN THE NATION
---------------------------------------------------------- Letter :4.3

High land and construction costs, stringent seismic standards, and
other factors make California's tax credit projects among the
costliest in the nation.  In addition, in 1994, when the Commission
applied for tax credits, the California Tax Credit Allocation
Committee had not yet adopted the per-unit cost limits established by
the Department of Housing and Urban Development (HUD) for nonluxury
multifamily housing projects participating in its 221(d)(3) mortgage
insurance program.\3 Before the Committee adopted HUD's 221(d)(3)
limits in 1996, the costs for construction financing and various fees
had escalated throughout the state.  After the Committee adopted
HUD's limits, these costs reportedly declined by 12 percent.  Knox
Glen received tax credits 2 years before the Committee adopted HUD's
limits. 

Compared with the costs of the other California properties that
received tax credits at the same time, Knox Glen's costs were
reasonable.  Of the 30 projects--most of which were located in San
Francisco, Los Angeles, or Sacramento--Knox Glen was the tenth lowest
in eligible costs per bedroom.  Eligible costs, computed on the
eligible basis for tax credit projects, include the costs of new
construction, the developer's costs, and various fees; they exclude
the costs of land, permanent financing, rent reserves, syndication,
and marketing (see app.  I, table I.6).  Knox Glen's eligible costs
per bedroom were about $40,300. 


--------------------
\3 This program is designed to establish maximum per-unit cost limits
equivalent to the costs of constructing nonluxury multifamily housing
projects for different areas within each state.  Initially set by the
Congress in legislation, the limits are adjusted annually by HUD to
reflect changes in construction costs.  The limits also reflect
differences in housing characteristics, such as the presence or
absence of elevators. 


      COMMISSION IMPLEMENTED SOME
      BUT NOT ALL COST-SAVING
      MEASURES
---------------------------------------------------------- Letter :4.4

While reasonable, Knox Glen's costs were not as low as they might
have been.  As noted, the project's design included certain features
desired by the neighborhood, and the Commission retained these
features to secure the neighborhood's approval of the project's
design.  In addition, the project included some amenities that were
not required to satisfy code requirements but were necessary to
enable the project to compete for tax credits. 

To accommodate the neighborhood's preference for a low-density
development, the Commission did not take advantage of a density
waiver for affordable housing that would have allowed 69 units to be
built on the property.\4 The waiver would have reduced the project's
per-unit costs by spreading some general costs over more units, but
it would not have permitted the construction of the town houses
desired by the neighborhood. 

Before starting to construct the project, the Corporation, architect,
and contractor performed a value engineering study, which recommended
a number of design changes to control costs.  The Corporation chose
to implement most of the study's recommendations.  For example, the
Corporation deleted skylights and glass from garage doors and
installed less expensive doors, door hinges, drainage systems, and
landscaping.  The Corporation did not, however, substitute lower-cost
roof facades or traditional pitched roofs with asphalt shingles for
the barrel-vaulted roofs preferred by the neighborhood. 

According to the project's construction specialist, the Corporation
would have saved over $1,000 per unit if it had chosen the
traditional pitched roofs with asphalt shingles, but the community
insisted on "a design that would be more reflective of a
single-family home with an evident quality of design." He said that
the community chose the barrel-vaulted design to make the development
stand out visually and aesthetically, as well as to eliminate any
reference in appearance to Greentree Plaza.  He added, however, that
the final barrel-vaulted design represented a compromise with the
local housing groups, which had originally advocated even larger and
costlier vaulted roofs.  In addition, he noted that the
barrel-vaulted roofs are expected to last for the full 55 years that
California tax credit projects are required to operate under
restricted rents to serve low-income residents, whereas traditional
shingle roofs require replacement every 10 to 12 years, making the
ultimate cost differential negligible. 

Another design feature that was not required by the tax credit
program's or by state or local regulations but was requested by the
neighborhood for security reasons was a gated enclosure, which added
almost $1,300 per unit to the project's costs.  In addition,
according to the project's construction specialist, the project
received upgraded plumbing fixtures and flooring material to reduce
its long-term maintenance costs. 

The inclusion of a community center (see fig.  5) added to the
project's costs.  However, according to Commission officials, the
project would not have qualified for tax credits without the points
awarded for the center, and without tax credits, the project could
not have been built. 

   Figure 5:  Knox Glen
   Neighborhood Center

   (See figure in printed
   edition.)


--------------------
\4 The city of San Diego had already maintained that the new zoning
limit of 17.42 units per acre should be rounded down to 17 before
being multiplied by the project's acreage (3.2 acres)--an
interpretation of the zoning ordinance that limited the project to
54.4 units rather than 55.7 units. 


      OTHER OPTIONS MIGHT HAVE
      LOWERED COSTS BUT NOT
      REVITALIZED NEIGHBORHOOD
---------------------------------------------------------- Letter :4.5

Purchasing an existing apartment complex would likely have been
cheaper than building Knox Glen Apartments.  Other apartment
complexes were available in the San Diego area when the Knox Glen
project was being planned.  Because many owners of multifamily
properties were unable to refinance mortgage loans with high interest
rates or to increase rents to cover costs, a number of properties
were liquidated at very low prices.  According to the San Diego
County Apartment Association, some sold for as little as 40 to 70
percent of their replacement costs.  But few of these apartment
complexes consisted primarily of three- and four-bedroom units. 
Converting these properties would have increased the city's supply of
affordable housing at less cost per unit than constructing Knox Glen;
however, it would have provided fewer three- and four-bedroom units,
and it would not have helped to revitalize the Lincoln Park
neighborhood. 


   PROJECT HAS HAD A POSITIVE
   IMPACT
------------------------------------------------------------ Letter :5

Since it was placed in service, Knox Glen has not adversely affected
other rental properties in the area, and it has stimulated new
development. 

The demand for affordable rental housing in San Diego is so great
that new construction in almost any neighborhood is unlikely to harm
existing rental properties.  According to the city's consolidated
plan for fiscal year 1997,\5 San Diego will need approximately 17,520
new housing units for additional low-income households during the
next 5 years.  Because the city's housing costs have increased much
more rapidly than incomes, the report says, San Diego is now among
the least affordable cities in the nation.  Nearly 107,000 households
with very low and low incomes pay 30 percent or more of their incomes
for rent, and over 31,000 families are on the Commission's waiting
list for rental assistance. 

Given these figures, it is not surprising that Knox Glen's units were
rented within days after they were completed.  According to the
property's rental agent, over 950 applications were received and
about half of the applicants met the project's income guidelines.  At
the time of our visit, over 200 families were on the waiting list to
apply for apartments that might become vacant. 

We asked the owner of three sizeable low-income properties in the
area whether he was concerned about the impact of Knox Glen on his
business.  He said he lost about six families to Knox Glen because it
is new, has garages, and has somewhat lower rents.  He added that he
is not concerned because he had no difficulty replacing the families
he lost. 

Knox Glen's construction has already stimulated new development. 
Directly across the street, a private subdivision of 23 single-family
detached homes is being built.  According to the developer, the
project's goal is to help revitalize the neighborhood by building
affordable homes for first-time home buyers.  The developer
emphasized that he would not have built the project--and his bank
would probably not have lent him the money for its construction--if
the partially completed property that once stood on Knox Glen's site
had not been removed. 


--------------------
\5 The consolidated plan is produced annually by an interagency
working committee led by the San Diego Housing Commission.  The plan
replaces HUD's prior planning and application requirements with a
single submission and satisfies the regulatory requirements for HUD's
four formula programs:  Community Development Block Grants (CDBG),
HOME Investment Partnership (HOME), Emergency Shelter Grant, and
Housing Opportunities for Persons With AIDS.  Developing the plan
gives the city an opportunity to shape its publicly supported
programs into a coordinated housing and community development
strategy. 


   PRIOR STUDIES DID NOT FIND
   SERIOUS PROBLEMS AT KNOX GLEN
------------------------------------------------------------ Letter :6

A 1994-95 grand jury investigation, a 1996 report by a housing
subcommittee of the Select Committee on Government Efficiency and
Fiscal Reform, and a 1997 report by HUD's Inspector General examined
different aspects of the Commission's affordable housing portfolio. 
None of these reports found any abnormalities, malfeasance, or
incompetence in the financing or construction of Knox Glen as a
low-income housing project. 

After examining the Commission's management and lending practices,
the grand jury reported 18 findings and recommendations in 1995.  It
did not mention Knox Glen specifically in the report, although two of
the management recommendations address issues raised by critics of
Knox Glen's development. 

The first recommendation called for a "total project" feasibility
study to be submitted with the request to approve the funding for a
housing project's development or rehabilitation.  The Low-Income
Housing Tax Credit program already requires three feasibility
analyses for most tax credit projects--the first at the time of the
preliminary reservation, the second if a carryover allocation is
made, and the third when the project is placed in service.  These
three feasibility analyses were performed for Knox Glen. 

The second recommendation called for the Commission to amend its
underwriting criteria so that the allocation of funds or financing
does not exceed a total of 90 percent of a property's appraised or
market value.  Under such amended criteria, the Commission would not
have been able to fund Knox Glen--or to participate in most
low-income housing tax credit deals.  Under the Low-Income Housing
Tax Credit program, the appraisal calculates the market value of a
property using the restricted rents required for low-income
households; therefore, the appraised value will typically be lower
than the cost of construction. 

The housing subcommittee followed up on the grand jury's work and
examined Knox Glen as a case study.  The subcommittee's report,
released in October 1996, did not include the Knox Glen case study. 
Our review of the unpublished case study showed that the cost figures
obtained by the subcommittee were very similar to the project's
preliminary cost estimates. 

In January 1997, HUD's Inspector General investigated allegations of
possible noncompliance with HUD's regulations as well as excessive
costs in developing Knox Glen.  The Inspector General found no
evidence of illegal acts or violations of HUD's regulations. 
Furthermore, the Inspector General concluded that the reasons for the
project's costs appeared to be valid. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

We provided copies of a draft of this report to the San Diego Housing
Commission for its review and comment.  We spoke with Commission
officials, including the assistant to the executive director, the
senior housing construction specialist, and the financial specialist
for the Knox Glen project.  The Commission commented that the draft
was a well-researched and balanced presentation of the facts, and it
agreed with the overall conclusions. 

The Commission also further clarified its decision not to solicit
bids from existing nonprofit developers.  The Commission commented
that the qualified nonprofit organizations were fully occupied with
other projects in early 1994 when the property was purchased from
FDIC and the negotiations with community groups began.  According to
the Commission, this factor weighed heavily in its decision to have
the Corporation act as the general partner in the development of Knox
Glen Apartments.  We agree that the qualified nonprofit organizations
were busy completing tax credit projects at the time the property was
purchased.  However, the question whether a nonprofit corporation
established by a government entity with ties to that entity should be
in the development business remains an open issue.  The Commission
also provided technical comments to improve the accuracy of the
report, which we incorporated where appropriate. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

We met with officials of the California Tax Credit Allocation
Committee, the San Diego Housing Commission, the San Diego Housing
Development Corporation, and the County Apartment Association.  We
also interviewed officials from HUD's San Diego office and from local
community development corporations, as well as private developers and
interested members of the public.  In addition, we reviewed federal,
state, and local program regulations and ordinances; files on the
Knox Glen project; and reports of the grand jury, the San Diego
housing subcommittee, and HUD's Inspector General.  We conducted our
review from March through June 1997 in accordance with generally
accepted government auditing standards. 

We are sending copies of this report to the appropriate congressional
committees; the Executive Director, San Diego Housing Commission; the
Director, Office of Management and Budget; and other interested
parties.  We will make copies available to others upon request. 

Please call me at (202) 512-7632 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
II. 

Judy A.  England-Joseph
Director, Housing and Community
 Development Issues


PROJECT'S CHARACTERISTICS AND
FUNDING
=========================================================== Appendix I

Knox Glen is a 54-unit complex consisting mainly of two-story town
houses.  It includes 9 two-bedroom units, 31 three-bedroom units, and
14 four-bedroom units.  The average number of bedrooms is three. 
(see table I.1.)



                               Table I.1
                
                Size of Knox Glen's Units, by Number of
                                Bedrooms

Size of unit, by number of                             Total number of
bedrooms                           Number of units            bedrooms
------------------------------  ------------------  ------------------
Two-bedroom                                      9                  18
Three-bedroom                                   31                  93
Four-bedroom                                    14                  56
======================================================================
Total                                           54                 167
----------------------------------------------------------------------
Source:  Rent roll for Knox Glen Apartments, dated Mar.  7, 1997. 

In addition to three- and four-bedroom town house units, Knox Glen
contains 12 apartment flats.  The six ground floor units are fully
accessible for persons with impaired physical mobility.  The size of
the units varies from 678 square feet for a two-bedroom apartment
flat to 1,383 square feet for a four-bedroom town house.  (See table
I.2.)



                               Table I.2
                
                Characteristics of Knox Glen's Units, by
                 Number of Bedrooms, Type of Unit, and
                             Square Footage

                                                 Number of
                                                    square       Total
Size of unit, by        Type of      Number of    feet per      square
number of bedrooms      unit             units        unit     footage
----------------------  ----------  ----------  ----------  ----------
Two-bedroom
----------------------------------------------------------------------
                        Flat                 4         678       2,712
                        Flat                 5         711       3,555

Three-bedroom
----------------------------------------------------------------------
                        Flat                 3         855       2,565
                        Town house          14       1,197      16,758
                        Town house          14       1,214      16,996

Four-bedroom
----------------------------------------------------------------------
                        Town house          14       1,383      19,362

======================================================================
Total                                       54                  61,948
----------------------------------------------------------------------
Source:  Rent roll for Knox Glen Apartments, dated Mar.  7, 1997, and
Independent Auditor's Report, Dec.  23, 1996. 

Knox Glen's development was financed with funds from a number of
private and public sources.  The first mortgage accounted for less
than 25 percent of the total funding, while the proceeds from the
syndication of the tax credits accounted for approximately 50 percent
of the total funding.  The public subsidies enable the development to
charge rents that are comparatively affordable to low-income tenants. 
(See table I.3.)



                               Table I.3
                
                 Sources of Funds Used to Finance Knox
                           Glen's Development

Source of funds                                        Amount of funds
----------------------------------------  ----------------------------
Tax credit proceeds                                         $4,066,907
HUD-HOME funds                                               1,399,000
Community Redevelopment Agency of San                          150,000
 Diego
American Savings Bank, including a                           1,795,000
 $250,000 Affordable Housing Program
 award\a
Developer fee note                                             619,059
======================================================================
Total                                                       $8,029,966
----------------------------------------------------------------------
\a The project received this award after the tax credit award. 

Source:  California Tax Credit Allocation Committee, final cost
certification, Dec.  23, 1996. 

All of Knox Glen's units are targeted to low-income households:  22
units are targeted to households with incomes at or below 50 percent
of the area's median income (AMI), adjusted for household size, and
32 units are targeted to households with incomes at or below 60
percent of AMI, adjusted for household size.  (See table I.4.)



                               Table I.4
                
                Household Income Levels Targeted at Knox
                                  Glen

                                                  Household
                                                 income level   Total
                                                 targeted, by   number
                                                  number of       of
     Size of unit, by number of bedrooms            units       units
----------------------------------------------  --------------  ------
                                                    50      60
                                                percen  percen
                                                     t       t
                                                    of      of
                                                 AMI\a   AMI\a
----------------------------------------------  ------  ------  ------
Two-bedroom                                          9       0       9
Three-bedroom                                        7      24      31
Four-bedroom                                         6       8      14
======================================================================
Total                                               22      32      54
----------------------------------------------------------------------
\a Area median income, adjusted by household size. 

Source:  Rent roll for Knox Glen Apartments, dated Mar.  7, 1997. 

Knox Glen's rents are lower than the maximum rents allowed under the
section 8 rental assistance program, another program used by
Department of Housing and Urban Development (HUD) to make rents more
affordable to lower-income households.  The primary reasons that Knox
Glen can charge lower rents is the funding provided by the Low-Income
Housing Tax Credit, as well as the other public and private
subsidized financing provided to the Knox Glen development.  (See
table I.5.)



                               Table I.5
                
                Comparison of Knox Glen's Rents With the
                   Maximum Rents Allowed Under HUD's
                           Section 8 Program

                                                           Fair market
                                                                  rent
                                                           ceiling for
                                                             section 8
Size of unit, by number of       Number of  Monthly rent        rental
bedrooms                           units\a       charged  assistance\b
----------------------------  ------------  ------------  ------------
Two-bedroom
----------------------------------------------------------------------
                                         9           486           682

Three-bedroom
----------------------------------------------------------------------
                                         7         558\c
                                        23         678\d           947

Four-bedroom
----------------------------------------------------------------------
                                         6         618\c
                                         8         753\d         1,118
----------------------------------------------------------------------
\a Because no rent is charged for the three-bedroom unit occupied by
the resident manager, only 53 units are included in this table. 

\b Figures obtained from a San Diego Housing Commission letter dated
Mar.  18, 1997. 

\c Rents charged to households with incomes at or below 50 percent of
the area's median income. 

\d Rents charged to households with incomes at or below 60 percent of
the area's median income. 

Source:  Rent roll for Knox Glen Apartments, dated Mar.  7, 1997. 

Table I.6 identifies Knox Glen's total development costs, by major
cost category.  It also indicates which of these costs are counted as
part of the eligible basis for the Low-Income Housing Tax Credit
program.  Because of its location in a low-income neighborhood, Knox
Glen was eligible to increase its tax credit eligible basis by 30
percent. 



                               Table I.6
                
                 Total Development Costs and Tax Credit
                Eligible Basis for Knox Glen Apartments,
                        by Major Cost Categories

                                                            Tax credit
Cost category                     Development cost      eligible basis
------------------------------  ------------------  ------------------
Land                                      $970,585                  $0
New construction                         5,019,186           5,019,186
Architectural fees                         250,914             250,914
Construction interest and fees             115,179             115,179
Permanent financing                         36,763                   0
Legal fees                                   9,625               9,625
Reserves                                   234,000                   0
Other                                      485,456             424,733
Developer's costs\a                        908,258             908,258
======================================================================
Total uses of funds                     $8,029,966          $6,727,895
----------------------------------------------------------------------
\a Includes the developer's overhead and profit, as well as fees for
consultants and processing. 

Source:  California Tax Credit Allocation Committee, final cost
certification, Dec.  23, 1996. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Dennis W.  Fricke, Assistant Director
Andrew E.  Finkel, Senior Evaluator
Patrick B.  Doerning, Senior Operations Research Analyst
Elizabeth R.  Eisenstadt, Communication Analyst


*** End of document. ***