San Jose would spend $3 million to help wind down First Community Housing, a major affordable-housing nonprofit

SAN JOSE - City housing staff want to spend $3 million to help wind down First Community Housing, a San Jose nonprofit that builds and runs affordable apartments, according to a Housing Department memo going to the City Council on Nov. 10.  The memo states a "goal of winding down the corporation within 18 months" by selling or handing off its properties.

Founded in 1986, the nonprofit rents to households earning 20% to 60% of area median income (AMI, the region's middle income), its website says.  In 2022, city staff wrote that it owned or controlled 16 San Jose properties and was the only San Jose group with a federal designation that lets it receive certain U.S. housing grants.

Staff propose a forgivable loan, one the city can later cancel, of up to $1.5 million to hire an outside consultant through June 2027 to review each property and recommend whether to stabilize, restructure, transfer or otherwise dispose of it.  Another $1.5 million would go to Curtner Studios, 179 apartments for extremely low-income residents at 701 Curtner Ave., which lost $585,586 from January through July.  The memo says that covers about a year of operations and approves no property sale.

The nonprofit owes more than it owns, according to its 2024 federal tax return, the latest available.  At the end of 2024 it reported $100.1 million in assets and $123.3 million in debts and other obligations, a $23.2 million gap.  It lost $14 million that year, including $5.4 million on asset sales, and had about $630,000 in cash.  Its obligations have exceeded its assets every year since 2022, its returns show.  By late 2024 it had 13 employees and an unpaid volunteer CEO and had hired outside firms for asset management and accounting.

Most of its assets are not cash:  $70 million in construction in progress, $19.7 million owed by related companies, $6.2 million in development fees owed to it and $2 million in property held for sale.  Its biggest obligations are $75.8 million in mortgages and notes secured by property and a $36.5 million deficit in partnerships.  Many of its buildings are owned by separate partnerships it is tied to, such as Curtner Studios L.P., so the return does not show their full value or debts.

City records trace the trouble to a growth push.  In 2017 the nonprofit decided to start three new projects a year instead of about one, spending $2 million to $9 million per project on land and planning before construction loans closed, a 2022 Housing Department memo says.  When financing stalled, it "has become financially over-extended and unable to meet all of its financial obligations," that memo says:  a $29 million loan on its planned McEvoy Apartments was in default, it lost $2.5 million on a Santa Cruz project, and Second Street Studios and Curtner Studios were losing money every month.

The city has stepped in before.  In late 2022, staff recommended a $13 million city loan to pay off Second Street Studios' bank loan, making the city that building's first-mortgage lender.  In 2023, staff recommended the city buy the McEvoy land for up to $13.45 million so the nonprofit could pay down part of that defaulted loan.

The new memo says the city has put about $125 million in loans into the nonprofit and its affiliates; in 2022 staff put the figure at nearly $87 million across 15 projects.  The memo does not say how much has been repaid, how much the city expects to recover, whether any will be written off, or which loans are backed by property.  City records show how such loans can work:  the city's original Second Street Studios loan charged 4% over 55 years and was repaid only from "residual receipts," money left after a building pays its bills.  A building that loses money may pay the city little or nothing.

The $3 million would come from the city's Low and Moderate Income Housing Asset Fund, money set aside for affordable housing, not the General Fund that pays for police, parks and libraries.  It would cut that fund's housing project reserve from about $24.9 million to $21.9 million.  The memo puts no figure on possible losses, but money the city cannot recover is money not available for other affordable housing.  The plan aims to "protect the City's financial interests and public investment," the memo says.

The memo does not mention bankruptcy.  It describes a city-guided wind-down "while preserving housing stability" for tenants, with any sale, transfer or change in city financing coming back to the council separately.

Source:  Housing Department memo, council item 8.1; draft resolution (a); draft resolution (b); Nov. 10 council agenda; 2022 Second Street Studios memo; 2023 McEvoy land purchase memo; First Community Housing IRS Form 990 filings; First Community Housing, About page