The Hidden Incentives Driving California’s $1 Million Apartments

You do not need an economics degree to know that spending $1 million on a single affordable apartment is a failure. Yet in Sacramento we call it policy.

We have built a machine that rewards waste, funnels your money to big banks and treats working families like rounding errors. I believe we have a moral obligation to house our people. But as someone who spent twenty years fixing broken systems, I can tell you that our housing policy is not broken. It is functioning exactly as designed. And that is the problem.

If you want to understand why the costs are so high you simply have to follow the money.

The state rarely gives developers cash to build housing. Instead we give them tax credits. But a developer cannot go to a lumber yard and buy materials with a tax credit. They need actual cash.

To get that cash they must take these credits to Wall Street. They sell a dollar’s worth of tax credits to a bank for about 85 cents. The bank buys them to lower its own corporate tax bill and the developer gets the cash to build.

It sounds technical but the cost is staggering. We are effectively surrendering 15% of our housing budget just to convert these credits into spendable money. That is millions of dollars per project vanishing into transaction costs before a shovel hits the dirt. It is a massive wealth transfer to banks for the privilege of housing our neighbors.

The inefficiency compounds when we look at how developers are compensated.

In a standard business model if you build a house for $400,000 and sell it for $500,000 you have succeeded through efficiency. But in the world of government housing cost savings are often penalized.

Under the rules of the California Tax Credit Allocation Committee, the developer’s fee serves as their profit and is calculated as a percentage of the total construction cost.

This creates a backward incentive structure. The rule is simple: The more the building costs, the more the developer makes.

If a developer works hard to save $1 million through efficient management they reduce their own fee by roughly $150,000. The system discourages thrift. Instead it encourages budgets to expand with consultants, administrative delays and legal add-ons. We end up paying significant "success fees" for apartments that cost more than luxury condos.

This is not a sustainable housing program. It is a transfer of wealth from taxpayers to a system that has lost its discipline.

The disconnect is perhaps most visible in how these rules impact the working class.

In Los Angeles families are struggling with rent. Yet the state uses a formula that can make their lives harder. To qualify for state funding developers must run their project through a state computer model to determine its environmental score.

The model penalizes projects that offer free parking. If a developer provides a parking spot for a working family at no cost, the project loses the points required to qualify for funding.

However, if the developer commits to charging that family an extra $1,800 a year for the same spot the score improves. The model assumes that removing $1,800 from a working household’s budget will cause them to drive nearly 10% less.

The reality is different. The truck is still there. The job site does not move. The vehicle is still necessary. The only change is that the family has less disposable income. The building appears "greener" on a spreadsheet but the residents are financially weaker.

This creates a bureaucratic trap. Either the developer makes the housing less affordable for a working family or the housing does not get built.

This approach fails the very people we are trying to help. Ask a self-employed plumber in East L.A. His truck is not a luxury. It is his workshop. He cannot haul tools, pipes and equipment on the bus. By eliminating parking to satisfy a government formula we are stripping him of his livelihood. We are actively gentrifying the working class out of their own vehicles.

State leaders often focus on the ribbon-cutting ceremony. We need to focus on the math.

This is about respect. It is about respecting the taxpayer enough to spend their money efficiently. And it is about respecting working families enough to build housing that fits their actual lives.

We need leadership that can identify these errors and correct them. We need to stop paying a toll to Wall Street, fund construction directly and ensure that family housing includes space for work vehicles.

California has the resources to house its people. We just need the discipline to fix the system.