These tiny apartments for Sacramento homeless will cost more to build than a luxury house

Last year, Sacramento officials announced an extreme makeover for the Capitol Park Hotel, the century-old building just a few blocks from the Golden 1 Center and K Street restaurant scene, that would bring life to a dilapidated building with newly renovated rooms for the homeless.

The project has been hailed as an important step to house Sacramento’s homeless population. But transforming the Capitol Park Hotel will come at an extraordinarily high price to taxpayers and the nonprofit groups involved in the project, an investigation by The Sacramento Bee has found.

The cost to redevelop the Capitol Park Hotel is more than $445,000 per unit for apartments that will be tiny — about 250 square feet. In Sacramento, the median home value is $425,000 for houses more than 1,600 square feet, about the same price to redevelop these single occupancy micro-apartments at 9th and L streets downtown.

Redevelopment of the hotel is budgeted at $59.6 million, and is expected to end in the summer of 2022. If it stays on budget, the project will come to $1,100 per square foot — more than double the square-foot price to build a luxury home in El Dorado Hills or Granite Bay, or to buy a high-end midtown apartment.

In the meantime, some of the unoccupied rooms have been filled with homeless people off the streets of Sacramento. The city budgeted $10 million to operate a temporary shelter for 18 months at the downtown site — tens of thousands of dollars for every person who passed through the shelter.

The overhaul of the Capitol Park Hotel illustrates a significant problem in California: the astronomical cost of building is a roadblock to ending the homeless crisis. The higher the construction and redevelopment costs, the less money is available to make a serious dent in the problem in a state with an estimated 150,000 homeless people.

The Capitol Park Hotel, when completed, will house 134 of them.

In San Francisco, it takes $750,000 to build a two-bedroom affordable housing unit, something Gov. Gavin Newsom has called “insanity.” In Solana Beach in Southern California, the cost to develop each apartment at an affordable housing project reached $1.1 million.

“Anyone can do the arithmetic to know that a better way can be found,” said Phillip Mangano, the U.S. homelessness czar under Bush and Obama who now serves alongside Sacramento Mayor Darrell Steinberg on Newsom’s task force to address homelessness.

About 5,500 people experience homelessness on any given night in Sacramento County, with as many as 11,000 experiencing at least one episode of homelessness, according to last year’s point-in-time count.

To develop permanent housing for 134 people at the Capitol Park Hotel, a web of government agencies, nonprofits and others will end up spending approximately $70 million to move dozens of senior citizens out of the property; allow the homeless to occupy the building temporarily; move them out; tear apart and construct two connected buildings with historical significance; and then move in others with a host of services to help them.

Yet at a time when new affordable housing units are needed more than ever, the nonprofit developer Mercy Housing is reducing the number of permanent rooms that it will build at the hotel — from 180 to 134, because of funding and design limitations imposed by local, state and federal governments. Mercy will receive $2 million in “profit” once the redevelopment is completed.

The budgeted $10 million for the temporary shelter failed to relieve many of the substandard conditions at the hotel, which has been plagued by roaches and bedbugs, and repeated failures of its elevator and water system, a review of Sacramento Housing and Redevelopment Agency records show. Last week, the SHRA reported that the building’s remaining elevator is no longer functional and is beyond repair.

In late May, the air conditioner for the sleeping areas stopped working. Officials said that lack of air conditioning — also described as beyond repair — combined with scorching 100-degree summer heat, led them to stop accepting new residents in early June, more than 5 months before the shelter is scheduled to close at the end of October.

Angela Jones, a spokeswoman for the Sacramento Housing and Redevelopment Agency, said they received an estimate of $100,000 to repair the air conditioning, so they declined.

“It did not seem fiscally responsible to repair an air conditioning system that would only be used for a few months,” Jones said. “Guests and residents were provided with fans and ice needed on warm days. Other parts of the building have functioning AC, including the community room.”

‘This is just the reality’

Despite Newsom’s plea about the “insanity” of affordable housing costs, most officials at government agencies, nonprofit organizations and construction firms accept the stratospheric costs in California as unavoidable.

“We certainly wish building multifamily housing was less expensive, but this is just the reality,” said Stephan Daues, regional director of Mercy Housing, who is leading the redevelopment. “In both new construction, rehabilitation, or in this case, historic preservation and adaptive reuse of a building that’s falling down. It’s going to cost what it costs.”

In 2018 and 2019, the city of Sacramento used more than $5 million in taxpayer and private funds to open and run a shelter on Railroad Drive for 17 months. The endeavor ended up costing more than $30,000 for each of the 164 people who later found a permanent home. At the time it closed, 60% of people who had stayed at the shelter were either back on the streets or their location was unknown.

The temporary shelter at the Capitol Park Hotel will undoubtedly be more expensive per person than Railroad Drive. Through June, $5.1 million had been spent operating the shelter at the hotel. At most, 158 will be permanently housed. That means at a minimum, the temporary shelter at the hotel will have cost more than $32,000 for every person who later found a permanent home.

In an interview, Mayor Steinberg said he had no regrets about the project and “would do it again,” citing a “moral imperative to bring people who are unsheltered indoors.”

Steinberg said the project was part of a city housing strategy that includes acquisition and rehabilitation of affordable housing as well as new models like tiny homes and second units. He acknowledged that “it takes too long and is too expensive to rely exclusively on a new construction strategy to address the demand” and cited the construction of so-called “Sprung shelters” — the same as those put up in a hurry to house those displaced by natural disasters — as an alternative.

“I would do a Sprung shelter maybe before I would do Capitol Park again,” Steinberg said, “but it doesn’t change the fact that when your mission is to bring people indoors as quickly as possible that you use what is at your disposal to try to save lives.”

Expensive task of relocating legacy residents

Spending on the Capitol Park Hotel began in earnest with the complicated logistics of finding a place for the legacy residents of the building. By law, every person moved out to make way for the reconstruction needs to be accommodated, and even then the housing solution for some of them may not last forever.

David Nelson, 76, was grateful to receive relocation assistance and found an apartment on O Street in midtown, but rent is twice the amount he was paying to live at the Capitol Park Hotel when it was a single-room occupancy hotel.

“I won’t be able to stay here indefinitely,” Nelson said. “I’ll have to find someplace where I can pay the rent on my monthly income and still have money for prescriptions and for food.”

Nelson, who suffers from COPD and emphysema, receives Social Security but no other income.

It would have been difficult for the relocation staffers to find him a place for much less in the downtown area near his doctors, unless he lived with roommates. Studios in midtown and downtown Sacramento rent for $1,100.

“There’s only so much they could do,” Nelson said. “They helped me find a place but after that, they washed their hands of it.”

The apartment’s rent is $1,200 a month — double the $600 he paid to live at Capitol Park Hotel. The relocation services gave him about $35,000 to move out of the hotel — enough to cover about two years in his new place, as well as food and other needs, Nelson said. In November 2021, he’s not sure where he’ll go.

“I don’t know what I’ll do then because I won’t be able to pay the rent,” he said. “This money they gave us was supposed to last five years. There’s no way in the world it’s gonna do that.”

“I can get another year and then I’ll have to start wondering what I’m gonna do.”

Daues, the lead developer for the project, said Mercy Housing expects to spend the entire $4 million budgeted to relocate the existing residents. About $450,000 is going to Overland Pacific and Cutler, a relocation consultant Mercy is paying to manage the effort. That includes providing a dedicated social worker from a program called LifeSteps to support the residents.

Of the 80 permanent residents who lived in the Capitol Park Hotel when it became a temporary shelter, 64 have received relocation benefits, eight moved out on their own, and three were evicted “due to lease violations,” SHRA said.

In total, the relocation costs for the hotel break down to more than $59,000 per resident who received help.

Escalating costs for temporary shelter

The effort to transform the hotel was effectively launched in December 2018 when Steinberg challenged each City Council member to find a 100-bed temporary housing site for the homeless in their district.

Councilman Steve Hansen said the mayor and SHRA ended up suggesting the Capitol Park Hotel in his district as a location. At the time, the hotel was half-vacant and could be filled with people off the streets while Mercy Housing worked its way through the complicated process of securing funding for the hotel’s rehabilitation.

The shelter’s $10 million budget is about the same as two planned “sprung” tent shelters in Meadowview and North Oak Park that officials approved in August 2019. They are designed to serve 100 homeless people at a time over two years of operations. Meadowview is set to open next week.

Funding for the Capitol Park Hotel shelter comes from the city’s 2012 Measure U, a temporary half-cent sales tax. Private donors supplied about $500,000 to the effort, or 5% of the costs. (In 2018, voters approved raising the sales tax to a full cent after officials promised the money would be spent on affordable housing, homelessness and improving low-income neighborhoods.)

Early on, city officials were worried that the building’s dilapidated condition posed the risk of runaway repair costs. “Due to the age of the building and the lack of maintenance, there may be failures of the building systems (e.g., plumbing, electrical, HVAC, elevators), roofing, and other portions of the Property which could be too expensive to repair on a temporary basis,” city staff wrote in a June 2019 report.

And that is exactly what happened.

After the temporary shelter opened behind schedule in September, the building faced regularly scheduled water shutoffs and repair of more than 1,100 sprinkler heads. In the following months, showers were temporarily closed for emergency repairs for several days, and later required further renovation to prevent leaks.

At various times the hotel has had no hot water and broken heating and cooling systems. Elevators are often broken, sometimes for days or weeks at a time. To this day, new water leaks are addressed on a near-weekly basis. New air filters were installed on each floor in November, according to a review of weekly reports by the SHRA.

In November, the SHRA signed an amendment with The John Stewart Company providing them $1.1 million in additional funds for maintenance and repair. Even with this additional measure, SHRA declined to repair many essential elements of the building, citing costs as the driving factor.

In March, officials gave up on continually repairing one of the hotel’s two elevators. Earlier in January, the southern elevator was down for weeks, forcing officials to offer residents, many of whom are disabled, temporary relocation assistance.

Sewage lines also had to be repaired. Showers, hot water and leaks continued to be a problem. In February, some guests were relocated due to significant water damage and one guest room was taken “off line.” Routine pest controls continue throughout the building, the reports showed.

“The conditions, in my opinion, have been condemnable,” said Crystal Sanchez, president of the Sacramento Homeless Union. “There’s been a fire, there’s been lack of air conditioning. There’s been a lack of hot and cold water. ... I mean, it’s just a mess,”

Sanchez said closing the Capitol Park Hotel to make way for the renovation was “another kick in the gut because there’s nowhere for people to go at this point.”

“I think that the City Council was in a rush to do something because they didn’t have the Railroad shelter or the winter sanctuary program anymore,” Sanchez said. “I don’t really think that they thought it through.”

Councilman Larry Carr has said the hotel has become a “black eye” for the city.

“We need to look carefully before we take possession of a facility,” Carr said in an interview with The Bee. “Once we take possession, it’s our responsibility.”

In June, SHRA signed a second amendment with The John Stewart Company providing them an additional $1.4 million for maintenance and repairs.

The shelter plan vs. reality

When city staff originally recommended the temporary shelter in April 2019 they said, “The numbers of people living and dying unsheltered in Sacramento is on the rise, and there are not sufficient shelter beds to meet the need.”

But the housing agency’s long wind-down of the property has left rooms empty even as the city attempted to get unhoused people off the streets as COVID-19 spread through Sacramento.

On June 5, 2020, officials stopped accepting new residents at the shelter, almost five months before it is scheduled to close at the end of October.

Officials originally estimated the Capitol Park Hotel shelter would serve 540 people and hoped residents could stay for four months. Now that it is no longer accepting new guests, the shelter will close having served about 400 people.

SHRA officials said the average length of stay at the shelter so far has been about 60 days. To date, the shelter has averaged an occupancy of 72 people, far less than the 100 to 180 officials originally intended.

Yolanda Villanueva stayed at the shelter for less than two weeks in September of 2019 when it first opened.

She said she felt safe and that staff were “sweet” and frequently checked in on her. However, she said guests were forced back out onto the streets during the daytime so that necessary repairs could be made to the building.

“They packed you a sack lunch and said, ‘Now you have to leave, don’t come back until six or seven,’ ” she said. “They tell you, after breakfast, ‘Y’all got to get dressed and leave because we are working on the plumbing and no one can use the water.’ ”

“We’ve been in parks too long. I don’t want to be in the park,” said Villanueva.

Villanueva said she was, “So excited to get out of the Capital Park Hotel because they were doing so much work and a lot of time the bathrooms don’t work.”

Beyond the management, repair, maintenance and staffing costs for the hotel’s residents, a web of services funded by taxpayers and nonprofit donors descended on the Capitol Park Hotel.

Alcoholics Anonymous and Narcotics Anonymous offer weekly optional meetings. Elica Health Centers provided medical and dental services to residents as well as administered full behavioral consultations.

At one point, a Veterans Affairs physician provided medical services to veteran guests. American River College and Sacramento State provide alcohol and drug counseling services. Sacramento County’s alcohol and drug treatment programs were on a rotating schedule onsite to assist guests as was Wellspace, a medical provider, to provide nursing triage services.

Volunteers for America, which is paid by SHRA to oversee onsite shelter operations, provides laundry services for each guest, and three meals a day including beverages and snacks. The organization also provides case management for shelter residents, navigating them through the bureaucracy of government programs.

“We’re thrilled with the number of people we were able to house,” said Leo McFarland, CEO and President of Volunteers of America Northern California and Northern Nevada. “If people looked at this old hotel as a lemon, we certainly made lemonade out of this opportunity.”

For guests, support services such as housing application assistance, medical care, alcohol and drug counseling and life coaching are optional. “Services at the shelter are primarily focused on helping guests obtain housing,” SHRA states in its contract with Volunteers of America.

“The band-aid will continue until there is a permanent solution,” said Carr. Until then he said: “Given all of the constraints. Do what you can do in order to make the city livable. … And continue to work with the other agencies.”

Why redevelopment costs got so high

The renovation of the Capitol Park Hotel is part of a 15-year city effort to preserve single room occupancy hotels in downtown Sacramento. Built in 1912, the hotel was one of the dozens across the city that for decades provided affordable housing with no government assistance to much of the city’s low-income population.

At its peak in the 1960’s, the city had 68 such hotels. But by 1986, the majority had been demolished, sold for commercial use or converted into upper-scale apartment housing. Only 16 remained. Following the loss of six hotels in 2006, the council passed an ordinance requiring the city to maintain an inventory of no fewer than 712 SRO units at any given time.

Two of them, the Hotel Berry and Shasta Hotel, have been renovated in recent years, but at far less of a cost than what is projected for the Capitol Park Hotel.

Records show the Hotel Berry was rehabilitated for $26.4 million in 2012 at a cost of about $252,000 per unit. The Shasta Hotel rehabilitation cost $24.3 million in 2018, or about $308,000 per unit. Combined, the Berry and Shasta now house a total of 184 people.

So why will the costs get so high for rebuilding the Capitol Park Hotel?

The answer is a cascade of interests and regulations that all add expenses to the project.

In a vacuum, a building in such poor condition would almost always be demolished and rebuilt into something more profitable. That’s what happened last year when the Marshall Hotel, another former SRO Hotel, on the corner of 7th and L streets, was demolished to make room for a new Hyatt Centric boutique hotel.

The $10 million purchase price for the Capitol Park Hotel, said Daues, reflects that it could have been similarly converted. “We felt like the value was there, and the appraisal backed that up.”

In comparison, records show acquisition costs for the Shasta Hotel totaled only $3.5 million, or $44,000 per unit. That’s $30,000 less per unit than the Capitol Park Hotel.

Much of the rest of the Capitol Park Hotel’s comparatively outstanding costs can be attributed to construction, which is forecasted at $220,000 per unit, approximately half of all costs.

Daues said that in particular, historic preservation requirements and seismic upgrades added to the cost. The hotel is built of unreinforced brick and needs to be reinforced by a concrete superstructure throughout most of the building in order to meet seismic requirements, he said.

“If you look close enough, you’ll see a line down the middle and that the windows do not align, but they were joined as one. It’s actually two separate buildings. That creates huge seismic challenges.”

The seismic upgrades will cost $3.5 million alone. In addition, the state’s historic preservation office had its own requirements that added costs. “The upper floors will largely be preserved in the corridor shapes, which was really important to the state historic preservation office,” Daues said.

“We’ve accommodated that and plan to restore or replace in kind all of the wood trim and doors and all those features that will put the big upper-floor residential common areas back to a point where they are very well-appointed, attractive, hotel corridors,” he continued.

Outside of Capitol Park Hotel’s unique construction and acquisition costs, the project faces much of the same problems as other affordable housing development across the state.

Materials costs rise each year, along with land and labor. Union wages often guarantee construction workers well more than $90 an hour. Because the project uses federal funds, it triggers prevailing wage, a higher than market rate of pay that contractors and vendors must offer their employees when doing business with a government agency. Prevailing wage normally adds about 15% to the total cost to a project.

Add in regulatory hurdles and development impact fees that are three times the national average and you get an environment where any creative cost-cutting by developers is pennies on the dollar.

In California, it’s been this way for decades, though costs have accelerated even more rapidly in recent years. UC Berkeley’s Terner Center for Housing Innovation found that the cost of building a 100-unit affordable project in California increased from $265,000 per unit in 2000 to almost $425,000 in 2016.

Another factor that caused a reduction in the number of apartments from 180 to 134, said Daues, was the issue of rental subsidy. One of the most enduring costs projects like the Capitol Park Hotel face is making up for lost market rent that the homeless simply can’t afford to pay.

Most only receive a small amount of disability or welfare each month from a combination of the state and federal governments. Paying all of that check towards rent is nowhere near enough to service the property’s operating costs and loan payments due each month.

To compensate, SHRA agreed to pay out more than $1 million in rental subsidy each year for the next 20 years.

In the end, the more it costs to build, the more government subsidy required to make units affordable. The more subsidy required, the fewer people ultimately served. The higher the cost, the fewer units.

“I think to some degree or another,” Daues said, “this problem is pretty much always going to be with us.”

This story was originally published September 15, 2020 at 5:00 AM.