CITY HALL — The development company JSM Construction, which built much of Downtown Santa Monica’s housing supply, has failed to construct 52 affordable housing units it was required to build under an agreement the company entered into with City Hall.

As part of a deal that allowed JSM to build eight market-rate housing complexes Downtown, the company promised to build two, 26-unit deed-restricted affordable projects — one at 711 Colorado Ave. and one at 1514 Seventh St.

But construction at those properties has halted, and the lots were sold in a foreclosure auction in April.

Despite the company’s failure to follow through on its commitments, five of JSM’s market-rate buildings have received final “certificates of occupancy” and today house tenants, a Daily Press investigation found.

Numerous attempts to reach JSM executives, including the company’s president, Craig Jones, were unsuccessful.

Robert Tourtelot, a lawyer representing Jones in a lawsuit filed against him by another developer, said his client is “working on a project in Indonesia” and was unavailable.

At City Hall, officials said they were working to acquire the affordable units they were promised, but admitted the deal they approved with JSM was flawed.

“The city is committed to getting the affordable housing units built and occupied — that’s our goal in all of this mess,” said City Manager Rod Gould.

Documents obtained by the Daily Press show JSM put up $1.1 million as security that the affordable units would be built — or about 2 percent of what it would cost to construct the 52 affordable apartments.

City Hall has not been able to collect even that amount, officials said, because the security JSM put up was in the form of a lien against the properties where the affordable units were to be constructed, which were sold at auction to pay back other creditors.

The situation has caused officials to question the process they followed in approving the deal with JSM.

“There could have been a better type of security, and in a larger amount,” said Andy Agle, director of housing and economic development.

However, he said the problem wasn’t a failure to follow the rules, but rather the rules themselves.

Under City Hall’s formal guidelines for projects like the JSM deal, a developer is able to get final permits for a market-rate housing project even if its affordable-housing component hasn’t yet been built. All the developer has to do is prove that construction on the affordable units is underway and provide some type of security at least equal in value to the “in-lieu fee” the developer would be charged for opting not to provide the affordable units.

In the JSM deal, those conditions were met, Agle said.

The in-lieu fees, though, happen to be far less than the cost of building actual housing units. City Hall encourages developers to build affordable housing units rather than pay the in-lieu fees, Agle said, by rewarding those who choose to build affordable units themselves with a faster, simpler approval process for their market-rate projects.

Since JSM received administrative approval for its projects, the City Council was not required to vote on the deal.

Agle said the JSM episode raises concerns about the practice of allowing developers to open their market-rate projects before completing their affordable housing commitments under any circumstances.

“I think we’re going to want to have the council review the guidelines and look at [whether there are] opportunities to tighten them up and as well ask this question about the timing,” he said.

He declined to discuss City Hall’s strategy for obtaining the affordable units, citing the possibility of litigation, but said he’s optimistic the owners of the market-rate projects will be required to meet their commitments.

“If ultimately we failed to get the affordable units, then I think we’ve lost an important public benefit, but I’m not giving up on that at all,” he said.

City Attorney Marsha Moutrie said her office is prepared to sue in order to compel JSM and its partners in the deal to provide the affordable units, but added she hopes it won’t come to that.

“All the parties … need something from the other. The city needs the affordable units and the owners of the market-rate properties need various city approvals. [So] all parties have reason to cooperate with one another,” she said.

For some officials, JSM’s failure to follow through came as a surprise in part because of the company’s long history of successful projects.

JSM pioneered infill residential development in the downtown area in the 1990s, helping rejuvenate the city’s commercial core by building housing close to the Third Street Promenade, which debuted in 1989.

According to its website, JSM has built or entitled as many as 1,500 apartment units in Downtown Santa Monica, 300 of them deed-restricted for low-income tenants.

The completed projects, most of them located on Fifth, Sixth and Seventh streets, fulfilled a goal at City Hall, where officials have long encouraged residential construction that is close to transit, jobs and services as a way to cut down on auto emissions and protect existing neighborhoods from condo development.

Councilman Kevin McKeown, an advocate for affordable housing, said the city’s policy of encouraging low- and moderate-income housing Downtown has largely been a success, the problem with JSM not withstanding.

“The few problems we do have should be looked at in the context of a very aggressive and highly successful affordable housing production policy that has succeeded in diverting demolitions away from established neighborhoods,” he said.

JSM’s business model of entitling several market-rate projects at once and consolidating each building’s affordable housing requirement into a separate project had for years seemed rock solid. So officials were caught off guard when the real estate bubble burst and several JSM properties ended up in foreclosure.

McKeown said decision makers at City Hall had grown comfortable with JSM — and especially with Jones.

“People saw Craig riding around Downtown in his electric golf cart. He was part of the community, and people trusted him,” he said.

nickt@www.smdp.com

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