Larkspur rental housing complex sold after bond default

A 342-apartment complex in Larkspur that was purchased using tax-exempt municipal bonds to provide housing for middle-income households has been sold after defaulting on its debt.

Serenity at Larkspur at 700 Lincoln Village Circle was purchased in a $226.5 million deal in 2019. Bondholders were notified on Dec. 5 that the property was being sold for about $170 million to Pacific Multifamily Investors, a limited liability company.

The notice said that following “noticed defaults and events of default” and “after exploring various restructuring options for the bonds, the trustee and CalCHA concluded that the only viable path was to sell.”

CalCHA is the California Community Housing Agency. It was created in 2019 as a joint powers authority to address the state’s shortage of middle-income housing by financing affordable rentals through tax-exempt bonds.

CalCHA buys market-rate apartment properties by issuing its own government purpose bonds. As of 2023, CalCHA had purchased 14 apartment properties involving about $2.5 billion in tax-exempt municipal bonds.

In at least nine of those deals, it partnered with the Larkspur-based Catalyst Housing Group, acquiring more than $1.3 billion in high-end apartments. Catalyst’s founder, Jordan Moss, was instrumental in forming CalCHA.

Neither CalCHA nor Catalyst responded to requests for comment on the sale of Serenity at Larkspur. Pacific Multifamily Investors also did not respond to a request for comment.

Larkspur Councilmember Stephanie Andre shared the news with the council on Dec. 10.

“Given the circumstances, this is a very good result for the city of Larkspur,” she said.

That is because CalCHA, as a governmental entity, is granted a 100% property tax exemption for each property it acquires. Larkspur and other governmental entities, including the county, special taxing districts and schools, sacrificed about $3 million a year in property taxes when Serenity at Larkspur was purchased.

“Once the transaction closes,” Andre said, “the property will come back onto the property tax rolls.”

Less certain is the effect the sale will have on renters at Serenity and the availability of housing for middle-income households in Marin.

According to a regulatory agreement included in the bond offering for Serenity, vacant apartments were required to be rented to households earning between 80% and 120% of the area median income for Marin County. For example, a four-person household could earn between $154,700 and $222,850 a year. Rent increases were also limited to 4% per year.

Financial documents, however, show that as of June 30, only 207 of the apartments were being rented by households meeting these requirements. Notices to bondholders also show the average rent at Serenity in October was $2,999. The average rates included $2,674 for a one-bedroom apartment and $3,366 for a two-bedroom apartment.

“The average rents for Marin County, according to the most recent data published by CoStar and used for my rent survey, are less than that,” Michael Burke, an agent at Golden Gate Sotheby’s International Realty, wrote in an email. “The average one bedroom rent in the third quarter was $2,494. The two bedroom average was $3,202.”

It was necessary for Larkspur to join CalCHA as a non-charter board member to authorize the bonds that were used to purchase Serenity. In April, the City Council voted to withdraw from the authority.

In their final report, Andre and Larkspur Councilman Scot Candell wrote, “Serenity has not met its goal of providing significant rent benefits to middle income renters.” They estimated that taxpayers had foregone $14 million in taxes over the last five years.

There is a chance, however, that some of that lost tax revenue will be recouped.

In March 2024, Catalyst Housing, which had been receiving $200,000 a year to serve as project administrator for Serenity, was sent a $9 million bill for property taxes dating back to 2019. The bill was sent after Marin County’s tax assessor, Shelly Scott, concluded that Catalyst’s rental business at Serenity met the definition of a taxable possessory interest. A taxable possessory interest arises when a private entity uses, rents or leases real estate owned by a government agency.

“The outstanding balance for Catalyst Housing’s possessory interest unpaid taxes currently stands at $19 million,” Mina Martinovich, the county’s finance director, wrote in an email.

Marin County Counsel Brian Washington said, “Similar possessory interest tax assessments were made for CalCHA properties in the counties of Los Angeles, Orange, Alameda, and San Diego.”

Washington said Catalyst appealed the Serenity assessments to the Marin County Assessment Appeals Board, and earlier this year a decision was made by the Orange County Assessment Appeals Board that supports Catalyst’s position.

“Because there are four total appeals in Orange County, it is possible for additional decisions and Superior Court intervention,” Washington added. He said the county has entered into a tolling agreement with Catalyst to pause collection of the tax in Marin until the Orange County cases are resolved.

Larkspur resident Dennis Gilardi, who opposed the city’s decision to join CalCHA and has been tracking Serenity’s progress since the bond offering, said he wasn’t surprised by the sale.

“In my opinion,” Gilardi said, “this thing never could have made money because the debt structure was so heavy.”

A recapitalization plan that contemplated replacing the existing bonds with a new series of bonds was proposed in June 2024, but it was never acted on. The bond trustee appointed the Waterford Property Co. to replace Catalyst as Serenity’s project administrator in March. Waterford did not respond to requests for comment.

In a letter to Larkspur City Manager Dan Schwarz in March, Scott Carper, a CalCHA program administrator, wrote that when the bond financing on Serenity was paid off in 2050 and the property sold, “the city would receive approximately $180 million of net sales proceeds.”

Gilardi, however, said Larkspur’s exit from CalCHA made the issuance of new bonds problematic.

“There was really no appetite in the market for tax-exempt bonds that lacked an underlying asset that would ever pay off,” he said.

Both Andre and Gilardi see parallels between Serenity and Oak Hill, a proposed $124 million housing project for county and education employees. Marin County and local schools are considering guaranteeing the debt service for $74.1 million of the $94.5 million in bonds to be issued.

“Looking at the projections and the assumptions in today’s environment makes me nervous,” Gilardi said.

Andre said, “There are definitely similarities.”