By Andrew Keatts and Ry Rivard.

Not that long ago, the San Diego Housing Commission scoffed at paying $20 million to rehab downtown’s Hotel Churchill.

It made no sense to pour that much money into a century-old building to create just 90 apartments for very low-income people, agency officials said.

Fast-forward three years and the agency is paying $20 million to rehab Hotel Churchill – only it’s now getting even fewer rooms out of the deal.

An old neon sign was removed from atop the hotel last month with great fanfare. The project, however, almost didn’t happen — because Housing Commission officials said it would be a bad investment of taxpayer dollars.

A rush to spend federal money changed the agency’s tune. Now, the San Diego Housing Commission is proudly touting its efforts, even as it runs over budget.

From Sow’s Ear to Silk Purse

Commission officials rejected private developer bids in 2012 to rehab the historic Hotel Churchill and provide 90 rooms for residents on the brink of homelessness.

Two developers said they could remodel the hotel, or even build a whole new structure, for around $20 million.

But that meant spending nearly $213,000 per room. That was too much for agency officials. They were already under scrutiny for spending too much on each home they built for low-income residents.

“Staff does not recommend the expenditure of over $20 million to create approximately 94 [very-low income] units that are in excess of 100 years old,” top agency staffers said in a memo at the time.

The agency’s president, Rick Gentry, had a more colorful assessment.

“We’ve got a sow’s ear here we cannot make into a silk purse very easily,” he said of the Churchill, at the public hearing rejecting the developer bids.

So after rejecting those developers’ proposals, the agency looked at tearing down the Churchill and putting up something new, or selling off the property to get money for a project somewhere else.

About eight months later, the commission reversed itself.

Suddenly, investing $20 million in a bunch of small, bare-bones apartments made sense after all, but only if the agency developed the project itself, instead of partnering with a private developer.

The commission also reduced by 20 the number of units it planned to build, from about 90 to about 70, even though the total costs remained nearly the same.

Now, the commission will end up spending about $282,000 each for the 73 apartments meant as a last-ditch housing option for residents who could end up homeless, after it previously balked at the idea of spending $213,000 each for 94 such units.

What changed?

By spring 2013, the agency began to worry the Obama administration would take back federal housing money that the Housing Commission had been sitting on.

So, at a meeting that May, the commission rushed ahead with the project it had previously rejected as a bad investment.

What about asking for more competitive bids from private developers to see if they could beat the commission’s price? That would take too long.

What about trying to tear down the Churchill to put up a new structure? That would take too long too. Demolishing the historic property would trigger a lengthy series of public hearings that might be rejected anyway.

“If we are going to lose the money anyway, better to use it,” Gentry told the commission’s board.

Escalating Costs

In April, after realizing the Churchill was more difficult to redo than it had expected, the commission went to the City Council to ask for several million more — the agency was already running over budget.

Now, the agency is on track to spend $20.6 million on a project it said more than $20 million should not be spent on.

Fears about escalating costs had partly prevented the project from getting under way back in 2012, when private developers had said they could build more than 90 new apartments for that price.

Chuck Christensen, general counsel for the Housing Commission, said cost overruns were one of the reasons it made sense to reject the private developer bids that year. Projects, he said, tend to go over budget by about 20 percent.

That means a $20 million bid, like the one private developer Community Housing Works put together in 2012 to rehab the Churchill, could have really cost $24 million when all was said and done.

It doesn’t make sense, Christensen said, to now compare those preliminary estimates from bidders with the agency’s current budget, which is based on actual costs to date.

But there’s another reason why it may not make sense to compare the commission’s current budget for Hotel Churchill to those outside bids.

The private developers’ bids counted both the land and building as expenses, which made their projects seem about $2 million more expensive than they really were. The commission, by contrast, does not count building and land costs – making it seem $2 million cheaper than developers’ bids.

This is an odd but common practice in California for private developers of low-income housing projects. They inflate the cost of their projects to compete for state tax credits that are awarded to bigger projects. Because the Housing Commission isn’t using tax credits, it had no such incentive to inflate its costs.

Ultimately, because of this, when a developer put in a $20 million bid, that was roughly equal to an $18 million project by the Housing Commission.

That’s not the only way the commission’s plans differ from the developers’.

In its call for bids, the commission told developers to expect just $3 million in funding from city coffers. When the commission put the project together, it found more than twice that much in city housing funds to help the project pencil out.

The commission also argues that it’s saving at least $1.6 million by using its own nonprofit development arm, Housing Development Partners, instead of private developers, who asked for $2 million in fees to do the job. But it isn’t avoiding fees entirely. Housing Development Partners, on which Gentry also serves as president, is still collecting $400,000 to manage the project.

The commission had another reason to reject a Churchill rehab back in 2012. A seismic retrofit could ensure the safety of everyone in the building in the event of an earthquake – but it might not save the building. The commission could lose its $20 million investment.

The commission believes it has found a better way to earthquake-proof the Churchill. It’s essentially putting shock absorbers into the walls of the old building.

Troy Morgan, a structural engineer at the New York firm Exponent who reviewed the plans for the city, said the design is able to prevent a collapse even during a severe earthquake.

“It’s at least as good as a new building,” he said.

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Originally posted at Voice of San Diego.