Audit finds grant challenges, limited experience led to $6M bailout of Vallejo supportive housing project

VALLEJO – A managerial audit of a long-delayed Vallejo supportive housing project found that the complexities of the project’s state grant funding and the limited experience of city staff and the developer team were the root causes of delays and budget overruns that led to a $6 million city bailout of the project.

The audit was started after a City Council meeting in May, when the council faced a choice between having to pay back a significant portion of $20 million in grant funds or cover a $6.15 million shortfall. The frustrated Council felt they had no choice but to approve the bailout.

“We are now in a reality situation where we either solve the problem or it gets much more expensive,” Mayor Robert McConnell said at the meeting in May after referring to the project as a “financial catastrophe.” 

The council reluctantly approved the funds and directed city staff to conduct an independent audit of the management process that led to cost overruns. 

“Millions of dollars were wasted,” Councilmember Mina Loera Diaz said during the council meeting Tuesday following a presentation of the audit. “And the reason I feel that they were wasted is because we had a proposal given to us that was going to be X amount of dollars. I, at no time, expected to be a school or a learning place for anybody.”

Construction on the 47-unit supportive housing project – intended for Vallejo residents who are chronically homeless  –  began in September 2022. Early estimates of the cost prior to the start of construction were as low as $9.6 million but the project developer, Firm Foundation, proposed an initial budget of $15.6 million, according to Kevin Zwick, a representative of MRG, the management consultant firm that conducted the audit. 

However, the construction budget later grew to $22 million. 

The project ran into financial problems when a grant fell through and homelessness services provider Shelter Inc., which was slated to purchase the project upon completion, backed out of the deal stating that increasing debts were encumbering the property.

As a result of the funding shortfall, construction on the project came to a halt in September 2023 at 70% completion. Unpaid contractors filed liens against the project and the delay led to further additional costs, bringing the total budget to $26.6 million.

In May, the council chose to cover the funding gap with $3.2 million in unspent American Rescue Plan Act funds, part of which was originally earmarked for the Solano County Sheriff’s Office to provide assistance to the Vallejo Police Department. The remainder of the shortfall was drawn from Measure P funds, Vallejo’s eighth-cent sales tax approved by voters in 2022. 

The Measure P oversight committee recommended only approving $1.3 million to cover the liens and recommended that any funds drawn from Measure P come in the form of a loan to be repaid upon the sale of the project. The council chose to fund the full remaining gap of $2.8 million from Measure P but followed the recommendation of the to draw the funds in the form of a loan. 

Zwick said that the current project cost and timelines are comparable to similar affordable housing projects throughout the state. However, he said, the Project Homekey grant that made up nearly $12 million of the project’s funding involved aggressive timelines that were designed for converting hotels into housing. 

The substantial size of the grant also allowed the project to proceed without the oversight of investors or financial institutions that would have required safeguards to insure success, he said.

The challenges related to the Project Homekey grant have impacted other projects as well, Zwick said, noting that according to the state housing agency, only 26 out of 116 projects that were part of the same funding round have been completed and occupied.

Zwick said that on top of the difficulty inherent in the grant funding, a number of issues arose that are part of the general risks involved in development such as incomplete designs, supply chain delays, rising labor costs and environmental and legal challenges. 

These issues, combined with the inexperience of the development team at the city of Vallejo and Firm Foundation, made these challenges difficult to overcome. 

Zwick listed several recommendations for future development projects which provided the most insight into what actually went wrong. 

He recommended always requiring a payment and performance bond prior to construction to mitigate any losses due to a contractual default and he recommended thorough vetting of affordable housing developers through a formal request for qualifications process.

Loera Diaz, whose family members are involved in the construction industry, appeared shocked that the city apparently had not secured a bond prior to the start of construction. She asked if the city had conducted a request for qualifications in the search for a developer.

Zwick said that in interviews, staff members claimed that there was a vetting process to select Firm Foundation but he was unable to find a formal record of the process.

Also on the list were recommendations to never start construction on a project without firm commitments for all funding required, to hire a housing development officer with expertise in finance oversight, and to create a housing development policy and procedure handbook and underwriting guide to support future projects.

City Manager Andrew Murray said he expects to release a full report on MRG’s findings for public review later this month.

According to assistant to the city manager Natalie Peterson, the city now estimates the project will be completed in March and the city has a 90-day deadline from completion to reach full occupancy.

Loera-Diaz requested that city staff provide monthly updates to the council on the status of the project until it is complete.