By Nick Brunner

For a for-profit developer in Sacramento, from the different regulations they face to how they might not see a payday until a year or more after a job is complete, the challenges to being part of the affordable housing solution are many.

Nonetheless, John Vignocchi, founder and managing partner of Urban Capital, and Katie Hanten, owner and managing principal of Vertical Pacific, want to be part of that effort to create more affordable housing. Or, as Vignocchi says, “helping Sacramento realize its full potential,” in his case, by building new construction multifamily workhouse housing units. As for Hanten, her firm focuses on civil engineering and real estate development, especially with infill housing.

Vignocchi and Hanten recently got together to discuss the role of for-profit developers in affordable housing — and roadblocks they’d like to see removed to ease their efforts.

Vignocchi: I grew up in Santa Barbara — so kind of like NIMBY Central — with a lot of housing insecurity as a kid. So this job has been an idea that’s been lingering in the back of my mind. Founding the company and focusing on helping solve California’s affordability crisis is something near and dear to my heart. [I] went to school in San Luis Obispo, spent 10 years in San Francisco — another NIMBY Central — and moved to Sacramento in 2019. My wife is from here.

Hanten: I thought I would move back to Seattle after college. But I already knew that I couldn’t afford the housing prices there. [I] flew out to Sacramento for a job interview and probably spent a total of three hours here. … I felt like Midtown had a charm that resonated with me, and I just felt like that’s where I should start my career. So I moved here in January 2015.

Vignocchi: There’s something very quixotic about driving down the streets of Midtown and seeing all the trees and all the old homes. … My wife grew up in Carmichael in the ’burbs. … It wasn’t until 2009 when we graduated that we started going down to … Midtown. I was just like what is this place? This is so funky and cool. …

There’s a charm here. [During] COVID, when people had the freedom to leave their jobs or leave their daily commutes, it doesn’t surprise me a lot of them chose Sacramento because it’s a really hidden gem. … [I] just remember driving on 160 and seeing the skyline and feeling like, yeah, I want to help make an impact here. I feel like I can make an impact. I feel like I can help change the city skyline and feel like there’s so much underutilized land.

With our streamlining of our zoning processes, it’s much easier to build in Sacramento than it is anywhere else in the state of California. That’s something we should be proud of. That being said … it takes capital to build apartments. We are building a ton of apartments that are kind of naturally occurring affordable housing, even new Class A properties, out in the suburbs, where the costs are cheaper. So there is a bunch of affordable housing, it’s not deed restricted, but it’s definitely new housing supply. It is lower rent than what you see in Midtown. 

Sacramento has a ton of new housing supply that’s been coming online; there’s something like 4,000 units, I believe, in the pipeline right now in construction. Most of those are outside of the central city. But it comes down to capital. To build more housing, you need more capital. The demand is there. The capital is not necessarily there. Certainly, the more growth that you have, the more capital that unlocks. I think Sacramento kind of suffers from being in the Central Valley where we have a state that’s extremely hostile to capital and hostile to businesses. …

Right now we’re fundraising for a 130-unit, multifamily project at the corners of 12th and E [streets], and we’re reviewing all of our term sheets. Out of 55 parties that we went out to — 55 investment groups — we had one person providing us a term sheet. Sixty to 70% of the people said, no … they’re really not investing in California. I think there’s a massive perception issue. You see, obviously, the tragedy that’s happening on our streets with the unhoused. You see the retail theft, you see the drug markets and open air drug dens that are in beautiful cities like San Francisco, and even in our city in Sacramento, that scares capital away. And what do you need to build housing? You need capital.

So that is one of our limiting factors here. If we had the capital base of a large city, we’d be able to grow faster and build more housing supply. But it’s kind of a chicken and the egg: How do you get to have that large capital base? We have to have a lot of growth, and then that comes with its own set of challenges. I’m not here to say that I’m some wise sage. [I] try to take things really simple. I think we can avoid it by streamlining and encouraging as much housing production as possible. And letting the market decide how to best allocate capital … [to] get to build as much housing as possible.

Hanten: I think politics has pitted traditional affordable housing against market-rate housing for years. The problem with that is it’s painting market-rate housing in a bad light. Market-rate housing doesn’t have to mean luxury housing. We need all types of housing. … Traditional affordable housing is typically targeting individuals that are making 50% or less of the Area Median Income. So that’s somewhere between $35,000 and $40,000 a year or less, and that’s great. We need that. We also need housing for people that are making $60,000 to $95,000; that’s the 80% 120% Area Median Income. A lot of market-rate developers now are pivoting to that demographic — they’re building attainable workforce housing. That’s what you and I are building and focused on. 

We need both types of development to create diverse, inclusive communities where people from different tax brackets coexist in the same neighborhood on the same block. But there are policies being floated around that are going to restrict a lot of the ability to do that. Some of those might be forcing private developers to include very low-income units in their private development, which to me just shows a lack of understanding of how private development really works and it’s just an example of government overreach.

I understand why people hate BlackRock; it controls trillions of dollars and people hate it. They’re buying up swaths of single-family homes all over the country and with cash and I understand why people would be upset about that. I understand why they might even hate national home builders that are choosing to “build for rent,” which [is] just taking valuable units off the market, waiting out the storm for better market conditions to sell.

That said, local developers here in Sacramento aren’t even in the same galaxy as those types of conglomerates. You and I are in our mid-30s, we don’t have millions of dollars, and we’re not buying up properties left and right with cash, or making millions. There’s times where we may not see a paycheck for months, or maybe even years, trying to get these projects online. Local developers are really important for our economy here. 

I think people don’t understand what developers really do. Our job is essentially to sell Sacramento to outside capital. We’re pitching Sacramento to people outside of the area to fund housing projects here. We need that outside investment. Local developers are battling against astronomical construction costs that still haven’t come down since COVID, infrastructure fees, permitting fees. The city’s done a lot of good things too. But to add restrictive policies on top of that, I think there’s this idea that you’re going to push this on market rate developers. The fact is that’s not what’s going to happen. You’re not going to get a market rate project with some very low-income housing; you’re going to get maybe some very low-income housing with some luxury units on top of it, because adding those units in requires that we raise rents on the other units to make our return thresholds for investors. Some people might respond to that and say, well, your investor should make less money. [They] might even be right, but the reality is you can’t force people to invest. … And if they can’t double their money in Sacramento, they’re going to double their money in somewhere else like Austin or Atlanta.

Vignocchi: Requiring market-rate developers to build affordable units or pay a fee — it’s really a tough policy. I think the mayor recognized this. He wants an inclusionary policy, but he wants to do it when it pencils. So the hard thing to know is when do you know what pencils? … 

I think this inclusionary idea is very dangerous. If you create policies that reduce housing supply, that’s a huge challenge. Force is a bad tool, but it’s a tool that government goes to often. … I’ll say, especially in areas that are “more progressive” than others, or maybe more democratic, they really don’t understand how business works, unfortunately, and they don’t understand how to partner with business. We’re not all evil, greedy people. Yes, we want to make a profit. That’s not a bad thing. Everybody needs to make money to put food on their table. And when you’re a developer, you’re putting everything on the line — your house, all of your assets. You go for like months, years without getting paid. There’s nothing certain about it.

I mean, nonprofits make a lot of profit. So there’s a lot of alignment between the nonprofit development world and the for-profit development world. We’re not trying to draw a wedge or create a wedge between the two worlds, but they have a unique set of challenges. They have a whole host of inefficiencies that they have to deal with, that come with government financing and government funding, that we don’t necessarily need to worry about, with that there are structural inefficiencies that that creates within organizations that we don’t have. And so it’s just a different mindset. 

They do amazing work, they do really hard work, it’s really difficult to do what they do. They’re doing great work with the tools that they have. But they would be doing even better work if [we] had better tools, and better policymakers making those tools. And frankly, less bureaucracy. You have federal level, you have state level, you have county level, you have [Sacramento Housing & Redevelopment Agency], which is like a county organization, and then you have the city level. You’re getting funding from all these different sources, and they have all their little strings attached, very, very complex financing structures, and they spend a lot of time fighting over resources. …

Those funding pools are limited as well. They’re spending a lot of time fighting, kind of eating each other trying to get those funds. Anything with the government, they don’t make it easy. It’s like their notice periods aren’t always in alignment with what would make the most sense. And once you get funding, it’s like: Go as fast as possible. There’s a lot of start, stop. We need affordable housing developments that are catering to people making $40,000 or less. We also need developments that are catering to people making $60,000 to $95,000. And then we need luxury housing for people that don’t want them to price those other income brackets out. 

If you look at some of these affordable housing developments that are traditionally financed, what we’re paying for them to buy is like a Cadillac, and what they really need is a Honda. So you can help 10 people get Cadillacs or you can help 25 people get Hondas. Well, a Honda gets you to and from work. It’s super reliable, very low cost. That’s the analogy of what we do with our housing policy. And it’s batshit … crazy. And we’re the capitalists that get thrown all the spears by the socialist, crazy extremists that we have to deal with in California. … It’s really frustrating, because we’re out here trying to do God’s work trying to build housing. I don’t want to sound like a jerk, but we’re trying to build housing and who’s throwing daggers at us all the time? And yet, where’s all the inefficiency? Not from us.

Hanten: We’re probably building units, for all land costs, under $250,000 a unit. Maybe not all, but some of the affordable housing developments that we’ve read about recently are building units at $600,000-plus for a unit. Part of that is when you take public dollars, you’re tied to a lot of things like prevailing wage, and I’m not criticizing the idea of skilled tradespeople.

Of course, we believe all contractors should be paying their employees and giving them benefits and health care. And they should be paid accordingly. That’s not what we’re disagreeing about. But prevailing wage adds, in some cases, 30% to your project costs. And so that’s not something that private developers can absorb without passing it on to the renters. Affordable housing developments can because they’re taking public dollars, but look at the inefficiency there. You’re paying twice as much per unit, just because of things like that. We could build a lot more units faster and cheaper without some of those red tape items. …

[When it comes to] how local developers function, especially when you’re getting started in development is incredibly challenging, because who’s going to give you money when you don’t have a track record yet? They’re not going to give you your development fee early on because they don’t trust you yet. I spent over a year on 16 E — you spent even longer on that — and we didn’t get a developer fee until we started construction.

Vignocchi: We went into contract on that property in January 2021. And we broke ground in August of 2023. And [you were] around for about two thirds of that. In August of 2023, we finally got our first paycheck, it was a whopping $200,000 that we split between three people. So if anybody’s out here making poverty wages … 

Hanten: To some people that might seem like a lot of money. But when you’re talking two and a half years to make, I think $66,000 each, and you’re guaranteeing your house against that, it doesn’t always seem worth it. That deters a lot of people from development. Who wants to go stake everything they’ve worked for, all the things that they own, your house, all of your assets, and guarantee a construction loan for a $7 million project to make a total in the end, maybe $300,000 split between three people for two and a half, three years of work? 

And to add to that, when you’re new anyone that’s going to help you finance it, anyone that’s going to help you complete it, guarantee it, give you a track record, they’re all going to take a piece. … So [I’m] not trying to make people feel bad for developers. We chose this life and we love it. But it’s a little savage.

Vignocchi: And we’re just getting started on our first larger projects. We did a lot of two to four unit projects, which you basically don’t make any money on just unless you’re your own [general contractor]. … But, yeah, you take $66,000 over two and a half years, you’re making like $25,000 a year. I don’t know many people in the labor world who would do that. 

We’ve got families, we’ve got bills, and it’s hard to get started. What we need are more rich developers, because if you’re a rich developer, you’ve done this. You’ve been kicked in the shins a lot. And it happens. Sotiris Kolokotronis from SKK Development, he’s done like over 2,000 units in the grid. He’s been doing this for 40 years. He’s a local developer. When you’re a local developer and you’re making money here, you’re taking that capital and you’re generally reinvesting it right back into your neighborhood. These people care about Sacramento. … [The Kolokotronis] family has done an amazing amount of good for the city. And they’ve been through their ups and downs like anybody in this business. It’s a brutal business. And if you’re not carefully managing the 10,000 variables that are involved, you can easily get your ass handed to you.

Hanten: Sacramento is lucky to have a lot of smaller local developers, and lucky in the sense that they might be family owned shops that have been here for multiple generations. I heard Sotiris talk about his early beginnings one time, and he said that he drove through Sacramento before there was anything here with his wife and said they were going to move here, and she cried. She said, “Where is everything?” And he said, “I’m gonna build it.” And he did. And so, I think he’s delivered in the region, probably over 13,000-14,000 total units, which is awesome. But you think about someone that’s been here for 40 years or so it doesn’t seem like much. It’s awesome that he’s delivered that many units, but you can kind of see how long it’s gonna take for just local developers to get that done. There’s not enough money just in Sacramento, to build to the scale that we need to build. And so that’s why attracting capital from outside is really important. That’s how we have things like DOCO and the [Golden 1 Center] arena, and how [we] may or may not have an MLS Stadium at some point.

Vignocchi: We walk in Crocker [Art Museum], and whose name’s on there [as donors]? It’s the Friedman family. When these folks do well, they invest their capital back into the city and that’s not to knock out out-of-town developers either. We want them coming. … We want to welcome these folks. … [We] want to see more of that because that means more people will come in, more people will build housing. And when you have that you’ll have more supply, and rents won’t go up as fast. And maybe it’ll even go down in some cases. …

Hanten: One thing I’ll hit on briefly — you kind of talked about this a little bit — was impact fees and infrastructure costs. Sacramento is a really old city. We have aging infrastructure. And some of those impact fees are set to increase – double, triple, in some cases, tenfold, within the next several years. That’s something that we’re going to have to bear the cost of, and it’s going to impact affordability. 

A solution for that I’ve heard being floated around is there’s been whispers of creating Enhanced Infrastructure Financing Districts. EIF DS basically allows local governments, cities, counties to leverage future property tax revenue to fund infrastructure projects, which is a great idea and something we need. I will say some of my fears around that are, again, Sacramento’s the state capital, we have a lot of government buildings that don’t pay property taxes. We have a lot of hospitals, certain hospitals don’t always have to pay property taxes, either. And affordable developments are also subject to exemptions. So while that’s a great idea, if we continue to have vacant government buildings, and restrict development to only affordable housing, but not sure how we’re going to fund those yet. So it’s a great idea. But it’s another challenge that we’ll have to overcome. 

Vignocchi: Infrastructure is definitely a key thing. Infrastructure and housing are very related. I think Mayor [Darrell] Steinberg has been pushing this housing bond measure. And he’s been saying people typically don’t look at infrastructure as a housing thing, but it is. You need sewer pipes. You need water pipes, the SMUD infrastructure base takes care of itself. 

Talking about solutions around infrastructure and some of the tools that are currently used with impact fees, that’s challenging because anytime you increase the cost of housing, you’re taking money out of the renter’s pocket, you’re not taking money out of the developer’s pocket, if it if the housing gets built and all this any of these policies, if you’re going to increase costs, who are you taxing you’re taxing new housing supply, predominantly. So we need to change that. 

So if we look at solutions, one way to change that would be a housing bond. So the mayor’s proposed housing bond was dead on arrival with voters. Unfortunately, they’re in a bad mood. But I think there’s strong support for property tax. Some measure a local funding measure for affordable housing if it’s crafted in the appropriate way, that’s an important source of funding. … 

And because there’s so many layers of bureaucracy, the local politicians love focusing on what they can control and they don’t look up or around, they need to look up and around and look up to their folks in the state, which are in our back frickin’ yard. And they need to talk to their friends at SHRA and they need to talk to their friends of the federal government to solve these issues. We need to use these existing tools to do more affordable housing at lower cost with tax credit reform tax bonds, property tax abatements, we need to make this stuff easier. I am going to get skewered for this. … but we need to reform SHRA. They are a monopoly. They’re very challenging to work with. … They’re basically a little monopoly, and they act in monopolistic ways. And when you don’t have competition that doesn’t benefit the consumer. Unfortunately, the consumers in this case are homeowners, renters, taxpayers, our community. They have a tough job, they have to balance the needs of all these various jurisdictions. They also have their own kind of trauma from redevelopment [dollars] being taken away [in 2012]. So I want to acknowledge that. They do do a lot of good work, but they could be doing so much more work.

Hanten: Something we didn’t really talk about at all, which I think is just second nature to us now, is the attainable design — you know, affordable housing by design. Rather than taking government subsidies — that’s traditional tax credit type affordable housing — we’re doing affordable housing that’s privately financed because we are building units that are smaller. … We’re seeing a lot of success with it. Most cities around the globe have adopted this: smaller units, minimalism. We’re behind, but we’re catching up. I know Americans love our space and our big stuff, and we’re known for overconsumption, but we don’t need as much as we think we do.

We’re seeing the impact of minimalism and smaller unit design in real time. People don’t want a 500-square-foot studio with a pet wash station if it means it’s going to cost them $2,000 a month to live there. They want to live in Midtown for $1,600 or less. Even if it means they downsize to a 325-square-foot studio, it’s usually worth it. … Smaller rental housing isn’t meant to be permanent for them. It’s a stepping stone. It’s a way to save on rent for a downpayment, which is one of the biggest, if not the biggest barriers, to homeownership. 19th and J was a good example. That was kind of one of the first really micro-unit projects that had units as small as 225 square feet. They did well. They’re still leased up.

Urban Elements and Fulcrum — their West Sac property I think was 100% leased in like two months and they’ve got rents that are $1,400 or less, and somewhere around that 300 to 350-square-foot unit. So we’re seeing design with attainable rental prices in mind. It makes me optimistic for people. People should be able to live in Sacramento. Entry-level workers should be able to live in downtown. It shouldn’t be restricted to just high-income earners. So we need that socioeconomic diversity in our neighborhoods.

This conversation has been edited for length, flow and clarity. It has been adapted from our podcast, “Housing in the Capital,” which is recorded, edited and produced by Nick Brunner.

This story is part of the Solving Sacramento journalism collaborative. Solving Sacramento is supported by funding from the James Irvine Foundation and James B. McClatchy Foundation. Our partners include California Groundbreakers, Capital Public Radio, Outword, Russian America Media, Sacramento Business Journal, Sacramento News & Review, Sacramento Observer and Univision 19.