Fountain Valley is sitting on $9.4 million earmarked for affordable housing under state law. It cannot be spent on anything else. And after a contentious two-hour study session Monday night, it's going back into the bank.

City staff had brought forward a proposal to purchase 14 affordable housing units inside the Los Caballeros sports and condo complex on New Hope Street — units that already carry deed restrictions requiring them to serve low-income residents through 2062. The idea: buy them before the private owner could sell them off or let the affordability covenants eventually expire.

The council said no. Or close enough to it.

The direction from Mayor Kim Cunneen and a council majority: this is the wrong location. Staff should come back with other options.

Door hangers and damage control

The meeting started with a crowd that had been primed to be angry. Someone had gone through the Los Caballeros complex and left door hangers warning residents that the city was planning to turn units there into a homeless shelter. That was not what was being proposed. But the flyers worked.

Resident Ray Price, who said he has lived at Los Caballeros for 35 years and sits on the HOA board, was among the first to speak. He described ongoing problems with homeless individuals who had entered the property from the nearby Santa Ana riverbed — accessing pools, vandalizing cars, frightening residents. "Los Cab is a jewel here," he said. "Having homeless there would be a detriment."

City Community Development Director Omar Dadabhoy tried to stop that narrative early. "If the city moves forward with the purchase of the units, the intent is not to create a homeless shelter or house the homeless over there," he said. "This cannot be a homeless shelter. It doesn't act as a homeless shelter."

Housing Technician Robert Daly laid out the mechanics. The $9.4 million in the city's Low and Moderate Income Housing Asset Fund comes from old redevelopment money, transferred into a successor housing authority after the state dissolved redevelopment agencies in 2012. State law requires the money be used for affordable housing activities. Buying existing affordable units qualifies. Sitting on the money means it earns nothing and creates no housing.

The 14 units — seven in each of two buildings at Los Caballeros — have been deed-restricted as affordable housing for 18 years. They will remain deed-restricted regardless of who owns them through 2062. No tenants would be displaced. The existing residents, income-qualified working families and seniors, would stay. The city would simply become the landlord.

The math problem

Once the presentation ended, the objections shifted from homeless fears to broader skepticism about whether the deal made sense at all.

Councilman Glenn Grandis cut to the core of it. "One thing I do not like about this project at all is we're taking 14 affordable housing units, spending $9 million, and ending up with 14 affordable housing units," he said. "There's no gain." He said he'd rather see the money used somewhere that actually increases the total supply.

Several residents who had come in furious about a supposed homeless shelter left looking mostly confused. Speaker Michael Wakefield said his position "changed dramatically" after hearing the presentation, and apologized for not having more to say. Another resident acknowledged she'd come prepared to object to a homeless encampment, only to learn that wasn't what was on the table.

Others weren't satisfied regardless. One speaker pointed to language elsewhere in the city's housing reports — unrelated to the study session item — that mentioned persons experiencing homelessness, and demanded it be removed. Another raised concerns about whether a public entity would vet tenants as carefully as a private landlord. A commercial tenant at the adjacent Plaza de Lago office complex said the community needed more education before the city moved forward.

Councilman Ted Bui also raised a governance question: Council Member Constantine had recused herself from the study session item, but Bui asked whether she should have also recused herself from two prior closed sessions where the same deal had been discussed.

Where it lands

Bui ultimately made the clearest motion of the night: direct staff to come back with a full report on every legal use of the $9.4 million, including whether first-time homebuyer grants or down payment assistance for Fountain Valley residents would be permitted under state law.

Vice Mayor Harper was blunt about the arithmetic. "If we go out and buy an existing unit and convert it to low income, you're probably looking at about a million dollars per unit," he said. "We probably get nine units for that." He concluded it was "probably prudent to not move forward on this particular project."

Mayor Cunneen closed the item with a summary. "Good idea, wrong location," she said. Staff will return with a menu of options for deploying the $9.4 million, and the council will decide from there.

Three affordable projects are already in the development pipeline: 33 units on Slater, 78 units at the former Boomers site on Magnolia, and 82 units at Euclid and Heil. Bui argued those projects made the Los Caballeros purchase even less necessary.

For now, the $9.4 million stays in the account. Staff has new marching orders. And whoever put those door hangers on people's doors got exactly what they were looking for.