Developers can access a slew of tax breaks and credits for building low-income housing, but there are no incentives to build homes for middle-income earners.

A new state program seeks to increase the stock of housing for the so-called “missing middle” by issuing bonds to investors who buy existing market-rate buildings that are then transformed into units that a four-person household making $90,000 to $135,120 annually can afford.

Lennar, the developer of the Oceanaire building Downtown, recently took advantage of this new bond program and sold the two-year-old luxury complex for $144 million to the California Statewide Community Development Authority, which bought the building using bonds purchased by investors who are repaid through monthly rents, plus interest.

The city had to sign off on the sale, as it will have to forgo property taxes for up to 30 years, but will get to keep proceeds from the future sale of the building.

The city will also benefit from Oceanaire’s 216 units being more affordable for the middle class.

While the state owns the property, a management firm called Waterford Property Company will serve as the project administrator and collect an estimated $11.5 million in fees over 15 years, which comes from rent.

Oceanaire rents will be standardized, with studios going for as low as $1,841 per month and three-bedroom units as high as $3,941 per month.

While the state has helped cities across the state issue more than $5 billion in bonds to create affordable housing, until this past year the bulk of those projects have been restricted to helping households that  make 60% of the area median income and below, said Jon Penkower, a managing director for the state development authority.

The new bond program, created 18 months ago, could broaden its reach in the coming months, Penkower said. Glendale, Pasadena, Monrovia, Oakland and San Diego are all working their way to approving similar deals. Earlier this year in Anaheim, Waterford and the state agency secured 786 units across two properties for a total of over $376 million.

Penkower said for the program to work the “stars really have to align” because it needs a willing seller, equity partners, the property to appraise and the right interest rates for the deals to make sense. Right now, building middle-income housing outright doesn’t make sense for developers, so the bond program is one of few viable options for cities.

“You can’t get people to build these units,” Penkower said.

The rising costs of construction and labor, a labyrinth of state funding mechanisms, the potential for any project to be delayed by lawsuits and the price of land all feed into the costs of projects.

The Los Angeles Times reported in April that the cost of creating low-income units can be as high as $1 million per unit in the state, and that’s with the benefit of state and federal tax credits.

Those kinds of incentives dry up for projects focused on middle-income earners, which can still be impacted by unionized labor costs and environmental policies at the state level that require certain levels of efficiencies for new projects, both of which can add tens of thousands of dollars to the per-cost unit.

While the Oceanaire was not originally built to become affordable housing, the acquisition price of $144 million equates to a per-unit cost of about $666,000.

Sean Rawson, co-founder of Waterford, said Lennar and Waterford were able to come to a price that “made sense” for Lennar to sell the property. Officials at Lennar did not reply to requests for comment.

Oceanaire was about 70% occupied at the time of the sale, according to the city.

Rawson said he expects that about half of the current residents would qualify to remain in their units past their current leases. And while it won’t help close the city’s regional housing production target overall, it will help eat into the dearth of moderate income units that have been developed in the city, Rawson said.

The city had a goal of building nearly 1,200 moderate-income units during the last Regional Housing Needs Assessment by the Southern California Association of Governments, but has only created about 37, Rawson said. The next assessment cycle starting in 2022 calls for the city to build 4,158 moderate-income units.

Oscar Orci, the city’s director of development services, said the units won’t technically count toward meeting the city’s housing goals, but shifting them from market-rate to more affordable units presents a valuable new tool for the city.

“It’s a great opportunity to provide housing, quicker,” Orci said.

However, Orci said the Oceanaire is a pilot program, meaning that widespread use of the bond program is unlikely in the short term.

While nearly all new developments in the city’s pipeline will cater to higher-income earners in the coming years, creating new housing for any tier is a good thing, said Michael Lens, an associate professor of Urban Planning and Public Policy at UCLA.

Lens said that there’s still work to be done to address affordability for lower-income earners but the housing market has become so unaffordable that a program like the one used to buy the Oceanaire may have been necessary.

“It only happens when you’re so worried about the affordability of housing driving those kinds of people out of the state,” Lens said. “I think we’re there, but whether or not we’ll find a bunch of money to do something about it, it remains to be seen.”