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HomeMy WebLinkAboutStaff Report 14380 City of Palo Alto (ID # 14380) Policy and Services Committee Staff Report Meeting Date: 5/10/2022 Report Type: Action Items City of Palo Alto Page 1 Title: Discussion and Recommendation to the City Council to Join the California Community Housing Agency From: City Manager Lead Department: Planning and Development Services Recommendation Discuss referral from the City Council to the Policy and Services Committee to review the attached information about the California Community Housing Agency (CalCHA) and consider whether or not to recommend the City adopt the resolution (Attachment A) to join CalCHA, a Joint Powers Authority. Summary This report describes how the California Community Housing Agency (CalCHA) operates and provides moderate and lower income affordable housing. The report also summarizes some of the challenges of the program. Staff ask the Committee to consider the information provided and determine if the Committee would like to recommend for or against joining CalCHA—a Joint Powers Authority—as an additional member. Background On August 16, 2021,1 as part of a larger discussion regarding the ballot measure and funding for affordable housing, the City Council discussed the California Community Housing Agency (CalCHA). CalCHA is a public agency that produces, preserves, and protects middle-income housing. Upon consideration of the report and discussion, Council moved to review and accept the information regarding affordable housing and referred further consideration of CalCHA to the Policy and Services Committee.2 Prior to the Council discussion, the Finance Committee discussed CalCHA as part of its June 15, 2021 discussion.3 1 August 16, 2021 Staff Report: https://www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/agendas-minutes/city-council-agendas-minutes/2021/08-august/20210816/20210816pccsm-final.pdf 2 Excerpt from Council Motion: “Review and accept additional information regarding affordable housing funding mechanisms, and refer to the Policy and Services Committee on the housing land trust, Jobs Housing Linkage Policy, and particularly with the CalCHA;” https://www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/agendas-minutes/city-council-agendas-minutes/2021/08-august/20210816/20210816amccs.pdf 3 June 15, 2021 Staff Report: https://www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/reports/city-manager-reports-cmrs/year-archive/2021/id-12299.pdf City of Palo Alto Page 2 Discussion The California Community Housing Agency (CalCHA)4 is the State’s first public agency focused exclusively on the production, preservation, and protection of middle-income housing. The “Essential Housing” model has already created over 2,000 affordable rent-restricted rental units. Founded in 2019, CalCHA is a Joint Powers Authority (JPA) created pursuant to Chapter 5 of Division 7 of Title 1 of the Government Code of the State of California. Attachment B summarizes information about CalCHA. CalCHA purchases existing market-rate housing and restricts the homes to income-qualified households who earn no more than 120% of area median income (AMI). A property is evaluated based on its ability to perform under the agency’s financial model. In the pro-forma, a property is evaluated to see if it can sustain households earning up to 120% AMI. The model evaluates offering housing to households with a range of incomes: 1/3 of households at 80% AMI, 1/3 at 80% - 100% AMI, and 1/3 at 100% – 120% AMI. To finance the purchase, the JPA issues revenue bonds to purchase existing housing units. Revenue bonds are project-specific bonds that use the revenues of a project to service any debt obligations. It is notable that the purchase does not use any tax credit financing—a traditional funding source for affordable housing. Instead it uses 100% government purpose bonds. Cities that join the JPA have no responsibility or obligation to the bonds. As a governmental entity, CalCHA is granted a 100% property tax exemption for each property it acquires. The City would not be a direct party to the real estate transaction or financial transaction. The bonds issued by CalCHA for a project are payable solely out of the revenues and receipts derived from the project being financed and are not obligations of the City. For the Program to acquire properties in Palo Alto, the City would first need to become an Additional Member of CalCHA. Before a property is acquired under the Program, the City would need to sign a Purchase Option Agreement for the specific property, which allows but does not obligate the City, at its sole discretion, to purchase the property between Year 15 and Year 30 of the bonds. The cost of purchase is less than fair market value as the cost is equivalent to the outstanding bond payments. If the City were to acquire a property, any surplus cash flow, net of operation and maintenance, goes back to the jurisdiction. To maintain housing affordability beyond 30 years, the most likely outcome would be for the City to assign its purchase option to a non-profit housing corporation. Additionally, the City would receive any surplus cash flow from the property during the life of the bonds. If the City elects not to exercise its purchase option, CalCHA maintains the right to sell the property after Year 30, at which time all net sale proceeds would be granted to the City. 4 Website: https://www.calcha.org/ City of Palo Alto Page 3 The City has the option of directing any revenues it may receive from the Program to be used for affordable housing, or the City could opt to keep the revenue unrestricted. While CalCHA purchases existing, tenanted housing units, the JPA has a “no displacement” policy. No tenants are asked to leave. For those higher income tenants that choose to stay, they also benefit from stable rental costs as there is a 4% cap on rent increases. Over time, as tenants depart, new tenants must be income qualified. Rents on affordable units created through this Program would be capped at a maximum of 35% of the applicable percentage of AMI. To date, CalCHA has completed 13 projects throughout California—including 12 in the Bay Area. Acquisitions range in size, from 150 units to over 300 units. These include projects in Glendale, Glendale Housing Authority, Hayward, Larkspur, Livermore, Walnut Creek, Napa, and Santa Rosa. Each entity is an Additional Member. In addition, since its inception in January 2019, CalCHA has acquired a number of assets, including: 1. Annadel Apartments in Santa Rosa (390 units), 2. Verdant at Green Valley in Fairfield (286 units), 3. Serenity at Larkspur in Larkspur (342 units), and 4. The Arbors in Livermore (162 units);A full list of projects is available on the CalCHA website. Timeline, Resource Impact, Policy Implications Joining CalCHA has no cost and no obligation to the City of Palo Alto. There are very few funding sources for moderate income housing so this does help the City provide housing for that income group. There are some concerns associated with the program. The City of San Jose, as well as a number of other jurisdictions, have chosen not to join the JPA because of those concerns. These concerns, as identified in the City of San Jose report, include: 1. No third party to oversee ongoing income compliance – The JPA is responsible for property management therefore compliance to the affordability restrictions. There is no third part oversight, such as the City, to ensure compliance. Should non-compliance occur, there is no clear enforcement mechanism. 2. Compensation is not tied to performance or level of risk taken. – San Jose staff stated that the JPA charges significant upfront fee and ongoing fees are fixed with an annual escalator. Therefore, there is no incentive to any performance on the property. To be clear, these fees are not paid by the local jurisdiction. 3. Reduction in Property Tax Revenues – By acquiring the market rate complex and converting it to affordable housing, the property would receive a property tax exemption. However, the amount of property tax exemption could exceed the collective savings from the rent reduction. The City of Long Beach conducted a study of a CalCHA funded project and found that the property tax exemption was about 50% higher than City of Palo Alto Page 4 the annual rent reduction. Part of the reason for this disparity is that moderate income rents are not much lower than market rate rents. For the tenants receiving the rent reduction, however, the stability and decreased rents for income qualifying households may be significant and meaningful. The City must weigh the decrease in property tax revenue from the tax exemption with the benefits of stable, moderate income housing. 4. Cumulative Impact and property tax and transfer taxes. – The loss of cumulative property tax revenue could be substantial over the 30 year period as well as potential transfer tax from change of ownership. The acquisition of properties, however, might need to reach a certain threshold to significantly impact the City’s revenues. 5. High Purchase Offers – There have been reports that, because of the property tax exemptions, leads to overpayment for properties. This in turn, leads to greater debt financing, which may limit the City’s ability to exercise its purchase option in year 15 to 30. For reference, the link to the City of San Jose report can be found here.5 Therefore, if the Policy and Services Committee chooses to join CalCHA, staff recommends that these concerns be closely monitored regarding any potential project in Palo Alto. While the CalCHA does not result in net new housing units, it does increase a jurisdiction’s stock of affordable housing and create rent stability for households. This can be part of Palo Alto meeting its local Regional Housing Needs Allocation obligation. If, upon evaluation of the program, the Policy and Services Committee would like to join CalCHA, the Committee can recommend the Council adopt the resolution (Attachment A). Environmental Review Adoption of a resolution joining CalCHA is not a project for purposes of the California Environmental Quality Act (CEQA) because it can be seen with certainty that there is no possibility of a significant effect on the environment. Attachments: • Attachment A - CalCHA - City of Palo Alto Resolution • Attachment B: CalCHA Essential Housing Fact Sheet 5 https://sanjose.legistar.com/View.ashx?M=F&ID=9346325&GUID=E297E54E-4070-41BD-88B9-CA812F1206AD Resolution. No. Page 1 of 3 RESOLUTION NO. RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALO ALTO AUTHORIZING THE CITY TO BECOME AN ADDITIONAL MEMBER OF THE CALIFORNIA COMMUNITY HOUSING AGENCY (“CALCHA”); SUPPORTING CALCHA’S ISSUANCE OF TAX-EXEMPT BONDS FOR THE PRODUCTION, PRESERVATION AND PROTECTION OF ESSENTIAL MIDDLE-INCOME RENTAL HOUSING; AND AUTHORIZING THE CITY MANAGER TO ENTER INTO PURCHASE OPTION AGREEMENTS WITH CALCHA FOR ESSENTIAL MIDDLE-INCOME RENTAL HOUSING CREATED WITHIN CITY LIMITS WHEREAS, one of the primary goals of the City of Palo Alto (the “City”) is to meet the growing housing needs of its residents by actively supporting the production, preservation and protection of market-rate and affordable rental housing for all; and WHEREAS, no existing Federal, State or local subsidies, programs or motivations currently exist to meaningfully address the growing shortfall of protected middle-income rental housing; and WHEREAS, CalCHA is a Joint Powers Authority created specifically to produce, preserve and protect quality affordable rental housing made available to California’s essential middle-income workforce; and WHEREAS, CalCHA intends to acquire existing rental properties within City limits and restrict future occupancy to middle-income households earning no more than 120% of area median income; and WHEREAS, CalCHA will avoid the displacement of existing residents, implement regulatory agreements restricting the incomes and rents of future residents, and impose caps on the annual rent increases of qualified middle-income households; and WHEREAS, CalCHA will finance its acquisitions through the issuance of tax-exempt bonds, and in order for CalCHA to issue tax-exempt bonds in the City of Palo Alto, the City must be an Additional Member of CalCHA; and WHEREAS, the City proposes to become an Additional Member of CalCHA pursuant to Section 12 of the Joint Exercise of Powers Agreement Relating to the California Community Housing Agency; and WHEREAS, subsequent to becoming an Additional Member of CalCHA, any existing rental housing within City limits which CalCHA intends to acquire and finance with tax- exempt bonds must receive support and approval from the City; and WHEREAS the City proposes to support and approve CalCHA’s issuance of tax- exempt bonds for the acquisition of existing rental properties as a means towards the preservation and protection of essential middle-income rental housing within City limits; and Resolution. No. Page 2 of 3 WHEREAS, CalCHA’s issuance of tax-exempt bonds will provide public benefit through the production, preservation and protection of below-market-rate rental housing, as well as the granting of all surplus project revenues to the City; and WHEREAS, pursuant to one or more purchase option agreements (the “Public Benefit Agreement”), between CalCHA and the City, CalCHA will grant the City the option, but never the obligation, to purchase each essential middle-income rental housing property commencing on the date fourteen (14) years after CalCHA’s acquisition of such property; and WHEREAS, the Public Benefit Agreement will additionally provide the City with all surplus project revenues from each essential middle-income rental housing property; and WHEREAS, the City will maintain the option to exercise such Public Benefit Agreement for a period of sixteen (16) years following the commencement dates of the Public Benefit Agreement for each essential middle-income rental housing property; and WHEREAS, the City proposes to authorize the City Manager to enter into Purchase Option Agreements with CalCHA for all essential middle-income rental housing created within City limits. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Palo Alto hereby authorizes the City to become an Additional Member of CalCHA and authorizes the City Manager to execute the Joint Exercise of Powers Agreement Relating to the California Community Housing Agency, subject to approval as to form by the City Attorney. BE IT FURTHER RESOLVED that the City Council of the City of Palo Alto hereby supports and approves CalCHA’s issuance of tax-exempt bonds as a means towards the production, preservation and protection of essential middle-income rental housing within City limits. BE IT FURTHER RESOLVED that the City Council of the City of Palo Alto hereby authorizes the City Manager to enter into Purchase Option Agreements with CalCHA for all essential middle-income rental housing created within City limits, subject to approval as to form by the City Attorney. Resolution. No. Page 3 of 3 IN CITY COUNCIL DULY PASSED this [DAY] day of [MONTH] 2021. AYES: NOES: ABSENT: ABSTAIN: ATTEST: APPROVED: City Clerk Mayor APPROVED AS TO FORM: City Attorney Exhibit A – Joint Exercise of Powers Agreement Relating to the California Community Housing Agency Exhibit B – Public Benefit Agreement For more information, visit www.calcha.org CalCHA’s Essential Housing Program Providing sustainable housing opportunities for California’s essential middle-income workforce California’s essential workforce (nurses, teachers, first responders and civil servants, among others) generally earns in excess of traditional affordable housing income limits yet not enough to sustainably reside within the communities they serve. The resulting dislocation and “drive until you qualify” commuting patterns result in traffic, congestion, pollution, social isolation, academic underperformance and negative health outcomes. The California Community Housing Agency (CalCHA) was formed in 2019 to squarely address this growing crisis. As the State’s first public agency focused exclusively on the production, preservation and protection of middle-income housing, our Essential Housing model has already created >2,000 affordable rent-restricted rental units throughout the State and has spurred the creation of additional State agencies hoping to leverage similar models to further California’s middle-income housing needs. Program Mechanics • Cities, counties and housing authorities become members of CalCHA • CalCHA seeks Essential Housing opportunities within member municipalities • CalCHA issues governmental revenue bonds and uses proceeds to acquire properties • CalCHA assets are rent restricted to low-income and moderate-income households • CalCHA assets become exempt from property taxation • CalCHA grants all financial upside to the underlying member jurisdiction Public Benefit Creation In addition to being granted the financial upside of its assets, CalCHA members benefit from the immediate production of essential middle-income housing. Other programs benefits include: • Non-displacement of existing tenants • 4% cap on annual rent increases • No investment, cost or liability created for member jurisdictions • No use of tax credits, private activity bonds or other scarce affordable housing subsidies/resources Municipality Participation Participation in CalCHA’s Essential Housing Program begins with the adoption of a single resolution granting: • CalCHA Membership (no cost, no liability) • Authorizing CalCHA to issue bonds locally (no cost, no liability) • Granting of financial upside (project-specific Public Benefit Agreements) California Community Housing Agency CalCHA is a California joint powers authority and political subdivision of the State, specifically founded to provide, preserve and protect middle-income affordable housing projects throughout California. CalCHA’s program administrators maintain more than 30 years of related experience, having issued in excess of $50 billion of private activity and municipal bonds across more than 2,500 properties.