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HomeMy WebLinkAbout1998-05-18 City Council (6)City of Palo Alto City Manager’s Report 1 TO: FROM: HONORABLE CITY COUNCIL CITY MANAGER DEPARTMENT: PLANNING AND COMMUNITY ENVIRONMENT DATE:MAY 18, 1998 CMR:238:98 SUBJECT:BUDGET AMENDMENT ORDINANCE TO APPROPRIATE FUNDS AND TO AUTHORIZE A LOAN COMMITMENT FOR ACQUISITION COSTS OF THE SHERIDAN APARTMENTS AT 360 SHERIDAN AVENUE REPORT IN BRIEF The Palo Alto Housing Corporation (PAHC) has applied for City fmancing to assist with the acquisition of the 57-trait Sheridan Apartments, an existing rental project which provides affordable housing for very low-income seniors and persons with disabilities. The entire project is covered by a U. S. Department of Housing and Urban Development (HUD) Section 8 rental assistance contract which expires in April 1999. The purpose of PAHC’s acquisition is to ensure that the utmost efforts will be made to retain the Section 8 subsidies and to preserve the units as part of the City’s affordable housing stock. PAHC executed a purchase contract in March 1998 and is currently in the process of submitting applications for loans and housing subsidies to finance the $5.1 million acquisition price and rehabilitation costs. The principal financing sources being sought by PAHC are a new HUD/FHA-insured loan, Federal and State low income housing tax credits and a City loan. In February 1998, Council appioved an agreement with PAHC for a $145,500 predevelopment loan. Council is requested to approve a Budget Amendment Ordinance for a maximum of $2,354,500, in addition to the $145,500 appropriated on February 2, 1998, for a total budget authorization of $2.5 million for the Sheridan project. The sources of City funding are Community Development Block Grant (CDBG) funds and Residential Housing Reserve funds. Council is also asked to authorize a loan commitment from the City to PAHC for submittal with the tax credit application, which is due on May 29, 1998. The City’s loan commitment is expected to be $2.3 million; however, it could be as high as $2.5 million depending on the final amount of the HUD/FHA loan commitment, which will not be known until a few days before the May 29 tax credit application deadline. Staffrecommends that the City Manager be authorized to determine the final amount of the City loan commitment and execute the loan commitment letter. CMR:238:98 Page 1 of 7 RECOMMENDATION Staff recommends that the Council: Approve the attached Budget Amendment Ordinance to appropriate $2,354,500 in housing funds, in addition to the $145,500 in Community Development Block Grant (CDBG) funds previously appropriated on February 2, 1998, for the acquisition of the Sheridan Apamnents with the sources of funds as follows: ¯$1,014,749 from the FY 1997-98 CDBG New Housing Development monies; ¯$513,950 from the FY 1998-99 CDBG Sheridan Acquisition project; ¯$693,670 from the Residential Housing In-Lieu Fund (to be loaned from the General Fund Budget Stabilization Reserve until HUD’s approval of the City’s FY 1998-99 CDBG Action Plan in July 1998); and ¯$132,131 from the sub-fund in the Residential Housing In-Lieu Fund for resident subsidies at the Palo Alto Commons assisted living facility. Authorize a commitment to provide a loan to the Palo Alto Housing Corporation, or its assignee, for the acquisition of the Sheridan Apartments, with the actual amount of the loan commitment to be determined by the City Manager based on the final project budget and other sources of funds as stated in PAHC’s May 1998 tax credit application, but in no case exceeding $2,500,000; and Direct the City Manager to prepare and execute a letter evidencing the City’s loan commitment for submittal by PAHC with the application for low-income housing tax credits and any other financing. BACKGROUND The Palo Alto Housing Corporation (PAHC) initiated efforts to acquire the Sheridan Apartments in April 1997 when the project’s owners, a for-profit investment partnership, announced their intention to sell. Council approved a Budget Amendment Ordinance and an agreement with PAHC on February 2, 1998 to provide a loan of $145,500 in CDBG funds to assist with predevelopment expenses related to the Sheridan acquisition. A formal purchase agreement was executed on March 19, 1998, with a purchase price of $5.1 million. The Sheridan Apartments has 57 one-bedroom units and was constructed in 1979 to house very low-income elderly and disabled persons. The entire project is assisted under a HUD Section 8 rental assistance contract which expires in April 1999. The purpose of PAHC’s acquisition is to ensure that the utmost efforts will be made in future years to retain the Section 8 subsidies and to enable the project to continue to provide affordable rental housing for very low-income households, even if Congress should eventually terminate the Section 8 subsidies. The current residents are all either elderly or physically disabled. Forty-eight residents have extremely low incomes (under 30 percent of the median income) generally averaging about $9,700 per year and are paying an average of about $212 per month in rent with HUD paying CMR:238:98 Page 2 of 7 the rest of the $753 Section 8 contract rent. Another five tenants have somewhat higher incomes (from $16,200 to $27,000 per year) or up to 50 percent of the median income. Only four tenants have incomes high enough to afford the-S539 monthly rent that PAHC will need to charge without the HUD Section 8 assistance in Order to cover expenses and debt service under the fmancing planned for its acquisition of the project. DISCUSSION Overview of Fin0n¢ing Strategy: PAHC has chosen to pursue a conservative f’mancing strategy with the following objectives: ¯Keeping the underlying rent structure as low as possible; ¯Refinancing the project with a new HUD/FHA-insured loan to obtain 35-year fixed rate f’mancing and to help protect the Section 8 rental assistance; ¯Pursuing the competitive housing tax credits to maximize the equity funds raised for project costs from non-local sources. PAHC’s financing consultant advises that the chances for an award of the tax credits in July are reasonably good. Ten percent of the State’s tax credit allocation is reserved for "at-risk" projects like the Sheridan. There have been very few projects submitted in this category and none in the first 1998 round of competition. If this trend continues for this next round, then PAHC’s application stands a good chance of being funded. Future of HUD Section 8 Rental Assist0,n¢¢: Cun’ent Federal policy, as stated in the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRAA), mandates that HUD offer project-based Section 8 renewals to owners of properties that are predominately occupied by elderly or disabled residents, as well as properties in tight housingmarkets. HUD is currently drafting regulations to implement MAHRAA, which are scheduled to become effective October 1, 1999. The renewal of the Sheridan’s Section 8 contract, in April 1999, will be subject to this new legislation. This new law also formalizes HUD’s recent practice of providing only one-year Section 8 renewals, with future years renewals subject to sufficient annual appropriations by Congress. Thus, PAHC will need to reapply each year to HUD for continuation of the Section 8 assistance. For the short term, meaning the next three to five years, PAHC’s advisors believe that the continuation of Section 8 assistance is fairly secure. However, the long term future for the Section 8 program is unpredictable. The possibility that the Sheridan’s Section 8 contract will eventually be terminated by HUD, due either to insufficient Federal funding or changes in national housing policy, must be recognized. IfHUD should convert the project to tenant-based Section 8 vouchers, then the effect on the tenants would be minimal and the effect on the project would be gradual. However, if the Section 8 assistance should be terminated entirely, then the effect on both tenants and the project would be significant. There is presently an annual difference of about $200,000 between the rent revenue paid by the tenants and the rental income that will be needed by PAHC to cover operating costs and the first mortgage loan payments. PAHC would need to increase the tenants’ average rents from $250 to $539 per month to cover CMR:238:98 Page 3 of 7 operating costs. As stated above, only 4 of the current tenants can afford to pay that much for rent. Staff is working with PAHC and their consultant to develop a proposal for a reserve fund which would be capitalized from the project’s net rental income (which is projected to be about $140,000 per year) as long as the Section 8 contract is still in place. This proposed reserve fund would be used to provide tenant rent assistance during a rent increase phase-in period should the Section 8 assistance be terminated by HUD. If this seems to be a feasible approach, full details will be presented as part of the funding agreement with PAHC.. The funding agreement will be scheduled for Council review and action about 60 days prior to the close of escrow for the acquisition of the property. RESOURCE IMPACT PAHC must have a Council-authorized loan commitment stating the amount and terms of any planned local subsidy in time for inclusion as part of its application for Federal and State low income housing tax credits, which is due May 29. In mid-April, based on information available at that time, PAHC requested a total City loan of up to $2.5 million. The $2.5 million is available by combining the $145,500 in CDBG fimds appropriated on February 2, 1998 by Ordinance No. 4477 and the $2,354,500 proposed to be appropriated at this time. The $2.5 million should be a worst case figure. The most recent financial analysis available as of late April demonstrates a total City funding need of just under $2.3 million. The key uncertainty at this time is the amount of the first mortgage loan that HUD will approve. PAHC has applied for an HUDfFHA-insured loan of $1,924,535. However,because there is very little positive cash flow with this size loan without the Section 8 rents, it is possible that HUD may refuse to approve that size loan. HUD’s decision is not due until three days before the May 29 deadline for the tax credit application submittal. If there is a reduction in the HUD/FHA-insured loan request, then either PAHC as the project sponsor and developer~, or the City, would need to provide funds to make up the difference. If the City issues a loan commitment for more funds than justified by the project’s budget, then it is possible that the Tax Credit Allocation Committee (TCAC) could use that information to reduce the tax credit allocation. In order to provide the needed flexibility, staff recommends that the actual amount of the City loan commitment be determined by the City Manager based on the final budget, FHA firm loan commitment amount and other financial projections utilized by PAHC in the tax credit application. Staff is requesting that the City Manager be authorized to prepare and execute a loan commitment letter for the actual loan amount, not to exceed $2.5 million, to submit with PAHC’s tax credit application. If less than the full amount of the budget appropriation is required to be committed at this time by the City Manager, PAHC would be still be able to request additional funds, up to the total $2.5 million budget appropriation, prior to Council action on the formal loan agreement, if factors beyond PAHC’s control increase project costs. PAHC’s latest estimate for total project costs is $6.279 million, including acquisition, rehabilitation and transaction costs. The principal sources of funding are the new 35-year, CMR:238:98 Page 4 of 7 fixed rate HUD/FHA-insured first mortgage of $1,983,700, the equity to be raised from the tax credit investors (estimated at about $1,924,500), the $2,300,000 in City fimds, net rental ’income of $46,000 during rehabilitation and a $41,000 four month, short-term loan from PAHC. Attachment B details the costs and sources of fimds used in the HUD~HA-loan application. Staff will evaluate the possibility of submitting an application for 1998 Federal Home Investment Partnership Program (HOME) program funds for the Sheridan, if PAHC is successfifl in securing a tax credit award with this application. HOME applications will be due in September 1998. The project could be very competitive, since it would be ready to proceed. Any HOME fimds awarded could replace some of the City’s CDBG and Residential Housing In-Lieu funds. However, it is tmlikely that the HOME fimds could be available to the project until March 1999, assuming the application was even funded at all. This would delay the close of escrow and thus increase the purchase price, among other issues. Alternative Financing Strategy.: PAHC has also analyzed an alternative fmancing strategy that could be pursued if the proposed strategy is unsuccessful. This other plan would utilize a first mortgage loan funded from the issuance of tax-exempt bonds combined with the noncompetitive Federal housing tax credits. Preliminary analysis indicates that this type of financing plan might require a larger City funding contribution of up to $2.7 million, but it does have the advantage of not being subject to the highly competitive allocation process for the regular Federal and State tax credits. However, there is now such high demand for the State’s limited allocation of tax-exempt bond authority that only those applications filed by the first of the year are awarded a bond allocation. Effect of Transfer of Funds From the Palo Alto Commons Set-Aside: About $130,000 of the fimds proposed for the budget appropriation for the Sheridan project are firom the set-aside within the Residential Housing In-Lieu fund for resident subsidies at the Palo Alto Commons assisted living development. This is about one-half of the approximately $260,000 balance in that account. The developer of Palo Alto Commons paid an in-lieu fee of $226,751 in 1990 to the City in satisfaction of the Below Market Rate housing program requirements. At the direction of Council, a letter agreement (dated January 18 and modified February 26, 1990) was developed between PAHC and the owners of Palo Alto Commons to use the investment earnings from the in-lieu fee payment to fired an experimental program in which a monthly subsidy would be paid to the project on behalf of a few low income residents. Assistance commenced in 1990 for three residents at a rate of $500 per month each. PAHC completed a written evaluation of the experimental program in June 1994..The problems with the rent subsidy program included declining effectiveness as rents and services costs increased, difficulty setting appropriate income and subsidy amounts, few persons served compared to other types of housing subsidies and future administrative costs. PAHC recommended to City staff that the program be phased out as vacancies occurred and that the remaining funds be allocated to meet some other housing CMR:238:98 Page 5 of 7 need. At this time, one of the original subsidized residents remains and $500 per month is being paid from the set-aside on that person’s behalf to Palo Alto Commons. The remaining $130,000 balance in the set-aside, after the proposed appropriation to the Sheridan project, will be sufficient to assist this resident as long as needed. POLICY IMPLICATIONS The commitment of housing fimds for the Sheridan Apartments acquisition is consistent with Program 26 of the 1990-2000 Housing Element which states that the City will actively assist local nonprofits in the preservation of existing low-income units at risk of conversion to market rate housing and in pursuing funding to purchase such units. Approval of the staff recommendation also implements previous direction to staff from the Finance Committee on October 21, 1997 supporting the preservation of the Sheridan through nonprofit acquisition and continues City support for PAHC’s acquisition specifically as indicated by Council approval of fimding for the predevelopment agreement on February 2, 1998. It should be noted that funding this project will result in a major reduction in the available balance of City housing fimds which can be used to acquire existing housing. However, the current balance (approximately one million plus about $600,000 in future fee revenue from approved, but not completed projects) of the Commercial Housing In-Lieu Fund will remain unused and available for new construction housing activities. The Sheridan project will utilize the entire balance of the CDBG Housing Development monies, plus the entire amount for capital projects in the FY 1998-99 CDBG budget. From the perspective of the CDBG program, committing over $1.6 million in CDBG fimds to a housing project which is fairly likely to be completed by the end of 1998 will demonstrate solid progress to HUD in the implementation of City’s CDBG Action Plan. Providing the project is completed and the funds expended, the City will no longer be out of compliance with HUD standards on CDBG expenditures as it is presently. Most of the entire $693,670 current balance in the Residential Housing In-Lieu Fund is also expected to be utilized for the Sheridan acquisition. While there are approved housing developments with outstanding housing in-lieu fees, staff does not project significant fee revenue into the Residential Housing In-Lieu Fund until FY 1999- 2000. TIMEL1NE The deadline for submittal of applications for the second, and fmal round of the 1998 tax credit funding is May 29. Evidence of the City’s commitment of project fimding must be submitted with PAHC’s tax credit application. July 22 is the scheduled date for the announcement of the tax credit awards. IfPAHC is successful in securing an award inJuly, a formal funding and loan agreement will be scheduled for Council review and action prior to the actual sale of the property, probably in October 1998. After acquisition, PAHC would proceed with the rehabilitation work during 1999. An application to renew the existing Section 8 rental assistance contract would also be filed with HUD in early 1999. CMR:238:98 Page 6 of 7 If PAHC does not receive a 1998 tax credit award, it will not be possible to acquire the Sheridan this calendar year, as there are no further scheduled housing funding application rounds until early next year, for either the competitive tax credit or the alternative tax exempt bonds allocation process. PAHC intends to reapply for fmancing in 1999, if necessary. The purchase agre, ement includes a provision for the extension of the fmancing contingency period, if the funding is not assembled by PAHC by October 1, 1998. However, if escrow has not closed by January 1, 1999, the purchase price increases 3.5 percent per year, computed on a daily basis. The final deadline for the close of escrow is December 31, 1999. ENVIRONMENTAL REVIEW Appropriation of fundsunder a Budget Amendment Ordinance is not an action subject to the California Environmental Quality Act (CEQA). The actual provision of fmancial assistance to PAHC for the acquisition will be categorically exempt under Section 15326 of the CEQA Guidelines. The provision of CDBG funds for the project has been determined by staff to be categorically excluded under Section 58.35 (b)(6) of the CDBG program’s National Environmental Policy Act (NEPA) regulations. ATTACHMENTS Attachment A: Attachment B: Attachment C: Budget Amendment Ordinance Estimated Budget and Sources of Funds As of April 23, 1998 Letter from Palo Alto Housing Corporation PREPARED BY: Catherine Siegel, Housing Coordinator DEPARTMENT HEAD REVIEW: CITY MANAGER APPROVAL:. ANNE CRONIN MOORE Interim Director of Planning and Community Environment EMIL~HARRISON Assistant City Manager cc:Palo Alto Housing Corporation CDBG Citizen Advisory Committee Sam Webster, General Partner, Sheridan Associates Representatives of Residents of the Sheridan Apartments CMR:238:98 Page 7 of 7 ORDINANCE NO. ATTACHMENT A ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO AMENDING THE BUDGET FOR THE FISCAL YEAR 1997-98 TO PROVIDE AN ADDITIONAL APPROPRIATION FOR THE PALO ALTO HOUSING CORPORATION TO FULLY FUND THE CITY’S SHARE OF $2,354,500 FOR THE ACQUISITION AND REHABILITATION OF THE SHERIDAN APARTMENTS PROJECT WHEREAS, pursuant to the provisions of Section 12 of Article III of the Charter of the City of Palo Alto, the Council on June 23, 1997 did adopt a budget for fiscal year 1997-98; and ~ WHEREAS, the preservation of existing, very low-income rental housing units is a~goal of the City; and WHEREAS, the Palo Alto Housing Corporation (PAHC) has entered into a purchase agreement to acquire and rehabilitate the Sheridan Apartments with the intention of preserving them as housing units affordable to very low-income households; and WHEREAS, PAHC plans to apply for low income housing tax credits from the state and Federal governments to help finance the acquisition and rehabilitation of the Sheridan Apartments, and applications for such credits require a demonstration of the full commitment of all local funding; and WHEREAS, the City of Palo Alto has already budgeted $145,500 for this project;, and WHEREAS, PAHC is requesting an additional $2,354,500 in funding from the City of Palo Alto which, in combination with the previous budget commitment, will total $2,500,000, the total funding from the City for this project; and WHEREAS, the City Council desires to make such additional funding available to PAHC for this purpose; and WHEREAS, funding is available for this purpose in the Community Development Block Grant (CDBG)~ New Housing Development Fund ($i,014~,749), the Residential Housing In-Lieu Fund ($825,801), and the General Fund as an advance which will be reimbursed by 1998-99" CDBG Funds ($513,950); and WHEREAS, City Council authorization is needed to amend the 1997-98 budget as hereinafter set forth. NOW, THEREFORE, the Council of the City of Palo Alto does ORDAIN as follows: SECTION i. The sum of One Million Fourteen Thousand Seven Hundred and Forty-Nine Dollars ($1,014,749) is hereby transferred from the New Housing Development Fund to the Sheridan Acquisition Project ±n the Community Development Block Grant Fund. SECTION 2. This transaction will have no affect on reserves. SECTION 3. The sum of Five Hundred Thirteen Thousand Nine Hundred and Fifty Dollars ($513,950) is hereby transferred from the General Fund to the Community Development Block Grant Fund (CDBG), Sheridan Acquisition Project, as an advance (long-term loan) pending receipt of 1998-99 CDBG Funds. The Budget Stabilization Reserve is correspondingly reduced. SECTION 4. This transiction will reduce the Stabilization Reserve from $16,655,991 to $16,042,041. Budget SECTION 5. The sum of Six Hundred Ninety-Three Thousand Six Hundred and Seventy Dollars ($693,670) is hereby transferred from the Residential Housing In-Lieu Fund to the Sheridan Acquisition Project, and the Residential Housing In-Lieu Fund is correspondingly reduced. SECTION 6. This transaction will reduce the Residential Housing In-Lieu Fund Reserves from $693,670 to $0. SECTION 7. The sum of one Hundred Thirty-Two Thousand One Hundred Thirty-One Dollars ($132,131) is hereby-transferred from the designated Palo Commons Funds in the Residential Housing In-Lieu Fund to the Sheridan Acquisition Project, and the Palo Alto Commons Funds are correspondingly reduced. SECTION 8. This transaction will reduce the reserve of the designated Palo Alto Commons fund balance in the Residential Housing In-Lieu Fund from $259,370 to $127,239. SECTION 9. As specified in Section 2.28.080(a) of the Palo Alto Municipal Code, a two-thirds vote of the City Council is required to adopt this ordinance. SECTION i0. The Council of the City of Palo Alto hereby finds that this project is exempt from the provisions of the California Environmental Quality Act and, therefore, no environmental impact assessment is necessary. SECTION ii. As provided~in Section 2.04.350 of the Palo Alto Municipal Code, this ordinance shall become effective upon adoption. INTRODUCED AND PASSED: AYES: NOES: ABSTENTIONS: ABSENT: ATTEST:APPROVED: City Clerk Mayor APPROVED AS TO FORM:City Manager Senior Asst. City Attorney Director of Services Administrative Acting Director of Planning and Community Environment ATTACHMENT B Sheridan Apartments Estimated Budget and Sources of Funds As of April 23, 1998 Estimated Project Costs: Acquisition Rehabilitation Hard Costs Construction Soft Costs Financing, Escrow, Legal & Other Transaction Costs Replacement Reserves Operating Reserves Developer Fee to PAHC $5,100,000 $440,303 $110,599 $228,438 $57,0O0 $75,000 $267,810 Total Project Costs:$6,279,150 Estimated Sources of Funds: HUD/FHA-insured Loan from Bank of America (applied for) Investor Equity from State & Federal Tax Credits (estimated) Sponsor Equity (PAHC Sheridan, Inc.)- Net Rental Income During Rehabilitation Short-Term Loan (less than 1 year) from PAHC City. of Palo Alto Loan: ¯CDBG (in current budget & under contract) ¯CDBG (FY 98-99) ¯Residential Housing In-Lieu $1,160,249 $513,950 $6O8,O93 $1,983,700 $1,924,535 $1oo $46,613 $41,910 $2,282,292 Total Sources of Funds $6,279,150 [Note: A transfer from the Palo Alto Commons Set-Aside in the Residential Housing In- Lieu Fund is not necessary based on the above April 23, 1998 project budget, but could be needed if the full amount of the requested HUD/FHA-insured bank loan is not approved.] ATTACHMENT C 725 Alma Street ¯ Palo Alto, CA 94301 ¯ (650) 321-9709 ¯ Fax (650) 321-434 May 11, 1998 June Fleming, City Manager City of Palo Alto P. O. Box 10250 Palo Alto, CA 94303 Re: City Funding for Acquisition of Sheridan Apartments Dear June: The Palo Alto Housing Corporation (PAHC) is progressing on schedule toward the acquisition of the Sheridan Apartments. We have completed our application for an FHA 223(0 loan and are working on the application to the California Tax Credit Allocation Committee (TCAC) for a reservation of tax credits for the project. A critical component of the TCAC application is that 50% of the permanent financing has been committed or appropriated. The City funding is important to meet that.threshold criterion. W+ request that the City Council adopt a budget amendment ordinance that appropriates $ 2,354,500, in addition to the $145,500 appropriated in February 1998, for a total of $2.5 million toward the acquisition of the Sheridan Apartments out of Community Development Block Grant and Housing Reserve funds. We appreciate the City’s great interest in this project. We hope to be successful in accomplishing the desired result. Sincerely, PALO ALTO HOUSING CORPORATION Marlene H. Prenderga~t~~ Executive Director