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HomeMy WebLinkAbout1998-11-23 City Council (14)City of Palo Alto City Manager’s Report 14 TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: PLANNING AND COMMUNITY ENVIRONMENT DATE:NOVEMBER 23, 1998 CMR:443:98 SUBJECT:RESOLUTION APPROVING LOAN COMMITMENT TO MID- PENINSULA HOUSING COALITION TO ACQUIRE PALO ALTO GARDENS APARTMENTS AT 648 SAN ANTONIO ROAD; FUNDING MECHANISMS IN SUPPORT OF ACQUISITION; AND PUBLIC HEARING ON POSSIBLE SUBMITTAL OF A SECTION 108 LOAN GUARANTEE APPLICATION TO THE U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT RECOMMENDATION Staff recommends that the Council: 1)Support the proposed acquisition of the Palo Alto Gardens Apartments by Mid- Peninsula Housing Coalition (MPHC) by adopting the attached Resolution approving a loan commitment from the City’s Housing Development Fund to MPHC in an amount not to exceed $1 million; 2)Direct staffto seek the most advantageous funding mechanisms and return to Council by early March 1999 with the funding plan and a Budget Amendment Ordinance (BAO); 3)As Federal requirements dictate, hold a public hearing for Federal allocation purposes to receive citizen comments on the submittal of a Section 108 Loan Guarantee application to the Federal Department of Housing and Urban Development (H); and, 4)Authorize the City Manager to prepare and execute a letter indicating the City’s loan commitment, to be submitted by MPHC with the tax exempt bond allocation application and with any other fmancing applications required for the project. CMR:443:98 Page 1 of 8 BACKGRO~, The 156-unit Palo Alto Gardens housing project (project) located at 648 San Antonio Road, was developed in 1973 with HUD Section 221(d)(3) f’mancing. The project was developed without City monetary assistance, but the site was zoned Planned Community, specifically to accommodate the planned use as predominantly elderly, low-income housing with a related reduction in required parking spaces. The 20 year HUD contract onthe project provided for Section 8 rental subsidies for the 128 one-bedroom units, 20 two-bedroom and 8 three-bedroom units. On October 2-1, 1997, the present owners, Goldrich and Kest, provided official notice to HUD, the City and the tenants of its decision to immediately prepay the project’s HUD mortgage and not renew the Section 8 project-based contract upon its expiration in June 1998. That process was completed, and the project is now fi:ee of federal regulatory controls. Eligible households in the project (approximately 132 units) received special "enhanced" or so-called "sticky" Section 8 vouchers that are valid until June 30, 1999. These enhanced vouchers provide theproject owner with full market rents ($1,000 for the one-bedroom units, for example). In return, the owner agreed to allow the Section 8 tenants to remain in their units for one year and the Santa Clara County Housing Authority pays the difference between the full market rent and 30 percent of the tenants income. After this first year, the special HUD funding for the enhanced vouchers ends. However, it is expected that the Housing Authority will have the funding to convert all eligible tenants to regular Section 8 vouchers. Regular Section 8 vouchers limit the rent subsidy to the established Section 8 Fair Market Rents (FMRs) for Santa Clara County. As of October 1, the Section 8 FMRs were increased substantially (for example, $922 for a one-bedroom unit), but they are still less than current full market rate rents in Palo Alto. At the time the project is converted to regular Section 8 vouchers, the owner is under no Federal requirement to continue to accept Section 8 tenants and could choose to evict existing Section 8 tenants. For most of the residents, paying the difference between the full market rent that may be demanded by the owner and the amount allowed under Section 8 vouchers could be significant. Finding other housing in the mid-peninsula area would, likewise, be difficult as all subsidized housing is full and the waiting lists are closed or very long. The current tenants are concerned and have sent a number of letters to the Council, spoken at Council meetings, met with staff and Council members, as well as contacted their Federal and State elected representatives and HUD officials. The status of Section 8 vouchers is also unknown. HUD is currently renewing Section 8 vouchers and contracts for one year terms only. Although Section 8 vouchers are expected to continue for the near future, financing of projects that include Section 8 tenants must take into account the contingency of loss of Section 8 subsidies. ¯ CMR:443:98 Page 2 of 8 DISCUSSION City of Palo Alto policies and programs strongly support the retention of affordable housing projects, such as Palo Alto Gardens, and city staff has been working towards retention of the project as affordable housing since the original notification from Goldrich and Kest. MPHC has significant experience with similar housing projects: for example, in July 1998, it finalized the purchase from Goldrich and Kest of the 149-unit Central Park Apartments in Mountain View. The financing structure developed by MPHC for Palo Alto Gardens is modeled on the one used for its purchase of the Central Park Apartments. MPHC has conducted property inspections, completed an appraisal and initiated the process to obtain the bond rating and a tax exempt bond allocation for the transaction. MPHC expects to secure site control, with the execution of a letter of intent to negotiate a purchase agreement for a price of $13,000,000 very shortly. Together with rehabilitation, fmancing and other transaction costs, the total estimated development budget is approximately $16.5 million. This amount includes more than $1.3 million in rehabilitation work necessary because of bond rules and the age of the project. The principal source of funding is a fixed rate, first mortgage loan of approximately $11.4 million funded by the proceeds of a Standard and Poors-rated, tax-exempt bond issue. The interest rate on the bond issue will not be fixed until next Spring, but MPHC is using a rate of 5.75 percent for its financial analysis. The Association of Bay Area Governments (ABAG) would be the bond issuer and an "A" rating is expected. The bond fmancing would not involve any pledge of the City’s credit or have any potential impact on the City’s credit rating. The bonds would be secured only by a deed of trust on the project. The second component of the fmancing is an equity investment in the project through.the sale of the low income housing tax credits. Tax credits are authorized under the Federal Internal Revenue Code and provide corporations and other investors with income tax write- offs in return for equity investments in low-income housing. The tax credits are expected to provide over $4 million in equity funds. The type of tax credits proposed for this transaction, do not require MPHC to compete for funding with other projects in the State, as they are made available only to projects receiving tax exempt bond allocations. Based on the level of rents used for underwriting the project (i.e. the rents that would be needed to cover operating expenses, pay debt service on the first mortgage and allow for a sufficient cushion as required by the bond rating) there remains a funding gap of approximately of $750,000 to $1 million. Mid-Peninsula Housing Coalition has submitted an application requesting a City loan commitment of up to $1 million to complete its funding package (See Attachment A for letter and proposal). Staff has encouraged MPHC to plan a financing structure that brings the underlying rents as close as possible to the 50 percent of median income level, so that projects can serve a broader range of low income households. For example, with a City subsidy of $1 million, CMR:443:98 Page 3 of 8 rents affordable to households at 56 percent of median level could be charged and still cover the project’s operations and the bond loan at the required debt service, even with the loss of all Section 8 subsidies. MPHC must demonstrate this level of rent to Standard & Poor’s in order to receive a favorable rating. In reality, the project will be able to support rents at about 46 percent of median income after the transition from Section 8 to tax credit rents has stabilized. If the City only provided $750,000 in subsidies and the Section 8 subsidies are lost, then higher rents would be necessary, up to the 60 percent of median level. None of the funding sources staff is proposing to pursue would have any impact on the General Fund. The possible sources of City funding are: Federal Section 108 Loan Guarantees, HOME grant funds, City Community Development Block Grant (CDBG) funding or the City’s Housing Development Fund. Section 108 Loan Guarantee Program MPHC had originally indicated that the funding gap for the purchase of the Palo Alto Gardens might be as much as $2.1 million, which was more than the City had readily available for purchase of an existing project. Staff investigated the Section 108 loan program and determined that it was a feasible option. The purpose of the Section 108 Loan Guarantee Program (Section 108), is to assist communities in financing large scale activities that are too costly to be funded out of the annual CDBG entitlement grant. The Section 108 funds are not a grant to the City, but are provided by HUD in the form of a loan requiring regular, annual payments at the prevailing interest rate for Federal bonds. For the purposes of this analysis, staff has assumed a Section 108 loan would bear interest at 5.5 percent over a 20 year term. The project is expected to produce sufficient positive cash flow to MPHC to allow it to repay the City’s loan and then the City would, in turn, make the annual Section 108 loan payments. In any years in which the project’s cash flow was insufficient to cover the Section 108 loan repayments, the City would be obligated to make the payments from some other source of funds, such as CDBG or future Housing Development funds. The Section 108 loan payments would become a contingent liability against the City’s CDBG entitlement grant and, if the city did not make a payment, HUD would reduce the City’s letter of Credit balance, accordingly. For the Section 108 application process, the City must follow its CDBG citizen participation plan, and prepare an amendment to the Annual Action Plan of the Consolidated Plan. This process has been initiated by staffand a meeting of the CDBG Citizen Advisory Committee was held on November 10, 1998 to obtain its comments. The Committee supported the project, its acquisition and City funding of up to $1 million but did not feel they had enough information to comment on the funding source. Notification of the general public was done~ with publication of a public hearing ad in the Palo Alto Weekly on November 11, 1998, requesting public comments on the use of Section 108 at this Council meeting. CMR:443:98 Page 4 of 8 The Section 108 application would be submitted to the San Francisco HUD field office but ultimately must be approved by HUD in Washington, D.C. In several conversations with HUD, it appears that this is an appropriate project. The caution is that the City, and non- profits that seek CDBG funds for projects, must be prepared for the possibility that fewer CDBG funds would be available if the CDBG fimds must be used to make the Section 108 loan payments. Also, the timing of receipt of the Section 108 funds might necessitate a "bridge" loan from other City funds such as the Housing In-lieu fund. HOME Grant Award The City recently applied for $825,000 in HOME grant funds. Decisions on the awards will be announced on January 21, 1999. Staff expects the HOME application to score well in the competitive process but it is not possible to be sure the City will be funded. If awarded, the HOME funds would not be available until late March. The HOME grant application was for the Sheridan project but the funds would be used to replenish the Residential Housing In-lieu Fund which has been committed to the Sheridan purchase.. This could allow for funding all or part of the City loan for the Palo Alto Gardens purchase. 1999/2000 CDBG funds A portion of the City’s fiscal year 1999-2000 CDBG allocation could be designated for the project. With public notification and written permission from HUD, next year’s funds can be authorized, although a "bridge" loan of local funds, such as the Housing In-Lieu Fund, would be required from close of escrow in May, until July 1, 1999, when FY 1999-2000 CDBG funds could be drawn down from HUD. Housing In,Lieu Eunds By City policy, funds collected from developers of commercial properties are specifically collected for the purpose of constructing new housing, however, in the past, the City has found it necessary to temporarily loan funds from the Commercial Fund to the Residential Fund in order to expeditiously proceed with a project. This may be necessary depending on the source, timing and availability of the other funds, such as the Section 108 loan guarantee or FY 1999-2000 CDBG funds. The Commercial Fund has approximately $2.4 million. Included in the $2.4 million is the $734,000 from the Palo Alto Medical Foundation for the Urban Lane site. In addition, about $500,000 is outstanding from approved development projects that are not yet under construction or have not been completed. The Residential Fund currently has a balance of about $38,000. However, approximately $700,000 is outstanding in housing in-lieu payments on approved, but unbuilt projects. Of this, $200,000 to $300,000 is reasonable expected in revenues over the next six months including a $233,000 payment due by the date the Council considers the fmal map for the Glenbrook Court project. CMR:443:98 Page 5 of 8 In order for MPHC to meet the application deadlines for the bond allocation and the tax credits, the City Council is being asked to support the purchase of the project and commit, by resolution, to a loan of up to $1 million from the City’s Housing Development Fund monies. Because each of the funding sources have different requirements, such as timing, repayment, use of funds, allowable maximums and compatibility with other funds, staff is proposing to return to Council in early March 1999 with a recommendation for a specific funding package and a Budget Amendment Ordinance 03AO) for the required amount. Staff is also requesting authorization for the City Manager to prepare and execute a letter evidencing the City’s loan commitment for submittal with MPHC’s financing applications. The City Manager’s letter would include the specific dollar amount of the City loan within the $1 million maximum. This process would provide some additional time and flexibility for staff to continue to work with MPHC to determine the optimum combination of underlying rents, the amount of the bond loan debt and the City loan. Because the demand for tax exempt bond allocations far exceeds the State’s bond ceiling limits, delays in the City’s loan commitment that force MPHC to submit its application later on next year would significantly lessen the chance of securing the allocation and thus potentially make the project infeasible. It is important that the final City loan amount authorized by the City Manager be consistent with the budget and other funding sources shown in the December 15 bond application. ALTERNATIVES TO STAFF RECOMMENDATION A number of different funding alternatives have been considered by MPHC ranging from no City funding to $3 million in City subsidies. With no City fimding, MPHC would need to lend its entire developer fee (about $700,000) back to the project as a deferred payment loan. However, the developer fee is required by the tax credit investors as a guarantee to fund operating losses and loss of projected tax credits, if that should occur. Without the developer fee, MPHC would have to place other assets at risk. Staff did not consider this a viable alternative unless there was no other way to acquire and preserve the housing. Larger amounts of City funding could be used to reduce the amount of the first mortgage bond loan, bringing down the rents MPHC would be able to charge on the units without Section 8 tenants. However, the only possible source for City subsidies exceeding the $1 million maximum recommended by staff would be the Section 108 loan program. Staff believes that the $1 million City loan results in a prudent and workable rent structure within the resources likely to be available without using Section 108. Another reason for not providing such large subsidies for the Palo Alto Gardens units is that the Sheridan Apartments units will be available as similar housing serving households at the 40 percent of median income level. It is reasonable in the long term to have Palo Alto Gardens and the Sheridan serving somewhat different income levels and tenant populations. CMR:443:98 Page 6 of 8 RESOURCE IMPACT The projected maximum $1 million in city funds for the purchase of Palo Alto Gardens will come from either a Section 108 loan guarantee, FY 1999-2000 CDBG funds, City Housing Development funds, or a combination. Staff anticipates that the City will be awarded the $825,000 in HOME funds. This will allow the majority of City assistance on the project to come from the Residential Fund with the remainder likely to come from FY 1999-2000 CDBG funds. Should this be the preferred funding source, this will reduce the residential fund to a minimum amount and will partially reduce the available CDBG funds for other projects in 1999-2000. POLICY IMPLICATIONS The provision of City assistance to preserve the Palo Alto Gardens project as affordable housing is consistent with adopted City policy in the Housing Element of the 1998-2010 Comprehensive Plan, the HUD Consolidated Plan and 1998-99 Annual Action Plan. The Housing Element Technical Document analyzes in detail the problem of conversion of affordable units to market rate. Palo Alto Gardens is identified as one of three, for-profit owned, projects at-risk of conversion, along with the Sheridan and Terman Apartments. Terman Apartments is also owned by Goldrich & Kest; however, its Section 8 contract does not expire until 2004. In both the Housing Element and the Consolidated Plan, City assistance in pursuing funding for the preservation of these projects is identified as an action that would be undertaken. However, an application for a Section 108 Loan would require a formal amendment to the City Annual Action Plan according to HUD staff because use of the Section 108 loan program is not specifically discussed in the current Plan. TIMELINE Key dates include: ¯Initiate citizen process for Section 108 Loan (City) ¯Deadline to submit tax-exempt bond application(MPHC) ¯Submit tax credit application (MPHC) ¯Announcement of HOME grant awards re Sheridan (State) " ¯Council approval of funding source and BAO ¯Approval of bond allocation (State) ¯Council action on City funding agreement & loan documents ¯Deadline to issue bonds and purchase property (MPHC) November 10 December 15 January 15 January 21 Mid-February Late February Early March Late May CMR:443:98 Page 7 of 8 ENVIRONMENTAL REVIEW This action is not a project under the California Environmental Quality Act (CEQA). Appropriate environmental review under NEPA will be done if Federal funds are used for the project. However, because the project is the preservation of existing low-income housing with no increase in the number of housing units or change in use, the use of federal funding sources does not require public comment, notice or HUD approval of the City’s environmental determination. ATTACHMENTS A. Letter, dated November 18, 1998 from Mid-Peninsula Housing Coalition with attached Project Proposal B.Resolution Regarding Loan Commitment for Palo Alto Gardens Acquisition PREPARED BY:Catherine Siegel, Housing Coordinator James E. Gilliland, Assistant Planning Official DEPARTMENT HEAD REVIEW: G. EDWARD GAWF kl Director of Planning and Community Environmem CITY MANAGER APPROVAL: Mid-Peninsula Housing Coalition CDBG Citizens Advisory Committee Goldrich and Kest Palo Alto Gardens Tenants Association CMR:443:98 Page 8 of 8 ATTACHMENT A November 18, 1998 June Fleming, City Manager City of Palo Alto 250 Hamilton Avenue Palo Alto,.CA 94301 Mid-Peninsula Housing Coalition 658 Bair Island Road, Suite 300 Redwood City, California 94063 Tel: [650] 299-8000 Fax: [650] 299-6010 ernaih midpen@midpen-housing.org Dear Ms. Fleming: Mid-Peninsula Housing Coalition (MPHC) is currently negotiating a purchase agreement with Goldrich, Kest and Associates for Palo Alto Gardens. Currently, MPHC and Goldrich, Kest and Associates have agreed on a purchase price of $13 million and we are working out some other details. MPHC expects to have a signed letter of intent to sell from the current owner by November 23, 1998. The property is a 156-unit senior and. family rental project located at 648 San Antonio Road in Palo Alto, Santa Clara County, California. The Section 8 contract expired June 30, 1998, and as of July 1, 1999, the currentowner may convert the development to market rate housing. MPHC intends to purchase the property and preserve it as affordable housing to serve current and furore Section 8 tenants. As you know, MPHC has many years of experience in developing affordable housing. MPHC was founded in 1971 as a regional non-profit developer and manager of affordable rental housing. Family and senior units comprise 84% of MPHC’s portfolio. MPHC has constructed or rehabilitated nearly 3,800 units of affordable rental housing and has never had a project in financial difficulty. MPHC is requesting a loan commitment for a maximum of $1,000,000 from the City of Palo Alto for submittal with the bond application to the State on December 15, 1998. The funds from the City of Palo Alto will be used to pay for a portion of the land costs. MPHC is confident that this project will be successful and hopes that the City of Palo Alto will assist in the purchase of this property. Thank you for your assistance and cooperation. I am looking forward to working with the City of Palo Alto to preserve these units of affordable housing. Sinc, F~an Wagstaff Executive Director Equal Housing Opportunity-Professionally managed by Mid-Peninsula Housing Management Corporation Project Proposal November 18, 1998 Palo Alto Gardens Mid-Peninsula Housing Coalition Project Description Palo Alto Gardens is a 156-unit senior and family rental project located at 648 San Antonio Road in Palo Alto, Santa Clara County, California. The project is comprised of 128 one- bedroom units, 20 two-bedroom units, and eight three-bedroom units. The project has a recreation building and a new playground will be added during rehabilitation. The 156 units are configured in 10 buildings, with one building of three-bedroom units and two buildings of two-bedroom units in a triangle arrangement, and seven buildings of one-bedroom units. The entire project area is 7.1 acres. Palo Alto Gardens was originally financed through the HUD 221 (d)(3) program as a 100% "Cost Based" Section 8 project. The project has been owned and managed by the original developer since inception in 1973. Palo Alto Gardens was fully occupied by 100% Section 8 senior and family households from ~nception until the Section 8 HAP contract expired on July 31, 1998. The Section 8 contract was not extended. In keeping with HUD policy, tenants in place on June 30, 1998 received enhanced, or "sticky," vouchers that are valid until June 30, 1999. At that point, these tenants will receive regular Section 8 vouchers as long as HUD continues to fund the Section 8 program and these tenants remain in place. There will be some turnover after July 31, 1998 and before MPHC purchases the property. The current owner has agreed to attempt to find Section 8 tenants to move into these vacant units, but otherwise these units will be rented to market rate tenants. To the extent that Section 8 tenants move into vacant units, MPHC will encourage them to stay and continue to utilize the Section 8 assistance. Currently, there are 10 higher income tenants in the project. MPHC will increase rents on these units to true Palo Alto market rents as their leases expire. MPHC will provide some assistance with their new rent if they choose to move. When market rate tenants move out, they will be replaced with low-income households. Since very few landlords will accept the Section 8 vouchers and certificates, the project can expect close to 100% occupancy by Section 8 assisted tenants. Purchasing this property will preserve 156 units of affordable housing in Palo Alto, one of the strongest and most expensive rental markets in the country. Because of the high demand and low vacancy rate in the area, low-income seniors and families have few other choices for housing. If Palo Alto Gardens were allowed to convert to market rate housing, the current residents would be at risk of becoming homeless. Sponsor Information Mid-Peninsula Housing Coalition (MPHC) is a non-profit public benefit corporation. MPHC was founded in 1971 as a regional non-profit developer and manager of affordable rental housing. MPHC primarily develops affordable family and senior rental apartments.. Projects range from a 6-unit project to a 286-unit development. Family and senior units comprise 84% of MPHC’s portfolio. MPHC has constructed or rehabilitated nearly 3,800 units of affordable rental housing and has never had a project in default. In July 1998, MPHC successfully purchased the Central Park Apartments in Mountain View from the same owner as Palo Alto Gardens and using the same financing plan as proposed for Palo Alto Gardens. The ABAG Finance Authority for Nonprofit Corporations issued $8,750,000 in fixed-rate, tax-exempt bonds with a Standard & Poor’s "A" rating. Other financing sources included the City of Mountain View and 4% low-income housing tax credits. The Central Park Apartments also has a similar ownership structure and will build a similar Affordability and Operating Reserve to safeguard against the loss of Section 8 assistance. Ownership Structure There are two separate transactions in this acquisition. The improvements will be owned by a Limited Partnership with a General Partner that is created by MPHC and a tax credit investor as the Limited Partner. The Limited Partnership will purchase the improvements and pay for the rehabilitation and other associated costs with the bond proceeds and the tax credit equity. The Limited Partnership will hire the Management Company to operate the project. We have tentatively identified Transamerica Occidental Life Insurance Company as the tax credit investor (Limited Partner). Mid-Peninsula Housing Coalition will purchase the land with proceeds from the loan from the City of PaSo A~to and an advance land lease rent payment from the partnership. MPHC will then lease the land to the Limited Partnership for 60 years. The following financial analysis is based on the purchase price for land and improvements of $13 million agreed to by the seller. The total project cost is estimated at approximately $16.5 million. Property Manager Mid-Peninsula Housing Management Corporation, an affiliate of MPHC with the same board of directors, manages all of MPHC apartment developments. MPHMC has been managing affordable housing for over 17 years. MPHMC is currently managing over 3,600 units of affordable rental housing. Financing Plan: Land Sources of Funds Amount Rate $1,000,000 3.0% $674,056 NA $1,674,056 Description Loan from the City of Palo Alto. Loan is fully subordinated to the bond debt and is payable over 20 years from land lease rent payments. One-Time Land Lease Rent Payment at Closing from the Limited Partnership Total Uses of Funds Amount $1,640,000 $12,500 $11,556 $1o,o00 $1,674,056 Description Land Costs, per appraisal Legal - Land Acquisition & Land Loan Closings (City of Palo Alto loan only) City and County Transfer Tax Title and Recording Total Financing Plan: Improvements Sources of Funds Amount Rate $11,400,000 5.75% $4,084,814 Equity $15,484,814 Description Tax-Exempt, fixed rate bonds, issued by ABAG Finance Authority. Estimated Standard & Poor’s rating: "A." Investment by Limited Partner in exchange for tax credits and other benefits Total Uses of Funds Amount $11,360,000 $1,382,875 $1,328,820 $739,063 $674,056 $15,484,814 Description Acquisition of Improvements & Personal Property Rehabilitation: Hard Costs: housing rehabilitation and site impro.vements Soft Costsi Architecture and Engineering, Permits and Fees, Relocation, Environmental work, and a portion of the Developer Fee Other Soft Costs Bond Debt Service Reserve One-Time Land Lease Rent Payment at Closing (for land costs) Total 3 Operating Plan and Cash Flow Rent Levels MPHC will accept Section 8 Fair Market Rents as long as HUD continues to fund the Section 8 program. Tenants will not be required to pay any rents that are greater than 30% of their income. "Worst Case:" No Section 8 In the event that Congress terminates funding for the Section 8 program, MPHC will transition to the allowed Tax Credit rent schedule, with all of the units reserved for households earning 56% of median income or less. Existing tenants will continue to pay rents that are affordable to the household. Units vacated by normal turnover will be rented at allowable Tax Credit rents. While the project would still be affordable, this would mean a gradual increase in the incomes required of ne.___W_w tenants. After a period of transition, the average rents would be affordable to households at 46% of median income. At the normal turnover rate of fifteen units per year, the entire transition will take anestimated 14 years. However, many of the senior residents are quite elderly, and the turnover rate may increase as these tenants pass away or move to assisted living facilities. Additionally, MPHC may help some tenants move to other MPHC projects that are able to absorb the lower rents these tenants can afford to pay, thereby accelerating turnover. Duri.ng this transition, the project will experience significant operating losses that will be covered by the $1.5 million in affordability reserves held by the Limited Partnership and MPHC and a Conditional Funding Obligation by Transamerica, as explained below. Operating Expenses Operating expenses were developed in direct consultation with the Mid-Peninsula Housing Management Corporation. MPHMC created a management budget with operating costs at $3,-147 per unit per year, for a total of $490,932 in the first year. This figure includes administrative costs, management fee, maintenance and operating costs, utilities (excluding electricity, which is individually metered), taxes, and insurance. Replacement Reserves Replacement reserves are funded at $275 per unit per year, and a replacement reserve fund analysis outlines the required growth of the reserve fund and estimated expenses in the year that the expenses may occur. There is no capitalized replacement reserve because the property will be extensively rehabilitated. Debt Service for Bonds The bonds have a 40-year term, and are underwritten conservatively with a 5.75% interest .rate and a 1.4 debt coverage ratio. All other debt and payments are fully subordinated to the bond debt, and will be paid out of land lease payments. Additional Payments Out of Cash Flow The Limited Partnership first pays operating expenses, bond debt service, and the replacement reserves. After these costs, a Partnership Management Fee is paid to the General Partner and the Limited Partner receives an Asset Management Fee. All remaining cash flow will go toward the payment of the land lease and the Affordability and Operating 4 reserve. The average land lease rent payment is estimated at $290,000 per year. The land lease payments received by MPHC will be used to pay any deferred portion of MPHC’s developer fee allowed under the Tax Credit program, to fund an affordability reserve (in the event Section 8 is terminated), and to repay the City of Palo Alto loan. Affordability and Operating Reserve The Affordability and Operating Reserve is designed to absorb the revenue losses that will occur if Section 8 is terminated. The Affordability and Operating Reserve is set at $1.5 million based on the property’s turnover rate and projected gross rents during the transition to allowable tax credit rents. The Affordability and Operating Reserve will cover the estimated cumulative shortfall in rents expected to occur if Section 8 is terminated and the existing tenants continue to enjoy affordable rents for the remainder of their tenure. Any excess cash flow after paying the land lease is deposited into the Affordability and Operating Reserve Account. In addition, a capitalized portion of the Affordability and Operating Reserve is deposited in Year 2. Interest income will also add to the growth of this Reserve. To the greatest extent possible, the reserves will be held by MPHC’s control instead of the Partnership. This will ensure thatif the reserve is not spent before the Partnership dissolves in fifteen years, MPHC will not have to purchase the reserves from the Limited Partner and will still have access to those funds. In the years before the Affordability and Operating Reserve is fully funded, Transamerica, the Limited Partner, will guarantee the ~]ifference between the annual balance of the Affordability and Operating Reserve and the full $1,500,000 amount. The fee for this guarantee, called the Conditional Funding Agreement, is .50% of the difference between the balance of funds in the full Affordability and Operating Reserve and $1,500,000. The fee is adjusted annually. The Limited Partnership pays the Fee for Conditional Funding as an operating expense before debt service. Once the reserve achieves a balance of $1.5 million, the Transamerica guarantee is no longer needed and no fee is required. At that point, the City of Palo Alto loan-will begin repayment. We project full repayment by 2008. This is subject to the continuation of the Section 8 program. If the program ends, repayment of the City loan would be delayed accordingly. 5 ATTACHMENT RESOLUTION NO. RESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO APPROVING A LOAN COMMITMENT TO THE MID-PENINSULA HOUSING COALITION TO ASSIST IN THE ACQUISITION OF THE PALO ALTO GARDENAPARTMENTS AT 648 SAN ANTONIO ROAD WHEREAS, the Mid-Peninsula Housing Coalition (~MPHC") has entered into an agreement to purchase the 156 unit housing project located at 648 San Antonio Road, Palo Alto, Santa Clara County, California ("Property"), and intends to purchase said Property in order to preserve its use as low-income rental housing; and WHEREAS, the preservation of the City’s stock of existing, HUD-assisted Section 8 rental housing is a priority objective as stated in the Housing Element of the Comprehensive Plan and in the City’s Consolidated Plan; and WHEREAS, the City is willing to make a loan to MPHC to cover certain acquisition expenses that MPHC must incur to acquire the Property. The Council of the City of Palo Alto does RESOLVE as follows: SECTION I. The use of up t0 One Million Dollars ($i,000,000) of City Housing Development Funds, including any component fund, for fiscal year 1998-99 is hereby approved and authorized as a loan to the Mid-Peninsula Housing Coalition for acquisition of the property at 648 San Antonio Road, subject to the following terms and conditions: // II II II II II I1 II The City Manager and City Attorney shall cause preparation of suitable loan documents that include terms consistent with the November 18, 1998 Project Proposal from MPHC and acceptable to both the City Manager and City Attorney. The loan documents shall be presented to the City Council.in conjunction with a Budget Amendment Ordinance~ 1 981112 lac 0052113 SECTION 2. The Council finds that this is not a project under the California Environmental Quality Act and, therefore, no environmental impact assessment is necessary. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST:APPROVED: City Clerk APPROVED AS TO FORM: City Attorney Mayor City Manager Director of Planning and Community Environment 2 981118 lac 0052113