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HomeMy WebLinkAbout1997-10-20 City Council (33)City of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL Attention:FINANCE COMMITTEE FROM:CITY MANAGER DEPARTMENT: Planning and Community Environment AGENDA DATE: OCTOBER 20, 1997 CMR:428:97 SUBJECT:STATUS REPORT ON SHERIDAN APARTMENTS (360 SHERIDAN AVENUE), REQUEST FOR COUNCIL DIRECTION ON PRIORITIES FOR USE OF CDBG AND OTHER HOUSING DEVELOPMENT FUNDS AND SELECTION OF DEVELOPER FOR NEW AFFORDABLE FAMILY RENTAL HOUSING RECOMMENDATION Staff recommends that the City Council direct staff to: Continue to reserve the available balance of $1,160,249 in Community Development Block Grant (CDBG) Housing Development Funds and the current balance of about $500,000, plus future revenues in the Residential Housing In-Lieu Fund until February 1, 1998, for possible commitment for assistance to a nonprofit housing organization for the acquisition and rehabilitation of the Sheridan Apartments (360 Sheridan Avenue); Prepare for Council review and action an agreement with Mid-Peninsula Housing Coalition (MPHC) to provide $50,000 in CDBG funds for site search, feasibility studies and option funds to secure an appropriate site for a new family rental housing development; and Reserve the current balance of about $630,000 plus future fund revenues in the Commercial Housing In-Lieu Fund for family housing site acquisition. BACKGROUND In 1974, the City acquired the approximately one-acre property known as the "Power Parcels" (360 Sheridan Avenue) with about $200,000 in CDBG funds under the City’s landbanking program for the purpose of facilitating its development as affordable housing. In January, 1977, Council approved a real estate purchase agreement with a for-profit investment company to sell the site for $211,000 for development of subsidized, low-income, elderly housing.. On December 5, 1977, Council adopted CMR:428:97 Page 1 of 7 Planned Community Ordinance No. 3028, zoning the property for use as a housing complex for the elderly containing 57 units.and 21 parking spaces. In 1978, the project’s developers obtained FHA mortgage insurance for a market rate loan of about $1.6 million under Section 221 (D) (4) and a twenty-year commitment of project-based Section 8 rental assistance for all 57 units. On June 30, 1978, a deed transferring ownership of the property from the City.to the Sheridan Associates was recorded. The deed included restrictions limiting the use of the property to low- and moderate- income residential rental purposes for 40 years, and to use as elderly housing for the first 20 years under U.S. Department of Housing and Urban Development (HUD) housing assistance contracts. The deed restrictions require that the property owners make good faith applications for any and all available rental subsidy programs during the second 20 year period. If no rental subsidy program is later available, or the owners are denied funding, then the housing complex may be used for any lawful residential purpose, provided that the rent shall not exceed that amount necessary to keep the project financially self-supporting and allow a reasonable rate of return. The deed restrictions also contain a provision for the City to have a 30-day right of refusal on a bona fide offer to purchase. In May 1997, the City was notified that the owners planned to put the property on the market; however, a prospective purchaser had not been identified. This notice came during the Council review of the 97/98 CDBG allocations and resulted in a five-month delay on a Citizens Advisory Committee (CAC) and staffrecommendation to allocate $50,000 towards the possible development of a family housing project. When the Sheridan owners announced their interest in a sale, there was an expectation that the City would shortly receive a request for a substantial commitment of CDBG and other funds to subsidize an acquisition by a local housing nonprofit. At that time, it was unclear if the City had sufficient housing funds to assist with the Sheridan’s acquisition and concurrently pursue a family housing site. Since that time, the balances in the Residential and Commercial Housing Funds have been replenished with increasing mitigation fee revenues from several new developments. Since May 1997, both Palo Alto Housing Corporation (PAHC) and Community Housing, Inc. (CHI) have negotiated separately with the Sheridan’s owners, but neither organization has yet been able to work out an acceptable deal. The principal issue is that the purchase price expected by the owners is incompatible with the likely financing and subsidies that would be used to preserve the project as very low-income housing. Determining an accurate fair market value for the property is not a simple matter, because judgements must be made, by both the owners and prospective buyers, of the effect on valuation of several complex factors, including: 1) the implications of the City’s deed restrictions and Planned Community zoning for future owners; 2) the likelihood of continued Federal funding for proj ect-based Section 8 renewals over the next 20-40 years; and 3) the effect of the project’ s physical configuration, amenities and parking for alternative future uses. On August 19, 1997, the Director of Planning and Community Environment sent a letter (copy attached) to the Sheridan’s owners summarizing the property’s zoning and deed restrictions, requesting information about their long-range intentions and timing, and urging them to proceed expeditiously in 1997 if they intended to sell the property to a nonprofit. The letter helped initiate another round of negotiations between the owners and local housing nonprofits. Negotiations have been occurring during the preparation of this report. On September 16, 1997, the CAC met to review and discuss the status of the Sheridan, options for the use of CDBG housing development funds and issues related to pursuing a new family housing CMR:428:97 Page 2 of 7 project. Five of the current eight members of the CAC attended the meeting. The CAC supported efforts to acquire and preserve the Sheridan, provided that a purchase contract could be negotiated within 60-90 days. The CAC remains strongly in favor of pursuing the new construction of family rental housing, notwithstanding the activity related to the Sheridan. The CAC discussed these issues in detail, and then voted 5-0 to recommend that Council earmark the CDBG housing development funds only until January 1, 1998 for the acquisition of the Sheridan, and then make the funds available for other purposes. The CAC also recommended that the Council award $50,000 in CDBG pre- development funds to MPHC to pursue the new family housing site. DISCU.SSION There are two major issues that are separate, but significantly intertwined in regards to funding, for which staff requests Council direction. They are: 1)The acquisition and retention of the Sheridan as low-income housing for the elderly and disabled, and 2)The development of a family housing project by the selection of a single non-profit developer to develop a project. Acquisition and Retention of the Sheridan as Low-Income Housing: The most fundamental issue is the question of whether limited, locally-controlled housing funds should be allocated for the transfer of ownership of the Sheridan into nonprofit ownership in order to assure its long-term use as low- income, elderly and disabled housing. There is some probability that the factors mentioned earlier, that affect the property’s valuation, would ~lso result in the preservation of the existing use of the property without a nonprofit purchase for at least the remaining 20 years of the original 40-year term of the deed restrictions and zoning. Staff supports City assistance for a nonprofit acquisition of the Sheridan, provided that a purchase price can be negotiated which accurately reflects the City’s restrictions on the property and the other pertinent factors. Transfer to nonprofit ownership provides the greatest assurance that the property would continue tO house very low-income elderly and disabled households, as it has doric since its opening in 1979. While continued Federal funding for project-based Section 8 rental assistance is beyond.the City’s control, at least a nonprofit owner would advocate strongly with HUD for any available rental assistance, without the necessity of annual City monitoring and enforcement. Another advantage of a nonprofit acquisition is that the likely use of the Low Income Housing Tax Credit Program for financing would ensure continuation of the low-income elderly and disabled use for an additional 65-year term, even if the Section 8 assistance was terminated by HUD. However, even with City and tax credit subsidies, tenants’ rents would increase if the Section 8 rental assistance cannot be renewed. While a Sheridan acquisition could require most of the City’s available CDBG and Residential In-Lieu.funds, staffrecommends that permanent preservation of the Sheridan should be a high City housing priority. Furthermore, staffbelieves that both the federal and local funding opportunities for an acquisition are more opportune now then they may be in future years. Preservation projects are now a priority under the tax credit rules. Since few applications were submitted this year in this category, the chances are greater for an award. The City presently has a total of approximately $1.6 million in CDBG and CMR:428:97 Page 3 of 7 Residential Housing In-Lieu funds available. This total does not include about $215,000 in outstanding in-lieu fees from projects under construction, $250,000 set aside in the Palo Alto Commons Fund and approximately $500,000 anticipated in the 98/99 CDBG allocation. HUD sets expenditure standards for all CDBG grantees. The City currently is out of compliance with HUD’s standard, mainly due to the $1.1 million of CDBG funds being reserved for future housing projects. By next April, the ’City could be under a threat of disciplinary action from HUD, if expenditures are still below HUD’s standard. At the minimum, the City will need to demonstrate clear progress on a major housing activity leading to the expenditure &these CDBG funds. HUD’s standard is always difficult for Palo Alto to meet, in part due to the large portion of the City’s grant that is allocated to housing development, and the need to accumulate a large enough sum to accomplish a housing project. If the Sheridan project has not materialized by early 1998, the City needs to be prepared with an alternative plan for the commitment of the CDBG housing funds. Development of a Family Housing Project: The second major issue is the recommendation to award MPHC $50,000 in CDBG funds for pre-development costs associated with the development of a family housing project. InNovember 1996, the request for applications for 1997-98 CDBG funding included an appeal for proposals from nonprofit housing developers interested in pursuing site control of a parcel in Palo Alto suitable for a family rental housing project in the size range of 30 to 60 units. At that time, there were still appropriate, vacant properties available on the open market. Currently, due to the resurgence of market-rate housing development activity, very few sites remain actively for sale. Because affordable new construction housing projects typically require many years of effort involving site search, due diligence and usually a rezoning, subdivision or other discretionary entitlement permits, the City needs to continually and proactively plan ahead for the next housing project or else site opportunities will be lost, and unused funds will continue to accumulate beyond the levels permitted by regulation or law. Rather than purchase a site offered on the market, staff expects that Palo Alto’s next affordable housing construction site is more likely to be secured through creative negotiations, joint ventures or partnerships with property owners as part of larger mixed use or private redevelopment and re-use ¯ efforts. These creative ventures are time consuming and require a significant up-front commitment of staff time on the part of a housing nonprofit. A nonprofit cannot be expected to devote the necessary time .and expense without the certainty of receiving both the develOpment rights to the resulting site and the availability &City funding. Because funds are sufficient to pursue only one new housing site at a time, it would be counter-productive to encourage several nonprofits to seek similar types of sites simultaneously. Staff believes that a City commitment of support to one developer is the best course of action, given the market difficulties, the limited funding and the need for close coordination between the developer and City. In the CDBG application cycle for 97/98, both PAHC and MPHC submitted proposals to pursue a family housing site. Both proposals were favorably received by staff and the CAC. Both agencies have the necessary ability and capacity to implement the project, and both have excellent track records. Each agency presented a well researched proposal, and it was very difficult for the CAC to reach a decision on a recommendation. After careful consideration, the CAC recommend.funding CMR:428:97 Page 4 of 7 MPHC’s proposal and staff concurred. MPHC has accessed every conceivable type of housing financing and has built many family projects of all sizes. While the PAHC staff and board has extensive local contacts and superior knowledge of Palo Alto’s development policies and processes, MPHC has shown it can work successfully in the City. A number of MPHC’s staff and board members are local, and its offices were formerly located in Palo Alto. MPHC has had extensive experience developing mixed income and mixed use projects, at times through the use of partnerships or joint ventures with for-profit developers and builders. MPHC’s greater experience in the type of projects and strategies that are expected to be necessary for this endeavor was the principal deciding factor in the recommendation. ALTERNATIVES TO STAFF RECOMMENDATION 1. Council could determine that funding assistance for a nonprofit acquisition of the Sheridan is inadvisable, given limited resources and the great need to develop new housing units. Council could direct staff to pursue enforcement of the existing legal restrictions on the Sheridan, with the assumption that it is unlikely the federal government will terminate continued funding for Section 8 rental assistance to existing low-income housing, especially to elderly and disabled housing. In taking this position, Council would reaffirm the intent of the original 1977 land purchase agreement and the zoning and deed restrictions. Under this alternative, the Sheridan could be converted to market rate housing in 2019, or sooner if the Section 8 subsidies became unavailable. If Council were to decide not to pursue acquisition of the Sheridan, a possible alternative would be the identification of a site for construction of new housing units for seniors, either under HUD’s Section 202, as was used for Lytton Courtyard, or using other subsidies such as housing tax credits. Funds that would have been committed to a Sheridan acquisition could, instead, be committed to new senior housing development to mitigate the possibility of an eventual loss of some of the City’s inventory of subsidized senior housing. Council could decide to select PAHC as the developer for the family housing project instead of MPHC. Council could decline to select any developer for family housing at this time. If this alternative is selected, then staff recommends that direction be given to undertake specific efforts to encourage all qualified developers to pursue affordable housing development projects in Palo Alto. This could be done in conjunction with the 98/99 CDBG allocation process or as a separate proposal to be widely circulated. Council could direct the Real Estate Division to seek out a suitable vacant or under utilized site for the City to purchase and then seek proposals for development as an affordable family housing project. Due to the limited available sites on the market, this might require eminent domain proceedings in order to acquire a site. RESOURCE IMPACT Pursuit of both the Sheridan acquisition and the family housing project would effectively commit all City housing funds for the next few years. If the Sheridan acquisition does not proceed and a family housing site has not been found by April 1998, then a decision will need to be made to commit the CMR:428:97 Page 5 of 7 CDBG housing funds to another activity for which funds could be expended quickly, such as a purchase of an existing apartment building. Because purchase of an existing apartment building with Federal funds is likely to require significant outlays for relocation benefits and payments, staff views this as a less desirable alternative course of action. Under State Law (AB 1600) commercial in-lieu housing mitigation fees can be accumulated for up to five years while a site is obtained and a project is planned. Thereafter, special findings must be made by Council in order to allow the funds to be retained rather than refunded. Therefore, the time constraints on the expenditure of most of the balance in the City’s Housing Reserve Fund is a less critical issue than for the CDBG funds. The City’s CDBG program would be adversely affected ifHUD begins disciplinary action against the City for not expending CDBG funds in a timely manner. City staff resources are insufficient to manage the administrative workload if the CDBG funds are allocated to many smaller projects instead of one or two larger projects. Significantly greater staffresources are required when the City directly seeks, acquires and holds real property (Alternative 4 of the Alternatives Section) compared to the staff efforts needed when the City’s role is limited to financial assistance to a nonprofit. POLICY IMPLICATIONS The staff recommendations are consistent with past Council policy for the use .of the City’s CDBG and other housing funds. They are also consistent with federal requirements that CDBG funds be awarded through an open process that involves citizen participation. The City’s HUD-required Consolidated Plan and the Housing Element both emphasize the need for new construction of affordable, family rental housing as the highest priority for our housing funds. However, preservation of existing, federally subsidized rental housing owned by for-profit investors is the second highest priority. The staff recommendations attempt to balance these two important priorities. TIMELINE If directed, staffwill return to Council before the end of this year with a proposed agreement for the family housing project. Staff will return to Council as quickly as possible if the owners of the Sheridan present the City with a purchase contract which invokes the 30-day decision period prescribed in the deed restrictions. At the latest, staff will report to Council on the status of the Sheridan by early February 1998. ENVIRONMENTAL REVIEW The actions recommended in this report are not considered projects under the California Environmental Quality Act (CEQA). Prior to the binding commitment of federal funds for the activities discussed in this report, staffwill carry out the required environmental assessment under the National Environmental Policy Act (NEPA). ATTACHMENTS Letter fi-om Kenneth R. Schreiber to San Webster Regarding the Sheridan Apartments dated August 19, 1997 CO:Mid-Peninsula Housing Coalition Palo Alto Housing Corporation Community Housing, Inc. CDBG Citizen Advisory Committee CMR:428:97 Page 6 of 7 Sam Webster Residems of Sheridan Apartments requesting Public reports PREPARED BY:Cathy Siegel, Senior Planner, Housing James E. Gilliland, Assistant Planning Official DEPARTMENT HEAD REVIEW: CITY MANAGER APPROVAL: KENNETH R. SCHREIBER Director of Planning and Community Environment CMR:428:97 Page 7 of 7 c gf_Palo Alto Department ofPlmming and Community Enviromnent August 19, 1997 DMsions h’tspection Sen,ices Ptarming Trm~sportation Sam Webster Webster Realty 425 Waverley Street Palo Alto, CA 94301 Dear Sam: Re: The Sheridan Apartments, 360 Sheridan Avenue This letter is a follow-up to our telephone conversation of July 31, 1997, regarding the intentions of your partnership for the furore of the 57-unit Sheridan Apartments. In that conversation you explained that the parmership had not yet reached any final decisions, but that there was interest in a sale, especially if a tax- deferred exchange could be arranged. You confn’med receiving infonnation from the Palo Alto Housing Corporation (PAHC) regarding the inability to reach agreement on a satisfactory purchase price for the property during your negotiations with PAHC this last June. Concerning the partnership’s time frame for pursuing a sale, you stated that there are no sptcific deadlines or timing in mind at this point. Preservation of all of Palo Alto’s existing HUD-assisted low income housing developments is a top City priority. Projects such as The Sheridan, which are one hundred percent assisted with Section 8 rental assistance contracts, are especially valuable to the city in continuing to meet our affordabIe housing needs. Given current realities of land scarcity, cutbacks in federal housing funding and the local rental housing shortage, Palo Alto cannot expect to replace these units if they should ever be converted to market-rate housing. These facts make preset-ration a paramount objective. The City certainly hopes that your parmership will continue to own and operate The Sheridan Apartments as a low and moderate income complex for elderly persons under the Section 8 project-based rental assistance program for the full 250 Hmnilton Avenue P.O. Box 10Zr-,0, Palo Alto, CA 94~3 415.329.2404 415.329.2240 Fax Sam Webster ’ August 19, 1997 Page 2 forty-year term. This would be consistent with the project’s December 5, 1977 Planned Community zone ordinance and the recorded deed restrictions. However, the City understands that continuing the status quo may not always remain the partnership’s objective. At some point in the near or more distant future, the parmership’s business and investment objectives may cotne into conflict with both the City’s affordable housing objectives, and with the use and occupancy limitations in the PC zoning ordinance and the deed restrictions. Because these limitations will affect any future owners, you should be aware that the City fully intends to enforce these zoning and deed rest~’ictions as they affect the use of the property, regardless of future changes in ownership. The City would also seriously consider exercising its right to purchase the property under the deed restrictions in the event the partnership obtains a bona fide purchaser. Presently, the City is in the position of having an accumulation of federal and local housing funds which could be awarded to a nonprofit housing organization to help to subsidize an acquisition of The Sheridan for the purpose of ensuring its preservation as low income, elderly housing. In May 1997, the City Council acted to set aside about $1,160,000 in federal CDBG funds pending the outcome of negotiations between you and PAHC over a possible acquisition of The Sheridan. Under federal regulations, these funds caimot be set aside indefinitely, but must be allocated to an actual project by the end of this yea and expended by the end of March 1998. We have scheduled a City Council review of the possibilities of a Sheridan sale and a discussion of alternative projects for the expenditure of our CDBG funds. Review by the Council’s Finance Committee is scheduled for Tuesday, October 21. From a City funding perspective, this year is an optimum time for the City to assist in a nonprofit purchase of The Sheridan. I cannot necessarily be optimistic that City funds will always be available as they are at the present time. Should the Council decide to pursue other alternative uses of these funds, such as new construction of family apartments, then there would not be a ready and adequate source of City subsidies to assist in a Sheridan purchase for several years. Of course, while City funding is a necessm3, and critical part of a funding package, other funding would still be necessary and any nonprofit purchaser would need to make application for this other financing, which continues to be a highly co~npetitive and complicated process. Sam Webster August 19, 1997 Page 3 In summary, I ask that you continue to keep me informed of any changes in circumstances or decision that affect the future of The Sheridan. If any type of commitment from the partnership to a plan of action, or to the continuation of the status quo, is possible by the end of September, that action and information would be extremely helpful to the Council’s discussions and decision making process. Also, we would appreciate having a representative of the partnership in attendance at the October 21 Finance Committee meeting. I am confident that we can continue to work together on the future of this important property and that we can find a solution that meets both the partnership’s investment objectives and the City’s housing objectives in a reasonably satisfactory maimer. Please do not hesitate to contact me at any time at 329-2354 to discuss this matter. Sincerely, KENNETH R. SCHREIBER Director of Planning and Community Environment s:\plan\pladivkshareMaersw.ltr City Council CDBG Citizens Advisory Committee Steve Sachs, HUD Marlene Prendergast, Palo Alto Housing Corporation Fran Wagstaff, Mid-Peninsula Housing Coalition Vera Goupille, Lytton Gardens June Fle~ning, City Manager Ariel Calonne, City Attorney Catherine Siegel, Housing Coordinator