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HomeMy WebLinkAbout1999-03-15 City Council (15)City of Palo Alto C ty Manager’s Report TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: PLANNING AND COMMUNITY ENVIRONMENT DATE: SUBJECT: MARCH 15, 1999 CMR:172:99 AMENDMENT TO THE 1998-99 HUD CONSOLIDATED PLAN’S ACTION PLAN TO ADD ACQUISITION OF PALO ALTO GARDENS APARTMENTS AT 648 SAN ANTONIO ROAD AS A PROJECT AND TO INCUR PROJECT COSTS PRIOR TO THE AWARD OF 1999-00 CDBG FUNDS; AND BUDGET AMENDMENT ORDINANCE OF $1,000,000 TO APPROPRIATE INTERIM LOAN FUNDS FOR ACQUISITION COSTS OF THE PALO ALTO GARDENS APARTMENTS REPORT IN BRIEF Council action is requested to amend the 1998-99 Community Development Block Grant (CDBG) Action Plan to formally establish Mid-Peninsula Housing Coalition’s (MPHC) acquisition of the Palo Alto Gardens Apartments as a current year’s CDBG project and to adopt a Budget Amendment Ordinance (BAO) in the amount of $1.0 million to appropriate Housing Development Funds for the City’s loan to the project. In order comply with the terms of the purchase agreement and to minimize interest rate risk, MPHC must acquire the property before the end of May 1999. Council action on the funding agreement and loan documents is tentatively scheduled for April 5, 1999, provided that MPHC receives a tax- exempt bond allocation this month. The City’s loan would be funded on an interim basis with the $275,000 balance in the Residential Housing In-Lieu Fund and a $725,000 transfer from the Commercial Housing In-Lieu Fund, pending completion of the public hearings and Council action on the 1999-00 CDBG budget. This process will allow the Council’s decision on the amount of CDBG funding for Palo Alto Gardens to be made concurrently with its funding decisions on the other applications for 1999-00 CDBG funds without delaying the housing project. It is the staff recommendation at this time that $658,550 in CDBG funds be allocated to Palo Alto Gardens. The CDBG funds allocated by Council to Palo Alto Gardens will be used to repay a portion of the $725,000 loan from the Commercial Fund, with the remaining portion to be repaid from outstanding fee revenue owed to the Residential Fund from approved projects currently under construction. HUD authorization for this financing plan was issued on March 5. CMR: 172:99 Page 1 of 6 RECOMMENDATION Staff recommends that Council: 1)Hold a public hearing in accordance with Federal Community Development Block Grant (CDBG) regulations and the City’s CDBG Citizen Participation Plan to receive public comments on a proposed amendment to the City’s 1998-99 Consolidated Plan’s Action Plan to add the acquisition of the Palo Alto Gardens Apartments by Mid-Peninsula Housing Coalition (MPHC) as a project activity in the 1998-99 Action Plan without a decision at the present time on the amount of CDBG funds to be allocated to the project; and 2) 3) Adopt the attached Amendment to the 1998-99 Action Plan as submitted to HUD on February 17, 1999 as a condition of HUD’s approval of the expenditure of local housing development funds for the Palo Alto Gardens project prior to the award the City’s 1999- 00 CDBG grant by HUD; and Approve the attached Budget Amendment Ordinance to appropriate $1,000,000 in City Housing Reserve Funds for the acquisition of the Palo Alto Gardens Apartments with the sources of funds to be appropriated on an interim basis as follows: $275,000 from the Residential Housing In-Lieu (Residential) Fund; and $725,000 to be loaned from the Commercial Housing In-Lieu (Commercial) Fund to the Residential Fund; and 4)Direct staff to prepare a funding agreement and loan documents for the $1,000,000 in City funding to the Palo Alto Gardens project and return for Council action on April 5, 1999. BACKGROUND In November 1998, Mid-Peninsula Housing Coalition (MPHC) finalized negotiations to acquire the 156-unit Palo Alto Gardens Apartments located at 648 San Antonio Road. Sale of the project to MPHC will preserve the housing for the existing residents and keep the entire 156 units as part of the City’s affordable housing stock under new 50-year affordability requirements. The purchase agreement contains a May 31 escrow closing deadline. On November 18, 1998, MPHC submitted a formal request for $1 million in City funding to assist with acquisition costs. On November 23, 1998, Council adopted Resolution No. 7815 approving a $1 million loan commitment to the project from the City’s Housing Development Fund. MPHC needed an early funding commitment from the City in order to submit applications in December 1998 for the other funding components of the project financing,which include an $11.4 million allocation of tax-exempt bonds and about $4 million in low income housing tax credits. Council directed staff to return in March 1999 with recommendations on the most appropriate funding mechanism and a BAO. CMR:172:99 Page 2 of 6 In order to secure additional resources to assist with the acquisition of the Sheridan Apartments and Palo Alto Gardens projects, the City submitted an application for $825,000 in Federal HOME funds in October 1998. Unfortunately, that application was denied by State Housing and Community Development as an ineligible use of HOME funds under the State’s definition of eligible activities. The manner in which that application was structured, as a reimbursement by the HOME funds of the Residential Funds expended for the Sheridan Apartments purchase, was not acceptable to the State. DISCUSSION In order to minimize the risk of higher interest rates, and to comply with the closing deadline in the purchase agreement, the City must approve its loan documents and fund the Palo Alto Gardens project before the annual CDBG funding decision process has been completed. A tentative closing date of April 15 has been set by MPHC assuming the bond allocation is awarded on March 10. Due to the large number of applicants seeking CDBG funds this year for rehabilitation of other low income housing facilities, staff is recommending an interim funding plan for Palo Alto Gardens. Staffrecommends that the $725,000 in Commercial Funds for Palo Alto Gardens be provided on an interim basis pending the completion of the CDBG funding recommendations and the Finance Committee and Council’s public hearings on CDBG allocations. This process will allow the decision on the amount of CDBG funding for Palo Alto Gardens to be made concurrently with the funding decisions on the other projects seeking 1999-00CDBG funds. For example, based on the staff’s recommendation at this time, if $658,550 in CDBG funds were allocated by Council to Palo Alto Gardens, then $658,550 of the $725,000 loan from the Commercial Fund would be repaid after execution of the CDBG grant agreement early next fiscal year. The remaining $66,450 of Commercial Funds would be repaid from outstanding fee revenue owed to the Residential Fund from approved projects currently under construction. This example is summarized in the following table, however there are a number of other-possible combinations of funding that could be selected by Council: Example: Palo Alto Gardens Interim & Permanent Funding Source of Funds Interim Funding Permanent Funding Residential Fund $275,000 $275,000 CDBG 1999-00 Funds -0-$658,550 Commercial Fund $725,000 $66,450 [until repaid Residential Fund revenues] Total $1,000,000 $1,000,000 CMR:172:99 Page 3 of 6 Staff discussed this approach with HUD staff and confirmed that it would be acceptable provided the City amends its current year’s Action Plan after public notice and comment. The current year’s Action Plan must be amended because, while it includes the priority of preserving existing units with Section 8-assisted tenants, the Plan does not specifically list the acquisition of Palo Alto Gardens as a project to be funded. The attached draft Action Plan amendment and letter describing the interim funding plan was formally approved by HUD on March 5. ALTERNATIVES The initial budget and financing concept presented by MPHC in July 1998 indicated that the total funding gap for Palo Alto Gardens would be as much as $2.1 million. At that level of funding, staff had recommended that the HUD Section 108 loan guarantee program be used to fund the City’s contribution to the project because sufficient funding was not available from the Residential Fund and the City’s CDBG allocation. However, with the October 1998 increase in the Section 8 fair market rents and the final data from project’s appraisal, MPHC was able to reduce the City funding to $1 million. Resources are available to cover the $1 million funding level by utilizing 1999-00 CDBG, existing and outstanding Residential Fund revenues and a temporary loan from the Commercial Fund. The advantages to using this funding mix over the Section 108 loan program are that the City loan can be provided a lower interest rate and with flexible repayment terms..This flexibility is advantageous for the security of the existing Section 8 tenants. Deferring repayment of the City loan until the project’s affordability reserve for the potential loss of Section 8 assistance is fully funded will mean the reserve will reach full funding at an earlier date than if annual payments on the Section 108 loan had to be made from the project’s cash flow. There are also timing difficulties with initiating a Section 108 loan application at this point in the project’s schedule because it is unlikely that HUD approval of an application could be obtained prior to the scheduled April 5 date for Council action of the formal City loan documents. RESOURCE IMPACT A table is attached as Attachment C describing the current balances and expected fee revenue for each of the City’s Housing Development Funds. Commercial Housing In-Lieu Fund: The current, uncommitted balance in the Commercial fund, as of February 1, was over $2.6 million. This includes the $734,265 from the Palo Alto Medical Foundation as payment for its Urban Lane project. There are also about $522,000 in housing mitigation fees owed, but not yet payable, to the Commercial Fund from approved projects under construction. Residential Housing In-Lieu Fund: The available balance of the Residential Fund is presently about $294,000 with approximately $475,000 expected in fee revenue over the next year on approved projects which are either under construction or expected to begin construction early this year. CMR:172:99 Page 4 of 6 Community. Development Block Grant Funds: The CDBG budget for FY 1999-00 is about $924,000 which is composed of $738,000 in the City’s FY 1999 entitlement grant, $45,000 in estimated program income and $141,000 in reallocations of unused and unprogrammed funds fr~m prior years. Assuming that the maximum amount is used to fund public services ($117,450) and deducting $150,000 for program administration, project supervision and fair housing services, $658,550 in CDBG funds remains available for capital projects. Seven capital project applications (including MPHC’s $1 million application for Palo Alto Gardens) were submitted by nonprofit agencies, totaling $1,592,789. If Council adopts the staff recommendation and allocates the entire available CDBG capital funds to the Palo Alto Gardens project, then no other capital projects will receive CDBG funding in 1999-00. POLICY IMPLICATIONS The provision of City assistance to preserve the Palo Alto Gardens project as affordable housing is consistent with adopted City policy in both the Housing Element of the 1998-2010 Comprehensive Plan and the HUD Consolidated Plan. The 1998-99 Annual Action Plan adopted by Council on May 11, 1998, identified "preservation of existing HUD subsidized units to prevent conversion to market rate units" as a possible project activity during FY 1998-99 that might need funding from CDBG. However, because the Action Plan did not specifically identify Palo Alto Gardens Apartments by name and location, HUD has advised staff that a formal amendment to the 1998-99 Action Plan is necessary prior to obligating any funding, including local housing funds, to the project.. Criteria for Loans Between.Funds: The Housing Reserve Fund Guidelines were adopted by Council on February 3, 1986 and were amended on November 19, 1990 to allow for loans from the Commercial Fund to the Residential Fund on a case-by-case basis as determined by the Council. Past Council action has established the policy that loans between the funds should only be considered when there is an exceptional opportunity or. need to acquire an existing rental property. Staff believes that the current opportunity to acquire Palo Alto Gardens qualifies under this standard, due to the benefit of preserving both the existing Section 8 tenants’ housing and the 156 units in the City’s affordable housing stock for perpetuity. Furthermore, it is probable that this interfund loan will be repaid within one year from a combination of future residential fund revenues expected to be received in the next year and possible allocation of CDBG funds to the project by Council. TIMELINE Key dates in the CDBG funding cycle and the Palo Alto Gardens project schedule are: Tentative Date for Approval of MPHC’s bond allocation by the State: (triggers 90-day deadline to issue bonds & acquire project) Public Hearing on Action Plan Amendment & Action on BAO for interim funding appropriation for Palo Alto Gardens project: Council action on Palo Alto Gardens loan agreement using interim funding sources: March 10 March 15 April 5 CMR:172:99 Page 5 of 6 Finance Committee reviews CDBG applications & recommends amount of CDBG funds for Palo Alto Gardens: Close of escrow on acquisition of Palo Alto Gardens by MPHC (tentative): Council public hearing on 1999-00 CDBG Annual Action Plan including decision on amount of CDBG funds for Palo Alto Gardens: Submittal of 1999-00 CDBG funding Plan to HUD: Deadline to close escrow per purchase agreement with G & K: HUD approval of CDBG funding Plan & availability of 1999-00 CDBG funds to repay a portion of the loan from the Commercial Fund: April 6 April 15 ¯May 10 May 14 May 31 After July 1 ENVIRONMENTAL REVIEW This project is exempt from the provisions of the California Environmental Quality Act (CEQA) pursuant to Section 15301 (existing facilities) of the CEQA guidelines. Appropriate environmental review under NEPA is in the process of being completed in the anticipation that federal CDBG funds will be used for a portion of the City’s loan. Because the project is the preservation of existing low-income housing with no change in use or increase in the number of housing units, the use of federal funding does not require public comment, notice or HUD approval of the City’s environmental determination. ATTACHMENTS A. March 5, 1999 Letter From HUD Approving Reimbursement of Pre-Award Costs for Palo Alto Gardens and Draft Amendment to 1998-99 HUD Annual Action Plan B. Budget Amendment Ordinance C.Status of Housing Development Funds Chart PREPARED BY: Catherine Siegel, Housing Coordinator DEPARTMENT HEAD: G. ED~W~ARD GA~WF /~ Direct°r ! ~anning and~Tunity Envir°nment/, CITY MANAGER APPROVAL: . ~(~u’.. /~. ~-- Mid-Peninsula Housing Coalition CDBG Citizens Advisory Committee Goldrich and Kest Palo Alto Gardens Tenants Association CMR: 172:99 Page 6 of 6 03/08/99 ~ON X4:56 FAX 4X5 436 6438 ~ CPD ~002 U.S. De~:,rtment of H0u~lng end Urban Deve~pment 4.~ Golden G~te Avenue ~an FrandS¢O, C~llfomle 94132-3448 Mamh 6, 1999 Ms. Suzanne Bayley CDBG Coordinator Department of Planning and Community Environment City of Palo Alto 250 Hamilton Avenue P. O. Box 10250 Palo Alto, CA 94303 Dear is.,.~ayl~y:"~ ~ ATTACHMENT A Subject:Request for Approval of Reimbursement of Pre-Award Costs i’or the A~iuisition of Palo Alto Gardens Apartments Community Development Block Grant Program (CDBG) 1999 P~ogram Year In response to your letter dated February 17, 1999, we have determined that the City of Palo Alto may utilize 1999 Program Year CDBG funding to reimburse the City for local funds which will be provided to Mid-Peninsula Housing Coalition, a non-profit subreclpient, to purchase the 156-unit Palo Alto Gardens Apartments in April of 1999. Palo Alto Gardens Apartments is a HUD-insured affordable housing project occupied by low income elderly and/or disabled residents who would likely face ren! increases and displacement once the Federal regulatory restd~ions are removed and the project.based Section 8 rental assistance contract expires at the end of June, 1999. The City has addressed the required conditions described at 24 CFR Part 570.200 (h)(1) of the CDBG Program regulations, as follows; The activity for which the cbsts are being incurred, i.e., the purchase of the Palo Alto Gardens Apartments, will be included in the City’s Amended 1998 Annual Action Plan prior to the costs being incurred, as well as in the 1999 Annual Action Plan upon completion of the citizen participation process and its adoption by the City; Citizens will be advised of the extent to which these pre-award costs will affect the 1999 and future CDBG grants; The costs and activity funded are in compliance with the requirements of this part and with the Environmental Review P~ocedures stated at 24 CFR Part 58; 03/08/88 MON 14:57 FAX 41~ 436 0438 HUD CPD ~]00~ The activity for which payment is being made will comply with the st.~tutory and regulatory provisions in effect at the time the costs are paid for with CDBG funds; CDBG payments to reimburse the amount of local funds used for this activity and costs will be made within two years from July 1, 1999, the effective date of the 1999 grant agreement and 1999 Program Year start date, The City expects to incur pre-award costs in excess of $300,000 for this activity, and also requested an exception to 24 CFR Part 570.200(h)(1)(vi), We are approving this exception which is permitted under 570.200(h)(2), given that the Cibj has demonstrated good cause based on the following factors: ¯The granting of the exception would clearly result in a significant contribution to the goals and purposes of the CDBG Program, as well as the City’s Col~solidated Plan and 1998 & 1999 Annual Action Plans; Failure to grant the authority would result in undue hardship to the City, the sub- recipient and low and moderate income residents; Granting the exception would not result in a violation of a statutory provision or any other regulatory provision; The timely financial support and escrow dosing of the acquisition of the Palo Alto Gardens Apartments is beyond the City’s or subrecipient’s control. We commend the C.ityfor its efforts in preserving these units as affordable housing and helping low income community residents. Should you have any questions, please contact Rafael Cedillos, Community Planning and Development Representative at (415) 436-8493. Very sincerely yours, Steven B. Sachs Director, Community Planning and Development Division June Fleming City Manager James Gilliland Assistant planning Official Catherine Siegel Housing Coordinator City of Palo Alto Department of Planning and Community Environment February. 17, 1999 Planning Division Mr. Steven B. Sachs Director, Community Planning and Development U. S. Department of Housing and Urban Development Pacific/Hawaii Office 450 Golden Gate Avenue San Francisco, CA 94102-3448 Subject:Request for Reimbursement of Pre-Award Costs for the 1998/99 Acquisition of Palo Alto Gardens Apartments Dear Mr. Sachs: This letter is a request for HUD’s authorization to allow 1999/2000 CDBG funds to be used to reimburse the City of Palo Alto for costs expended in fiscal year 1998/1999 related to the acquisition of Palo Alto Gardens Apartments by Mid-Peninsula Housing Coalition. Additionally, the City requests that HUD authorize the payment of pre- award costs which may exceed the $300,000 per year maximum specified in the CDBG regulations at 25 CFR 570.200(h)(1)(vi). In November 1998, the non-profit Mid-Peninsula Housing Coalition (MPHC) finalized negotiations to acquire the 156-unit Palo Alto Gardens Apartments located at 648 San Antonio Road in Palo Alto. This action was taken to preserve the site as affordable housing following the owner’s decision to prepay the HUD-insured mortgage and not renew the Section 8 project-based rental assistance contract. On June 30, 1999 all Federal regulatory restrictions end on the property, including the HUD-required tenant rental protection period following mortgage prepayment. Fears of rental increases, displacement, eviction, and the unknown prompted the tenants into action. Over the past year they have written letters, spoken at City Council meetings, met with City staff and Council members, as well as contacted their Federal and state elected representatives, HUD officials, and non-profit housing organizations. While almost all of the current tenants are low-income, elderly and/or disabled, many are also either Russian or Chinese immigrants with limited English-speaking abilities.. 250 Hamilton Avenue P.O. Box 10250 Palo Alto, CA 94303 650.329.2441 Steven B. Sachs February 17, 1999 Page 2 Once MPHC had successfully accomplished the acquisition of Palo alto Gardens’ "sister" project in Mountain View, they began pursuing a similar acquisition strategy for Palo Alto Gardens. At Mid-Peninsula Housing Coalition’s request, the Palo Alto City Council agreed in November 1998 to commit $1,000,000 to the Palo Alto Gardens Apartment project so that MPHC could proceed with the submittal of applications, for tax exempt bonds and low-income housing tax credits. A specific funding source was not identified at the time due to the fact that the City had just expended all of its CDBG and Residential Housing In-Lieu funds on the 56-unit Sheridan Apartment acquisition (see the 1998/1999 Annual Action Plan). Several funding strategies were pursued for the acquisition. City staff applied to the State of California for an $835,000 grant from the Federal HOME program, and explored the possibility of securing a Section 108 Loan Guarantee. Unfortunately, the City’s application for HOME funding was denied, and the 108 Loan Guarantee did not appear feasible upon further investigation. Preservation of the Palo Alto Gardens Apartments as affordable housing is consistent with adopted City policy in both the Housing Element of the 1998-2010 Comprehensive Plan and the Consolidated Plan for the period 1995-2000. The Consolidated Plan Annual Action Plan, adopted by City Council on May 11, 1998, refers to the "preservation of existing HUD subsidized units to prevent conversion to market rate units" as a possible activity in fiscal year 1998/1999. However, because the Palo Alto Gardens project was not specifically identified by name or location, the 1998/1999 Action Plan has been amended to include the project details. A draft of the amended 1998/1999 Action Plan is submitted for your review. The amended Action Plan will be submitted to the City Council for adoption at a March 15, 1999 Public Hearing. The amended Action Plan has been made available for public review and comment, and has been discussed and reviewed by the CDBG Citizen’s Advisory Committee. In order to fund the project in fiscal year 1998/1999, it is expected that the City will utilize the available balance in the Residential Housing In-Lieu fund (approximately $275,000) and borrow the remaining $725,000 from the Commercial Housing Fund. Local regulations prevent the Commercial Housing Fund from. being used for the acquisition of existing housing. The Palo Alto City Council will determine the amount Steven B. Sachs February 17, 1999 Page 3 of 1999/2000 CDBG funds to be utilized to repay the $725,000 loan following the CDBG Citizen Advisory Committee review process, and Public Hearings on April 6, 1999 and May 10, 1999. The City of Palo Alto requests HUD authorization to pursue the above outlined course of action in accordance with 25 CFR 570.200 (h)(1) as follows: (i) (ii) (iii) (iv) (v) The proposed activity is included in an amended Consolidated Plan Action Plan Citizens have been advised of the extent to which pre-award costs will affect the 1999/2000 grant. The costs and activities proposed are in compliance with the General Policy requirements of 24 CFR 570.200 and with the Environmental Review Procedures in 24 CFR part 58. The activity will comply with applicable statutory and regulatory provisions at the time the costs are reimbursed with CDBG funds (July 1, 1999). CDBG reimbursement will be made within the required two year time frame. An exception is requested to (1)(vi) which limits the amount of reimbursement to the greater of 25 percent of the amount of the grant or $300,000. Although the exact amount of the reimbursement has not yet been determined, it will more than likely be in excess of $300,000., The exception is requested in accordance with 25 CFR 570.200 (h)(2) for the following reasons: (i) (ii) Granting of this authority will contribute significantly to the locally identified priority of providing more affordable housing. It will also meet the goals and purposes of the CDBG program by providing decent housing and a suitable living environment principally for lower income persons. Failure to grant this authority will result in undue hardship to the activity beneficiaries by placing them at risk of homelessness. Failure to act will disproportionately effect a minority segment of the community, many of whom are elderly and/or disabled. The jurisdiction will also be Steven B. Sachs February 17, 1999 Page 4 negatively impacted by significantly reducing the number of housing units affordable to lower income persons. (iii) Granting of this authority will not result in a violation of a statutory provision or any other regulatory provision. The acquisition of housing to be occupied by lower income persons is an eligible CDBG activity. (iv)The timing of this affordable housing opportunity was beyond the control of either the City of Palo Alto or Mid-Peninsula Housing Coalition. An April 1999 escrow closing date is a part of the negotiated purchase agreement, and failure to act could jeopardize the agreement. The type of flexibility being requested is necessary in order for a small jurisdiction like Palo Alto to accomplish as many affordable housing projects as possible with limited funding sources. We would appreciate your response to this request at your earliest convenience. Please feel free to contact me at 650/329-2428 should you have any questions, need additional information, or wish to discuss the matter further. Very truly yours, CDBG Coordinator June Fleming, City Manager James Gilliland, Assistant Planning Official Rafael Cedillos, CPD Representative Encl. 1998/1999 Draft Annual Action Plan Amendment DRAFT AMENDMENT TO THE CITY OF PALO ALTO’S FISCAL YEAR 1998/1999 CONSOLIDATED ACTION PLAN The Consolidated Plan The Palo Alto City Council adopted the fiscal year 1998/99 Annual Action Plan of the 1995- 2000 Consolidated Plan on May 11, i998. The Consolidated Plan is a federally-required five- year planning document which describes local conditions and resources, identifies priority housing, human service, and community development needs, and outlines a strategy to address the identified needs. The Annual Action Plan identifies the specific activities which the City anticipates undertaking with Community Development Block Grant (CDBG) funds, during a one-year time frame, to address the identified priority needs. The City of Palo Alto’s Consolidated Plan and Housing Element of the Comprehensive Plan both emphasize the great need for housing affordable to low and very low income households. While all types of housing are needed in the City, the Consolidated Plan objectives focus on the creation and preservation of rental housing, with an emphasis on housing for singles and very small households who are homeless or at risk of homelessness, very low and low income persons with special needs, and housing for families with children. The 1998/99 Action Plan identified the acquisition and rehabilitation of the 57-unit Sheridan Apartments by the Palo Alto Housing Corporation (PAHC) as the primary use of local housing and CDBG funds in 1998/99. Preservation of the existing units, affordable to seniors and persons with disabilities, was accomplished on December 9, 1998 when PAHC closed escrow and acquired the property. However, the acquisition used the majority of the available money in local Residential and CDBG housing funds. Consolidated Plan Annual Action Plan Amendment In November, 1998 the non-profit public benefit corporation, Mid-Peninsula Housing Coalition, (MPHC) successfully negotiated a purchase agreement with the owners of another affordable housing project in Palo Alto which was at risk of converting to a market rate rental project. Consequently, the Palo Alto Gardens Apartments project became a viable affordable housing opportunity in fiscal year 1998/99. On November 23, 1998, at the request of MPHC, the Palo Alto City Council made a $1 million loan commitment to the Palo Alto Gardens project without identifying a specific source of funding. This was done so that MPHC could complete its funding package and proceed with financing applications for tax exempt bonds and low-income housing tax credits in a timely fashion. This amendment to the adopted 1998/99 Action Plan identifies the potential acquisition of the 156-unit Palo Alto Gardens as a specific project and an activity that will be undertaken in fiscal year 1998/99. It provides current, detailed information on the project itself and the likely sources of funds, and links the project with the identified priority housing needs of the Consolidated Plan. Copies of the amended plan were distributed to the CDBG Citizen’s Advisory Committee at its February 18, 1999 meeting. An ad informing the public of the Plan Amendment was placed in the Palo Alto Weekly on February 17, 1999 and provided for a 20-day public review and comment period, from February 17, 1999 to March 5, 1999. The Palo Alto City Council will hold a Public Hearing on March 15, 1999 to adopt the Consolidated Annual Action Plan Amendment. Palo Alto Gardens Apartments Palo Alto Gardens Apartments, located at 648 San Antonio Road, Palo Alto, CA 94306, was originally developed in 1973 and financed through the HUD 221 (d)(3) program as a 100% "cost based" Section 8 project. However, on October 21, 1997, the present owners, Goldrich and Kest, informed the U.S. Department of Housing and Urban Development (HUD) of their intention to prepay the HUD-insured 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 free of federal regulatory controls. Eligible households in the project (approximately 132 units) received special "enhanced" Section 8 vouchers that are valid until June 30, 1999. These enhanced vouchers provided the project owner with full market rents, and in return, the owner agreed to allow the Section 8 tenants to remain in their units for one year. Under this plan, the tenant pays 30 percent of their income for rent, and the Santa Clara County Housing Authority makes up the difference. After June 30, 1999, the special HUD funding for the "enhanced" vouchers ends. Although it is expected that the Santa Clara County Housing Authority will have the funding to convert all eligible tenants 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. Additionally, for residents currently receiving Section 8 assistance, paying the $130 per month difference between the full market rent t_hat would be demanded by the owner and the amount allowed under Section 8 vouchers could be significant. The average annual income for the project’s Section 8 households is less than $10,000 per year. Finding other housing in the mid-peninsula area is also ,difficult as all subsidized housing is full, and the waiting lists are closed or very long. Since Palo Alto is one of the strongest and most expensive rental markets in the country, due to the high demand for housing and low vacancy rates, low income seniors and families have extremely limited choices for housing which they can afford. If Palo Alto Gardens Apartments were allowed to convert to market rate housing, the existing tenants would be at risk of becoming homeless, and an irreplaceable affordable housing resource would be lost. 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 preservation of housing units available for rental to holders of Section 8 assistance and affordable to lower income persons, especially small families and persons with special needs, is the highest priority need in the adopted Consolidated Plan. Mid-Peninsula Housing Coalition Mid-Peninsula Housing Coalition is a non-profit public benefit corporation. They were founded in 1971 as a regional non-profit developer and manager of affordable rental housing. In July, 1998 they successfully purchased the Palo Alto Gardens Apartments’ "sister" project in Mountain View, the 149-unit Central Park Apartments, from the same owner. The financing plan proposed for Palo Alto Gardens Apartments was modeled on the one used for the purchase of the Central Park Apartments. MPHC has negotiated site control with a letter of intent to purchase the property for a price of $13 million. Together with rehabilitation, financing and other transaction costs, the total development budget is expected to be approximately $17.1 million. 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 bonds would be issued by the Association of Bay Area Governments (ABAG) and would carry an expected "A" rating. An additional $4 million would be provided as an equity investment through the sale of Federal low income housing tax credits. The $1 million loan from the City of Palo Alto would be subordinated to the bond debt and would be payable from land lease rent payments. It is expected that escrow could close on the property in Mid-April, 1999. MPHC will accept Section 8 Fair Market Rents as long as HUD continues to fund the Section 8 program. Income eligible tenants will not be required to pay any rents that are greater than 30 % of their income. In the event the 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. 1999/2000 CDBG Funding In order to provide the $1,000,000 needed to leverage the acquisition of Palo Alto Gardens Apartments in 1998/99, it is expected that the City will utilize the available balance in the City’s Residential Housing In-Lieu Fund, and borrow the remaining amount from the City’s Commercial Housing Fund. The "Housing Reserve Guidelines" limit the use of the Commercial Housing Fund to the creation of new units of housing affordable to lower income persons, and cannot be used directly for this project. It is the City’s intention to apply to the U.S. Department of Housing and Urban Development (HUD) for authorization for payment ofpre-award costs under the CDBG program, so that 1999/2000 funds may be used to reimburse the Commercial Housing Fund for Palo Alto Gardens Apartments’ acquisition costs incurred in the 1998/1999 fiscal year. The amount of the CDBG reimbursement from 1999/2000 funds would be determined by the City Council following the Public Hearings on April 6, 1999 before the Finance Committee, and May 10, 1999 before the full City Council. Any shortfall between the amount of 1999/2000 CDBG assistance and the Commercial Housing Fund Loan balance could be repaid from future contributions to the Residential Housing In-Lieu Fund. 4 ATTACHMENT B ORDINANCE NO. ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO AMENDING THE BUDGET FOR THE FISCAL YEAR 1998-99 TO PROVIDE AN ADDITIONAL APPROPRIATION OF $i,000,000 TO SUPPLEMENT THE ACQUISITION COSTS FOR THE PALO ALTO GARDENS APARTMENTS AT 648 SAN ANTONIO ROAD WHEREAS, pursuant to the provisions of Section 12 of Article III of the Charter of the City of Palo Alto, the Council on June 22, 1998 did adopt a budget for fiscal year 1998-99; and WHEREAS, the Mid-Peninsula Housing Coalition (MPHC) finalized negotiations to acquire the Palo Alto Gardens Apartments with the intention of preserving them for the existing residents and keeping them as part of the City’s affordable housing stock; and WHEREAS, MPHC has identified financing components that include an $11,400,000 allocation of tax-exempt bonds and approximately $4,000,000 in low income housing tax credits; and WHEREAS, MPHC has submitted a formal request for $I,000,000 in City funding to supplement the acquisition costs; and WHEREAS, the preservation of existing, affordable housing units is consistent with adopted City policy in both the Housing Element of the 1998-2010 Comprehensive Plan and the Housing and Urban Development (HUD) Consolidated Plan; and WHEREAS, the City Gouncil adopted Resolution No. 7815 on November 23, 1998, approving a $i,000,000 loan commitment from the City’s Housing Development Funds to supplement the funding needed for the purchase of Palo Alto Gardens and the Council directed staff to return in March’1999 with recommendations on the most appropriate funding mechanism ’and a Budget Amendment Ordinance (BAO); and WHEREAS, this funding will come from the Residential Housing In-Lieu Fund, which will require a loan of $725,000 from the Commercial Housing-In-Lieu Fund to be repaid in full at a later date plus $275,000 from the Residential Housing In-Lieu Reserve; and WHEREAS, this appropriation is for a one-time cost and no future year General Fund ongoing costs are anticipated from this loan; and WHEREAS, City Council authorization is needed to amend the 1998-99 budget as hereinafter set forth. NOW, THEREFORE, the Council of the City of Palo Alto does ORDAIN as follows: SECTION i. The sum of Seven Hundred Twenty Five Thousand Dollars($725,000)is hereby transferred from the Commercial Housing In-Lieu Fund Reserve to the Residential Housing In-Lieu Fund, and a loan, payable upon the availability of funds, is established. SECTION 2. This transaction will reduce the Commercial Housing In-Lieu Fund Reserve from $2,648,340 to $1,923,340 and correspondingly increase the Residential Housing In-Lieu Fund from $293,889 to $1,018,889. SECTION 3. The sum of One Million Dollars ($i,000,000) is hereby appropriated to non-salary expenses in the Housing In-Lieu Residential Fund, and is authorized for expenses associated with acquisition of the Palo Alto Gardens Apartments, being initiated by the Mid-Peninsula Housing Corporation. SECTION 4. This transaction will reduce the Housing In-Lieu Residential Fund Reserve from $1,018,889 to $18,889. SECTION 5. 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 6. This project is exempt from the provisions of the California Environmental Quality Act (CEQA) pursuant to Section 15301 (existing facilities) of the CEQA guidelines. Appropriate environmental review under NEPA is in the process of being completed in the anticipation that federal CDBG funds will be used for a portion of the City’s loan. SECTION 7. 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: City Clerk APPROVED AS TO FORM: Senior Asst. City Attorney APPROVED: Mayor City Manager Director of Services Administrative Director of Planning Community Enivronment and ATTACHMENT C STATUS OF CITY HOUSING DEVELOPMENT FUNDS - 2/28/99 FUNDS AVAILABLE FUNDS EXPECTED TOTAL CURRENT & CDBG: FY 99-00 for Capital Projects [Total CDBG 99- 00 Budget is $924,000] TOTAL CDBG FUNDS RESIDENTIAL FUND: ¯ Available as of 2/28/99 ¯ Outstanding Fees from Approved Projects Expected to be Received in 1999 TOTAL RESIDENTIAL FUND SUBTOTAL CDBG & RESIDENTIAL FUNDS COMMERICIAL FUND: ¯ Available as of2/28/99~ ~ Outstanding Fees from Approved Projects Now Under Construction ’ TOTAL COMMERCIAL FUNDS EXPECTED FUNDS $658,550 $658,550 - - -$658,550 $293,889 $475,925 (estimated) $293,889 $475,925 $769,814 $952,439 $475,925 " $1,428,364 $2,648,340 $522,302 $2,648,340 $522,302 $3,170,642 GRAND TOTAL ALL FUNDS $3,600,779 $998,227 $4,599,006 ~ Includes the $734,265.51 in commercial housing fees paid by PAMF for the 795 E1 Camino facility which was subject to PAMF’s request for a rebate or reduction of the housing fees. Council on 12/1/97 continued the matter to a date uncertain.