Loading...
HomeMy WebLinkAboutStaff Report 206-08City of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL 8 FROM:CITY MANAGER DEPARTMENT: PLANNING AND COMMUNITY ENVIRONMENT DATE: SUBJECT: APRIL 14, 2008 CMR: 206:08 PRESERVATION OF THE BELOW MARKET RATE UNIT AT 502 THAIN WAY: 1) APPROVAL OF THE CITY’S ACQUISITION OF THE UNIT FOR THE PURPOSE OF RENOVATION AND RESALE TO A QUALIFIED BMR BUYER; AND 2) APPROVAL OF THE METHOD FOR SETTING THE RESALE PRICE RECOMMENDATION Staff recommends that the City Council: 1. Authorize the acquisition by the City of the Below Market Rate (BMR) unit located at 502 Thain Way (Barron Square) for the purpose of preservation, renovation and resale as a BMR unit to a qualified BMR buyer identified by PAHC Housing Services, LLC (PAHC) with a first right to repurchase by the current owner; and 2. Approve setting the resale price at the City’s total direct costs; and 3. Direct the City Manager or his designee to approve the final resale price, execute the certificate of acceptance and all other documents and deeds necessary to complete the purchase, renovation and the resale. BACKGROUND 502 Thain Way is one of six, one-bedroom BMR units in the 65 unit Barron Square condominiums located at Maybell Avenue and E1 Camino Real. The complex was built in 1979 and thus has some of the oldest units in the BMR program. Barron Square is an attractive development with strong sales values for the market rate units; the BMR units are located together in one building with two similar market rate units at the rear of the complex. Unit 502 has not been occupied since late 2004. Following a lengthy probate process, PAHC found little interest in the unit from the BMR waiting list, primarily due to concerns about past problems with water intrusion and its poor interior condition. A qualified applicant agreed to purchase the unit contingent upon his review of the mold testing. The seller refused to accept any contingencies, claiming the right to sell the unit at market price because the resale deadlines in the deed restrictions had been exceeded. On May 7, 2007, Council authorized the purchase Of the property by the City and the subsequent resale to the purchaser, together with a deferred payment renovation loan of up to $45,000 and time for the CMR:206:08 Page 1 of 4 completion of the inspection report. (See Attachment A CMR: 227:07). DISCUSSION The City acquired the unit for $108,900 on June 5, 2007 and then entered into the purchase contract to resell the unit at the same price to the BMR purchaser. The purchaser contracted for a mold report; after reviewing the report, the purchaser decided to go ahead with his purchase of the BMR unit and escrow closed on September 5, 2007. Once he had ownership, the purchaser contracted for further investigation of the unit. Earlier this year, the purchaser and his contractor met with Barron Square Homeowners Association (HOA) and PML Management Corporation (the company responsible for repairs and maintenance) to discuss the findings and recommendations in the inspection reports. The purchaser made both written and verbal requests to the HOA and PML to conduct the repairs necessary. The HOA refused to accept any responsibility for the mold remediation. The purchaser has decided that he cannot continue to pay the monthly mortgage, homeowner’s dues and taxes, which total about $1,100 per month, without having a place to live. On February 25, the purchaser gave the City and PAHC official notice of his intention to sell the property. As provided in the BMR deed restrictions, the City must exercise its right to purchase at the BMR resale price by April 24 or else the owner can claim the right to sell the unit without BMR price restrictions. The staffrecommendation is to repurchase and rehabilitate the unit and then resell it to a qualified BMR buyer from the waiting list at a price that recoups the City’s direct costs. As the legal owner, the City will be in a better position to negotiate a solution with the HOA regarding responsibility for the mold remediation costs and the common area repairs. If necessary, litigation against the HOA may be undertaken. In general, City practice has been to only take on ownership of BMR units as a last resort if there is no other way to preserve them in the program due to the financial risks and increased staff workload. As the property owner, the City would need to pay the $545 monthly holding costs for property taxes and HOA dues and be directly responsible for the completion of the interior renovations. The City’s investment in the unit will total $121,700 as follows once the City takes title from the current owner: $109,500 8,725’ 2,000 1,475 BMR price (based on June 2007 purchase price plus one-third CPI) Amounts already paid to purchaser as reimbursement for construction and assessment costs Estimated escrow, title costs for three purchase / sale transactions HOA dues and taxes for the three months City already held the unit $121,700 Total City expenditures by close of escrow Future costs the City would incur include: 1) estimated $7,000 in holding costs for about one year; and 2) interior renovation estimated at $40,000. This would bring the City’s total investment in the unit up to $168,700. Assuming the City can offer the renovated unit for resale for not over $170,000 (recouping all of the City’s direct costs), that price would be affordable, with a five percent down payment, to a single CMR:206:08 Page 2 of 4 person with an income of $66,500, which equals 90 percent of the 2008 area median income. This price is lower than the one-bedroom 800 High BMR units which sold for $189,450 with good demand from the waiting list. Due to the limited supply of new or completely renovated one- bedroom BMR units, staff believes this unit will be attractive to the waiting list and sell quickly once its problems are resolved and it has been completely renovated. The purchaser has requested that the City provide him with an opportunity to repurchase the unit once it is renovated and ready for occupancy. Staff supports his request and proposes that he be given a first right of refusal to repurchase at the resale price the unit would be offered to the BMR waiting list (as described above) for 30 days prior to the unit being advertized to the BMR waiting list. If the City does not exercise its fight to purchase by April 24 (within 60 days of the notice to sell), then the deed restrictions allow the owner to sell the unit at market rate and retain the proceeds; this would result in the loss of this unit from the BMR Program. Staff reviewed this course of action, but is not recommending it because there would probably further delays in remedying the conditions with the unit which could adversely affect the other five BMR units in the building. However, there is clearly a difference between the current BMR restricted price and the value at market rate that would provide an incentive for an potential buyer to purchase the unit, deal with its problems and then use it as a home or resell it for profit. For example, there are two market rate one-bedroom units on the second floor of the building which sold in the last three years for $486,000 and $510,000 respectively. While the upper floor units would have higher values, these prices give some indication of the market value of 502 Thain Way if it was in good condition and ready to occupy. RESOURCE IMPACT The BMR Emergency Fund (BMR Fund) has a current available balance of $455,000. This Fund will be used to pay all costs related to the preservation of the 502 Thain Way unit, including the purchase price, renovation, holding and transaction costs estimated at $170,000. The proceeds from the eventual resale will be deposited back into the BMR Fund to be immediately available for any future needs related to the preservation of BMR ownership units. POLICY IMPLICATIONS The staff recommendation does not represent any change to existing City policy, which is to protect and preserve the BMR ownership units in the City’s affordable housing stock. TIMELINE Should Council approve the staff recommendation, a purchase contract will be prepared and executed with the City as the buyer without any contingencies other than City review and acceptance of a preliminary title report with escrow to close as quickly as possible. Once the City has legal title to the unit, the City Attorney will initiate negotiations with the HOA and PML regarding the satisfactory completion of repairs and the remediation. If necessary, litigation against the HOA will follow. Lastly, the unit will be offered for sale to the BMR waiting list. ENVIRONMENTAL REVIEW The provision of City funds to preserve a single-family ownership unit as affordable housing is categorically exempt under Section 15326 of the California Environmental Quality Act (CEQA). CMR:206:08 Page 3 of 4 ATTACHMENTS A) City Manager’s Report dated May 7, 2007 (CMR:227:07) PREPARED BY: Catherine Siegel, Advance P1 " DEPARTMENT HEAD REVIEW: JSTEVE E1V~LIE Director of Planning and Community Environment CITY MANAGER APPROVAL: EMILY H~-"-RRI S O~ Assistant City Manager CC:Bill Fellman, Real Estate Division, Administrative Services Department Marcie Mitchell, BMR Administrator, PAHC Housing Services, LLC Mr. Randy Lu, Owner of 502 Thain Way Barron Square Homeowners Association (c/o Marla Degner, President) PML Management Corporation (c/o Deborah McGraw) CMR:206:08 Page 4 of 4 ATTACHMENT A City of Palo Alto City Manager’s Report TO: FROM: HONORABLE CITY COUNCIL CITY MANAGER 14 DEPARTMENT: PLANNING AND COMMUNITY ENVIRONMENT DATE: SUBJECT: MAY 7, 2007 CMR: 227:07 PRESERVATION OF THE BELOW MARKET RATE UNIT AT 502 THAIN WAY IN BARRON SQUARE: 1) APPROVAL OF THE CITY’S ACQUISITION OF 502 THAIN WAY FOR THE PURPOSE OF RESALE TO A NEW BMR BUYER; AND 2) AUTHORIZATION FOR A DEFERRED PAYMENT LOAN FOR REPAIRS AND RENOVATION RECOMMENDATION Staff recommends that the City Council: 1. Authorize the acquisition by the City of the Below Market Rate (BMR) unit located at 502 Thain Way (Barron Square) for the purpose of preservation and resale as a BMR unit; and 2. Authorize a deferred payment loan of up to $45,000 from the City to the buyer for repairs and renovation; and 3. Direct the City Manager, or his designee, to execute all documents and deeds necessary to complete the purchase, resale and the renovation loan. BACKGROUND 502 Thain Way is one of six, one-bedroom BMRs in the 30-unit Barron Square condominiums located at Maybell Avenue and E1 Camino Real. The unit was built in 1979, and, at 28 years old, is one of the oldest units in the BMR program. The six BMR units are located together in one building with two similar market rate units. The Barron Square complex buildings are wood shingled and the setting is attractive with many trees and amenities such as tennis courts, a pool and a community building. With about 750 square feet of living space and large patios or decks, the six BMRs are fairly spacious compared to one-bedroom BMR units in other developments. Like many other BMR units that come up for resale, especially those that have never changed owners or have been through probate, 502 Thain Way shows poorly: the carpets are dirty and worn; the walls and paint are dingy; the appliances are 30-years old; and the cabinets, sinks and counter tops are worn and dated. Sellers are very reluctant or lack the funds or expertise to get repairs done, replace carpets or do painting to make the units more attractive. In addition, the deed restrictions place only very limited obligations on sellers for the condition of units at resale. Few potential buyers on the City’s waiting list are interested in units in this kind of condition. If there are any potentially serious CMR: 227:07 Page 1 of 5 problems, finding a buyer is problematic. Many BMR buyers utilize all their assets to purchase a BMR unit and need to move in immediately after closing. Remodeling the unit is not an option. Furthermore, as first time buyers who have been renters for years, they lack the skills and funds to undertake remodeling. To improve the livability of resale units and to get old appliances replaced when a sale occurs, staff has increased the unit’s resale price by an estimated amount for modest improvements. These funds are deducted from the seller’s proceeds and held in escrow, together with any seller payq’nents for deferred maintenance such as re-painting. The buyer is required to purchase and install any improvements and complete any deferred maintenance within 60 days of the escrow closing. Upon completion of the work, the funds are then released by escrow to the buyer. This system works since the buyer’s natural motivation is to fix up this new home, but it can only be used for improvements that can be installed easily and quickly. It is not feasible for work that requires hiring a general contractor or that wil! take over 60 days because the escrow companies will not agree to complex arrangements. DISCUSSION 502 Thain Way’s first, and original, owner passed away after a long illness in late 2004. Due to issues with her will, the probate process extended for one and a half years and it was not until June 2 !, 2006 that the City received a notice to sell, thus commencing the BMR resale process. For a variety of reasons, this resale has been burdened with delays and difficulties and it is now ten months since the notice to sell was received by the City. The City has identified a qualified buyer for the property. However, due to the poor condition of this unit, which includes problems with moisture intrusion, the prospective buyer is unwilling to sign a contract without contingencies. The heir is unwilling to agree to the contingencies. To ensure that the deed restrictions remain enforceable and the unit can be resold as a BMR unit, the City needs to step in, execute a purchase contract with the City as the buyer, and close the transaction with the heir before May, 27th. The City will then enter into a purchase contract with the prospective buyer that includes his inspehtion contingencies and the offer of a renovation loan. The BMR deed restrictions specify a 60 day period from receipt of an owner’s notice to sell for the City to exercise its right to purchase and then a 90 day period for the buyer to be selected, financing secured and escrow c!osed. For any BMR unit in good condition, there are many ready and willing qualified buyers on the waiting list. Currently there are about ! 80 potential buyers for one-bedroom units. Normally, the deadlines in the deed restrictions can be met, providing all parties (seller, buyer, City and PAHC) carry, out their responsibilities quickly and in good faith. In this case, the City had to exercise its purchase right at the end of the 60 day time limit on August 21, 2006. This occurred even though the unit was still not ready to show to buyers and no agreement had been reached by the seller and the City Real Estate Division staff on the valuation of capital improvements claimed by the seller and deductions for deferred maintenance. Normally, marketing to the waiting list should be underway within the first 60 days, but that cannot occur until the resale price is set. In this case, it was not until late September that the final resale price was set and not until November 18 that the open house was held for the waiting list. Even though Barron Square BMR units usually sell easily, there were few applicants for this property as a result of its poor appearance and obvious need for renovation and repairs. While the unit has CMR: 227:07 Page 2 of 5 had a few significant improvements, such as new doubled paned windows, the bath remodeling was poorly done and general maintenance was neglected. Due to the holiday season and the serious illness of the BMR administrator at PAHC, it was mid-January before an initial buyer was under contract for the unit. That buyer cancelled her contract two weeks later after reviewing letters in the property file regarding past problems with water leaks and mildew reported by the original owner in 1982. She was not willing to purchase the unit after she found that the homeowners’ association could not provide her with any records to verify that these past problems had been corrected. Planning and PAHC staff then began working with the next buyer in line. To ensure that the buyer was fully informed prior to signing the purchase contract, additional time was provided for him to visit the unit again and examine the property file records that had caused the previous buyer to reject the unit. In order to minimize his risks in purchasing this unit, Planning also offered to reimburse the buyer for the costs of a full professional property inspection and a mold inspection with limited mold testing (up to $1,500 total). Additionally, Planning staff offered to request Council authorization for a deferred payment loan of up to $45,000 for the complete renovation, repair and updating of this unit. Price Calculation for Sale by Current Owner: The original purchase price of 502 Thain Way in 1979 was $28,000. With the full CPI appreciation rate that was allowed in !979, the $108,900 resale price includes $57,400 in appreciation for the seller. There is no mortgage on the property. The City is allowing the owner to recover $11,686 for the depreciated value capital improvements that were completed (electrical work, new windows and a new Jacuzzi bathtub) plus the full $8,826 she paid for a 2002 homeowner’s special assessment. $1,000 is to be deducted from the seller’s proceeds to pay for the estimated cost of interior painting and $3,000 has been added to the resale price to reimburse the buyer for the estimated cost for new carpets and kitchen appliances. The sum of these various additions and deductions results in a total purchase price of$108,900, with the seller receiving proceeds of $ t 04,900 less the seller’s closing costs. The $108,900 will be repaid to the City when the unit is sold. This was the purchase price the prospective buyer was offered last year when he submitted his application to PAHC to buy the property. The renovation loan will be eventually repaid the next time the unit is resold. The City’s other costs will not be recouped because to do so would require the prospective buyer to seek a large purchase loan, which he probably could not afford. Risks for City: There are some uncertainties and risks with the City acquiring any BMR unit. Staff wi!l require a title report and title insurance and the seller will be required to remove any liens, pay property taxes and HOA dues to the date of closing and transfer clear title to the City. In this situation, there are two main concerns for both the City and the new buyer: 1) whether there is any significant problem with indoor air quality from current or past water leaks and moisture; and 2) whether the HOA and its management company can be induced to quickly and effectively complete repairs to stop any current leaks and prevent future ones. To address and minimize these risks, the City is requiring the buyer to conduct a full set of inspections including initial mold testing. Further mold testing could be undertaken if that seems prudent. Copies of all reports and test results done must be provided to the City. If there is a major indoor air quality problem that would be very costly to correct, then staff will return to Council for direction on how to proceed. CMR: 227:07 Page 3 of 5 RESOURCE IMPACT Funds are available and budgeted in the BMR Emergency Fund (BMR Fund) for costs to preserve BMR units; there is currently an available budget of $380,300. The BMR Fund will be used to pay all costs related to the preservation of the 502 Thain Way unit, including the purchase price, the renovation loan, holding and closing costs and the potential cost of Menlo Park’s services. The $108,900 proceeds from the unit’s resale will be deposited back into the BMR Emergency Fund to be immediately available for any future needs related to the preservation of BMR ownership units. The buyer will execute a note and deed of trust in favor of the City for the renovation loan. Renovation Loan Terms and Repayment: The loan is proposed to be offered at no interest and the buyer will be able to accumulate appreciation at the current one-third of CPI formula on the tota! of the purchase price and the loan amount as an incentive for the buyer to undertake purchase and renovation of a problem property. The note will only accrue interest if the buyer breaches the rules and restrictions of the BMR program such as if there is a default or an uncured and continual violation of the deed restrictions such as rental of the unit. Otherwise, the loan is only due on the sale, transfer or refinance of the property. In the event of a hardship, in which the BMR program goals would be better served by allowing an assumption of the loan (for example a transfer of title to an eligible person approved by the City), the City Manager could waive the repayment requirement and allow-an assumption of the loan. BMR Emergency Fund: Council authorized the BMR Emergency Fund (BMR Fund) in September 2002 as a housing program special revenue fund to clearly identify and set aside funding within each annual budget for the sole purpose of preserving the City’s 179 units of BMR ownership housing stock. This fund has been used for the City to acquire units threatened by foreclosure or to settle litigation and facilitate the resale to a qualified BMR buyer. A secondary purpose of the fund has been to provide deferred payment loans to extremely low-income BMR owners subject to special capital assessments from their homeowner’s association. The BMR Fund does not have its own revenue source; rather, it has been funded by transfers from the Residential Housing Fund, which in turn is primarily composed of BMR in-lieu fees from housing developers. POLICY IMPLICATIONS These actions do not represent any change to existing City policies. However, staff believes that there is a definite need for some type of limited loan program that could be available in similar situations in the future. Staff intends to develop and bring to Council in the spring, a loan program of a very limited nature only for units that are difficult to sell at the time of resale due to their condition. There is not sufficient City staffcapacity to oversee a more extensive program, even with outside contract assistance. TIMELINE After approval by Council, a purchase contract will be prepared and executed with the City as the buyer without any contingencies other than City review and acceptance of a preliminary title report. The closing date will be Friday, May 25, 2007. The City will request that the seller grant permission to allow the inspections and testing to get underway prior to close of escrow and to permit the City to assign the purchase contract to the prospective buyer, should he be ready to assume ow-nership by the closing date instead of the City. CMR: 227:07 Page 4 of 5 However, it is more likely that the City will need to close the escrow, expend the funds for the purchase price and become the owner. The City will then immediately enter into a purchase contract with the prospective buyer which will include his contingencies for inspections and testing with reasonable time deadlines for completion, review of the reports and closing of the escrow. Once the unit has been transferred to the new BMR owner, a work write-up for the renovations will be completed and the work put out to bid to general contractors. After a bid has been for the work and a construction contract has been prepared, loan documents for the City’s renovation loan will be signed and a deed of trust recorded to secure the City’s loan. At that point, the City will authorize the release of the $4,000 in repairs funds from the escrow. While these funds were intended for painting and appliances, the purpose of releasing them at the beginning of the renovation is to give the prospective buyer cash to front payments to the contractor pending disbursements of the City loan. ENVIRONMENTAL REVIEW The provision of City funds to preserve a single-family ownership unit as affordable housing is categorically exempt under Section 15326 of the California Environmental Quality Act (CEQA). PREPARED BY: Catherine Siegel. Housing Coordi DEPARTMENT HEAD REVIEW: o/STEVE EI~,SLIE Director of Planning and Community Environment CITY MANAGER APPROVAL: HARRISON Assistant City Manager CC:Bill Fellman, Real Estate Division, Administrative Services Division Marcie Mitchell, Palo Alto Housing Corporation Mr. Randy Lu Claire Kaufman James Efting, Jackson & Efting, Lawyers CMR: 227:07 Page 5 of 5