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HomeMy WebLinkAbout2003-10-27 City Council (7)City of Palo Alto City Manager’s Report TO: FROM: HONORABLE CITY COUNCIL CITY MANAGER DEPARTMENT: PLANNING AND COMMUNITY ENVIRONMENT DATE:OCTOBER 27, 2003 CMR: 455:03 SUBJECT: ADOPTION OF A RESOLUTION AUTHORIZING A GRANT APPLICATION FOR THE~ STATE’S LOCAL HOUSING TRUST FUND PROGRAM (LHTFP); DESIGNATION OF $4,210,000 OF CITY HOUSING FUNDS AS MATCHING FUNDS; COMMITTMENT TO TARGETING THE GRANT AND MATCH FUNDS AND APPROVAL OF UPDATED AFFORDABLE HOUSING FUND GUIDELINES RECOMMENDATION Staff recommends that the City Council: 1. Adopt the attached resolution authorizing the City Manager to submit a grant application to the State in the amount of $1 million from the Local Housing Trust Fund Program (LHTFP) and to accept the grant and execute the grant agreement and any other documents required to implement the grant. 2. Designate $4,210,000 from the City’s Housing Reserve Fund as matching funding for the grant. 3. Commit,.to targeting the State grant and matching funds as described in this report. 4. Adopt the attached resolution updating and amending the City’s 1986 Housing Reserve Guidelines (to be renamed the Affordable Housing Fund Guidelines) for submittal with the grant application. BACKGROUND In 2002, the State legislature passed AB1891, authored by Assembly Member Manny Diaz (D- San Jose), establishing the Local Housing Trust Fund Program (LHTFP). The Housing and Emergency Shelter Trust Fund Act (part of Proposition 46), approved by the voters in November 2002, provided a one-time funding allocation for the program. The purpose of the LHTFP is to reward local jurisdictions and nonprofits entities that have CMR: 455:03 Page 1 of 6 created local affordable housing trust funds utilizing local funding sources not otherwise restricted for housing, and to provide incentives for the creation of new local housing trusts. The State Department of Housing and Community Development (HCD) issued a Notice of Funding Availability (NOFA) in August 2003. Applications are due November 16, 2003 and grant awards will be announced by December 31, 2003. A total of $23.3 million is available, with $14.3 million for existing local housing trust funds (such as the fund operated by the City) and $9.5 million for newly established funds. Grant applications must be for a minimum of $1 million, but may not exceed $2 million. A minimum match equal to the grant request is required. However, one of the evaluation criteria is the degree of additional matching funds designated by the applicant. The grants are expected to be highly competitive and the City’s application is likely to need high scores on most of the six evaluation criteria to receive an award. The State grant funds must be used by the City to provide loans for the construction or rehabilitation of very low and low-income rental housing, with assisted units serving households with incomes not exceeding 60 percent of the area median income. The City will have 30 months to identify a rental housing project(s) and encumber the grant funds and then 30 months to expend the funds after they are encumbered. Part of the requirements for the LHTFP application is submission of operating guidelines for the City’s housing trust fund that address specific subjects such as the City’s priorities for awarding housing funds, loan policies, terms and conditions, household income targeting and income limits, developer requirements and security agreements. History_ of the Palo Alto’s Housing Funds: The City originally established two separate special revenue accounts for affordable housing purposes as part of the budget for fiscal year 1977-78. The Industrial-Commercial account consisted solely of monies received from industrial and commercial developers to mitigate housing impacts of large development projects. The Residential-Miscellaneous account was composed of monies received from residential developers in-lieu of providing below market rate housing and other funds designated by Council from time to time for affordable housing. While the City did not use the term "housing trust fund" Palo Alto was nevertheless one of the first cities in the State to dedicate local, on-going revenue sources specifically for affordable housing development programs. The City’s principal local housing revenue source has been fees on major commercial projects, which were initially imposed through environmental review authority. In 1984, Council enacted Chapter 16.47 -Approval of Projects with Impacts on Housing, of the Municipal Code codifying the commercial housing impact fee. Later the two local CMR: 455:03 Page 2 of 6 housing accounts were renamed the Commercial Housing In-Lieu Fund and the Residential Housing In-Lieu Fund, with the funds collectively called the Housing Reserve. Additionally, the City has consistently dedicated most of its annual Community Development Block Grant (CDBG) budget to affordable housing projects. CDBG fimds earmarked by Council for housing have been held in a CDBG Housing Development Fund, pending award by Council to specific projects. In September 2002, Council created a Below Market Rate (BMR) Emergency Fund to maintain, improve and preserve the City’s stock of BMR ownership units and to assist BMR owners with major capital assessments. Over the last decade, the staff has used the term Housing Development Fund to refer in general to all of the City’s various housing funds. Housing Fund Guidelines: In 1986, Council approved Housing Reserve Guidelines (see Attachment C) to establish written City policy regarding the source monies for each of the two locally funded City housing funds, eligible housing projects, uses of funds, preferences for housing types, loan policies and application procedures. Other than a minor amendment to the Guidelines in 1990 to clarify that loans could be made from the Commercial Fund to the Residential Fund to support the acquisition of existing housing, no changes have been made to the Guidelines in the last 17 years. DISCUSSION Amount of City Grant Application: Staff proposes that the City apply for $1 million even though it is possible to apply for higher amounts, up to a maximum of $2 million. The State’s $14.3 million in funds are limited in comparison to the likely number of applicants. Indications are that there will be more applications than the State will be able to fund. State HCD staff has suggested that the City’s application will have a higher probability of being funded if the City requests less than the maximum grant. This is because three of the six scoring criteria are ranked relative to the other applications in the pool, including the excess match criterion. Staff expects that there will be many applicants with very large amounts of matching funds. Because the City’s matching funds are relatively low, by applying for a lower grant, the City will obtain a higher overall score. Source and Amount of Matching Funds: Funds that are historically restricted by federal or State law for housing, such as CDBG, HOME funds and tax increment housing set- aside funds, are not eligible as match. As of July 1, 2003, the City had net available balances of just over $1 million in its Commercial Fund and approximately $750,000 in the Residential Fund that are eligible to be designated as match for the State grant. These are net balances after deducting funds covered by appropriations in the FY 2003-04 and 2004-05 budgets for special activities such as the Opportunity Center, the Oak Court project, and the BMR program study; or encumbered under existing contracts. At a minimum, the City must designate $1 million as required match. The $1 million in the CMR: 455:03 Page 3 of 6 Commercial Fund makes the best match because match sources that are not from residential impact fees receive extra rating points. Staff is not proposing to designate the entire potential Residential Fund match, in order to leave some of the Fund’s balance unrestricted by the State. City housing funds planned for current affordable housing projects, but unspent as of July 1, 2003, are eligible to include in the City’s matching funds, because these two projects will provide the type rental housing that meets the State’s restrictions on the use of match funds. The funds are composed of the Oak Court $1.96 million development loan and the $750,000 committed to the Opportunity Center last February by Council. They provide the City with a significantly larger matching amount for the grant. In summary, staff proposes designating a total of $4,210,000 as match for the $1 million grant. The matching funds are summarized below. Matching Funds for State Grant Application Source Commercial Housing Fund Residential Housing Fund Commercial Housing Fund Residential Housing Fund TOTAL MATCH Status Most of Net Available Balance Portion of Net Available Balance Development Loan Closed on 8/25/03 for Oak Court BAO dated 2/3/03 to Fund Development Loan for Opportunity Center Amount $1,000,000 $500,000 $1,960,000 $750,000 $4,210,000 Restrictions on Use of Grant and Matching Funds: One impediment to the use of the LHTFP funds is that the State grant may not be used together with the State’s Multifamily Housing Program (MHP) funds within the same project. This is a statutory restriction written into the voter-approved proposition. For example, both the Oak Court apartments and the Opportunity Center have MHP funding and thus those projects would not have been eligible for LHTFP funding. Nevertheless, the City’s funding for these projects does qualify as matching funds. The State grant funds can be used in combination with many other housing funding sources such as CDBG, housing tax credits and HUD housing funds, so this restriction should not be a major constraint to using the grant funds. CMR: 455:03 Page 4 of 6 The most significant restriction placed by the State is that a commitment by the City to fund certain types of rental housing with both the grant and the match funds is required in order to obtain the highest possible rating score. Twenty points, of 105 total points, will be awarded if the applicant commits to using both the State grant and the required match on projects where: ¯ At least 30 percent of total units will be occupied by extremely low income households (below 30 percent of median income), and ¯ Either the project: 1)Is an "at-risk" development, or 2)Has at least 30 percent of total units with 3 or more bedrooms, or 3)30 percent or greater of total units will be restricted to special needs populations (which does not include independent elderly housing). Since 1998, all but one (Alma Place) of the six major housing projects funded by the City met the above priorities. In the preceding 15 years, nine out of the 15 major projects funded met these priorities. Given that the State’s priorities and the City’s past funding actions are very similar and that the City’s application is unlikely to be successful without these 20 points, staff is recommending that the commitment be made by Council. A possible use of the State grant would be assistance with the acquisition of the Terman Apartments, if the current owner decides to convert these units to market rate when their Section 8 funding expires in 2005. Retention of the Terman units as affordable housing is a top City housing priority. Updating the City’s Housing Fund Guidelines: In order to submit a competitive grant application, the City’s housing fund guidelines need to be revised to reflect current priorities and procedures, and to address the specific subjects listed in the NOFA. The 1986 guidelines are overly general and do not clearly identify City funding priorities, use outdated affordability terms, do not describe current application procedures, lack selection criteria and minimum loan terms and do not incorporate the CDBG housing development fund. As more housing developers seek to develop projects within the City, the need for updated housing fund guidelines has become apparent to staff. The proposed guidelines will provide all developers with the same information regarding the City’s current priorities, policies and procedures for housing funding. The proposed guidelines (Attachment D) provide detailed information regarding affordable housing funding priorities, selection criteria and lending terms, yet they retain flexibility for staff and Council to respond to unusual affordable housing opportunities. The revisions include guidelines for CDBG housing funding and any future loans funded with HOME program funds, and incorporate by reference the BMR Emergency Fund. To reflect the comprehensive focus of the new guidelines, they have been renamed "The Affordable Housing Fund Guidelines." CMR: 455:03 Page 5 of 6 RESOURCE IMPACT A $1 million grant award will significantly increase the City’s resources for very low- income rental housing. With the lack of recent and projected new commercial development and the emphasis on the provision of actual units in meeting BMR requirements, housing fund revenues have been low. POLICY IMPLICATIONS Acceptance of the grant will obligate the City to utilize the both the grant funds and the designated $1.5 million of available, currently unobligated match funds for rental housing projects that meet the State’s targeting priorities. As discussed above, these priorities are: units for extremely low income households, projects with 30 percent three bedroom units, at-risk projects such as Terman, or projects for special needs populations, which does not include elderly housing. The LHTFP grant application and the proposed Affordable Housing Development Fund Guidelines are consistent with adopted City housing policies as expressed in the Comprehensive Plan’s Housing Element, the HUD Consolidated Plan, and past Council actions. ENVIRONMENTAL REVIEW Neither the grant application nor revision to the guidelines is considered a project subject to the California Environmental Quality Act (CEQA). If grant funds are awarded for an affordable housing project, the future project would be subject to CEQA. ATTACHMENTS: A) Resolution authorizing the City to apply to the State for the LHTFP Grant B) Resolution amending and updating the Housing Reserve Fund Guidelines C) 1986 Housing Reserve Guidelines, as amended D) Draft "Affordable ~9using Fund Guidelines" /Q Catherine Siegel, Housin~2oordinator DEPARTMENT HEAD REVIEW: Director of Planning and Community Environment CITY MANAGER APPROVAL: ~-~#. EnVy Harrison, Assistant City Manager CMR: 455:03 Page 6 of 6 ATTACHMENT A RESOLUTION NO. RESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO AUTHORIZING THE CITY TO APPLY TO THE CALIFORNIA DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT FOR THE LOCAL HOUSING TRUST FUND PROGRAM (LHTFP) GRANT WHEREAS, AB 1891 of 2002 established Section 50843 of the California Health and Safety Code and is funded by the Housing and Emergency Shelter Trust Fund Act of 2002 (Proposition 46), thus creating the Local Housing Trust Fund Program (LHTFP); and WHEREAS, the California Department of Housing and Community Development (HCD) issued a Notice of Funding Availability (NOFA) on August 18, 2003 for the award of approximately $14.3 million in matching grant funds under competitive applications for one-time LHTFP grants of from $i million to $2 million each from eligible public agency and nonprofit applicants for the purpose of supporting local housing trust funds that are dedicated to the creation or preservation of affordable multifamily rental housing; and WHEREAS, the City Council originally established, through adoption of its budget resolution for the fiscal year 1977-78, two separate affordable housing trust funding accounts and has continuously funded said accounts with dedicated local fees on new commercial development and Below Market Rate in-lieu fees on residential projects, together with other miscellaneous revenues as designated from time to time by the Council; and WHEREAS, in 1984 the City Council adopted ordinance 3560 codifying its commercial housing linkage fee requirement as Chapter 16.47 of the Municipal Code; and WHEREAS, on February 3, 1986, the City Council adopted Housing Reserve Guidelines which established eligible uses, priorities and application procedures for the local affordable housing trust fund and adopted the new name of the Housing Reserve, composed of the Commercial Housing In-Lieu Fund (formerly the Industrial-Commercial Account) and the Residential Housing In-Lieu Fund (formerly the Residential-Miscellaneous Account); and WHEREAS, the City has continuously funded and operated its local affordable housing trust funds since 1977 with dedicated, on-going local revenues, loan repayments, federal 031022 cl 0091379 1 CDBG entitlement funds, additional specific appropriations and other grant funds since 1977; and WHEREAS, since 1977 the City has provided financial assistance from its local housing trust funds to affordable housing developers by funding: (a) the construction of 377 new affordable rental units in seven projects from its Commercial Housing Fund; (b) the acquisition and rehabilitation of 290 existing rental units in eight projects from its Residential Housing Fund and (c) the acquisition and rehabilitation of 562 existing rental units in nine projects from its CDBG Housing Fund; and WHEREAS, in response to the NOFA, the City of Palo Alto wishes to apply to the HCD for, and receive an allocation of, LHTF funds. NOW, THEREFORE, the Council of the City of Palo Alto does RESOLVE as follows: SECTION I. In response to the NOFA, the Council hereby approves submitting an application to the California Department of Housing and Community Development (State HCD) to participate~ in the LHTFP program and for an allocation of funds not to exceed One Million Dollars ($i,000,000) for the City’s affordable rental housing programs. These funds are a grant to the City and do not have to be repaid provided that the funds and the City’s matching funds are utilized in accordance with the LHTFP rules and the Standard Agreement with State HCD. SECTION 2. If the application for funding is approved, the City hereby agrees to use the LHTF funds for eligible activities in the manner presented in its application as approved by HCD in accordance with the statute and guidelines cited above. It also may execute a standard agreement, any amendments thereto, and any and all other documents or instruments necessary or required by HCD for participation in the LHTF program (collectively, the required documents). SECTION 3. The City Manager is hereby authorized and empowered to execute in the name of the City of Palo Alto all necessary documents to effectuate the purpose of this resolution, including but not limited to: (I) Making application to State HCD for LHTFP funds in the amount of One Million Dollars ($i,000,000); and (2) Executing a Standard Agreement with State HCD and any amendments thereof and any related documents necessary to participate in the LHTFP. 031022 cl 0091379 2 SECTION 4. The match resources committed by the City for the LHTFP grant are: (i) $i,000,000 currently on deposit and available in the Commercial Housing Funds for future affordable housing; (2) $500,000 currently on deposit and available in the Residential Housing Fund for.future affordable housing; (3) $1,960,000 available in the Commercial Housing Funds for Oak Court; and (4) $750,000 available in the Residential Housing Funds for Opportunity Center. SECTION 5. The Council finds that the application for LHTFP grant funds and the commitment of City matching funds is not considered a project under the California Environmental Quality Act. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: City Clerk APPROVED AS TO FORM: Mayor APPROVED: Interim City Attorney City Manager Director of Planning and Community Environment Director of Administrative Services 031022 cl 0091379 3 ATTACHMENT B RESOLUTION NO. RESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO AMENDING AND UPDATING THE HOUSING RESERVE GUIDELINES AS THE AFFORDABLE HOUSING FUND GUIDELINES WHEREAS, in 1978 the City began requiring large commercial developers to pay affordable housing environmental mitigation fees on new developments and in 1977 first collected in-lieu fees from residential developers under its Below Market Rate Program; and WHEREAS, over twenty-six years ago, the City established, by adoption of a budget resolution, the ~Industrial-Commercial" account and the ~Residential- Miscellaneous" account as its local affordable housing funds and began providing loans and financing to developers of affordable housing projects from these accounts; and WHEREAS, in 1984 the City adopted ordinance 3560, codified as Chapter 16.47 Approval of Projects with Impacts on Housing, as subsequently amended in 1985 and 2002, of the Palo Alto Municipal Code establishing a commercial housing linkage fee to require that developers of commercia! and industrial projects contribute to programs that increase the City’s low- income and moderate-income housing stock; and WHEREAS, on February 3, 1986, the City adopted the Housing Reserve Guidelines which established eligible uses, priorities and application procedures for monies contributed to the Housing Reserve which was comprised of the two separate local affordable housing funds previously created in 1977-78, the "Industrial-Commercial" account and the ~Residential- Miscellaneous" account, subsequently renamed the Commercial Housing In-Lieu Fund and the Residential Housing In-Lieu Fund; and WHEREAS, since the inception of the Co~unity Development Block Grant (CDBG) program in the 1970’s, the Council has consistently allocated through its annual CDBG budget resolution a substantial portion ofits annual CDBG entitlement grant to a Housing Development Fund within the City’s CDBG program for the purpose of fundingcosts of new and existing low and very-low income housing; and 031022 c10091378 1 WHEREAS, the City as a past grant recipient of federal HOME program funds is required to separately account for any future loan repayments from HOME funded housing projects and maintain a segregated HOME program income fund; and WHEREAS, in September 2002, the Council established a Below Market Rate (BMR) Emergency Fund, which is a trust fund to preserve the City’s stock of BMR ownership housing and to assist BMR unit owners facing substantial, mandatory condominium assessments; and WHEREAS, in conjunction with an application to the State for grant funding under the State’s Local Housing Trust Fund Program, the City must document that it has created, funded and operated a local housing trust fund with dedicated, on-going revenues and must submit its trust fund program guidelines as part of the grant application; and WHEREAS, the City wishes to incorporate established policies, priorities and past practice for its existing five housing trust funds, as reflected in adopted policy documents including the 1999-2006 Housing Element of the Comprehensive Plan, the 2000-2005 HUD Consolidated Plan and the 1986 Housing Reserve Guidelines into new updated, consolidated and restated guidelines covering all five funds. NOW, THEREFORE, the Council of the City of Palo Alto does RESOLVE as follows: SECTION i. The City Council hereby renames the Housing Reserve Fund the ~Affordable Housing Fund" and establishes the following specific housing sub-funds under the Affordable Housing Fund: Commercial Housing Fund, Residential Housing Fund, CDBG Housing Fund, HOME Program Income Fund, and BMR Emergency Fund. SECTION 2. The City council adopts the amended and restated Affordable Housing Fund Guidelines, replacing the former Housing Reserve Guidelines, in order to clearly describe, coordinate and consolidate the City’s housing funding priorities, eligible projects, lending terms and standards, application decision making procedures and other matters for all sub-funds of the Affordable Housing Fund. 031022 cl 0091378 2 SECTION 3. The Council finds that adoption of the amended and restated Affordable Housing Fund Guidelines is exempt from the California Environmental Quality Act under Guidelines Section 15280 for Lower Income Housing Projects. INTRODUCED AND PASSED : AYES : NOES : ABSENT: ABSTENTIONS : ATTEST: City Clerk APPROVED AS TO FORM: Mayor APPROVED: Interim City Attorney City Manager Director of Planning and Community Environment Director of Administrative Services 031022 cl 0091378 3 ATTACHMENT C CITY OF PALO ALTO HOUSING RESERVE GUIDELINES Approved by Palo Alto City Council on February 3, 1986, amended November 19, 1990 Purpose The Housing Reserve (the Reserve) is a separate City fund set aside for the specific purpose of assisting in the development of housing that is affordable to low, moderate and middle income families and in assisting in the housing needs of low and moderate income persons. All monies contributed to the Reserve and interest earnings accrued shall be used solely for these purposes, subject to guidelines set forth below. The Reserve is made up of two accounts, the A Industrial-Commercial=- and the AResidential-Miscellaneous_= accounts. Monies received from industrial and commercial developers, pursuant to Chapter 16.47 of the Palo Alto Municipal Code1, are deposited by the City Finance Department in the Industrial- Commercial account. Monies received from residential developers, in-lieu of providing housing under the City=s Below Market Rate (BMR) Program (Program 13 of the Housing Element), are deposited by the Finance Department in the Residential-Miscellaneous account. This second account also includes monies from miscellaneous sources that are intended for housing purposes (e.g., Mortgage Revenue Bond fee payment, Webster Wood payments, and any repayment of loans for the Reserve). Eligible Uses The Reserve will be used to reduce the cost of housing to levels that are affordable to low, moderate and middle-income families, as defined in the City=s Comprehensive Plan. A preference will be given to projects with housing for families with minor children; however, this preference does not preclude the use of funds for other types of housing affordable to the low, moderate and middle income. Monies that have been credited to the Industrial-Commercial account must be used to support the construction of new housing development, whereas monies credited to the Residential-Miscellaneous account may be used for either I Including payments required pursuant to the California Environmental Quality Act prior to enacmaent of Chapter 16.47 C:kDOCUME-I\jcaporgLLOCALS-I\TempLHsg Reserve Guidelines 86 90.doc 1 new or existing housing. However, no-interest loans may be made on a case-by- case basis as determined by the City Council from the Industrial-Commercial account to the Residential-Miscellaneous account to support the acquisition of existing housing to be used for low and moderate income families. Eligible uses include, but are not limited to, the following: Eligible Uses in Support of New Low/Moderate/Middle Income Housing Development Purchase of land or air rights for resale to developers at a reduced cost to facilitate housing development for low, moderate and middle-income households; Reduction of interest rates for construction loans or permanent financing used by developers or purchasers of low, moderate and middle income housing; Payment of predevelopment and development costs, including the costs associated with obtaining Mortgage Revenue Bond financing; and Payment of off-site costs directly relating to low, moderate and middle income housing development (e.g., utility connections, road improvements). Eligible Uses in Support of Existing Low/Moderate Income Housing 1.Costs in support of the City=s Rental Housing Acquisition Program; and Reasonable expenses necessary to administer the City=s Below Market Rate Program or other City-Sponsored housing programs. Procedures Request for use of the Reserve funds shall be submitted to the City Manager for review and recommendation to the City Council. A request for funding should provide the following minimum information: 1.Size of loan or grant requested; C:kDOCUME~l\jcaporg~LOCALS~l~TempkHsg Reserve Guidelines 86 90.doc 2 A description of the proposal to be funded and the organizations involved in the project. Public benefit and relevant Comprehensive Plan Housing policies and programs should be identified; Identification of the number of low, moderate and middle-income persons to be assisted and the specific income range of those assisted; 4.Reasons why a grant, rather than a loan, is requested (if applicable); Identification of loan rate and terms, security or collateral and source of repayment funds (if applicable); and 6.Identification of leverage achieved through City grant or loan. Audit At the close of each fiscal year, the Director of Finance and the Director of Planning and Community Environment shall report on activity during the previous year (deposits and transfers) and available funds. The City Auditors Office shall periodically examine this report and all Housing Reserve funds, and shall report on the results of this examination. C:kDOCUME~ l\jcaporgkLOCALS- !\TemphHsg Reserve Guidelines 86 90.doc 3 ATTACHMENT D City of Palo Alto Draft Affordable Housing Fund Guidelines Approved by the City Council on ,2003 Contents A. Definition of the City of Palo Alto’s Affordable Housin~ Fund B. Pro~am History, Summary and Description 1)Commercial Housing Fund 2)Residemial Housing Fund 3)CDBG Housing Fund 4)HOME Program and Program Income Fund 5)Other Funds C. Eligible Housing Types, Proiects and Activities 1.Housing Types 2.Eligible Projects and Activities for Each Fund 3.Eligible Uses of Funds 4.Specific Limitations, Restrictions and Ineligible Uses 5.Eligible Applicants; Project Sponsors; Developers D. Funding Priorities, Housing and Housing Types, and Evaluation Criteria 1.Priorities for Affordable Housing Funding: Housing & Household Types 2.Rent and Occupancy Standards: Income Targeting 3.Evaluation Criteria for Project Selection and Underwriting Standards E. Loan Provisions and Terms 1. Grants, Unsecured Loans 2. Security 3. Subordination 4. Loan Interest, Repayment 5. Term of Affordability; Regulatory Agreements F. Administrative Procedures & Responsibilities Exceptions and Revisions to Guidelines 1-3 3-7 7-9 9-11 11 G. Application Process and Contact Information 12 City of Palo Alto Draft Affordable Housing Fund Guidelines Approved by the City Council on ,2003 A. Definition of the City of Palo Alto’s Affordable Housing Fund The Affordable Housing Fund is a local housing trust fund established by the City Council of the City of Palo Alto, California to provide fmancial assistance for the development, acquisition and rehabilitation of housing affordable to extremely low, very low, low and moderate income households that live or work in the City. The City currently administers five distinct Sub-Funds for affordable housing that together comprises the City’s Affordable Housing Fund. The BMR Emergency Fund has the sole purpose of preservation of the BMR ownership housing stock, whereas the other four fimds have the broader purposes listed above. 1)Commercial Housing Fund 2)Residential Housing Fund 3)Community Development Block Grant (CDBG) Housing Fund 4)Home Investment Partnerships (HOME) Fund 5)Below Market Rate (BMR) Emergency Fund These Administrative Guidelines summarize the City’s goals, policies and priorities for both the overall Fund and the Sub-Funds. These Guidelines cover eligible projects, eligible and ineligible costs, funding criteria and priorities, typical loan terms, application process and administrative procedures. B. Program History~ Summary, and Description 1. Commercial Housing Fund In 1977, the City of Palo Alto began requiting affordable housing mitigation payments on large industrial and commercial projects. Mitigation payments were deposited into a separate account and the funds were used exclusively to assist in the development of new housing units, with most units affordable to very low and low-income households. Originally, this fund was named the Industrial - Commercial Account; later it was renamed the Commercial Housing In-Lieu Fund. It is now to be called the Commercial Housing Fund. In 1984, the City Council adopted Chapter 16.47 of the Palo Alto Municipal Code requiring that all commercial, retail, hotel and industrial projects pay an affordable housing mitigation fee on net new square footage as a condition of project approval. In March 2002, the Council increased the fee rate from $4.21 to $15.00 based on updated nexus study findings; the current fee is much less than the full cost of affordable housing impacts. The fee rate is adjusted annually to reflect inflation. Collection, administration and reporting concerning the commercial housing mitigation fee must comply with the State’s Housing Mitigation Fee Act Sections 66001 et seq. of the California Government Code. The fees collected must be utilized in ways that increase affordable housing for Palo Alto’s workforce. Since the Fund’s inception, seven new construction housing projects have been assisted from the Commercial Housing Fund producing 377 new affordable rental units. All but 20 of the 377 new units assisted are restricted to very low income and low-income occupancy. Palo Alto’s Commercial Housing Funds have been used by developers in combination with other State and federal housing programs in all seven projects, such as the Low Income Housing Tax Credits, project-based Section 8, HUD Section 202 and Section 811, HOME, AHP and the Multi-Family Housing Program (MHP). 2. Residential Housing Fund Since 1974, the City has required developers of market-rate housing to include below market rate (BMR) housing units in housing developments containing more than a minimum number of units. (See Program H-35 the Below Market Rate Program of the City’s adopted 1998-2006 Housing Element). Palo Alto collects housing in-lieu fees from small projects, for fractional units and for residential developments where it is infeasible to provide below market rate units on-site. These fees, along with interest earnings of the Fund and other miscellaneous revenues related to housing, are placed in the Residential Housing Fund. Examples of miscellaneous revenue sources have included proceeds from the sale of surplus public land, payments pursuant to housing development agreements, and repayment of loans made from the Residential Housing Fund. The Residential Housing Fund may be used to provide funding for new housing development or for the conversion of existing housing to affordable housing through acquisition. The Fund may also be used for the rehabilitation and preservation of existing affordable housing. Throughout the history of the Fund, all housing assisted has been rental and most of the traits have been affordable to very low and low-income households. 3. CDBG Housing Fund The City has been an entitlement recipient of federal Community Development Block Grant Funds (CDBG) since the creation of the program in 1974. Policies and priorities for the use of CDBG funds are stated in the HUD Consolidated Plan prepared by the City every five years. Historically, Palo Alto has allocated a large portion (typically 50%) of its annual CDBG grant for housing development activities. Any use of CDBG funds for housing activities must comply with the federal CDBG regulations (see CFR Section 570.200) as the regulations apply to Palo Alto’s grant. CDBG funds have been provided by the City to non-profit organizations for housing activities such as land acquisition for housing construction, housing pre-development costs, acquisition of existing rental apamnent buildings, rehabilitation of rental units, construction or rehabilitation of shelters and transitional housing facilities for homeless persons, preservation of HUD-assisted rental housing, and acquisition and rehabilitation of group housing for persons with disabilities. S flPLANqPLADIVkAdvance Planning~HousingkHsg Fund Guidelines 102 ! 03..doc 2 4. Home Investment Partnerships (HOME) Program and Program Income Fund The City does not receive federal HOME funds on an entitlement basis from HUD. However, the City is eligible to apply for HOME funds from the California Department of Housing and Community Development (State HCD) annually on a competitive basis. Certain nonprofit organizations known as Community Housing Development Organizations (CHDOs) may also apply for funding from State HCD for housing projects located within Palo Alto. The City received one HOME grant from 1992 HOME funding for the Barker Hotel project. Proceeds from HOME loan repayments must be deposited into a HOME Program Income Fund and used in accordance with the HOME program regulations. 5. Other Funds: Redevelopment Housing Set-Aside Fund: Palo Alto has established a redevelopment agency but has not adopted a project area. There are no tax increment funds available for housing from redevelopment projects. BMR Emergency Fund: On September 9, 2002, the City Council adopted Ordinance 4761 together with the "Assessment Loan Program: Criteria, Need, Priorities, Definitions and Loan Terms" to establish the "Below Market Rate Program (BMR) Emergency Fund". The Fund was created to preserve and maintain the City’s stock of BMR ownership units and to assist owners with low incomes and/or very limited assets pay for large mandatory assessments for capital repairs and improvements. An appropriation transfer of $150,000 from the Residential Housing In-Lieu Fund provided the initial funding. C. Eligible Housing Types~ Projects and Activities 1. Housing Types Palo Alto’s Affordable Housing Fund revenues will primarily be used to assist the following types of affordable housing: ¯Rental housing, typically apartments (new and existing) ¯Rental housing with supportive services for elderly and special needs populations ¯Single room occupancy (SRO) rental units ¯Transitional rental housing ¯Group homes serving special needs populations ¯Shared housing, co-housing, mobile home parks and other special or innovative housing products ¯Below Market Rate ownership housing with resale deed restrictions Some affordable housing activities such as down-payment assistance for home purchases and rehabilitation loans to low-income single-family homeowners are eligible, but either have never been offered, or in the case of rehabilitation loans, were discontinued. S APLANLPLADIV~Advance Plannin gkHousinghLIsg Fund Guidelines 102103..doc 3 2. Eligible Projects and Activities for Each Fund Commercial Housing Fund: In accordance with City policy in effect since its inception, the Commercial Housing Fund is restricted to funding activities that increase Palo Alto’s affordable housing stock through: ¯The construction of new housing units, ¯The addition of new units to existing buildings, or ¯The conversion of non-residential space to housing units. Reasonable related administrative costs incurred by the City may also be paid from the Fund; examples of appropriate administrative costs include: ¯Direct staff costs for the collection of housing mitigation fees and the administration of the fund, ¯The cost of periodic consultant studies required to determine or update the fees charged, and ¯Direct costs for the City to implement the affordable housing new construction program. Residential Housing Fund: All housing types are eligible for assistance utilizing Residential Fund monies. This Fund may be used for new housing projects, for acquisition of existing housing and for rehabilitation of existing housing serving any household type. Because most of the monies deposited to the Fund are from in-lieu fees received pursuant to the City’s BMR housing program requirements, a reasonable portion of the Fund’s average annual revenue may be used for administrative costs of operating the BMR program. Historically, the City has used Residential Housing Funds for the costs of an annual contract with an outside organization for the administration of certain aspects of the BMR program. CDBG Housing Fund: Uses of CDBG funds for housing must comply with -the federal regulations, as stated previously. Broad funding priorities are established every five years as part of the City Council’s adoption of the Consolidated Plan. The current plan covers the period from July 1, 2000 to June 30, 2005. Council also approves an Annual Action Plan with specific funding priorities and awards, usually in May. The annual CDBG fimding cycle begins in the fall for funding for the fiscal year beginning the following July. HOME Program Funds: Housing assisted with HOME fimds must comply with the federal regulations for the HOME program. Given the State’s once per year funding cycle, the focus of Palo Alto’s affordable housing programs and the local housing market, the City intends to seek HOME fimds only for major rental housing projects. HOME program income will also be used only for rental housing activities. BMR Emergency Fund: This Fund may be used for activities related to the preservation of the City’s BMR ownership housing stock. In September 2002, Council authorized: 1)An assessment loan program to provide deferred payment, low interest loans to assist BMR owners facing severe financial hardship in paying major capital S:kPLAN1PLADIVkAdvance PlanningkHousingWlsg Fund Guidelines 102103..doc 4 2) 3) 4) assessments on their condominium homes. Regular monthly homeowner’s dues do not qualify for these loans. The Director of Planning and Community Environment establishes specific eligibility criteria and procedures within the general guidelines set by Council. Protection and preservation of units within the program from loss due to foreclosure, typically by legal action and / or direct purchase by the City; Repair, holding, and resale costs of BMR units acquired by the City; and Short-term loans to correct deferred maintenance or rehabilitate older BMR units at resale Overall City Affordable Housing Loan Program Administrative Costs: From the inception of the City’s affordable housing program in the late 1970’s through 2003, the City has utilized the General Fund budget to cover staff administrative costs and third party direct costs, such as outside legal costs in administering and monitoring the loan program. The portion of the City’s CDBG grant that may be used for staff costs is very limited and has historically been only sufficient to cover the cost of the CDBG program management staff. The General Fund has covered the cost of affordable housing activities, including staff work in the Planning Division, the City Attorney’s Office and the Administrative Services Department. 3. Eligible Uses of Funds Commercial and Residential Housing Funds: All reasonable and necessary costs to the development of eligible affordable housing types may be funded from these two Funds. Examples of eligible costs are: feasibility studies, site evaluation, due diligence and environmental studies; all pre-development "soft" costs, including design, engineering, legal, costs necessary to apply for and close the project’s permanent and construction financing and subsidies, demolition and clearance, land acquisition, acquisition of air rights or by long-term lease, acquisition of buildings, hard construction costs, rehabilitation, on and off-site improvements, developer fees, impact fees, permit fees, marketing, initial funding of replacement and operating reserves, buy down of interest rates on permanent and construction financing and furnishing of on-site facilities that will primarily serve project residents, such as community rooms, playgrounds and child care centers. City funding may be used at any stage of project development from site search to long-term permanent loans. CDBG Housing Fund: The most commonly funded affordable housing activities in Palo Alto that are eligible under the federal regulations, are compatible with City housing priorities and the realities of the local housing market include: ¯Acquisition of land for housing construction ¯Acquisition of existing housing or buildings for conversion to housing ¯Rehabilitation and major repairs of existing affordable rental housing projects ¯Feasibility studies, environmental and pre-development activities related to the acquisition of land or buildings S APLANLPLADIVkAdvance PlanningkHous ingkHsg Fund Guidelines 102103..doc 5 ¯Relocation studies and benefits ¯Pre-development costs for new housing (to the extent allowed under HUD rules) ¯Clearance & disposition of land or buildings ¯Construction of off-site utilities necessary for housing ¯Installation of accessibility improvements ¯Construction, acquisition and rehabilitation for transitional housing ¯Acquisition and / or rehabilitation of group homes for special needs populations 4. Specific Limitations, Restrictions and Ineligible Uses by Fund Commercial Fund: By Council policy, all costs must be directly related to the development of new housing units. In addition, because the Fund’s revenues are linked (as required by State law) to the affordable housing needs of Palo Alto’s work force, fimded projects should provide housing for households likely to be participating in the work force. Housing with occupancy restrictions for individuals with statistically low work force participation (such as the elderly) will only be eligible for these fimds in proportion to the extent that the intended residents typically participate in the work force. Furthermore, housing projects assisted with this Fund must be located within the City limits of the City of Palo Alto. Residential Housing Fund: There are no special limitations or restrictions on the use of this Fund. CDBG Housing Fund: Federal regulations prohibit the use of CDBG funds (except in unusual situations) for the actual construction costs of housing. Palo Alto is also very limited, by the way federal regulations are applied, in the amount of CDBG funds that can be provided for predevelopment costs of certain kinds of housing. 5. Eligible Applicants; Project Sponsors; Developers The typical funding applicant and project sponsor is a nonprofit housing development organization, a social service nonprofit, or a public agency (such as a city, county or the Housing Authority of Santa Clara County). Eligible non-governmental applicants are nonprofit corporations and limited partnerships (in which an eligible applicant, or an affiliate of an applicant, is a controlling general partner), that have as part of its organizational purposes the development of housing or operation of housing programs for households of extremely low-, low-, very low- or moderate-income. The City will consider applications for funding from for- profit housing developers for the Commercial and Residential Funds on a case-by-case basis, providing provisions for long-term affordability can be met. All entities involved in a housing project, particularly the applicant, sponsor, consultants, developer, general parmer, management entity, services provider and their principals or key staff, must have appropriate experience in affordable housing relative to the complexity, scale and type of project for which funding is sought. The City may require that applicants with insufficient S:kPi3tNkPLADIVkAdvance Harming~lousingLHsg Fund Guidelines 102103..doc 6 housing development or management experience secure a joint venture partner and / or agree to ownership and / or management of the housing units by an experienced affordable housing organization approved by the City. The CDBG and HOME regulations should also be carefully reviewed by applicants for specific rules regarding the types of organizations that are eligible funding recipients. D. Funding Priorities, Housing and Household Types~ and Selection Criteria 1.Priorities for Mfordable Housing Funding (Commercial, Residential, CDBG and HOME Funds) Primary Priorities: ¯ New construction of permanent rental housing, especially for households with children Preservation of existing, federally subsidized rental housing from conversion to market-rate ¯New construction of permanent rental housing for households with special needs or disabilities ¯New or existing permanent rental housing for homeless households or those at- risk of homelessness linked with supportive services ¯Transitional rental housing linked with supportive services Secondary Priorities: ¯ Acquisition and / or rehabilitation of existing rental housing, including group and shared residential facilities, especially for households with children and special needs households ¯New construction of permanent rental housing primarily serving Palo Alto’s low- income work force, including Single Room Occupancy (SRO) units ¯New construction of permanent rental housing primarily serving extremely low- income elderly ¯Acquisition and rehabilitation of existing market rate rental housing for conversion to affordable housing for extremely low-income and very low-income households Other Priorities To Meet the City’s Housing Production Goals as Stated in the Adopted Housing Element: Palo Alto also has important unmet housing production needs for low and moderate-income households as described in the City’s Housing Element of the Comprehensive Plan. The BMR requirements are the City’s principal method of addressing these housing needs. Normally, developers provide the required BMR units within the market-rate projects or off- site without funding assistance from the City. The City would consider providing funding if S:LPLANLPLADIVkAdvance PlarmingkHousingkHsg Fund Guidelinesl02103..doc 7 there was a significant or unique oppommity to increase low and moderate income housing production. New construction of very low and low-income rental housing units within, or in connection with, market-rate housing projects under the City’s BMR program requirements. New construction of moderate-income homeownership units, including units within market-rate projects under the BMR program. Two groups of households will be served: those with incomes between 80 and 100% of median income and households with incomes between 100 and 120% of median income. 2. Rent and Occupancy Standards: Income Targeting The primary objective of Palo Alto’s affordable housing program is to increase the City’s housing stock for those households with the most serious housing needs. To meet this objective, the City prioritizes and focuses the program and the available funding on serving extremely low, very-low and low-income households. Most rental housing projects funded with City Affordable Housing Funds also are funded by at least one, and often several, State, local or federal housing programs with rent and occupancy requirements. The City sets appropriate rent and occupancy requirements for each project giving consideration to factors such as: *Financial feasibility ¯Coordination with other funding rules, such as tax credits, HUD, State ¯Availability of rental subsidies such as Section 8 ¯Needs and income level of project’s target population (for example, elderly, homeless, working families, etc.) A long-term regulatory agreement is usually required and must be recorded against the property as a condition of most City housing loans. This regulatory agreement will include the City’s affordability and occupancy requirements. Smaller rehabilitation loans (generally under $100,000) will usually be provided with just a loan agreement containing use and occupancy requirements and a note and deed of trust. If appropriate and allowed by other funding entities, local occupancy preferences for households living or employed within the City of Palo Alto will be required. The City may also require that existing rental assistance contracts be renewed and that the owner seek and give preferences to households receiving Section 8 assistance. 3. Evaluation Criteria for Project Selection and Underwriting Standards The following factors will be considered in evaluating applications for City housing funds. All factors will be assessed in relationship to the type of project being proposed and the difficulty and risk involved: S APLANkPLADIV~dvance PlarmingkHousingLHsg Fund Guidelines 102103..doc 8 ¯Affordable Housing Fund Guidelines ¯Housing needs and priorities stated in the most recent Consolidated Plan ¯Relevant Housing Element and Comprehensive Plan goals, policies and programs ¯Provision of a significant number of units (at least 30% of total units) affordable to extremely low-income households ¯For family housing projects, whether there is a significant number of three or more bedroom units (at least 30% of total units) ¯For special needs housing and housing for the homeless, the coordinated provision of supportive services available to the residents ¯Lack of relocation of residential tenants and owners, especially low income tenants ¯Experience & staff capability of the development team and management entity ¯Financial strength and fiscal record of sponsor & developer ¯Project readiness & ability to meet a reasonable schedule ¯For major projects, the likelihood of securing other State, federal or local housing subsidies to leverage City housing funds ¯Matching of City housing funds including sponsor and developer commitments of equity funding, in-kind staff support, partial waiver or deferral of developer fees and other matching funds or resources committed ¯Reasonable cost per unit for type of housing proposed ¯Reasonable percentage of City funding to total development costs ¯Management plan and experience of management entity ¯Rehabilitation projects require specific information regarding the scope of work, specifications, inspections and written cost estimates. In addition to the above factors, funding applications involving new housing construction, demolition or conversion of use, especially where a site will require a rezoning, will be subject to City review for site-related factors such as the following. The City may require that a formal feasibility study be completed and reviewed by Council prior to application for, or approval of, site acquisition funding or development subsidies. ¯Compatibility of the proposed use, density, height and other features with the surrounding neighborhood ¯Suitability of the site for the proposed project ¯Environmental review issues including traffic, access, parking and historic preservation ¯Displacement and relocation issues ¯Soil or groundwater contamination, including costs of remediation ¯Provisions for site control, land acquisition costs and terms E. Loan Provisions and Terms Grants. Unsecured Loans: The City does not provide grants of housing funds, except for emergencies or very unusual circumstances and then only for small amounts, generally under SAPLANkPLADIVkAdvance Planning~lousing~-Isg Fund Guidelinesl02103..doc 9 $50,000. Funding for preliminary feasibility studies may be provided subject to an unsecured loan, if the property, or site, is not owned by the applicant. The applicant may request that the City forgive the loan, if the proposed project does not proceed. Council will make such decisions on an individual basis. If the project does proceed, then the feasibility loan will be combined with any further funding provided by the City into a permanent loan against the project. Expenditure Limits: There are no per unit or per project expenditure limits. Leverage and Matching Funds: Project applicants should seek to maximize the leverage of the City funds and secure matching funds, to the extent feasible. Security: Normally, all loans must be secured against the real property with a promissory note and recorded deed of trust. For projects with direct HUD funding and operating budget controls (such as HUD 202 and 811 projects), the City will accept a HUD approved residual receipts note form and may waive the deed of trust security. Subordination of City Loan Documents and Regulatory Agreements: The City will agree to subordinate its loan to the loans of construction and permanent lenders, when required for the developer to secure the necessary funding to complete the project. Subordination of the City’s regulatory agreement to the loan documents and regulatory agreements of other lenders may also be approved, if absolutely necessary for the project to proceed to completion. All subordination agreements will be reviewed by the City Attorney’s Office on a case-by-case basis. Typically, the City Council delegates the authority to approve subordination agreements to the City Manager, with the recommendation of the City Attorney. Applicants must provide the City with information as soon as possible about the subordination policies and requirements of the other lenders, fimders and investors in the project. Loan Terms: Typical minimum City loan terms are: ¯3% simple interest ¯Deferred payment of interest and principal until senior debts, such as commercial lender mortgages, are repaid, or ¯Annual payments from residual receipts (surplus cash flow) ¯Principal and interest is due at sale, transfer, refinancing or early termination of use restrictions or at the end of the affordability term ¯Projects with substantial numbers of Section 8 assisted units will usually require the funding of an affordability reserve fund Loan interest rates, repayment provisions, and subordination provisions are negotiated on each project. Lending terms are tailored to the project’s cash flow and the specific requirements and legal regulations of other financing sources.~ Higher interest rates, loan amortization or other loan terms may be a condition of loan approval, depending on the specifics of the project. The Council must approve loan and regulatory agreements and other documents or specifically delegate such approval to the City Manager. S:kPLANkPLADIVkAdvance PlanningkHousingkHsg Fund Guidelinesl02103..doc 10 Term of Affordability and Regulatory_ Agreements: Palo Alto’s policy is that housing provided with City Affordable Housing Fund subsidies remain affordable for the longest possible period of time with the ultimate goal of permanent affordability. The use and occupancy restrictions for affordability must be included in legal agreemems between the applicant / developer, property owner and the City and in most situations will be recorded against the property. For City housing funds, regulatory agreements that survive repaymem of the loan are required for funding exceeding $50,000. Where CDBG funds are used for housing, the federal regulations regarding the disposition or change in use of real property funded with federal assistance may apply when there is an early termination of the affordable housing use. The minimum term of the affordability controls are based on the source and amount of City funding, as follows: Affordability Terms for City Housing Funding Source of Loan Funds Term of Affordability and Use Other Provisions Restrictions - Commercial & Residential Housing Fund Loans; - HOME & CDBG funding (Loans of over $150,000) - CDBG Housing Fund (Loans over $50,000) - CDBG Housing Fund (Loans under $50,000) 55 years 30 years 5 years or more -With provisions for extended affordability, where possible - Regulatory agreement required - Regulatory Agreement required - Subject to CDBG regulations regarding the disposition or change in use of real property acquired with federal funds E. Administrative Procedures and Responsibilities The Department of Planning and Community Environment is responsible for administering the City’s affordable housing programs and the Affordable Housing Fund. The Administrative Services Department provides financial management, accounting and reporting services for the Fund. The Affordable Housing Fund is regularly audited by the City’s outside auditor and may also be examined by the City Auditor’s Office. Exceptions and Revisions to the Affordable Housing Fund Guidelines: The City Manager may approve revisions to these Guidelines, or exceptions for a particular project, in order to comply with the regulations or requirements of other housing funding sources or with the regulations for the CDBG or HOME program, as necessary. Significant permanent revisions to the Guidelines shall be presented to the City Council for review and approval. SAPLANLPLADIVLa.dvance Plarming~-lousingkHsg Fund Guidelinesl02103..doc l 1 F. Application Process and Contact Information Applications for Affordable Housing Funds shall be submitted to the Department of Planning and Community Environment for review and recommendation by the City Manager to the City Council. Funding applications may be submitted at any time throughout the year. However, when possible applications should be submitted by the deadline for the annual CDBG funding cycle for funding awards in the next fiscal year. Staff will review an application and seek additional informatiordclarification, if required, within 60 days. Staff will then schedule the application for internal management review. Housing funding applications are normally taken to the CDBG Citizens Advisory Committee (CAC) for review and comment, including applications for funding from the Commercial and Residential Housing Funds. If a funding review and decision is needed more quickly than is possible under the CDBG cycle, then the application can be taken directly to Council, or to Council after CAC review. Applicants should allow at least 90-days for City review and action on an application. The application forms are those used for CDBG funding proposals together with the separate housing project proposal attachment. For more information, contact: City of Palo Alto Planning Division, City Hall 250 Hamilton Avenue Palo Alto, CA 94301 (650) 321-2441 (Department’s main information number) Web Site: http://www.cityofpaloalto.orp_Jcdbg/application.html S APLANLP LADIV’~Advance PlarmingLLIousingWlsg Fund Guidelines 102103..doc 12