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HomeMy WebLinkAbout2001-06-11 City Council (8)City of Palo Alto City Manager’s Report TO: FROM: DATE: HONORABLE CITY COUNCIL CITY MANAGER JUNE 11, 2001 6DEPARTMENT: PLANNING AND COMMUNITY ENVIRONMENT ¯ CMR:279:01 SUBJECT:RECOMMENDATION OF THE EVALUATION COMMITTEE TO SELECT PALO ALTO HOUSING CORPORATION AS THE DEVELOPER OF THE SOUTH OF FOREST AFFORDABLE HOUSING PROJECT AND REQUEST FOR AUTHORIZATION FOR THE CITY MANAGER TO NEGOTIATE A PREDEVELOPMENT AGREEMENT REPORT IN BRIEF In July 2000, the City obtained an option to acquire a 1.23-acre site in the South of Forest Area (SOFA) for development of affordable rental housing in satisfaction of the Palo Alto Medical Foundation’s obligations for below market housing under the SOFA Coordinated Area Plan (SOFA CAP). The City issued a Request for Proposal for a housing development team in February. Three proposals were received and two developers, Palo Alto Housing Corporation (PAHC) and the Santa Clara County Housing Authority, were invited for interviews. An Evaluation Committee composed of representatives from City staff, housing advocates, housing ftmding professionals, the SOFA neighborhood and the Planning and Transportation Commission conducted the interviews and the review and ranking. The Evaluation Committee agreed that both developers had assembled an experienced and talented team, presented viable financing strategies and were capable of developing the project. However, the Evaluation Committee unanimously recommended PAHC for this particular housing project. PAHC was ranked higher because of the strength of its design team; its emphasis on working with the neighborhood during the design phase; and its priority for units that will meet the housing needs of very low-income families with children. A predevelopment agreement will be negotiated with PAHC; this will enable PAHC to proceed quickly with the architectural design and the financing applications with the objective of beginning construction by mid-2002 and occupancy by the end of 2003. CMR:279:01 Page 1 of 6 RECOMMENDATION. Staff recommends that the City Council: Approve the recommendation of the Evaluation Committee selecting the Palo Alto Housing Corporation (PAHC) as the developer for the South of Forest Avenue (SOFA) affordable housing project; and 2.Authorize the City Manager to negotiate a predevelopment agreement with PAHC for Council review and action. " BACKGROUND The SOFA Coordinated Area Plan (SOFA CAP), adopted by Council in March 2000, designated an approximately 1.23-acre site, located on the north side of Channing Avenue between Bryant and Ramona Streets, for affordable housing under the Plan’s Attached Multifamily (AMF) development guidelines. The SOFA CAP provided (per Program H-l) that the dedication of a portion of this site would be accepted by the City in full satisfaction of Palo Alto Medical Foundation’s (PAMF)obligations for below market rate housing under Program H-20 of the Comprehensive Plan. On April 10, 2000, the City Council approved a development agreement between the City of Palo Alto and PAMF that provided the City with a three-year option to acquire the entire 1 ~23-acre site, 48.8 percent or about 0.60 acres by dedication, and 51.2 percent or about 0.63 acre~ by purchase. On July 19, 2000, escrow closed on the real property transactions authorized by the SOFA CAP, including the City’s acquisition of the option on the affordable housing site. To date, the City has expended about $3.5 million in Commercial Housing In-lieu funds on this housing project, including about $3 million for the full purchase price of the 0.63-acre portion of the property not being acquired through dedication and about $500,000 for site clearance Costs. Additional funds will need to be expended during the second year of the option period for property taxes and other holding costs. DISCUSSION Request for Proposal Process: On February 15, 2001, the City issued a request for proposals (RFP) seeking an experienced development team capable of designing, financing, building and operating an affordable rental housing project of at least 45 units on the SOFA housing site. The RFP was sent to over 20 housing developers, of which 16 were non- profits specializing in subsidized rental housing. Five developers and several architects attended a pre-proposal conference and site.tour held on March 6. Three developers submitted proposals to the City by the March 20 due date. Selection Process: An Evaluation Committee was formed to review and rank the proposals, conduct interviews, and recommend a developer for approval by Council. The Evaluation Committee was composed of six members representing staff of the Planning and Administrative Services Departments, housing advocates, housing funding providers, the SOFA neighborhood and the Planning and Transportation Commission. The names and affiliations of the Evaluation Committee members are listed in Attachment A. CMR:279:01 Page 2 of 6 The Evaluation Committee met initially to review the three proposals. One proposal, from the Olson Company, was judged by both staff and the Committee to be non-responsive to the provisions of the RFP and was removed from further consideration.. The Olson Company’s proposal was. for a 60-unit, for-sale condominium project With 30 units priced at levels affordable to households at 80 percent of the median income and the remaining 30 units affordable to households at 120 percent of the median income. Eighty. percent of the units were to be one-bedroom units. Olson Company requested a City subsidy of $850,000, in addition to the contribution of the site. The Olson Company’s proposal was rejected because it did not meet the development criteria identified in the RFP. Specifically, the proposal was not for a rental housing project, the affordability level provided in relation to the City subsidy was low and the project design would not serve large family households. Palo Alto Housing Corporation (PAHC) and the Santa Clara County Housing Authority, the other two proposers, were invited for interviews before the Evaluation Committee. Interviews were held on May 7, with each development team bringing its project manager and architect. The teams were asked to present a schematic concept of their design for the project and then to respond to a series of questions from the Evaluation Committee and staff. Because each developer proposed a different financing plan With very different levels of affordability in the rents, it was not possible for the Evaluation Committee to compare or fully evaluate the project financing without additional information. After conducting the interviews, the Evaluation Committee postponed a final decision pending.responses from both developers on a series of written questions regarding each one’s financing plan. The Evaluation Committee met a third time on May 16 to discuss the developers’ responses to the financing questions and complete the fmal ranking and recommendation. The Evaluation Committee was unanimous in ranking PAHC above the Housing Authority, using criteria and ranking factors based on the evaluation standards identified in the RFP. The evaluation criteria and scoring system used by the Evaluation Committee are included as Attachment B to this report. The Evaluation Committee was particularly impressed by the approach and experience of PAHC’s architect, Michael Pyatok, in working with diverse, involved neighborhoods. It felt that his schematic plan demonstrated an understanding of the SOFA plan’s design guidelines and sensitivity to the character of the area. The Evaluation Committee also agreed that PAHC was the best choice to develop this project due to its: ¯Willingness to work with the neighborhood in the schematic design phase; ¯Strategy to maximize the development potential of the site; ¯Priority for unit design that will best meet the needs of families with children; ¯In-depth understanding of the planning goals of the SOFA CAP; and ¯Emphasis on pursuing financing subsidies that result in lower overall rents. The two developers approached the project’s financing using widely differing assumptions regarding the desired level of affordabiiity, the project’s density, the feasibility of incorporating the historic house into the project and the likelihood of obtaining various CMR:279:01 Page 3 of 6 housing subsidies. Due to these differences, it was very difficult to compare the two financing strategies. PAHC proposed a project with lower rents, more units, agreed to incorporate the historic house at an estimated additional cost of $500,000 and judged that the project could be successful in the 2002 tax credit competition. In terms of development costs (with the cost of the historic house removed to make the assumptions comparable), PAHC’s development costs were $6,000 per unit more than those proposed by the Housing Authority. PAHC’s conceptual, site plan showed 53 units with a large proportion of two, three and four bedroom units. PAHC asserted that its project should score well in the competitive tax credit program resulting in rents on all units affordable to very low-income families with incomes below 50 percent of the median. Without including the cost of renovating the historic house, PAHC estimated that about $2.5 million in subsidy funds (about $47,000 per unit) would be necessary in addition to the land contribution and the equity from the tax credits. PAHC proposed that about $1.2 million of these funds be from local housing funds. The Housing,Authority proposed 44 units with a smaller proportion of large family units and recommended that the tax credit competition was too problematic and that tax-exempt bond financing should be pursued instead. It initially proposed that half of the units should be rented at moderate market rents affordable to households at 100 percent of the median income, with the remaining 22 units rented to low and very low-income households with 11 units, assisted by the Section 8 program. However, despite the much lower level of affordability and slightly lower per-unit development costs, the Housing Authority still showed a need for local subsidies of $1.1 to $1.2 million. In the follow-up questions, the Housing Authority was asked to prepare an analysis of a 100 percent affordable project under the competitive tax credit program so that a direct comparison could be made with PAHC’s preferred financing proposal. It submitted a financing plan with a total funding gap very similar to PAHC’s of about $2.4 million with about $1:65 million from. local housing funds. However, since the total number of units is lower (44 versus 53), the funding gap per unit is higher, $54,000 versus PAHC’s $47,000. The differences in the financing approaches illustrate that there is no one way to plan and finance an affordable rental housing project. There are risks and benefits associated with each. of the proposed rental housing financing strategies. Both PAHC and the Housing Authority have excellent track records with various housing finance programs. Each developer assembled an experienced and talented team and either organization could finance and develop the project. The Evaluation Committee concluded that PAHC’s objectives of more family units and the deeper rental affordability were most closely aligned with the City’s housing programs. RESOURCE IMPACT The financial analysis presented in the RFP responses must be considered very preliminary and the estimated amounts of City housing subsidies should be used only as a guideline for future funding allocations. There are many unknowns that will affect the final project budget including the ultimate number of units, details in the architectural design, disposition CMR:279:01 Page 4 of 6 of the historic house, changes in interest rates and construction costs and the status of the tax credit program next year. For budgeting purposes, the City should expect that the project would require roughly between $1 and $2.5 million in local subsidy in addition to the land contribution. Staff is hopeful that $250,000 to $500,000 of the local subsidy can be provided bythe new Housing Trust of Santa Clara County. Staff will return to Council later this year with budget appropriation recommendations. Staff anticipates that the source of the City’s funding will be the Housing Reserve Fund; however, Community Development Block Grant (CDBG) funds may also be utilized. POLICY .IMPLICATIONS The recommendation in this staff report is consistent with Palo Alto Comprehensive Plan as amended by the SOFA-CAP on March 27, 2000. Selection of the project developer is another milestone towards the eventual development of the site with housing that will help meet the City’s Housing Element production goals of 265 very low-income and 116 low- income units. TIMELINE Following selection of PAHC as the developer, staff will negotiate a predevelopment agreement for Council review and action prior to the Council’s summer break. The predevelopment agreement will commit the City to transferring its option on the site to PAHC contingent upon the completion by PAHC of specific milestones in the development process such as development and approval of the architectural design and securing commitments of bank financing and other housing subsidies. Staff expects to return to Council towards the end of this year or early in 2002 with a Budget Amendment Ordinance to provide funding for the City’s.subsidy of the project’s development costs, At that time, staff will also seek Council approval of the permanent legal documents to regulate the use and occupancy of the housing and secure the City’s contribution of land and financial subsidies. Staff will work with PAHC to determine the optimum timing for the transfer of the site option. PAHC and its development team need to move ahead expeditiously with design studies and the ARB/HRB review process in order to obtain bank financing commitments by the end of this year. PAHC’s objective is to submit an application for the housing tax credit program in the first round of 2002. If PAHC is successful in the 2002 tax credit competition, then construction could start in the summer of 2002, with occupancy by the end of 2003. However, because success in the tax credit competition cannot be predicted, an alternative financing strategy will be prepared. At the worst case, a change in the project’s financing structure could result in a year’s delay in the start of construction. ENVIRONMENTAL REVIEW The SOFA CAP Final Environmental Impact Report, certified as adequate by Council on March 27, 2000, covers the acquisition and development of the affordable housing site. CMR:279:01 Page 5 of 6 ATTACHMENTS A.List of Evaluation Committee Members B.Evaluation Criteria SOFA Affordable Housing Project PREPARED BY: Catherine Siegel, Housing Coor~inatigr DEPARTMENT HEAD REVIEW: G. L~’~ffARD GA~F~-- Director of Planning and Community Environment CITY MANAGER APPROVAL: "HARRISON Assistant to the City Manager CC:Members of the Evaluation Committee Palo Alto Housing Corporation Santa Clara County Housing Authority CMR:279:01 Page 6 of 6 ATTACHMENT A LIST OF EVALUATION COMMITTEE MEMBERS FOR SOFA AFFORDABLE HOUSING REQUEST FOR PROPOSALS City Staff: Julie Caporgno, Advance Planning Manager, Planning and Community Environment Bill Fellman, Real Property Manager, Administrative Services Department. Planning and Transportation Commission: Annette Bialson, Chair SOFA Neighborhood and Working Group: Sarah Cane Housing Advocate: Jane Glauz, Peninsula Interfaith Action Housing Finance Professional: Chris Block, Housing Trust of Santa Clara County . Attachment B