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HomeMy WebLinkAboutStaff Report 2409-3517CITY OF PALO ALTO CITY COUNCIL Special Meeting Tuesday, January 21, 2025 Council Chambers & Hybrid 5:30 PM     Agenda Item     4.Authorize the City Manager, or designee, to award a Conditional Funding Commitment of $5,000,000 in Housing In-Lieu Residential Funds, Commercial – Residential Impact Fee Funds, Residential – Housing Impact Fee Funds, and Local Housing Trust Fund Funds to, and enter into funding agreements with, Charities Housing for the Development of a 100% Affordable Housing Project at 3001 El Camino Real; CEQA status – previously studied in a Mitigated Negative Declaration. City Council Staff Report From: City Manager Report Type: CONSENT CALENDAR Lead Department: Planning and Development Services Meeting Date: January 21, 2025 Report #:2409-3517 TITLE Authorize the City Manager, or designee, to award a Conditional Funding Commitment of $5,000,000 in Housing In-Lieu Residential Funds, Commercial – Residential Impact Fee Funds, Residential – Housing Impact Fee Funds, and Local Housing Trust Fund Funds to, and enter into funding agreements with, Charities Housing for the Development of a 100% Affordable Housing Project at 3001 El Camino Real; CEQA status – previously studied in a Mitigated Negative Declaration. RECOMMENDATION The Housing Ad Hoc Committee and staff recommend the City Council authorize the City Manager or their designee to award a conditional funding commitment of $5,000,000 in Housing In-Lieu Funds and Local Housing Trust Funds for the development of a 100% affordable housing project at 3001 El Camino Real. Additionally, authorize the City Manager or their designee to prepare and execute agreements and other documents necessary to finalize such funding. EXECUTIVE SUMMARY Aligned with Housing Element Programs 2.1A, 2.1C, and 6.1C and the 2024 Council Priorities, the City issued a Notice of Funding Availability (NOFA) in September 2024 to allocate $5 million from the City’s Housing Funds. Two timely applications were submitted for consideration: •Charities Housing: Requested $5 million to construct 130 new affordable rental units at 3001 El Camino Real, with 45% of units designated for households experiencing homelessness. •Eden Housing: Requested $1.89 million for the rehabilitation of 50 existing affordable units at 801 Alma Street. Applications were evaluated based on NOFA scoring criteria,1 Housing Element goals,2 and the Affordable Housing Fund Guidelines.3 Charities Housing’s proposal ranked highest due to its alignment with City priorities, competitive per-unit cost of $38,500, and readiness to leverage additional funding sources. In December 2024, the Housing Ad-Hoc Council Committee recommended support of the proposal from Charities Housing and staff recommends allocating the full $5 million to Charities Housing for the 3001 El Camino Real project. This funding will enable the creation of new affordable rental units, help meet the City’s Regional Housing Needs Allocation (RHNA) goals, and ensure timely use of the Local Housing Trust Fund (LHTF) award. An analysis of the two applications supporting staff’s recommendation and alternative funding scenarios are provided for Council consideration. BACKGROUND On September 30, 2024, the City issued a NOFA for $5 million to support the construction, rehabilitation, acquisition, and/or predevelopment of affordable housing projects. This funding was drawn from the City’s Commercial Housing Fund, Residential In-Lieu Fee Housing Fund, Residential Impact Fee Housing Fund, and Local Housing Trust Fund (LHTF). While a total of $8.1 million was available across these funds, the Housing Ad Hoc Committee recommended reserving approximately $2.5 million to address emergent projects in the future. The City Council may consider allocating additional funding to projects at a later date. The City collects housing impact fees from residential and non-residential developers and in- lieu fees from residential developers who meet their inclusionary requirements by paying fees instead of providing affordable units on-site. These funds are deposited into dedicated housing accounts that support the preservation, rehabilitation, and production of affordable housing. The City Council’s adopted Affordable Housing Fund Guidelines establish policies and priorities for these funds, while State law imposes additional requirements. Housing impact fees must mitigate the effects of market-rate and commercial development on affordable housing needs, while in-lieu fees must be used in a manner consistent with the inclusionary programs under which they were collected. As of September 2024, approximately $4,996,880 was available across the Residential In-Lieu Fee Housing Fund, Residential Impact Fee Housing Fund, and Commercial Housing Fund for allocation to qualified affordable housing projects. In addition, $3.8 million was held in the LHTF, which consists of $1.9 million in State grant funds and $1.9 million in matching City funds. These LHTF dollars are specifically restricted to the construction of 100% affordable multi- family housing and are intended to be the first dollars expended. 1 Attachment A: NOFA Scoring Sheet 2 https://paloaltohousingelement.com/wp-content/uploads/2024/08/Palo-Alto-Housing-Element.pdf 3 https://www.cityofpaloalto.org/files/assets/public/v/1/planning-amp-development-services/housing- element/0131472-housing-fund-guidelines-august-2015.pdf The release of the NOFA aligns with Housing Element Programs 2.1A and 6.1C as well as the 2024 Council Priority of Housing and Economic Balance. Program 2.1A emphasizes the importance of using the City’s residential and commercial housing funds to provide gap financing for affordable housing projects. Program 6.1C prioritizes the development of housing for special needs populations, including individuals experiencing homelessness, through funding incentives and streamlined processes. The NOFA process reflects these objectives by establishing a competitive and transparent mechanism for allocating resources to projects that address critical housing needs. The NOFA was distributed widely to residential developers and nonprofit housing organizations throughout the Bay Area. By the October 28, 2024 deadline, the City received two applications. Charities Housing submitted a proposal for an entitled 130-unit affordable rental project at 3001 El Camino Real, which includes 45% of the units reserved for households experiencing homelessness. Eden Housing requested funding for the rehabilitation of 50 existing affordable housing units at 801 Alma Street completed in 2013. A third application from Alta Housing was submitted after the deadline and was therefore not eligible for consideration under this NOFA. By preparing and releasing the NOFA, the City fulfills the Council’s milestone of advancing affordable housing opportunities through a structured funding process. This approach ensures alignment with the City’s broader housing goals, including progress toward meeting RHNA targets and reinforcing its commitment to increasing housing affordability and equity. ANALYSIS Once all NOFA applications were received, a Review Panel (“Panel”) was established which consisted of three staff members. The Panel scored each application based on the structured point system outlined in the NOFA and ranked the applications by score. Funding amounts were then recommended based on overall rankings, the amount requested, and the planned timeline of each project. Application Summaries Proposed Project One – 3001 El Camino Real – Charities Housing The 3001 El Camino Real proposal was submitted by Charities Housing and consists of a request for $5 million for development-related expenses. The total development cost for this project is estimated at approximately $126.6 million. The proposed project is a 100% affordable, new construction rental development located in the North Ventura Coordinate Area Plan area. The project will include the construction of a five- story, 130-unit apartment building. At least 45% of the project (58 units) will have a preference for households experiencing or at risk of homelessness, which will be allocated through County- wide homeless prevention programs. The project’s income categories and unit sizes are shown in the table below: Table #1: 3001 El Camino Real Affordability Income Category # of Units Percentage Extremely Low-Income 72 55% Very Low-Income 42 32% Low-Income 14 11% Manager's Unit(s) 2 2% Total 130 Table #2: 3001 El Camino Real Unit Mix Unit Size # of Units Percentage Studio 24 19% One Bedroom 40 31% Two Bedroom 33 25% Three Bedroom 33 25% Total 130 Charities Housing, a nonprofit with over 30 years of experience in Santa Clara County, develops, owns, and manages over 1,600 affordable housing units serving extremely low- and very low- income individuals, families, seniors, and those with special needs. The project received approval of planning entitlements in June 2023. In December 2023, the County of Santa Clara awarded $13 million from the 2016 Measure A Affordable Housing Bond and allocated 42 Section 8 Project-Based Vouchers to the project. A year later, in December 2024, the County increased its funding commitment to $16 million. In response to this additional support, staff inquired whether Charities Housing would reduce their $5 million request through this NOFA. Charities staff clarified that they intend to maintain their full $5 million request to strengthen their position in securing additional competitive funding sources necessary to initiate construction. If approved for funding, the developer intends to apply for the California Housing Finance Agency’s Mixed-Income Program and 4% Tax Credits through the Low-Income Housing Tax Credit (LIHTC) program in Quarter 1 of 2025. A successful award would enable Charities Housing to begin construction at 3001 El Camino Real by December 2025. The City has made no prior funding awards for the 3001 El Camino Real Project and while Charities Housing has noted that City funds beyond the $5 million request would be beneficial to the project, they have not indicated that additional City funds would be requested during a future NOFA. If this request is fully awarded, the $5 million award is equal to approximately $38,500 per unit. Proposed Project Two – 801 Alma Street – Eden Housing The 801 Alma Street Rehabilitation proposal was submitted by Eden Housing and consists of a request for $1,893,230. The requested funds would be for rehabilitation of an existing multi- family community, 801 Alma Street, which was built in 2013. The development consists of 50 units, including a manager’s unit. Among other elements, the rehabilitation efforts would focus on replacing common area and unit flooring, replacing appliances, interior painting, water conservation measures, replacing the existing HVAC systems with new high-efficiency sustainable systems, and replacing the security system. Of the items in the proposed rehabilitation scope, the project’s Physical Needs Assessment categorizes many of the items in the proposed rehabilitation scope as Fair, meaning that they show some signs of wear and use but still performing satisfactorily as-is and are typically near the median of its estimated useful life, which is consistent with a property constructed in 2013. The project income categories and unit sizes are shown in the table below: Table #3: 801 Alma Street Affordability Income Category # of Units Percentage Extremely Low-Income 20 40% Very Low-Income 29 58% Low-Income 0 0% Manager's Unit(s) 1 2% Total 50 Table #4: 801 Alma Street Unit Mix Unit Size # of Units Percentage Studio 0 0% One Bedroom 8 8% Two Bedroom 26 26% Three Bedroom 16 16% Total 50 Eden Housing, with over 56 years of experience, has developed or acquired 12,681 affordable units, manages 163 properties across California, and serves over 22,000 low-income residents. This funding request, if awarded in full, would be for approximately $37,800 per unit. The City previously issued a $7,800,000 loan, using Commercial and Residential Housing In-Lieu Funds, in 2012 to support the development of 801 Alma Street. Therefore, if the loan request for rehabilitation was awarded in full, the City’s total investment in 801 Alma Street to date would be $193,864 per unit. Eden Housing has operated the project since its construction in 2013. The project has complied with affordability requirements and regulatory audits throughout the life of the project. Ranking and Funding Recommendations The two projects received by the deadline were ranked in the following order based on the ranking form in Attachment A (NOFA Scoring Sheet): 1.3001 El Camino Real – Charities Housing •This project was ranked highest — with an average score of 95 points— due to a variety of reasons as outlined on the NOFA Scoring Sheet, including but not limited to, highest volume of units contributing to the City’s RHNA goals, a low per-unit funding request for a new construction project, confirmed site control, project readiness, and the inclusion of extremely low-income and supportive units for certain special needs populations. Further this project’s ranking was enhanced because, as a LHTF-qualifying project, this development will enable the City to efficiently utilize funds awarded through the LHTF program. 2.801 Alma Street – Eden Housing •This project was ranked the second highest — with an average score of 67 points— due to a variety of reasons as outlined on the NOFA Scoring Sheet including, but not limited to, project readiness and the agency’s expertise in managing rehabilitation projects. The proposal was ranked lower due to the low matching fund percentage and the relatively low time sensitivity of the repairs. The City has an existing Regulatory Agreement with Eden Housing for 801 Alma Street that is valid through 2068. In total, awarding these NOFA funds as recommended would support the creation of 130 affordable units for lower-income households and further a pipeline of affordable housing that can help the City meet its RHNA targets for the 2023-2031 planning period. Staff’s funding recommendations are summarized below and included with additional details and funding alternatives as Attachment B. Despite the additional $3 million awarded to Charities by the County in December 2024, staff recommends maintaining the full $5 million funding allocation through this NOFA, recognizing their need to maximize available resources to secure additional competitive funding and advance the project. Table #5: Project Ranking Project Score Final Rank NOFA Request Recommended NOFA Award 3001 El Camino Real - Charities Housing 95 1 $5,000,000 $5,000,000 801 Alma Street - Eden Housing 67 2 $1,893,230 $0 Sheridan Apartments - Alta Housing N/A N/A N/A $0 NOFA Total $6,893,230 $5,000,000 Applicants awarded funding through this NOFA will be given a Conditional Award Letter. For non-predevelopment projects, this award is valid for two years while applicants finalize remaining funding and planning entitlements (as applicable). For pre-development projects, the City will begin negotiating a funding agreement upon issuance of the Conditional Award. If any successful applicant fails to meet the funding timelines outlined in the NOFA, the conditional funding award will be withdrawn, and the applicant must resubmit during a future NOFA round. Timelines may only be extended by a formal request and subsequent approval by the Planning and Development Services Director. POLICY IMPLICATIONS The recommended allocation of funds under the NOFA reflects the Housing Ad Hoc Committee’s recommended policy to establish a reserve for future projects. This strategy reserves approximately $2.5 million of the City’s housing funds to address emergent opportunities or support future pipeline projects. Maintaining this reserve aligns with the City’s goal to balance immediate funding needs with long-term affordable housing production and preservation. Potential future projects that may benefit from this reserve include the development of Lot T, a City-owned parking lot identified as a candidate for affordable housing development, and the affordable housing project on an anticipated City-owned site near Matadero Creek. These projects remain in preliminary stages, but the availability of reserved funds could accelerate their progress once they are ready for financing. Additionally, the City could use reserved funds to address unforeseen needs or leverage matching funds from state or federal sources to maximize financial impact. As an alternative to establishing a significant reserve, the Council could consider directing staff to allocate funds to the Eden Housing rehabilitation project at 801 Alma Street. While the project ranked lower in the NOFA evaluation, it addresses maintenance needs for an existing affordable housing community and ensures long-term habitability for its residents. Should there be a majority of support from Council, it could direct staff to fund both 3001 El Camino Real and 801 Alma Street projects. FISCAL/RESOURCE IMPACT If approved, the 3001 El Camino Real project will receive a total of $5,000,000 from the City’s Housing Funds, including: Table #6: Fund Balances Fund Awarded from Fund Remaining Balance Fund 233 - Residential In-Lieu $500,000 $1,018,218 Fund 234 - Commercial Housing $2,200,000 $2,030,633 Fund 293 - Residential Impact Fee $400,000 $748,030 2022 HCD LHTF Award $1,900,000 $0 STAKEHOLDER ENGAGEMENT The NOFA announcement was distributed broadly to residential developers and non-profit housing agencies throughout the entire Bay Area region. An Informational Session for interested parties was held on October 9, 2024. ENVIRONMENTAL REVIEW The environmental impacts associated with funding the 3001 El Camino Real project are analyzed in a Mitigated Negative Declaration dated April 2023 and adopted concurrently with the project approval. In the event the City Council elects to fund the 801 Alma Street project, such action would be exempt from review pursuant to CEQA Guidelines Section 15301 (Existing Facilities). ATTACHMENTS Attachment A: NOFA Scoring Sheet Attachment B: NOFA Funding Alternatives APPROVED BY: Jonathan Lait, Planning and Development Services Director E. Proposal Scoring Category Maximum Points 1. Organizational Capacity and Relevant Experience Organization is well qualified to complete and operate project, considering years of relevant experience and number of similar projects completed. 15 2. Project Need Project clearly addresses the housing goals and priorities listed in this NOFA, the Affordable Housing Fund Guidelines, and the City’s Housing Element and Comprehensive Plan. 20 3. Project Design and Readiness Project design (physical and operational) is cost-effective, feasible, compatible with the neighborhood, includes green building/sustainability considerations, and effective in meeting the stated goals and objectives. Applicant is ready and able to apply for other financing upon issuance of conditional funding award. 20 4. Budget and Financial Management Financial management points based on clean financial audits and a strong record of financial and regulatory compliance at other projects owned or managed by applicant. Budget scores based on realistic cost estimates and budget for development and operation of project, and projected competitiveness of project costs in tax credit applications, etc. If applicable, Proposals must address how units will be made affordable to households with incomes between 0% to 30% of AMI (i.e., through use of project-based subsidies or other means). 15 5. Percentage of Matching Funds Points are awarded based on the following formula: - 5 points for the minimum required match (25%); - 10 points for a 50% match; and - 15 points for a match of 75% or more. Proposals with match ratios in between these percentages will be awarded 1 point for every 5% of match up to 15 points maximum. Matching percentage is determined by the percent of project cost to be funded by sources other than the requested City funds, according to applicant’s proposed project budget. Matching funds do not include existing City funding awards. 15 6. Affordability Level Points are awarded based on the percentage of restricted units limited to various percentages of Area Median Income (AMI) and adjusted by household size. The proposed affordability restrictions included in the application will be incorporated into a City Affordable Housing Regulatory Agreement or other regulatory agreement prior to disbursement of funds. Points are awarded as follows: Rental Projects Percent of AMI Percent of 50% 30% 100% 8 15 90% 8 15 80% 7 15 15 Category Maximum Points Restricted Units 70% 7 14 60% 6 12 50% 5 10 40% 4 8 30% 3 6 20% 2 4 10% 1 2 Ownership Projects Percent of AMI Percent of Restricted Units 120% 80% 100% 8 15 90% 8 15 80% 7 15 70% 7 14 60% 6 12 50% 5 10 40% 4 8 30% 2 6 20% 1 4 10% 0 2 Total Points Available 100 2024 NOFA Funding Alternative 1 ($5,000,000) ‐ Staff Recommendation Total City Funding per UnitTotal City Funding Alternative 1 (Staff Recommendation)(Including Alternative (Including Alternative Project Units Score Final Rank NOFA Request Recommended NOFA Award Prior City Funding 1 Amount)1 Amount) 3001 El Camino Real ‐ Charities Housing 801 Alma Street ‐ Eden Housing Sheridan Apartments ‐ Alta Housing NOFA Total 130 50 95 67 1 2 N/A $ $ 5,000,000 1,893,230 N/A $ $ 5,000,000 $ $ ‐$ $ 5,000,000 7,800,000 $ $ 38,462 156,000‐7,800,000 $6,893,230 $5,000,000 2024 NOFA Funding Alternative 2 ($6,893,230) Total City Funding per UnitTotal City Funding Alternative 2 (Including Alternative (Including Alternative Project Units Score Final Rank NOFA Request NOFA Award Prior City Funding 2 Amount)2 Amount) 3001 El Camino Real ‐ Charities Housing 801 Alma Street ‐ Eden Housing Sheridan Apartments ‐ Alta Housing NOFA Total 130 50 95 67 1 2 N/A $ $ 5,000,000 1,893,230 N/A $ $ $ $ 5,000,000 1,893,230 0 $ $ ‐$ $ 5,000,000 9,693,230 $ $ 38,462 193,8657,800,000 $6,893,230 6,893,230