HomeMy WebLinkAbout0273.091May 16, 1991
HONORABLE CITY COUNCIL
Pal. Alto, California
Attention: Policy and Procedurts Committee
PRESERVATION OF AFFORDABLE HOUSING IN PAlQ ALTO
Kember. of the Council;
Report in Brief
This report and attachments provide background information on 1) the use of
deed restrictions in repurchase options for a specific property: and 2) the
mechanisms being pursued by the City and the Pa10 Alto Housing Corporation
(PAHC) to ensure the preservation of federally subsidized housing in Palo
AltD.
Backgroynd
On Septeober 10, 1990, the City Council, as recommended by PAHC, deciderl not
to exerc;se i repurc~ase option on the federally subsidized Sheridan
Apartments at 360 Sheridan Avenue. Tbi, complex i, built on land Driginally
owned by the City. ~en the City sold the land for construction of the
apartment complex, deed restrictions were included that I) require tne
property to be used for law· and .ader~te-income res,denti~1 rental purposes
for 40 years, with the first 20 years as housIng for the elderly under the
federal Section 8 rental assistance program; and 2) provide the City with a
f1rst right t~ repurchase if the property is put on the market for saTe. The
use restrictions were also included in the Planned COlmli,Jnity zoning of the
prop~rtl, under Ordinance ~o. )028.
The discussion tnat led to the decision not to repurchase Sheridan Apartments
brought up two lssues ttl at were referred to Pol icy and Procedures Committee
for consideration:
l~ The issues and complexities associated with deed restrictions in
repurchase options; ind
Z. The braader question of the ~chanisms ~ecessary to ensure that
existing affordable housing can be maintained CD an on90in9 basis.
The tlty Attorney's Office has reviewed the use restrictions and the
repurchase optfon in favor of the Citl, contained ift the deed and t~e zoning
f~r the Sheridan Apartments, in~ determined that they are generall,
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enforceable. ~nder t~e use restrictions, the property must be used fOT low
and moderate-1ncome resfdential rental purposes for 40 years after ;t$
conveyance on Jur.e 30. )978. During the first 20 years of the period. until
]998. the prDpe~ty must be used as elderly hous1ng under Section 8. However,
after 1998. if there ire no Iyailable rental subsidy progr~s existing, or if
t~e then owner has applied for rental subsidies and been denied, the owner may
~se the site for any lawful resfdentia' purpcse. The rents charged may not
b< higher th,n neces,ary to keep the project 'fin,ncia11y self-supporting' and
to allow the owner i -reasonable Tate of return.· The deed does not define
.hat the reasonable rate of return would be.
Under the City's option to repurchase, before the owner sells the property to
any buyer, the owr.!r must fir5t offer it to the City on the same terms and
conditfons. The City has 30 days to deter.ine whether to accept such in
offer. The City's right to repurchase cr.ntinues for the full 40-year period
or ~ntil l(tUll repurchase of the property by the City or the new buyer,
whichever occurs first.
It should be noted that the Sheridan Apartments did not sell at be previ{lus.
offering and is back on the .. ark-et It th1 s time. Therefore, tt.~ Cityls fi rst
right to repurch,se the property is still in effect. Tne staff ,nd PAHC are
,onti~uing to monftor the property, but do not reCGmmend l thange in the
Council decision to not ex!rcise the City's option to repure"ase it this tlme.
Preservatjon of Federally Subsfdizgd Hgusing
Palo Alto currently n,s 16 subSidized or .ffordab1e rent.1 housing comp1exe"
Of these sixteen, seven were aCQuired under the City's Rentll Housing
Acquisition Progr~ and are owned and operated by PAHC. Six are either owned
Dr contrDlled by other nonprofit corporations. Tnese]3 c~lexes are not at
risk.
Three complexes --Arastradero Park ApartMents, Palo Alto Gardens, and
Sheridan Apartments --are at some risk of being lost is affordable housing.
The recently adopted -Low-income Ho~sing Preser~ati~n and Resident
Homeownersbip Act of 19~O llIHPRHAj,-provides some incentive for majntenance
of existing affordable housing ~nits and establish!s a r~ndatory preservat10n
progra. for ~ei1g;ble-low income housing; however, t~e legislation 1$ new and
regulations a~d funding having not been completed. The attached letter from
FAMe provides a definition of -eligible-and more spetific informatfon on
llHPRHA and efforts by PAHC to ret,i. tne existing stock of affordab1. housing
in P,!o Alto.
Arastradero Park falls into the category of -eligible-low-fncome housing
under lIHPRHA and h protected by provisions that allOW the present owners to
obtain an e percent annual return on a ~ fair market appraisal provided that
the units are kept affordable to Tow-income tenants~ ]f t~e owner cannot
Dbtain I fair rate of return as above, the property must be offered for sale
to nDnprofit entities, tenants and public bodies. for a 12-montn period. The
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concern .it~ Aristradero Park 15 t~e present Gwner's desire to sell, th~
expected hlgh cost of the property .nd the st.tus of .vallabl. federal, state
.nd loc.l funds for purchase .t the tfoe It .. y b. pliced for s,le.
PAHC has been ad.ised that P.lo Alto '.rdens probably f.lls Into the c.tegory
of -eligible-low-income housfng and will receive th~ sime protectfon is
Arlstradero Park. Since this complex f5 not as large as Araitradero Park, the
concern over the cost of t~e propert, Is nat as great if it were to be made
available to nonprofit entities, te~ants and p~b'fc bodies for purchase.
Sheridan Apart.ents does not fall into the category of -eligible-low-income
hQ~sing. However, as stated above, tne use restrictions and the Cfty~s right
of first refu.,l to repurchase the property rem'ln in effect.
R!KO!!""imdat i on
Staff recommends that the Policy and Procedures Committee ret~nd to Council
that stiff and th~ Housing Corporation continue to ~n;tor the progress and
impleRentation of t~e new federal legislation with the intent of retaining as
.. c~ a. possible of the a.,llable ,ffordab1e housing stoct. In addition,
sho~ld I bonl fide off!r be made for pYTchase of the Sheridan Apart.ents.
staff will return to the C.ouncil with i recommer.dation bas-ed on the
circumstances It th! time of the proposal.
Respectf.ll, .ubmitted,
q~J¥L<LC" /Jdt" I
JAMES E. GILLILAND
Manager~ Plannfng Projects
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JtjII£ FLEMING' ;
Assistant City Manager
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KENNETH R. SCHREIBER
Director of Planning and
Community Environment
~chments: May 10, 1991 letter from Palo Alt. Housing Corpor.tion
cc: Palo ~lto Ha~sing Corporation
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Palo Alto Housing Corporation
May 10, 1991
Honorable City Council
Pilo Alto, Collforolo
AttD: Policy and Services Committee
S~bject: Preservation of Federally Subsidized Housing in Palo Alto
M • .,bers of the Council:
On September 10. 1990, the Council considered and supported the recommenda
tfons of the Palo Alto Housing Corporation (PAHC) that the City not exercise
its option to purchase the Sheridan Apartments at 360 Sheridan
Avenue.
O~r1ng t~e course of that discussion. the Council decided to refer to
Co •• fttee the genera' topic of how to e"su~ thft the City's existfng
affordable housing can be maintained on an ongoing basis. and the specific
topfc of deed restrictions and repurchase options as ~echlnfs~s to preserve
such hoLlsing.
To help us explore and eyal~ate tne issues leading to the Sheridan Apartments
recoMmendatfon. we reta1ned the services of Helen DynTap. Chief [xe'~tiye
Gfffter Df t~e California Housing Partnership Corporation (CHPC}. a nnnprofit
entity created by state lesislatfon to preserv~ affordable housing for low and
very Jow income households. Helen has generously offered her services at no
cost to Idvfse on t~ ~atters before the Committee. ~uch of the infor.at1on
followfng. relating to federal legislation. is from materf.T that has been
pnepared by CHPC. and she .ill attend your .eeting of May 21. 1991 to respond
to your questions.
Background
Tne concerns expressed by the Council in Sept~mber ire part of the national
concera that approxf~ately 600.000 units of federally assisted housfng
elfgfble for .ortgage prepa)~ent. market rate conversion, and expiration of
rent a~d occupancy restrictions (includfng nearly 117.000 un1ts in
Califor!1.} would be lost fro. the stock of housing affordable to those of low
and ver), low income.
540 Cowper Street, Suite G, Palo Alto. Califomia 94301, (4151321-9709
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The bulk of these projects .... re built •• lng the Sect10n Z21(d)(3) and section
236 f1".ncfng progr._s and the Section 8 rental assistance program. The
financing progr.ms provided to for-profit and ~onprofft owners very attractive
law-1~terest lOins which were Ivailable between 1961 and 1983. They ~ere
typically at an effectfve 1~terest rate of 1 or 3 percent and praY1d~d
borrowers w1th It least 90S of the cost of development. Ma~y for-profit
borrowers were able to take tlJ benefjts which provided them with I very
attractive return on thefr lOS e~utty contributfon_ Many owners also received
I restr1cted annual cash flow of up to 6J of original equit1 and .1so received
compensation ir. the forI!! of l1anagement and partnershfp fees.
The mortgages ~ere fo~ te~$ of 40 yea~s. Howeve~. at the times the programs
were conceived. it was believed that new rental ~ousin9 would continue to be
built and that owners might wish to prepay the mortgages so as to seet other
investlilent opportunities. rt fs I lIonumental understatement to say that
owners. the governJlentt tenants and (ommunities in general did not expect the
housing ,risis tnat exists today nor the astronom'cal 1ncrea~es in value that
~ave occurred, particularly ift states such as California. Therefore the
oriqtnal progra.s pra~ided for loan repayment in year 2Q and eltm1nat1on of
ti . .J regulatory restrfctions on botn rents and occ.upancy. (Palo Alto Gar~ens
and Arlstradero Plrt are examples of projects built by for-profit entities
under the sectIon 2Zl(d)(3) f1nanclng programs,)
In add1tfon to the probleM of ~ort9age prepayment, ~Iny projects ha~e Section
B rental subsidies attached to the units .hich enable very poor households to
afford the restricted rent that the low-fnterest-rate-ffnancing provided. In
many cases, these subsidies weTe written to allow owners thf option of
renew1ng or opting out of the contract every 5 years. Further. many Section S
contracts are a-lso due to expire in the next few years. Tl'tere is conceJ"11 that
the federal goyern~nt mBY not reaut~orize the funds for these subsid1es~
These project-based Section 8 contracts are f~und in proje(ts .it~ 10w
fnterest HUD 10.n5 and restricted rents. as well as in projects that are
otherwise unne9ul.ted. (Sheridan Apartments fs an example of the latter. [t
does not utilize tile federal SectIon ~~1{d)l3) nor Section ~3b flnanclng. but
it does utilize different federal financing_ and the Section 8 rent!1
assistance program. I~ August. 1999. the 20-year authorization of Section 8
subsIdIes wIll expIre,)
Tne low-Inco~e Housing Preservation and Resident Homeownership Act of 1990
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After years of debate, iI tellporary prepayment r.oratorium, three emergency
extensions. Ind a prolonged legislatf~e battle. Congress, on October 27. 1990~
passed permanent legislation to regulate the conversion of properties with
HUP-subs1dized mortgages to lIarket-rate usage~ The bill _15 Signed into Jaw
by the Presfdent on November 28. 1990. as Title WI of the Cranston-Gonzales
Natlon.1 Affordable HousIng Act of 1990. an omnibus pIece of legi.'at10n that
a1 so creates i few new housing programs and changes many exhtfng ones.
The new law. lIHPRHA, c.overs onTy projects eligible for prepayment of those
federally .ubsldl •• d mortgages ••• 1sted under the Section 221(0)(3) and
Section 236 Progr ... s.
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Essentially. lrHPKHA establ1shes I mlndltor~ prtservat10n program for
-eligible-low 1ncolle housing. (As desc,.1bed above. Palo Alto Gardens and
Arlstra4.ero 'art 'IIith ell"11est sub-s.tdy retirecnent da.tes of JUlie 13. 1993 and
August 21. ]994 respectively. Ire tne kind of projects included under the new
legfshtlon. )
Under the Act. In o~ner must first file I -notice of intent-up to two years
pr10r to the scheduled prepayment date. After the owner files the notfce.
both ~UD and the owner co •• I,.lon separate appraIsals. (A third appral.al .'Y
be necessary if HUD's and the ownerls C:fsagree~) Tne appraisal deterllines tf'le
fafr •• rket (unrestricted) value of th~ project '5 res1dtntial renta.l
property. as well IS tne bfghest and best use value of the property, if
different. The appraisal dfstounts only for the reasonable costs of
con¥ersion to ~arket rate housfng or other oses.
Based on the appraised value. HUn cllcu'ates the rents necessary to provfde
owners with an 81 annua! return on thefr recalc~lated equity. If Hun can
provide tbe owner with this return wftho~t exce~ding the federal cost li~ft5.
the o_ner cannot p~~, the mortgage. The owner may then file I Plan of
Action seeking incentives to pro~1de the 81 return J or offer the project for
sale to nonprofit e~tfties. tenants and public bodies for a 12 Mont~
negotiation period. and other purchasers for an additional 3 mont~s. The
owner must accept I bona fide offer to purchase It th~ appraised value~ 1f no
bone fide offer .!!. made within the negotiation pe!"'fod. tne ~ !!.!l
Sij"6'$eguently prepay.
If HUO cannot proy1de the ow~er vith the 81 retur~. the owner may prepa) only
after offerf~g the property for sale to a nonprofit entity, tenants or public
body for i period of 12 months. This provision may be tritfcal to p~jetts in
Pa10 Alto. because depending on ya~ue determination and other program rules.
the propertfes n" exceed t~e KUO hfgh cost limits.
]ncluded 1ft the legislation are important issues related to tne length of tf~
the property is to be preserved {I minfmua of 50 years after the Plan of
Action is approve¢), federal f1n~n,ial a~$1stance in the form of inc~ntfve$ 1f
t~ property is retained by the owner or a federal ~ortgage insurance program
or grants if sold to Qualified purchasers, and tenant protections.
Proposed regulations implementing LIHPRHA required by stAtute to be published
by late February. have just been published for public comment. The release of
the interim or ffnal regulations is then not 1 ikely to occur before ,I\ugust.
thereby delaying HUO's ability to begfe processi"g of owner incent1ve or
transfer plans until ~ate summer or early fall~ A pre-re1eased 235 page draft
of the proposed regulltions is Ivailable wh1c~ raises many ~ssues of critical
concern to tenants. nonprofit organizations and local governments interested
10 purthasing the HUD-subsfdized developments at r1sk of mortgage prepayment.
C.HPi: 1s actfvely participating in ill national dialogue lIIit~ other organizations
to work out mutually agreeable positions on the ~any issues of concern. Tne
City of Palo Alto .ay wIsh to particIpate in this dialogue by submission of
comments on the regulat1orls.
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f!l2 !llg.ll2£! of Fedecally SubSidized !!!l!!l Housfn;
There Ire afne federally subsidized renta' housfng complexes in Palo Alto (not
eount1ng the 82 units in 1 co.plexes f~ t~e Rentel Housing Acquisition Program
t~.t a,.., not .t chkJ:
Ra ...
Arastradero Park Apartments
Colocado Park Apartments
Webster WOod Apartment.
T ....... Apartments
callfanol. Park Apartments
PlIo Alto Garden.
Sheridan Apartments
Stevenson House
lytton Saedens I
lytton Gardens II
TOTAL
~o. of Units
66
60
68
92
45
156
57
128
218
100
990
Of these complexes, Colorado Park Apartments. Stevenson House and Lytton
Gardens I and II a~ owned by nonprofft corporations and are not lit risk..
Webster Wood Apartments, Ter~an Apartments and Ca11fornia Park Apartments are
owned by limIted equIty for-profit entitl.s In w~lch • general partner Is the
PlIo Alto Housfng CorporatIon or Its subsidiary. They .lso ha.e Cfty controls
and In!' not It risk.. Sherfdan Apartraents has efty controls as well. l"nese
controls vary. They are evaluated later 1" tkfs report by the CHy Attorney's
Office.
Arastredero Part Apartments, Palo Alto Gardens and Sher1dan Apartments Dre
owned by limIted equity for-profit entitle. and may be at rIsk. LIHPIUiA .. 111
regulate Arastradero P,rk and Palo Alto Gardens. but not Sheridan. As was
discussed in September, 1990. there 1s scme rfsk contfnuing with conversion of
Sheridiln Apartments to mark!t rate housing. liowever. the Cfty's right of
first refusal to purchase the property fs currently in effect.
T~ Housfng Corporl~fon end t~ California Housing ~artnershfp Corporatfon
look forward to the P , S Committee meeting. and w11l be sharing our thoughts
on the next steps and potential policies for preservation Jt tnat tf~e.
If the Count11 .e.bers have any questions or wfsh aore 1nformatfon prior to
the meeting. please call o~r office.
Sincerely yours~
PALO ALTO HOUSING CORPORATION
~{:: /;&,/ tfidTt·
Joe lC.rtlgnet1~. Jr.
President -.
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