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HomeMy WebLinkAbout0231.095""I • TO: AlTENTION: FROM: City of Palo Alto City Manager's Report HONORABLE CITY COUNCIL FINANCE COMMITfEE CITY MANAGER DEPARTMENT: FINANCE AGENDA DATE: MAYl,l9')S CMR:l31:9S SUBJECT: REOlJF.ST APPROVAL OF PROPOSED RFAL PROPERTY TRANSFER TAX EXEMPTION FOR LOW AND MODERATE INCOME JIlRST-TIME HOMEBUYERS AJIIl) ADOPTION OF ORDINAl"CE GRANTING AN EXEMPTION FOR RELEASE OF OWNERSHIP INTEREST HELD BY CO-BORROWERS WITHOUT MONETARY CONSIDERATION This report was prepared in response 10 Cooncil a".«:Iion for a modified staff recommcnda6on for an ~cmption 10 dle City's real property transfer tax for low and modera!e income firsI-fum bomebuy=-It also includes proposed cbanges \0 the Palo Alto Municipal Code, necessary \0 enact dle exemption for real prDp<lrty transfers involving a release of ownership interest of one or more parties, where no IIlO!leIaly consideration is involved RECOMMENDATlQH Staff recommends that Coon<:il oW"'" a modified exemption \0 the City's real propet1y lIans{er tax for low and moderate income first-time homebuyers. Staff also recommends that the ex=Plioo be administered on • rebate basis in conjunction wi1h the Palo Alto Housing Ca;>oratioo (P ARC), and that • $50 processing fee per rebate request be instiMed, \0 be adjust<d annually by the C<lnsumer Pri<:e Index (CPI). Staff also recommends that Cooneil adopt the attached ordinance granting an exemption to the City's real property transfer tax for all Iransactioos involving • release of ownership interest beld by co­ bo<rowers. wilen monetal)' or other valuable consideration is ooIlnvolved. Pace'." "'. _ r POI,ICY IMPYCAUONS 1'llis report has been prepare<110 aid in the anal) sis of. first-time bomebuyer exemption 10 the City', real property Ironsf .. tax fur transfen of R'SidentiaJ property. The proposed exemption targets low and moderate L'lCome buye", of property in Palo Aho, EXECJITIYE SHMMARY Baekgroaad During 1hc 1992-93 budget process. !he City iru;tiM~ • real property transfer tax of $1,65 per $SOO of assessed value, in order 10 fiJI • ",'{ooue shortfall. Upon instituting the tax, the City ,.,1inquisbed its sit ..... ($.275 per $5()() of!he Coonty's document transfer tax. The tax generates revenues of approximate!) $1.5 million annually. 00 average, a buy ... of residential property in Palo Alto pays • transfer tax of S6l!5 (Attachment 2). lA December 1994, staff completed. review of the City's real p!'Operty transfer tax, which in<:Juded an evaluatioo of pctential exempoo'.s 10 the tax (CMltS33:94), Staff recommended two exemptions 10 the ta. ... fur transf.". of residential property: 1) an exemptlon lOr transfers where ti1lc is chan~ merely 10 =tOYe "" ownership in1erest of one or more parties without moneto.ry considera6on; 2) or. exemp600 fur low and moderate in<:ome ~-1ime homebuyers. Cooncil lllWliInoos!y .pprov~ !he first exemption. ~ Council expressed support lOr the second exemptioo, there were = .bouI the way iIl'wIDell it was slrllctuIed; and Cooneil ,.,quested staff 10 return willi a modified recommendation. Fint-Tlm .. Bomeb"Ytr Extmptioa Optio •• Staff consid~ several options in stnK:tu.-ing the fIest-time bomebuyer exemption recommended 10 Coanci1 in December 1994. The first option was 10 <>!fer the exempti<>n only 10 Mortgage Credit Certifi<:ale (MCC}q\laIified homebuyers, The MCC program provides quaTlfied law income fltSt-time homebuyers with federal income tax credits, Since the MCC qualification criteria are restrictive (e,g,. the cost of the home must be less than 5250,000, the \O!aI household income lOr • L'rree "" more persoo hcusebold ~ exceed $63, 195, etc,), • very limited nwnber of Palo Aha transactioos would quaIil'y lOr this option. Staff consider~ rnaJOng the exemption Iv.Hab!e 10 a greater number of first-time bomebi.'Y"" by basing the cxc.mption 5O!eiy 00 income le1.'els. This option COIICerned staff, because lite vorificati<m of iDcoo>e poses administrative difficultles. As. result, staff selected, lite option of basing the qualification for lite first-time buyer exemption on the ~l." ,- ----~. , -" . ~ .', . ·,--, . :- -.'. putcIwe price of the home. Spe<:ificaIly,:O qualify for this option, staff recommended the pu1dlase price of the home be less 1Iw! 60 petcet!! of the average sales price ofa P;uo Alto resideOGe. In C8k:u1ating the avemge .. Ies price, staff combl',ed single family homes and coodomini~wnbomes, whicb res;l!ted in • q"a1ifying home sales price of IIp 10 a ma.'t1mum of5332,OOO. Staff selected !his op6oo because it was easy 10 admlnister, since it .r""mated !he need 10 verify inw<m levels; and under this option, I majority of the first- lime homcbuyers in Palo AlIo would qualify. • . .lJIbougb. in general, Council expressed suppo!l for • low and moderate income first-lime bomebuyer eXemptioo. there were seven! coocerns about the option selected by staff CoIlncil WlIS concerned that staff bad not defined or \imited the income level required 10 qualify for Ibe exemption. Since the average sales pr',ce included boll! coodominlumsl\ownbomes and single far.u1y homes, Coon<;i1 was coocemod about t;e potential \bat • lim-time homebuyer ,.ith substannal income would purchase a bigh-end condominium for 5332,000 and qualify for the exemptio<>_ Council recognized. however, that the cost of ad!ninistering an exemption based on income verification could be subsWlnal. To address Council concerns. stafIhas modified the recommendation 10 define the maximum inc<:me !evellhat • t.omebuyer may have in onlet to qualify fur the exemption. AI the same lime, staff bas limited the odministrative effort and costs involved in implementing this exemption. Modified Recomme.dotioa Staff ~ modifYing the optloo recommended in December 1994 by inC<ll'p<ll'llting 8ft income level cap. The City woold qualify first-lime buyers based on • combination of income level and the purcbase price of the home. By focusing the ."eruption OIl income level, staff woold ensure that .. first-lime buyer with S'obstantiaI income woold not qualify for !he exemption. At the same time, by inducfmg I purcbase price cap, staff woold ensure that • first-time homebuyer purchasing I higher priced home would not qualify for the exemption. The Palo Aho Housing Coq>oration (P AHC) has agreed 10 per'..orm the income verificatioa for the City with the same process they use \0 quaflf'y buyers for the City"s Below Madel Rale (BMR.) program. This will allow staff to include this qualifi<:ation c:riteria withou't !he administrative concerns expressed previously. Staff I'CCOIIllIKlIds structuring the low aud moderate first-time buyer .""mption as Ii:>!lows: '. ' .. ~--, ~, ;:" ~--'.-. "',' " ' -, . ,--"-. I) StalJproposes an iIIt:OINlevd cap of ISO perCeDI oflll. median income IOCthis area, as reported by HUD, or S86,67(1 lOr a three-persoo household (Attachment 3)­ AI1llougb various incooJe level cboices are displayed in Attachment 3, !his income level .. ", selecUd l>c<:a-, based onl survey conducred by \he Board of Realtors IOC first-time home purchases, it was the income IlIat would !lOCmally be required to qualify IOC • first-time home purchase in Pak> MG, Utilizing this income critcria, more !ban half of \he first-time buyen in Palo Alto ",'ould qualify_ 2) The proposed purr:It_ prW t:flP for a lhreei>=OO hoosebold would be $330,000 (Attacbmenl3)-Although Ihe average Pal<> Alto borne l":ice is $414,958 (Attachment 2), Ihe average prke of. single family resideace is .woximalely S« 8,000 and !be average price of & """dominiumltownhome is $234,000, Cooscquently, fOr $330,000, the first-time buyer would be purchasing property at \he hlgh..-r-middle range of !he coodomini~ ma:1i:et and !he boUom 2 S percent oftl!e single fltJll11y residence market (Attachment 4). 3) The intent of \he low and moderate income first-tirM buyer exemption is to benefit !be buyer who. with !be bigh COS! of real estate in Palo Mo, is struggling 10 wme up witI! the cash down payment needed 10 purchase • first borne, Since \he tradition is !hat the buyer and seIler split the !ax with each party payL"g 50 percent. staff recommends • car 00 the e""mptioo of 50 pen:enI of !he 100Il !ax due lOr each transaction_ This would ensun: that only \he buyer would benefit from the ~ - Since \he incooJe ceiling would prevent. conoo",inrumitownbo= buyer with substantial inccme from qllllfifying fur this e"etIljltioo, staff did not define separate qualification criteria IOC single Camfly resid<=es and coodominiums?k>, In addition, \he P AHC has o4vised slaffthat most of\he families in the City'. BMR Program purchase condominiums ()/.' lOWDhomes whea buying \heir first home in Palo Mo_ However, if Council prefers to eliminate or define coodomini\l!IlSl\oy,nhomes sepal'alely, staff ",iII r<vise the first-time exemption 10 refkct Council direction. AdmjnjetpMD . The'City would adminisler the first-time bomebuyer exemption unlizing • rebate progrartL Wnh such. program, the County Recorder would rolleclthe full payment ofth. tax at the time \he deed or other instrument cfrecti.-,g • lraru;fer is recorded, The taxpayer would then submit • rebal. request \0 the Administrative Services Departm<:nL In order 10 verify the purchase price 0( the home, staff .... oold require specific c""'ing statements from the bomebuyer_ P AHC would perl<xm !be income levellUld lirst-tlme bU)'er status verification- "': -, .) ","" . '. -- -'. Thls verilieatioo prot... woo14 provide \he City with proIectkln against fraudulent oppIicatioas. Following review and approwI of the rebate request. the tax would be refunded to the taxpayer. StalTanticipales anywhere from 60 10 188 first·time bomebuyer refund nquests annually. The P AHC estimates that, for each rellate ~ verilkatioo of income and certificalioo ofbuyer sta"..IS would talr.e from ooc 10 !WO hours.. P AHC would chorge the City b: the actual time spent on eacb verification. Utilizing PAHC's standard how-Iy rates, it is estimated that cllarges 10 1he City would range from 53.000 to 511.200 annuany, depending on the time spent on each \'erificatioo and 00 the nwnber of rebate request vmticalioos processed. The staff wo<k.1oad rq>reSeIl!ed by the anticipated ,'oIume would be approximately 5 percent of a full.ti!Ile equivalent employee oad could be absoIt>ed by the Administrative Services Department. Staff recommends tharging • processing fee of $50 (ad'jUS!ed annually by CPf) when the rellate request is submilled to rC<over the WSIs of administering the program. IfCooncil.pproves the modi1icd low and moderate income first-time bornebi.'}·er cxmnption, staff will return with proposed ell/IDg« to the Palo Aho Municipal Code, Mun.1cipal F~ Schedule. and the 1995-96 Budge<_ fiSCAl, IMPACI The exemption b: low and moderate income first-time bomebuyers would r"",,11 in an estimated annual r~ue reduction ""'ging from $33,000 10 586,000 (assuming the 50 percent cap is in place). The exemption for • release of own=hip interest held by <» bcrrowm would resuI! in an estiIrutted annual revenue reductioo ofapproJ<imately $10,000. Staff'. inteoI W0310 eslab!ish the processing fee at • level suflkieot to rec<JV<;r PAHC rosIs b: the first-time homebuyer verification. However, .;nce payments to the F AHC could be .. much as $11.200, there is the potential thai the City would need 10 absorb an annual expenditure ofSI,800 for the first-time homebuyer exemp600. ENVIRONMENTAL ASSESSMF-'\f[ Thi. does no( constitute • project under the California Environmental Quality Act. Thereb:e, no envirorunen!al assessment is needed. AUACBMENIS I) Relea.se of Ownership Interest Ordinance 2) Average Residential Transfer Tax Payment 3) I""""", Level and Purchase Price Limits 4) Single Family and Condo{]' ownhome Market Poco 5.1( ." .; /.' .; em MANAGER APPROVAL: cc: 80anI cfRealtors Jan C. Aam. Cornish " CorC)' Marlene l'rmdetgast. PA Housing Co<poratioo Eric T. Tru1 .... NOf1h American Tille Company .. • AnAClf£lT I Of<DIliO.NCB NO. ORDINANCE OF THE COUNCIL OF ffi CIn' OF PALO ALTO A.'II!IID!NG ~BR 2.3. OF TITLS 2 OF THliI PALO AL10 M!JlUCIPAL COOE BY A.."DrNG SECTION 2.14.095 TO UEMP'l' TRA.'lS FBRS EFFECTBD BY THS HLEASB OF AN ~HIP INTEREST IN RSAL P11.0Pl!RTY BY A CO·OWNER WITHOUT CONSIDERATION The COWlCil of the City of Palo Alto does ORDAIN as follows , SIC"fION 1. cr..apter 2.34. of Title a of the Palo Alto MuniCipal Code ls hereby amended by adding a new section 2.34. OSS to read as follows: 2.H .on COD-nyanC •• DOt subject to t6.x-'2<11 ..... of OWIJeraMp !.ater •• t :by • co ·ow.ner Any tax ~ed pu.rsuant to this c~.apter shall !lOt apply to the maJting. delive~" or filing of an instru:l!\ent by which a co­ owner or t.ile co-owners of real prcperty releases his or her or their cwnership interest to the ot:her co-owner or co-owners of the rea.l prot>e'rty without receiving. directly or indirect.ly. any monetary or ~ber valuable consideration" wbere the co-ownere are eo-oorr:owers "under a loan to finance or refi.nance t.he acquisition of or ~he cODstructioa of Lmprovements ~~ the real property. SBC'UON ? The City Cou:ucil hereby of ~hls ordinance does ~ constitute california Envir~ntal Q~ality Act. finde that the passage a project under the SECTION J. Pursuant to Sec~icn 2.C4.3S0 of tbe Palo Alto MUniCipal Code.. this ordinance shall becane effective upon its adopeloa. Ili'I'i<OOUCBD AND PASSED: NOBS: ABSBN'l': ABS'I'ENTIONS: A'ITBST: APPROVED: City Clerk .Mayor City !'.anager Director of Finance 1 APPRQVEI> AS ro FORM, Senior Asst. city Attorney 2 "--1 •• Attachment 2 AV8la1l" Residential T.-ns'e. Tall Payment Average Palo Me Home Pri<;e (a) Palo Mo Transfef Tax ($1.65l'@C$5OO) Santa Clara Transfer Tax (.55 pet $500) Ave.age F'1I'Sl-Time Buyer FA Home Pri<;e (b) Palo Mo T"",srer Tax ($165 per $500) Sailla Clara Transfer Tax (.55 per $5(0) Tolal Tax Payme.1I $41<4,958 $1,369 Paym&nl with 5OISO $;>Ii! (e) ilu}<1! Seller $41<4,958 $41<4,958 $<C56 $0 $456 .f ..,S~ '. ~ -~ .. -c~T"~" ,,_'IIi!! ~ ._0_'-'-___ 4 ____ "~ ______ ~,,_~.:J_!:JY" $335,250 $1,106 $369 $335,250 $335,250 $553 $0 $553 $369 a-Based on average price of s;,gle familyresiclences and condominitJmsi!ov;nhomes n 1993/94. II-This avenoge is based on a sampie of first-time buyer puroI!aoes of .1"1118 family residences and COndominiums!lownhomes n 1994. c.. The buyer and seller l<a<frtionally split VI9 Cily Hnsfer lax, with each paying SO percent; toe CounIy lransfer lax is traartionaily paid by !he seller. AaaahftMlnt3 Incl)lM and Pu,., ..... PrlO8 LIIIII .. ,00%QI 125% of -~eo%at-..,"' .... MOU$ohOld .5lU MI,iDM~"n PllfQha •• MUD,Me<:!lan ..... r(lIl ... Incoma.(J),.J'1ICO.LIllll1.(bl ---IJ)gOmlt...--!'~ ~~~::::-=~ 1 $014,~~ $170,000 $~,18e $215,000 :107,426 $280,000 2 51,3110 1;5,000 84,~00 246,000 ,77,040 ,,~Moo 3 57,780 220,000 72,225 275,000 80,870 ~,OOO; 84,200 246,000 8O,2~ 3(15,000 ' 1I/J,3(IO 365,090: , 4 6 e9,336 2e5,000 8M70 33(1,000 104,004 395,000, •• MUD rn~lln bale<:! on FebrUary 1l1li5 MUD data W \he San.lOM PttmOl'J MetrQPOlllan SIaIlI\lc;MI Nee, 01 whiCh "alo AKo 10 • port, b-Eq .... 1 to the "'aximum hOme prioa • buy., would qU81!fy for (prinolp~l, Int ..... I, _ •• nr.llnaul'll_ "'iuollO 40% of lr\IlOMo) ..... .,"Ing • 10 percent down peymollt, IntenI.t hi ",,10.1_ ... Ing lhe FNMA delivery 'ate publllhe<:! in the Wallat_ JOUm.1 pi .. _5 peroant Ind WOYkI be lIdjul1e<:! bioannually. 175% of HUD Me(IIen p~ ~~ __ I'lICLUm~ $78,8e3 $300,000 eg,8/!O 340,000 101,1'5 365,000 112,350 "25,000 121,336 <180.000 Pun:/IaM Slngle Con4oO( Prlce farnjJy Beajdorn;e Merkel 1(lW!l!loml> Mall<el $220,000 SoIIom ~ pereel1l rA marlsel . , low ... na e>t marls.1 $27S,000 So!Iom 1\:1 pen;enl 01 matl<et ),fiddle 11Iif1ge 01 mall<eI $330,000 So!Iom 25 percenl of ma"'el tflQl>er-mldd!e fliOQe e>t marf<et $385.000 Lowet-middle raIl9" of mall<el Higb-end 0( rna"'.!