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SR-9A (24) '. \~;A ..cI5i ~ - :," . RM:JM:PB:MS:nhsits13.rpt Council Meeting: July 12, 1994 JUl 1 2 1994 Santa Monica, California To: Mayor and City council From: City Staff Subject: Recommendations Regarding Feasibility of 1642 Ocean Avenue and Other City-Owned Sites for Project New Hope. INTRODUCTION This report provides an analysis of the potential use of three City-owned properties as a site for a 25 unit low-income housing project sponsored by Project New Hope and recommends that City Council authorize staff to enter into an option agreement with Project New Hope for a long-term ground lease at 1642 Ocean Avenue. BACKGROUND On April 12, 1994 the city Council instructed staff to explore the feasibility of locating Project New Hope on several alternative sites in the City including: 1642 Ocean Avenue, 502 Colorado Avenue, 1920-28 Ocean Avenue (t1Bay Street site") and any other appropriate site, and report back to council as expeditiously as possible. In addition, the City Attorney was asked to evaluate several issues specific to 1642 Ocean Avenue, including the city's replacement housing obligation associated with the site and the City'S obligation to reimburse the Gas Tax Fund (which was used to acquire a portion of the site). -1- JUL f 2_ ?A DISCUSSION pro;ect New Hone Project New Hope received a reservation of $2.4 million from HUD in October 1993 for a proposed new construction, 25 unit, rental housing project. HUD required that they identify and secure a site for the project by september 30, 1994. The proposed project will provide permanent housing for the very low-income physically disabled, with supportive services for persons with HIV/AIDS and include a Community Room/Training Center. As per HUD guidelines tenants will pay no more than 30% of their adjusted income for rent. Project New Hope is a non-profit corporation founded in 1990 to provide supportive housing and employment retraining services for persons with HIV / AIDS. It is an outgrowth of the Bishop I s Commission on AIDS Ministry of the Protestant Episcopal Church in the Diocese of Los Angeles. Project New Hope has operated a vocational training facility for persons with AIDS since January 1993, providing training in advanced computer skills and job development and placement services. In addition, they are currently developing two other residential projects in the City of Los Angeles. Their staff includes a part-time executive director, housing development staff person, vocational training staff and supportive services coordinator. -2- Project New Hope works closely with Yokota and Associates on the development of each of its affordable housing projects. JoAnne Yokota has worked with the sponsor for over four years in developing these projects. In addition, she has worked as a consultant for 6 years with other non-profits to develop affordable housing through a wide variety of housing subsidy programs, including the Low Income Housing Tax Credit Program, CDBG and HOME Programs, Redevelopment Agency and Housing Authority programs. Architectural work will be performed by Killefer I Flammang, Purtill Architects. The firm has undertaken design of affordable housing projects in both Santa Monica and Los Angeles. Upon completion, property management services will be performed by the firm of Housing Management Associates. This non-profit agency was founded in 1986 as part of the Episcopal Diocese of Los Angeles, and merged in 1990 with an existing property management firm. They specialize in management of subsidized housing, and currently manage 932 units of housing. A resident manager will live on the project site and supportive services will be provided by Santa Monica Aids Project. 1642 Ocean Avenue Site 1642 Ocean Avenue is a City-owned vacant site at the corner of Seaside Terrace and Ocean Avenue. The site is zoned Residential- visitor commercial (RVC) and was most recently used as the site of -3- an 11 unit apartment building. The 1642 Ocean building along with the 1616 Ocean building received a Category IIDII removal permit February 9, 1989, from the Rent Control Board. The 1642 Ocean building was damaged in the January 17, 1994 earthquake, was f1red- tagged" by building inspectors and demolished shortly thereafter. The 1642 Ocean site is contiguous to other city-owned parcels which, when added together, total approximately 33,607 square feet of developable land. In analyzing whether development of this site by Project New Hope is feasible or desirable, a number of considerations must be addressed. These include: (1) replacement housing and relocation obligations associated with a removal permit obtained by the City, (2) the impact of the City's obligation to reimburse the Gas Tax Fund, (3) FEMA reimbursement for the replacement of the demolished structure, (4) the expansion of the storm water treatment facility, and (5) development standards and costs. The first two require legal analysis. That analysis is attached as Exhibit A. . Replacement Housing Issue As discussed in detail in the City Attorney's memorandum, the City is obligated to provide replacement housing in accordance with the removal permit issued by the Rent Control Board. The total replacement obligation for 1642 Ocean Avenue and 1616 Ocean Avenue is 28 units. -4- since the granting of the application the City has indicated to Rent Control Board staff that it may only desire to proceed with the redevelopment of 1642 Ocean Avenue at this time. A redevelopment plan which only includes 1642 Ocean would need to replace the 11 units recently removed from the site. The replacement project approved as part of the original removal permit granted by the Rent Board included both properties. The proposed New Hope project differs significantly in character from the project approved by the Rent Control Board. Accordingly, the city would be required to apply for and obtain a redefinition of the removal permit before the project could proceed. . Relocation Obligation The Category nD" Removal Permit was approved on the condition that existing tenants have the right of first refusal to rent any new units built on the site. There are currently five former tenants of the 1642 Ocean Avenue building that have the t'right" to return to units constructed on the site. However, these tenants would probably not be eligible to occupy the 25 units built by Project New Hope under HUD funding, since these units would be restricted to low-income persons with disabilities. Preliminary discussions are underway wi th the tenants to determine their interest in returning to the site or being compensated for waiver of their right of first refusal. Several of the five tenants have indicated their preference for compensation in lieu of a right of first refusal. However, for those tenants wishing to return to the site, -5- Project New Hope would be required to build additional units with non-HUD funding. Either scenario will add additional cost to the development of the site. . state Gas Tax Funds A portion of the 1642 Ocean Avenue property was purchased by the city in 1975 for proposed highway improvements using state Gas Tax Funds. The extent of the City's obligation to reimburse the Gas Tax Fund is addressed in the City Attorney's memorandum. The fair market value of the reimbursement to the Gas Tax Fund for the housing portion of the site is estimated to be between $215,000 and $330,000, dependent upon the actual square footage of land utilized by Project New Hope. This money will be paid by Project New Hope as part of its site acquisition costs. . FEMA Reimbursement The ll-unit building on the site was demolished as a result of the January, 1994 earthquake. As such, the cost to demolish and to replace the 11 units is expected to be eligible for reimbursement from FEMA. The application to FEMA is in the process of being submitted and it is anticipated by staff that the city will receive approximately $700,000 for the replacement of that building. The FEMA funds may be used by the City as part of any potential housing trust fund subsidy for Project New Hope or for any other affordable housing project. -6- . storm Water Treatment Expansion The Environmental & Public Works Management Department is proposing a new storm water treatment facility to be located on the north side of the 1642 Ocean property along Appian Way. The new facility will extend to the north along Appian Way and away from the proposed housing site. The process used to treat the storm water is not harmful, and measures needed to mitigate any sound, odor or visual impacts could be addressed in the design and construction of both the housing and the storm water treatment facility. . Development standards The proposed 25-unit project is consistent with the current zoning for the site and will include a least a 35 foot landscaped set-back along the Ocean Avenue frontage. Maintenance responsibility for this landscaped area is currently under discussion between Staff and Project New Hope. The Zoning would also allow the construction of relocation units for former tenants who select that option. . Development Costs Development costs for the site include acquisition, construction, financing and indirect costs. The estimated development cost for the 25 unit New Hope project on this site is as follows: -7- Estimated Development Cost Cost Per Unit site Acquisition(est) $1,520,000 $60,800 Construction 2,479,864 $99,195 Financing 5,000 $ 200 Indirect costs 816,470 $32,659 TOTAL DEVELOPMENT COST $4,821,334 $192,853 Project New Hope has obtained financing commitments of approximately $2,425,000 from HUD and $500,000 from the City of Los Angeles' Office of Housing Opportunities for Persons With AIDS (HOPWA). Consistent with housing trust fund guidelines and based on discussions with the project sponsor, Staff anticipates the project may qualify for a housing trust fund loan of up to $900,000. This will leave a financing gap of approximately $1,000,000. The project sponsor has indicated that they will be able to close this gap through a combination of construction cost savings, funds from other financing sources, or a lower land value based upon a future HUD appraisal. Although several issues remain to be fully resolved, as outlined above, the 1642 Ocean site appears to be feasible for the proposed Project New Hope project. . Alternatives for 1642 Ocean Avenue City Council also directed staff to look at alternative uses for -8- 1642 Ocean Avenue such as a view corridor for the Pier and other visitor serving uses. staff reviewed the alternatives and determined that the site is best suited for housing, primarily because of the replacement housing requirements for the site. In addition, the availability of a qualified developer, like Project New Hope, bringing $2,900,000 in funding commitments provides the city an opportunity to meet it's replacement housing obligation for the site. staff also considered the possibility that Project New Hope could satisfy the replacement housing obligations for both 1616 Ocean Avenue and 1642 Ocean Avenue. However, because the tenants at 1616 Ocean Ave must be provided a right of first refusal for the new units but are not disabled (disabled status is a requirement of New Hope's funding), this option is not considered viable. Further, staff considered holding the 1642 Ocean Avenue site vacant until another housing developer could be found. Staff concluded that the immediate replacement housing advantage and the worthwhile nature of the Project New Hope development outweigh the unpredictability of a future housing developer coming to the site. Bay street Site The Bay Street site, located at 1920-28 Ocean Avenue, is the second of three sites analyzed by staff. This site is a City-owned vacant parcel of approximately 20,640 square feet located next to the -9- pritikin Center at the northwest corner of Ocean Avenue and Bay street. The site is in a R4 High Density Multiply Family Residential District and is adjacent to the Beach Promenade and across Bay street from Crescent Bay Park. . Development Standards The development standards for the site would allow for a 4 story building with a maximum of 35 residential units. Project New Hope's HUD funding, however, only allows a maximum of 25 units. In an effort to reduce the per unit land costs a second 10 unit project, in conjunction with the 25 unit Project New Hope development, was considered. However, increasing the density in this manner would add significant cost and timing delays and could jeopardize Project New Hopes $2.4 million in HUD funding. . Development Costs The estimated development cost for the 25 unit Project New Hope on the Bay street site is as follows: Estimated Development Cost Cost Per Unit site Acquisition $2,000,000 $ 80,000 Construction 2,840,000 $113,600 Financing 7,000 $ 280 Indirect costs 923,000 $ 36,920 TOTAL DEVELOPMENT COST $5,770,000 $230,800 -10- As previously mentioned, Project New Hope has obtained financing commitments of approximately $2,425,000 from HUD and $500,000 from HOPWA, leaving a financing gap of approximately $2,800,000 at this time. Because of the substantial financial gap, Bay street is considered less feasible as a site by the sponsor and staff. 502 Colorado site The Colorado site is the third of three sites evaluated by staff. 502 Colorado is a City-owned vacant parcel of approximately 12,525 square feet located on the south east corner of 5th and Colorado streets. The site is adjacent to Angels Attic on the east and the Santa Monica Municipal Bus Yard to the south. The site is in the C3 Downtown Commercial District. . Replacement Housing Obligation 502 Colorado Avenue was purchased by the city to be utilized to meet the replacement housing obligations that the City incurred when it was granted a removal permit from the Rent Control Board for 505 Olympic Boulevard. More specifically, in obtaining the removal permit, the City agreed to construct either a 42-bed homeless shelter or a 42-room single residency occupancy (SRO) project within seven years from the date that the removal permit agreement was executed -- June 29, 1993. While the removal permit pertained specifically to 505 Olympic, the agreement authorizes the City to meet its replacement housing obligation on that parcel or any contiguous parcel now owned or subsequently acquired by the -11- City. 502 Colorado Avenue satisfies this requirement. This agreement also authorizes the city to subsequently convert the shelter or SRO housing to another form of residential rental housing. The obligations under the agreement last for twenty five years dating from the time of execution of the agreement. since the development proposed by Project New Hope is neither a shelter nor SRO housing, this development would not satisfy the city's current replacement housing obligation for 505 Olympic. However, Rent Control Board staff believe that the Rent Control Board would likely be amenable to amending the Agreement in a way that would enable Project New Hope to satisfy the City's replacement housing obligation if this project provides housing for 42 individuals. Project New Hope has indicated that this project will house at least 42 persons. . Development Standards The development standards for the site allow for a 3 story building with approximately 337,500 square feet, assuming an affordable housing bonus. Given the current development standards, the site could accommodate the 25 units proposed by Project New Hope. . Development Costs The estimated development cost for the 25 unit Project New Hope is as follows: -12- Estimated Development Cost Cost Per Unit site Acquisition $ 875,000 $ 35,000 Construction 2,200,000 $ 88,000 Financing 5,000 $ 200 Indirect costs 735,000 $ 29,400 TOTAL DEVELOPMENT COST $3,815,000 $152,600 As mentioned earlier in the report, Project New Hope has financing commitments of approximately $2,425,000 from HUD and $500,000 from HOPWA. This leaves a gap for this site of approximately $900,000. Although this gap is smaller than the gap for 1642 Ocean, the project sponsor has rejected 502 Colorado for reasons detailed below. . Environmental Suitability The sponsor has rejected 502 Colorado as a site for the Project New Hope because of environmental concerns. The sponsor's target population are physically disabled households with an emphasis on persons with HIV/AIDS. The sponsor also indicated it is likely there will be households with children living in the project. The location next to the city Bus Yard, in a commercial district and on the corner of a busy intersection presents negative environmental impacts that are unacceptable to the sponsor. FINANCIAL/BUDGETARY IMPACTS No budgetary action is required at this time. Upon conclusion of -13- lease negotiations, staff anticipates a future City loan to the project of up to $900,000 from housing trust funds. This figure is within the loan limit of housing trust fund guidelines. RECOMMENDATIONS staff recommends that the city council authorize staff to enter into an option agreement with Project New Hope for a long term ground lease at 1642 Ocean Avenue. Prepared by: Howard Robinson, Real Estate Manager Paula Burrier, Housing & Redevelopment Manager Mike Strader, Senior Development Analyst Attachment -14- II:xH[BIT A SANTA MONICA CITY ATTORNEY'S OFFICE STAFF REPORT DATE: July 6, 1994 Mayor and city Council TO: FROM: Marsha Jones Moutrie, City Attorney Barry Rosenbaum, Deputy City Attorney Eriko Matsumoto, Deputy City Attorney RE: 1642 Ocean Avenue Pursuant to the request of the city council, this memorandum responds to three legal issues arising from the city's possible use of 1642 Ocean Avenue as a site for a 25 unit low-income housing project sponsored by Project New Hope: (1) whether the City is obligated to provide replacement housing at 1642 Ocean Avenue pursuant to the removal permit issued by the Rent Control Board for this property and 1616 Ocean Avenue; (2) whether the city can remove this property from the rental housing market pursuant to the Ellis Act; and (3) whether and to what extent the City would be obligated to reimburse the Gas Tax Fund since the City utilized revenues from this fund to acquire 1642 Ocean Avenue. CONCLUSION The City is required to provide replacement housing at 1642 Ocean Avenue pursuant to the removal permit issued for this property since after the city obtained the removal permit, and pursuant to the authority of the permit, the City entered into relocation agreements with the tenants at 1642 Ocean Avenue and relocated these tenants to other housing in the City. The City can utilize the Ellis Act to withdraw rental property from the housing market just as any other landlord can. However, since the city has already obtained a removal permit from the Rent Control Board which achieves the same result, and the City is obligated to meet the conditions attached to that permit, resort to the Ellis Act would be of no utility. The City is obligated to reimburse the Gas Tax Fund at the fair market value for any portion of 1642 Ocean Avenue not used for a permissible street or highway purpose but instead used for the provision of housing. ANALYSIS OF ISSUE ONE To answer the first inquiry, it is necessary to examine the City's actions leading up to and following the issuance of the removal permit by the Rent Control Board. On or about July 1, 1988, the City submitted removal permit applications for 1616 and 1642 Ocean Avenue. See Applications for Removal Permit, No. 246R-D (Exhibits A and B).1 These properties contain a total of twenty-eight (28) housing units. As reflected in these applications, the City intended to redevelop these properties, and adjoining properties, with a parking structure to serve the pier and nearby beaches. The applications provided that twenty-nine (29) units of replacement housing would be developed at City-owned property located on Bay street. No on-site housing was contemplated. On or about October 6, 1988, the City submitted an alternative plan which provided for the construction of thirty (30) residential housing units on-site in the parking structure. See October 6, 1988 letter from John Jalili to Mary Ann Yurkonis (Exhibit C). Twenty-eight (28) of the replacement units would be subject to rent control and be deed-restricted to be permanently affordable to low income persons. Current tenants of the property would have the right of first refusal to occupy the replacement units. Given the nature of the redevelopment, it was envisioned that the temporary relocation of the tenants at 1642 Ocean Avenue would be necessary. However, the city intended to develop the replacement housing before relocating the tenants at 1616 Ocean Avenue and demolishing that building. Rent Control Board staff issued its staff report in late October 1988. See Santa Monica Rent Control Board Staff Report on Removal Permit Application (Exhibit D). Staff recommended that the City's request to build off-site replacement housing be denied since it was not permitted by the Rent Control Law. Staff also recommended that the City's alternative removal permit request conditioned upon an on-site housing replacement requirement be approved. On or about January 3, 1989, the city formally withdrew its off-site replacement housing proposal, seeking instead to proceed solely with its second proposal. See January 3, 1989 letter from John Jalili to Mary Ann Yurkonis (Exhibit E). The City reiterated that all twenty-eight units would be replaced on-site All exhibits referenced in this memorandum will be available for review at the July 12, 1994 City Council meeting on this matter. 2 in the proposed parking structure. The tenants who were temporarily relocated from this property would be guaranteed interim housing in the city. The displaced tenants would also be provided moving and storage expenses, utility hook-up fees, rent differential payments, and relocation payments of at least $1,000.00 per unit. On or about January 27, 1989, the city provided the Rent Control Board with supplemental information regarding its removal permit application. See January 27, 1989 letter from Peggy Curran to Mary Ann Yurkonis (Exhibit F). In this correspondence, the City guaranteed that the 1616 Ocean Avenue property would not be demolished until replacement housing was built. The City further detailed the relocation assistance benefits that would be provided the tenants at 1642 Ocean Avenue and the meetings that had been held with tenants concerning the City's latest proposal. The City stated that the relocation assistance benefits would be guaranteed through binding agreements between the tenants and the City. In a supplemental staff report issued by the Rent Control Board, the staff recommended approval of the City's removal application request based on the city's proposal reflected in the January 27, 1989 letter. See Santa Monica Rent Control Board Supplemental Staff Report on Removal Permit Application (Exhibit G). This recommendation was based on the understanding that the City would build on-site replacement housing. On February 9, 1989, the Rent Control Board granted the removal permit application. See Removal Permit Application -- Notice of Decision of Rent Control Board (Exhibit H). On or about February 1989, the City mailed the residents of 1642 Ocean Avenue a letter informing them of the Board's decision, setting forth the relocation benefits that would be provided by the City, and committing the City to enter into individual agreements with each tenant detailing these relocation benefits. See February 28, 1989 letter from Candy Rupp to Residents of 1642 Ocean Avenue (Exhibit I). The right of first refusal of an on-site replacement unit was expressly stated as one of the relocation benefits. On or about March 1, 1989, the City entered into an agreement entitled "Relocation Planll with Sandra Leet, a tenant at 1642 Ocean Avenue. See Leet's Relocation Plan (Exhibit J). This agreement specifically outlined the relocation benefits that the City would provide Ms. Leet as required by the removal permit including: the right of first refusal to occupy the replacement housing that would be constructed, interim housing, moving and storage costs, and relocation counseling. Ms. Leet subsequently vacated her unit and the City made payments to Ms. Leet as required by this agreement. 3 Later in March 1989, the City entered into a similar agreement with Nancy Safonov. See Safonov's Relocation Plan (Exhibit K). Ms. Safonov also vacated her unit in accordance with this agreement and City payments were made. Relocation Plans were subsequently prepared for Peter Woods and Milton & Aldona stark. See Wood's and Starks' Relocation Plans (Exhibits Land M). Although these agreements were never formally executed, these tenants moved in accordance with the provisions of the agreements and the city made certain payments to these tenants as required by the agreements' terms. The last remaining tenant at the property, Ida Porterfield, was relocated after the Northridge Earthquake. A Relocation Plan was also prepared for Ms. Porterfield. See Porterfield's Relocation Plan (Exhibit N). Although not executed, she also received payments in accordance with the terms of the relocation agreements. In entering into relocation plans with the tenants at 1642 Ocean Avenue and relocating these tenants from the property, the C1ty proceeded in reliance on the removal permit issued by the Board and in accordance with the commitments that the City made to the Board. The removal permit established the underlying authority for the actions the city undertook after the permit was issued. Having utilized certain of the benefits of the permit, i.e., obtaining the authority to relocate tenants from the property, the city must also accept the burdens of the permit -- provision of replacement housing on the site. See Sports Arenas Properties, Inc. v. San Dieqo, 40 Cal. 3d 808, 815, 710 P.2d 338, 341-42, 221 Cal. Rptr. 538, 541-42 (1985) (if permittee has exercised its authority pursuant to a permit, "it must accept the burdens with the benefits of the permit"). Accord City of Santee v. Superior Court, 228 Cal. App. 3d 713, 718, 279 Cal. Rptr. 22, 25 (1991) (landowner who specifically agreed to permit condition and accepted benefits afforded by permit cannot later challenge condition imposed in granting permit). Further, failure to build the replacement housing would directly contravene the agreements which the City entered into with each tenant at 1642 Ocean Avenue and which it agreed would be binding on the City. We are unaware of any authority which would justify such action.2 2 As a condition of the grant1ng of the removal permit, the City is required to enter into a removal permit agreement with the Rent Control Board which embodies the terms and conditions of the removal permit approval. As of this date, the city has not entered into this agreement. However, this factor does not alter the above analysis given the precise factual circumstances of this case. 4 It should be noted that although the removal permit was granted for both 1616 and 1642 Ocean Avenue, the City has only relocated tenants at the latter property. Further, the city has not entered into relocation plans with any tenant at 1616 Ocean Avenue. Given these circumstances, the City is not obligated to proceed with the removal of 1616 Ocean Avenue from the rental market as originally contemplated when the City obtained the removal permit from the Board.3 ANALYSIS OF ISSUE TWO The Ellis Act, Government Code Section 7060 et seq., authorizes a landlord to cease operating property as rental property and evict all the tenants thereon without obtaining a removal permit from the Rent Control Board. A public entity, such as the City, is entitled to utilize the Act in the same manner as any other landlord. While the City could have withdrawn the 1616-1642 Ocean Avenue properties from the rental market pursuant to the Ellis Act, there would be no utility in doing so now. As discussed above, the city has already obtained a removal permit from the Rent Control Board which authorizes the City to undertake the very actions that an Ellis Act withdrawal would authorize and the city is obligated to comply with the permit's terms and conditions. In short, resort to the Ellis Act would be redundant and have no practical effect or benefit. ANALYSIS OF ISSUE THREE In or around 1975, the City acquired 1642 Ocean Avenue for proposed highway improvements with revenues from the Gas Tax Fund. (The other contiguous parcels adjacent to 1642 Ocean Avenue, which are collectively being examined as the site of Project New Hope, are not the subject of this analysis since these other parcels were apparently purchased with funds other than the Gas Tax Fund.) Subsequent to the purchase and up until demolition early this year, the rental revenue from 1642 Ocean Avenue was placed into the Gas Tax Fund in compliance with state 3Since the City's possible use of 1642 Ocean Avenue as the site for Project New Hope is quite distinct from the proposal before the Rent Control Board in 1989, and does not include the removal of 1616 Ocean Avenue, this proposed use will have to be reviewed by the Rent Control Board to assure conformity with the Rent Control Law and the replacement housing requirements thereunder. 5 guidelines pending a final decision on the use of the subject parcel. The use of revenues from the Gas Tax Fund is specifically limited by the California Constitution and applicable state guidelines to street and highway purposes. See California Constitution, Article 19, section Ii state Controller, uGuidelines Relating to Gas Tax Expenditures" ("state Controller's Guidelines"), Chapter I, Section II. Where, such as here, revenues from the Gas Tax Fund are used to purchase real property initially slated for a street or highway use, but is no longer required for such purpose, the City must reimburse the Gas Tax Fund in an amount equivalent to the current fair market value of the parcel. See California Constitution, Art. 19, sections 8 & 9. However, if a portion of the parcel purchased with Gas Tax Funds is used for housing and the other portion used for a related street or highway purpose such as street widening, the city's obligation to reimburse is limited to just that portion of the parcel used for housing. The city's use of a portion of the parcel for street widening, street betterments, or any other permissible street or highway purpose is not subject to reimbursement. See generally, State Controller's Guidelines, Chapter 2 et seq. memos\bar\removal.ct2 6