SR-112696-9B
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RM JM RM KB CC112696-1JWP6 1 (mpstaff3 wpd) -
NOV 2 6 _
CounCil Meetmg November 26, 1996
TO Mayor and Members of the City Council
FROM CIty Staff
SU BJECT RevIsion of Multifamily Earthquake Repair Loan (MERL) Program GUIdelines
and Procedures and Approval of Techmcal Services Contract
Introduction
This report updates the status of the Multifamily Earthquake Repair Loan (MERL) Program,
and makes a senes of recommendations designed largely to provide the administrative
flexibility and capacity required to meet the HUD funding commitment deadline of February
28, 1997 By adoptIng these recommendatIons, the necessary loan commItments could
be made on a more timely basIs, thus maximizing the opportunity for all available funds to
be committed for multifamily housing by HUD's deadline Some of the recommendations,
If adopted, also Will clarify eXisting gUidelines and make minor techmcal changes to
faCilitate smoother program administration
To provide fleXibility, staff recommends eliminating the eXisting funding allocations, now
established by loan type, processing and funding applrcatfons on a first come first served
basIs, lifting the $2 0 mIllion cumulative cap on program funds for acqUIsition by post-
earthquake buyers, and, Increasing maximum per umt loan amounts by 20% Further, staff
proposes contmumg and Increasing the size of a contract With Rmcon Consultants to
ensure proper technical support In meeting the environmental review reqUirements of the
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NOV 2 6 1996
program Four recommendatIons propose minor technical changes and language
clanficatlons, and one proposes a change to affordablhty gUIdelInes
Backaround
Subsequent to the 1994 Northndge Earthquake, the City received three grants from the
federal Department of HousIng and Urban Development (two separate HOME grants and
one CDBG grant) for multifamily housmg earthquake recovery to repair and replace Units
damaged and destroyed The CIty suffered extensive damage to Its multifamily housIng
stock from the earthquake and funds were Insufficient from the federal Small Business
AdmInIstratIon (SBA) and private Insurance to address the needs In the community The
establishment of the MERL Program for the administration of these grant funds has
provIded an Important financial resource to allow the City to rebUild ItS multIfamily housing
stock and allow reSidents to return to theIr homes The gUidelInes of the MERL Program,
established by the CIty, define propertIes eligible for loans and the parameters for staff to
evaluate loan applIcatIon requests The gUidelines also specify projected allocations of
loan funds for the four ownership categones as follows
Category 1 Pre-Earthquake Owner - $9,387,455
Category 2 Post -Earthquake Buyer - $8,612,545
Category 3 QualifIed Affordable Housmg Developers - $9,546,500
Category 4 CondominIum Owners and ASSOCiations - $2,500,000
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Applications for loan funds In Categones 1 and 4 are significantly below their projected
commitment levels whIle qualified applications for funding In Categones 2 and 3 are
anticipated to exceed the projected commItment levels All MERL Program funds must be
committed by February 28, 1997 Adopting the staff recommendations will provide the
greatest opportUnity to ensure that all available funds will be utilized In Santa MOnica
DIScussion
The MERL Program staff, with the assistance of numerous other departments of the City,
has been working diligently to process all loan applications that have been received Thus
far, 2610ans have closed and another nine have been approved These 35 loans amount
to over $20 million In funds of loans closed and approved In addition, applications have
been received and are beIng reviewed for nearly $6 million In loan funds Therefore, a
total of $26 million In loan applications have been received thus far for the $30,046,500 In
total funds deSignated for lending to multifamily property owners to assist In earthquake
recovery
ExtenSive efforts have been made to encourage the submission of additional loan
apphcatlOns from owners of multifamily hOUSing and condomlnlum properties damaged by
the earthquake These endeavors have not resulted In Increased activity under Category
1 (Pre-Earthquake Owners) or Category 4 (Condominium Owners and ASSOCiations)
However, demand for loan funds under Category 2 (Post-Earthquake Buyers) and
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Category 3 (Qualified Affordable Housing Developers) will result In a need to commit funds
and close loans m an aggreg~lte amount above that designated In these categories
DISCUSSion of the Effect of the Recommendations
1) Eliminate designated funding allocations in the Program loan categories for
the balance of funds remaining - Currently there are specifiC budgeted amounts
for each of the four loan categories, however Categories 1 and 4 have experienced
demand far below these amounts while Categories 2 and 3 have applications
pending well In excess of their budgeted amounts This revIsion will allow funds to
be proVided for those projects which are ready to move forward, regardless of their
category deSignation
2) Process current pending applications and new applications as received and
make funding commitments based on project readiness - ThiS recommendation
will ensure that all applications are considered and processed without subjective
considerations as to which applications may receive the limited remaining loan
funds
3) Eliminate the cumulative $2 million limitation on loan funds used for
acquisition costs for Category 2 projects (Post-Earthquake Buyers) - The main
goal of the eXlstmg provISion, to ellmmate land speculatIon and prevent a surge m
land values, appears to have been reached No eVidence of acquIsition price
escalation IS apparent to MERL Program staff The relatively limited amount of
remaining funds avaIlable from the Program, coupled with the likelihood of
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applications forthcoming from other categories, will further ensure that land price
escalation does not occur, and will provide the needed flexibility to process all
applications for the remaining Program funds
4) Increase the maximum loan amount per unit by up to 20% for current and
pending projects, subject to Program underwriting standards - As the Program
nears completion, It IS possible and likely that there will be unique Circumstances,
such as construction change orders, that legitimately require the Increase of loan
amounts for previously funded and pending loans ThIS recommendation Will allow
staff to respond administratively to these SItuations, where the underwntten and
approved loan amount plus additional legitimate costs would result In a loan amount
above the dollar amount per Unit originally established for each of the loan
categories
5) Establish that the initial start date of the affordability covenant coincide with
the date of the certificate of occupancy - While the MERL Program GUldelrnes
and Procedures state the specific term of the affordablhty covenants, the slgnmg of
loan documents occurs before construction begms and the exact bUilding
occupancy date determined Therefore the onset of the affordablhty covenant
sometimes IS not consistent with Initial occupancy by tenants ThiS "clean-up"
reVISIon Will ensure that the affordablhty covenants begin with bUilding occupancy
6) Establish that the interest rate charged in the event of loan default be 10%
annually or the federal discount rate plus 5%, whichever is greater - Adopting
thiS "clean-up" recommendation Will allow the loan documents to reflect the mtent
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of this provIsIon consistent with standard real estate transactIons and establish a
single Interest rate Index (the Federal Discount Rate) that IS readily Identifiable
7) Permit loan funds to be used for acquisition and development of sites
necessary to replace units lost as a result of the earthquake - Currently the
MERL Program GUidelines and Procedures provide that loan funds may be used
for sites with earthquake damaged bUildings However, HUD has allowed funds to
be used for the construction of multifamily housmg projects anywhere In the City to
replace umts lost due to the earthquake ThiS recommendation Will ensure that the
City-adopted MERL Program IS consistent with HUD's provIsions
8) Mandate that deed restricted units be proportionately distributed in relation
to building and unit size configuration, and appropriately identified in the loan
documents - The MERL Program GUidelines and Procedures do not address the
distribution of deed restricted umts within a project ThiS recommendation Will allow
MERL Program staff, through the loan documents, to ensure that neither Isolation
of deed restricted Units within a project nor limiting these Units to a particular Unit
bedroom Size, Will occur
9) Approve an increase in the size of an existing technical services contract with
Rincon Consultants, Inc. to $85,000 to provide review and analysis as
required pursuant to the National Environmental Policy Act and the California
Environmental Quality Act - The MERL Program staff, under the supervision of
the Housing DIVISion, work closely to expedite the environmental review of loan
applications The proposed contract extension and Increase With Rmcon
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Consultants, Inc. will ensure that all environmental considerations are promptly and
sufficIently addressed dUring the application review process ThiS coordmated effort
among City staff and consultants Will continue to assure that all applications are
reviewed expeditiously and loan commitments and loan closing procedures are
completed m a timely manner
10) For Category III loans, amend current affordability guidelines to require that
no less than 49% of the units be restricted to occupancy by low-income
households - Current gUidelines reqUire that 100% of the umts be deed restricted,
however, a 49% requirement Will provide greater fleXibility In the use of funds
Additionally, In most circumstances non-profit developers Will utilize tax credits for
additional funding sources which Will result In SImilar rent restnctlons on the
remainder of the umts
Housing Commission RecommendatIon
The recommendation of thiS report regardmg removing the maxImum budget amounts of
the various categories of the MERL Program was revIewed conceptually With the Housing
Commission at Its August meetmg After a thorough diSCUSSion, the Commission stated
Its preference that applications be processed In the sequence received and that MERL
Program funds be made fleXible to commit to these projects In the order applications are
received, Without regard to category ThIS recommendation IS consistent With
recommendation number two of thiS Staff Report
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Fmance/Budaetarv lmoact
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There IS no direct financial or budgetary Impact that would result from adopting the
recommendatIons All loan fund repayments quahfy as revenue available to the City for
use In other ehglble HUD activities The Rrncon Consultants, Inc contract would be funded
from admrnlstratlve costs originally designated for management of the MERL Program
PrevIous to the orlgmal retention of Rincon, a competitive process was Implemented to
select an environment services consultant for the MERL Program The firm selected from
thiS process was found to have InsuffiCiently expertise m the many nuances of NEPA
regulations to provide adequate support to the Program Rincon was retained through a
sole source process after berng interviewed by various CIty personnel, Including
representatives from the Planning Department, City Attorney's office and City Manager's
office
Cone/us Ion
Adopting these recommendations will proVide the greatest fleXibility to commit as much of
the remaining funds granted the City by HUD for earthquake recovery as pOSSible After
extensive outreach efforts, It appears that applications will be received In the near future
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for the remammg uncommitted funds This action will maXimize the City's ability to
Implement Its multIfamily earthquake recovery efforts, ensuring that to the best of our ability
all of the funds available for assisting projects are utilized
Recommendations
It IS recommended that the City CounCil approve and Instruct the City Manager to execute
a contract with Rincon Consultants, Inc for environmental consulting services for the
MERL Program (as detailed In Recommendation Number 9), and Instruct the City Manager
to Implement the revIsions to the MERL Program GUidelines and Procedures detailed m
Recommendations 1-8 and 10
1) Eliminate desIgnated fundmg allocations In the Program loan categories for
the balance of funds remaining,
2) Process current pending applications and new applications as received and
make funding commitments based on project readiness,
3) Ellmmate the cumulative $2 million limitation on loan funds used for
acquIsition costs for Category 2 projects (Post-Earthquake Buyers),
4) I ncrease the maximum loan amount per Unit by up to 20% for current and
pendmg projects, subject to Program underwrltmg standards I
5) Establish that the initial start date of the affordablhty covenant cOincide with
the date of the certIficate of occupancy,
6) Establish that the Interest rate charged m the event of loan default be 10%
annually or the federal discount rate plus 5%, whichever IS greater,
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7) Permit loan funds to be used for acquIsition and development of sites
necessary to replace units lost as a result of the earthquake,
8) Mandate that deed restricted umts be proportIonately dlstnbuted In relation
to bUilding and unit size configuration, and appropnately Identl"fied In the loan
documents
9) Approve an Increase m the size of an eXlstmg technical services contract
with Rincon Consultants, Inc to $85,000 to provide review and analysIs as
required pursuant to the National Environmental Polley Act and the California
Environmental Quality Act
10) For Category III loans, amend current affordabllrty gUidelines to require that
no less than 49% of the Units be restncted to occupancy by low-mcome
households
ThiS Staff Report was prepared by
Robert Moncrief, Housing Manager
Keith M Breskm, MERL Program Manager
Jeff Math;eu, Director of Resource Management
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