SR-407-000-03
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City Council: 10/25/88
Santa Monica, California
TO:
Mayor and city council
FROM:
City Staff
SUBJECT:
Recommendations Regarding the Establishment of the
Citywide Housing Trust Fund Program
INTRODUCTION
This report provides information and recommendations regarding
the establishment of the Citywide Housing Trust Fund Program. The
report recommends that the City Council: (1) establish the city-
wide Housing Trust Fund and direct staff to prepare program
guidelines and implement the program consistent with the recom-
mendations outlined in this report; and (2) appropriate fees co1-
lected to date pursuant to Ordinance 1367 and Ordinance 1448 for
expenditure through the Citywide Housing Trust Fund Program.
BACKGROUND
The Land Use Element adopted in 1984 found that new office
developments create a need for affordable housing but do not pay
the same taxes as other types of development that the City may
use to address this need. On April 30, 1986, the City Council
adopted Ordinance 1367, which implemented the project mitigation
requirements of the Land Use Element and enabled the City to col-
lect fees from developers in lieu of on-site housing mitigation.
As of October 1, 1988, the City has collected $2,800,230.89 in
mitigation fees for housing/ plus $32,750.08 in accrued interest,
for a total of $2,832/980.97.
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OCT 2 5 1988
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Also, the city's Housing Element provides for a program which
requires inclusion of affordable housing in multifamily residen-
tial developments. ordinance 1448 adopted by the City Council on
June 14, 1988 provides for the payment of fees by developers in
lieu of meeting this requirement on-site. The city has collected
$506,137 to date from developers subject to Ordinance 1448, plus
accrued interest of $12,917.12, for a total of $519,053.84.
The development of program guidelines for the expenditure of
these funds is a fiscal year 1988-1989 Housing Division Workplan
Objective.
This report proposes that the City Council establish a single
program for developing affordable housing units using the revenue
received to date and future revenues from both Ordinance 1367 and
1448. A new Ci tyw ide Housing Trust Fund ( "Program II ) would serve
as the mechanism by which these fees will be used by the City to
assist in the development of new affordable housing units in San-
ta Monica.
The fOllowing discussion summarizes the program design, the fund-
ing mechanism, eligibility requirements, and application proce-
dures for the proposed Program.
DISCUSSION
program Design
In designing this housing program, staff considered local housing
market conditions, public and private resources available to as-
sist in affordable housing development, experience with the
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City's existing housing trust fund
needs created by office development.
cusses each of these considerations.
programs, and the hOlls ing
The following briefly dis-
o Local Market Conditions
The Regional Housing Needs Assessment (RHNA) prepared by the
Southern California Association of Governments (SCAG) estimates
that 11,187 Santa Monica low income households currently pay
greater than 30% of their income toward shelter cost: 96% of
these households are renters.
SCAG's RHNA also provides an estimate of future housing needs for
Santa Monica for the five year period ending June 30, 1994. This
model estimates a total of 1 r 969 units affordable to low and
moderate income households will be needed during this period, an
average of 394 units per year.
Further evidence of the need and demand for affordable rental
housing in Santa Monica is demonstrated by the fact that Communi-
ty Corporation of Santa Monica has a waiting list of over 2,000
households. In addition, 411 very low income Santa Monica house-
holds have applied for assistance through the Section 8 Certifi-
cate program.
New residential development has focused on condominiums and high
income rental housing. The rental housing market is extremely
tight in Santa Monica, with most recent vacancy figures below two
(2%) percent. Thus, the growing need for affordable rental hous-
ing and the scarce supply available in the market to meet this
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need make it necessary for the city to continue to encourage and
assist the development of affordable rental housing through pro-
grams such as the Citywide Housing Trust Fund.
o Available Public and Private Resources
currently available state and federal housing subsidy programs
are targeted to assisting the development of rental housing for
low income families and, to a lesser extent, to assist Single-
Room Occupancy (SRO) housing and housing for the elderly, dis-
abled, and other special needs groups ("special users"). Funding
for developing rental housing has been severely curtailed,
however, the state and federal low income tax credit programs
provide significant opportunity to leverage City funds invested
in permanent affordable rental housing.
with the recent Low Income Tax Credit legislation, it is likely
that for-prOfit investors will form limited partnerships to
develop low income housing in Santa Monica. The City can effec-
tively leverage its housing dollars by taking advantage of these
new state and federal tax credit programs which encourage this
private investment. Together these programs can encourage private
capital contributions constituting up to 35% of total develop-
ments costs for low income rental new construction projects.
No state or federal programs are currently in place which would
enable the City to develop its own ownership assistance program
without excessively high subsidy costs.
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o Existing Housing Trust Fund programs
Currently the City has two housing trust fund programs, the pico
Neighborhood Housing Trust Fund (PNHTF) and CHARP. Both programs
utilized the deferred loan as their primary mechanism. It is
recommended that a similar mechanism be utilized by the proposed
Program.
staff examined various alternative program mechanisms, including
deferred loans, interest rate buydowns, annui ty programs, and
rental subsidies to non-Section 8 eligible households. These
programs are administratively more costly, and programmatically
less effective than the deferred loan. It was determined that the
deferred loan mechanism is:
1) easily administered;
2) provides an effective guarantee of long-term affor-
dability by establishing a secured interest in the
property; and
3) enables the City to leverage non-city sources of debt
financing, grants, and capital investment.
o Office Development and Housing Needs
The shortage of rental housing for families is exacerbated by
expanded office development as employees of office developments
compete with existing residents for scarce affordable housing
resources. Office development particularly exacerbates the
shortage of rental housing for families and special users, who,
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when competition for units is great, will usually lose out to
higher income singles and couples.
The greatest housing need in Santa Monica continues to be afford-
able rental housing for families, and it is recommended that Pro-
gram funds be targeted to meet the needs of these households.
Just as the Housing Element and Ordinance 1367 require that on-
site housing mitigation be targeted primarily toward low income
families, so too should in-lieu fees be used primarily to benefit
this population. Indeed use of program funds not directly tied
to meeting established mitigation goals could raise legal chal-
lenges to the imposition of mitigation requirements.
Secondarily, the program should assist developments meeting the
needs of special users. This would include the development of SRO
housing. While the market for SRO housing exists as a market sep-
arate from that impacted by increasing the number of office work-
ers, increased office construction does increase the pressure to
convert existing BRO uses to more lucrative commercial uses,
thereby displacing a particularly needy segment of the population
without access to available federal housing subsidies.
Alternative needs to be addressed by the Program which Staff ex-
amined included the development of transitional housing and shel-
ters, and ownership housing. It is recommended that Program funds
not be used for transitional housing and shelters. First, be-
cause no linkage has been documented between office development
and the need for shelters, and to use funds for such purposes
could jeopardize the underlying program rationale. Second, by
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their nature, neither transitional housing or shelter housing
will generate income sufficient to leverage private debt financ-
ing. Given the type of state and federal program funds avail-
able, City investment in transitional housing or shelters would
be extremely large relative to that required for permanent low
income rental housing. In addition, recent housing studies have
demonstrated that the lack of permanent affordable housing a
major cause of homelessness.
staff also recommends that Program funds not be used for owner-
ship housing at this time. As noted above, there are no other
available public resources which would make an ownership assis-
tance plan feasible. Furthermore, office and commercial develop-
ment impacts much more heavily on the demand for rental housing
by low and moderate income households and much less on the demand
for ownership housing.
Funding Mechanism
Both the PNHTF and CHARP programs provide capital funds to
eligible borrowers to make up the financial gap between available
non-program resources, including the borrower's equity and pri-
vate financing, and the cost of developing affordable mul ti-
family and SRO rental housing. It is recommended that the Program
utilize a similar mechanism.
Establishing a separate program will ensure that in-lieu fees are
expended for the purposes for which the fees were collected, i.e.
to increase the supply of housing, as is required by state law.
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Whereas the CHARP and PNHTF have as an additional goal to main-
tain and preserve the existing housing stock, Program funds will
be used solely for projects which increase housing supply.
As in the CHARP and PNHTF programs, Program funds would be made
available in the form of a deferred loan, each evidenced by a
promissory note, and secured by a deed of trust. Each loan will
also be secured by a regulatory agreement restricting the occu-
pancy, rent levels, and management and maintenance of the proper-
ty for a term of not less than fifty (50) years.
In contrast to the City'S other trust fund programs, however,the
program will require repayment of principal and interest on the
loans from proj ect residual receipts, i. e. cash flow remaining
after payment of debt and approved operating expenses. This
residual receipts provision will help reduce long-term SUbsidy
costs. The year in which these payments will begin will range
from year five (5) to year thirty (30). Deferral for thirty (30)
years will be available only to projects which provide 75% bene-
fit to very low income households.
principal and interest which cannot be repaid through residual
receipts will be due and payable at the end of the loan term,
unless the loan term and regulatory restrictions are extended.
Forgiveness of the principal and interest will occur at the end
of the loan term if the borrower has complied with Program re-
quirements by maintaining the units at affordable rents and
making them available to lower income households.
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The interest rates on the loans will equal the rate for the
average conventional commitment of a fixed-rate 30-year mortgage,
currently 10.53% The minimum loan term will be 50 years.
Eligibility Requirements
Borrowers: Program funds will be made available to both for-
profit and non-profit housing developers with proven capacity to
develop, own, and operate affordable rental housing. Limited
partnerships with non-profit general partners would also be
eligible borrowers.
proj ects : proj ects el ig ible to receive funds are those which
resul t in the development of affordable rental housing units
through new construction, substantial rehabilitation, or conver-
sion from non-residential use. Projects may be located anywhere
in Santa Monica. No project which involves permanent involuntary
displacement of tenants would be eligible for funding. Both mul-
tifamily rental projects and Single Room Occupancy housing proj-
ects would be eligible for assistance, however projects which
include larger units for families would have priority for
funding.
Eligible Uses of the Fund: Funds will be used to make loans to
eligible borrowers for property acquisition, substantial
rehabilitation, and/or new construction activities. Program funds
could also be used for related predevelopment activities, includ-
ing professional services which cannot be obtained on a contin-
gency basis. All expenditures would be SUbject to City approval
and verification. Program funds could be used for permanent
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financing or for interim loans for up to a period of six months
for site acquisition or construction.
Level of Benefit: All projects must provide a minimum of 75%
benefit to low and middle income households, i.e households earn-
ing less than 100% of the County median income. Projects which
provide units to very low (50% of median) and low income (80% of
median) families and individuals, who are not eligible for
federal rental assistance, will receive priority for funding. As
in the PNHTF and CHARP programs, the City will require that all
borrowers execute and record a regulatory agreement, which will
require that the low-income benefit provisions be maintained over
the term of the Program loan.
Per Unit Subsidy: Based upon staff's analysis of current develop-
ment costs and available sources of funds, staff recommends a
maximum Program loan amount of $60,000 per unit. This level of
subsidy will be required to develop projects in high land cost
areas, projects which serve very low income households, and proj-
ects which serve special users for which state and federal subsi-
dy programs are limited.
The primary factor leading to the increased cost of developing
affordable housing in Santa Monica has been the escalating cost
of land. Four years ago land acquisition costs in the pico Neigh-
borhood averaged fifteen dollars ($15) per square foot. Current
land costs in this neighborhood are estimated at approximately
$35-$40 per square foot, an increase of 150% over just four
years. Similar increases in land costs have taken place in other
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neighborhoods. At the same time, modifications to the City's
Zoning Ordinance in recent years have reduced maximum allowable
densities for housing. The effect of this reduction has been to
further increase the per unit land cost for affordable housing
projects, and to increase the extent to which project feasibility
is affected by inflation in land cost. The impact of this infla-
tion is even greater in areas of relatively high land cost, such
as the Santa Monica-Montana corridor, than in historically low
cost areas such as Ocean Park and the Pico Neighborhood.
While in syndicated low income housing projects increases in con-
struction costs can be partially offset by additional capital
contributions because of increased depreciation and tax credit
potential, increases in land cost simply widen the gap between
total development costs and available capital and debt financing,
necessitating greater subsidy. To the extent that projects are
developed in high land cost areas, or provide long-term benefit
primarily to very low and low income residents, these proj ects
will require the greatest subsidy. The example below indicates
the projected sources and uses of funds for two typical projects
containing six three-bedroom units.
Example 1: Low Land Cost Area ($40/ft)
USES OF FUNDS:
TOTAL COST
PER UNIT
Land Acquisition
Construction (Building)
Construction (Parking)
Financing/Misc. Soft Costs
$300,000
$356,000
$139,750
$102,250
$898,000
$50,000
$59,333
$23,292
$17,042
$149,667
TOTAL DEVELOPMENT COSTS
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SOURCES OF FUNDS:
First Trust Deed Financing $274,000
Limited Partner Capital (Net) $273,000
City Subsidy $352,000
TOTAL SOURCES OF FUNDS
$898,000
Example 2: High Land Cost Area ($55/ft)
USES OF FUNDS:
TOTAL COST
Land Acquisition
Construction (Building)
Construction (parking)
Financing/Misc. Soft Costs
$412,500
$356,000
$139,750
$102,250
TOTAL DEVELOPMENT COSTS
$1,010,500
SOURCES OF FUNDS:
First Trust Deed Financing
Limited Partner Capital (Net)
City Subsidy
state RHCP
$274,000
$273,000
$360,000
$103,500
TOTAL SOURCES OF FUNDS
$1,010,500
$45,667
$45,500
$58,667
$149,667
PER UNIT
$68,750
$59,333
$23,292
$17,042
$168,417
$45,667
$45,500
$60,000
$17,250
$168,417
As the above examples indicate, proj ects providing substantial
benefit to low income households and/or projects located in high
land cost areas will require other sources of subsidy in addition
to Program funds even with the maximum Program loan of $60 1000
per unit. Because state and federal low income tax credit pro-
grams may not be used in projects which restrict occupancy to the
elderly, disabled or other special users, proj ects meeting the
needs of these groups may also require Program loans approaching
$60,000 per unit.
cording to competitive selection criteria, including:
In order to allocate Program funds, projects will be rated ac-
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1) Percent benefit to very low income households;
2) Benefit to special user households where no other
sources of subsidy are available; and
3) Relative land cost
Only a proj ect meeting the following criteria will be able to
receive the maximum Program loan amount:
1) the Project provide 75% benefit to low income house-
holds; or
2) the Project provides 100% benefit to low and moderate
special user households; or
3) the Project's land cost per unit (calculated at maxi-
mum density) exceeds $60,000, and the project pro-
vides 100% benefit to low and moderate income house-
holds; and
4) the Project would otherwise be infeasible without the
commitment of the maximum Program loan.
As the City has done with CHARP and PNHTF funds, Program funds
will be used to leverage state and federal sources of subsidy,
and thus keep average subsidy costs at substantially under the
program maximum. While the maximum per unit subsidy for CHARP
was $35,000 during Fiscal Year 1987-88, the average per unit cost
during this period was $26,500. Based upon the ability of the
City to use Program funds to similarly leverage these other
sources of subsidy, the average per unit subsidy required to
develop an affordable unit under the Program is estimated to be
$50,000. This is consistent with the per unit amounts the City
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has received under the Greenwood ($50,000)
($54,000) Development Agreements.
and Soutbmark
As indicated in Exhibit 1, funds paid to date will enable the
City to develop approximately 66 units based upon this estimated
per unit subsidy cost. Exhibit 2 estimates Program expenditures
and unit production over the next three years.
Application Procedures
The Program guidelines will provide for an "open-window" process
for proj ect submittal and approval, allowing for submittal of
applications for available program funds throughout the fiscal
year. Such an open-window process is effective in Santa Monica
because the market is constantly in flux and as properties become
available developers can apply to the city for assistance. Proj-
ect loan requests which are consistent with Program guidelines
will be reviewed and approved administratively as is the practice
for the CHARP and PNHTF programs. In selecting among competing
project applications, priority will be given to projects which:
1) significantly increase affordable housing opportunities for
households who have difficulty finding housing including large
families, the disabled and persons traditionally served by Single
Room Occupancy housing; 2) effectively leverage non-City sources
of financing; and 3) benefit a high percentage of very low and
low income households.
A neighborhood review process will be required and will provide
neighbors with an opportunity to review and comment to the City
on the proposed project prior to the release of program funds.
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The city's Housing Commission has reviewed the proposed Program
and has recommended approval by the city Council. The Planning
commission has also reviewed the proposed Program without recom-
mending any changes.
FINANCIAL/BUDGETARY IMPACTS
The program will expend funds paid to the city pursuant to Or-
dinance 1367 and Ordinance 1448, plus accrued interest thereon.
Funds will be appropriated on an annual basis. This report recom-
mends that the City Council appropriate funds in the amounts
specified from the following accounts:
01-987-008-000-000 Mitigation-Housing
01-987-006-000-000 Housing-Inclusionary
$2,832,980.97
$ 519,053.84
These funds will be allocated to the following accounts for ex-
penditure through the Citywide Housing Trust Fund:
01-720-264-145-961 Mitigation-Housing
01-720-264-146-961 Housing-Inclusionary
$2,832,980.97
$ 519,053.84
TOTAL
$3/352,034.81
In-lieu fees received subsequent to this appropriation will need
to be appropriated during the 1989-90 Budget cycle.
RECOMMENDATIONS
It is recommended that the city Council:
(1) Approve the establishment of the Citywide Housing
Trust Fund and direct staff to prepare Program
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Guidelines and commence implementation as outlined
in this report.
(2) Appropriate housing in-lieu fees paid to date pur-
suant to Ordinance 1367 and Ordinance 1448 as
detailed herein for expenditure through the citywide
Housing Trust Fund.
Prepared by:
Jeff MUdrick, Senior Development Analyst
Candy Rupp, Housing Program Manager
Department of Community and Economic Development
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EXHIBIT 1
IN-LIEU FEE PAYMENT SUMMARY
INCLUSIONARY ROUSING IN-LIEU FEES:
PROJECT ADDRESS
AMOUNT PAID
1037 Bay st.
1253 23rd st.
2528 3rd st.
927 5th st.
2453 Chelsea
925 17th st.
911 5th st.
1749 lOth st.
1128 17th st.
1514 18th st.
1006-14 Calif
309 Broadway
2807 3rd St.
1223 20th St.
2812 6th st.
2203 Ocean
712 Pacific
$17,169.00
$14,383.86
$13,201.50
$21,978.00
$12,300.00
$22,833.00
$28,135.50
$16,027.86
$25,032.00
$24,822.00
$43,818.00
$105,576.00
$26,406.00
$64,730.00
$22,750.00
$30,144.00
$16,830.00
$506,136.72
12,917.12
$519,053.84
$50,000.00
Subtotal
ACCRUED INTEREST
TOTAL
AVERAGE REQUIRED PER UNIT SUBSIDY
PROJECTED # UNITS
10 UNITS
OFFICE HOUSING MITIGATION FEES:
PROJECT ADDRESS
AMOUNT PAID
1452 Sixth st.
2701 Ocean Park Blvd.
2030 Colorado Blvd.
1723 4th St.
309 Broadway Ave.
525 Broadway Ave.
2425 Olympic Blvd.
$23,303.50
$42,043.22
$990,000.00
$26,438.00
$123,535.17
$17,911.00
$1,575,000.00
Subtotal $2,800,230.89
ACCRUED INTEREST 32,750.08
TOTAL $2,832,980.97
AVERAGE REQUIRED PER UNIT SUBSIDY $50,000.00
PROJECTED # UNITS 56 UNITS
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DATE PAID
12/22/86
03/09/87
03/05/87
03/15/87
03/11/87
03/19/87
05/08/87
12/11/87
01/05/88
03/03/88
03/10/88
03/11/88
09/08/87
05/12/88
06/06/88
06/15/88
08/22/88
DATE PAID
07/16/86
04/20/87
01/04/88
03/11/88
04/09/88
05/16/88
08/20/88
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EXHIBIT 2
PROBABLE ANNUAL EXPENDITURES - CITYWIDE HOUSING TRUST FUND
Total Revenue: $3,352,035
1988-89
1989-90
1990-91
Total Number of units
11
33
22
Total Projects
Total Expenditure
2
4
3
$550,000
$1,650,000
$1,100,000
Note: Projection based upon previous program experience, current
workload, and staffing levels.
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