SR-407-003-01 (2)
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DEe 1 3 1988
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city Council Meeting: 12/13/88
Santa Monica, California
TO:
Mayor and City Council
FROM:
City Staff
SUBJECT:
Recommendations Regarding the Housing Development
at 1851-1901 and 1907 11th street
INTRODUCTION
This report transmits information and recommendations regarding
the status of the project and options for disposition of the
property at 1851-1907 Eleventh street in Santa Monica.
BACKGROUND
In December, 1983 the City Council approved the use of $600,000
in Community Development Block Grant funds, and authorized the
city Manager to execute purchase agreements, to acquire the sites
at 1851-1907 Eleventh Street for the purpose of developing af-
fordable rental housing.
The city of santa Monica, under a
cooperation Agreement with the Housing Authority of the county of
Los Angles (County), secured a "Turnkey Public Housing Program"
commitment from the U.S. Department of Housing and Urban Develop-
ment (HUD) for the construction of nineteen (19) family rental
units on the property.
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QEe 1 ; 1988
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In May, 1985 the city Council authorized the City Manager to
negotiate and execute a Grant Deed transferring the Eleventh
street property to the selected developer - EAC Construction Cor-
poration - as required under the terms of the HUD "Turnkey Con-
tract of Sale." The property was deeded to EAC Construction and
the Grant Deed contained covenants which require that the proper-
ty be used only for the purpose of providing affordable housing
to low and moderate income households, and which also gave the
City the right to repurchase the property for $1. 00 upon a de-
fault of these restrictions.
Construction of the project began in early 1986 and the project
is now complete and ready for occupancy. The property is cur-
rently owned by First Interstate Mortgage Corporation (FIMC) who
acquired the property through foreclosure after a default by EAC
Construction of the terms of the construction loan. A purchase
escrow for the property has been opened by the County and FIMC as
Seller has required that escrow close by December 19, 1988.
Under the HUD "Turnkey Contract of Sale" regulations, the County
will purchase the property and improvements from FIMC using
Federal funds. However, HUD must review all legal documents in-
vol ved in the purchase and inspect and approve the development
prior to loan closing and occupancy. HUD has completed its
physical inspection of the property and accepted the property,
but in the review of the legal documents HUD raised issues with
the covenants contained in the City's original Grant Deed which
restrict the use on the property. These covenants run with land,
and are superior to the Declaration of Trust to be recorded by
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HUD, which secures their Annual Contributions Contract (ACe).
HUD has indicated to the County and the City that they are un-
willing to permit the funding of the lITurnkey Contract of Salen
with the recorded use restrictions, thus jeopardizing the pur-
chase of the property by the County.
The following discusses the options available to the City at this
time and recommends that the city council authorize the city Man-
ager to proceed to take a series of actions which will enable the
project to be occupied by low income households.
DISCUSSION
There are currently two options open to the City which would en-
sure that the property be used for the provision of low and
moderate income housing. The two options are discussed below in
order of preference.
1. Modification of Existing Covenants and Recordation of New
Covenants
As discussed, HUD has indicated that they are unwilling to accept
the property and fund the project with the covenants currently in
place. HUD has proposed that the City remove the existing cove-
nants and in place substitute the following:
A) A Deed Restriction would be recorded in subordinate position
to the HOD Declaration of Trust containing use restrictions
on the property requiring it to be used for rental housing,
affordable to low and moderate income households, and which
would not be in force or effect until the term of the HUD
Annual Contributions Contract (ACC) expired; and
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B) An Option Agreement would also be recorded concurrently and
would give the City the exclusive right to purchase the prop-
erty upon any proposed sale, transfer of title, or change of
use, for the purchase price of the HUD Contract of Sale -
$1.1 million approximately, adjusted annually by the Consumer
price Index (CPI).
An evaluation of this option has been undertaken by Community and
Economic Development staff and city Attorney's Office staff. It
is recommended that this be the first course of action as HUD has
indicated that they would find this to be acceptable, and this
ensures with a reasonable probability that the property will re-
main as affordable rental housing with the city having the op-
tion, if need be, to purchase the property and improvements at
some point in the future. During the term of HUD's Annual Con-
tributions Contract (ACC) the property is governed by federal
regulations which require it to be operated and managed as rental
housing affordable and available to very low income families,
thus securing its use as intended by the City for the term of at
least forty (40) years. This option is also the most expeditious
and time is of the essence.
FIMC has given the city and county until December 19th to pur-
chase the property before they pursue alternative buyers of the
property. Such an eventuality is not considered an option by
staff I as there is no guarantee or requirement that FIMC will
sell the property to a responsible and experienced developer of
affordable rental housing.
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2. Purchase Option
The second option available to the city is to facilitate the pur-
chase of the property without utilizing the HUD "Turnkey Contract
of Sale" funds.
This would require a participation by a third
party, such as community Corporation of Santa Monica (CCSM) to
purchase the property. A combination of private debt, syndica-
tion proceeds, and additional gap financing from the City of ap-
proximately $300,000 would be required to retire the loan held by
FIMC. This option would enable the covenants to remain in place,
and would result in ownership by an organization which the city
is confident would properly own and manage the property. There-
by, making the units available to very low income households at
affordable rents, as would be case under the terms of the HUD
llTurnkey Contract of Sale.1I However, this scenario would require
that: (1) FIMC extend the closing date beyond the December 19th
deadline~ and (2) the city commit additional funds to the
project.
Next Steps
Given the complexities of the project and the imminent loss of
the property, staff is requesting that the City Council authorize
the City Manager to take the necessary steps to pursue each of
these options in turn in order to bring this project to occupancy
as expeditiously as possible, while maintaining permanent use
restrictions on the property.
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The following provides more specific details as to the recommen-
ded terms of the deed restriction and option agreement to be exe-
cuted and recorded.
Deed Restriction: The deed restriction shall include the follow-
ing basic provisions:
(1)
The property and all improvements thereon shall be
used for rental housing for low and moderate income
families and disabled persons, and these covenants
shall run with the land and be binding upon future
successors, assignees, transferees, etc;
(2)
The covenants will be junior and subordinate to
HUD's Declaration of Trust which secures their An-
nual Contributions Contract (ACC), and upon ter-
mination of the ACC the deed restriction shall as-
sume a senior position to all subsequent liens,
encumbrances, ete;
(3)
Reporting requirements will be included in order to
allow the City to determine whether the covenants
are being adhered to by the owner.
It is recommended that the city council authorize the city Man-
ager to negotiate the terms of the Deed Restriction with HUD and
the County, and execute the Deed Restriction with the inclusion
of the provisions stated above.
option Agreement: An option agreement is a standard mechanism
utilized in order to secure the exclusive right to purchase a
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property. The purchase price will be fixed at a sum or formula
acceptable to all parties and with consideration of the City's
available resources. The option agreement shall include the fol-
lowing basic provisions:
(1)
Term - the option agreement will commence upon ex-
ecution of the agreement and will expire upon con-
clusion of the term of HUD's ACC or any extensions
thereto:
(2 )
The City shall have 180 days to exercise the option
to purchasei
(3 )
The City may assign the option to any other agency
including the Redevelopment Agency, the Housing
Authority, or Community Corporation of Santa
Monica:
(4)
The option may be exercised upon any proposed sale,
transfer, assignment, or change of use, except for
change of title to HUD ownership under the terms of
the ACC.
It is recommended that the city Council authorize the city Man-
ager to negotiate and execute the Option Agreement, including the
purchase price, with HUD and the County with the inclusion of
the provisions stated above.
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FINANCIAL/BUDGETARY IMPACTS
There are no direct financial or budgetary impacts as a result of
the recommendations contained herein. If the purchase option is
pursued staff will return to Council to request authorization to
expend funds as required to enable the purchase of the property
by an entity other than the County.
RECOMMENDATIONS
It is recommended that the city Council:
1. Authorize the City Manager to negotiate with HUD and the
County the terms of a new Deed Restriction and option Agree-
ment to include the provisions stated herein and to release
the existing covenants recorded against the property in favor
of the covenants contained in the Deed Restriction and option
Agreement.
2. Authorize the City Manager to proceed to negotiate with FIMC
a substitute buyer of the city's choice as detailed herein,
if no acceptable resolution is reached with the County and
HUD.
Prepared By: Candy Rupp, Housing Program Manager
Department of Community & Economic Development
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