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SR-407-003-01 (2) . . ~..R DEe 1 3 1988 41t??--- PO "5 -tJ / C/ED:HD:CR:wp 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. - 1 - ~~12 QEe 1 ; 1988 . . 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 - 2 - . . 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 - 3 - e . 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. - 4 - . . 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. - 5 - . . 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 - 6 - . . 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. - 7 - . . 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 - 8 -