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sr-092083-11cC/ED:HD:ML:p Council Mtg._9/13/83 f / ~- ~ ~F ~G' j-v~o-~~ ~,1 ~ L //// Santa h=on~ a, C91~fornia TO: Mayor and City Council FROM: City .Staff SUBJECT: Transmittal of Report Entitled "Affordable Housing Programs for the City of Santa Monica"; Recommendation to Approve Report; Recommendation to Direct Staff to Develop Procedures and Implement Programs Introduction The City's Housing Element sets out a number of program objectives which attempt to deal with the changes in housing access and _, opportunity which have resulted from the rapid inflation in real estate values over the past several years. Primary objectives include: o Ensuring the supply of affordable housing; o Encouraging homeownership opportunities for a broader segment of the community; o Promoting resident controlled housing; and o Providing for reinvestment and rehabilitation. Although the policy framework is in place, the City lacks financial and programmatic mechanisms to translate policy into tangible results. This report. transmits a document entitled '"Affordable Housing Programs for the City of Santa Monica" which presents a set of programs resnor.sive to the. policy directions specified in the Housing Element and iaila~:ed to the City's particular 1-,ousing market i conditions, The financial and technical assistance interventions recommended are designed to stimulate changes iri the quality of housing, the allocation of housing resources among various income groups, and to increase the housing supply. Guiding Principles The report is based upon a set of premises about the public sector's role in housing production. That there are "gaps" in the capacity and/or incentives for the unassisted market to provide housing for low to moderate income households in particular is well understood. '. Pub lie efforts to change the distribution of housing resources, if they are to be effective, must be guided by recognition of the following: o Private Capital Investment is Necessary Public dollars are limited and must leverage private investment. Programs must attract capital and must mesh with the goals and practices of lenders, builders, and other members of the housing production system. 2 o Public Subsidies are Required Market prices for land, construction and for debt capital exceed the amount that low to moderate-income households can afford to pay. Public support is necessary to bring housing costs down to a level which is affordable. o Successful Programs Rely Upon Community Acceptance and Support Housing programs occur in a neighborhood context and must involve consideration of neighborhood values. Involving residents in decisionmaking is one means to assure housing programs work; harmonizing changes to the stock with existing patterns of development is yet another. o Human Capital (i.e. Sufficient Staff Resources) are Necessary Enlarging the City's role in the provision of affordable housing will require additional staff to implement, evaluate, and monitor programs. Housing Needs in Santa Monica Higri land and financing costs, strong demand pressures and other factors have significantly affected housing options available to ourrcnt and future Santa Monica residents., To preserve a hetercgeneaus population base, prcaram must address the fallowing: 3 o Dimimution of Hcmeow,nership Opportunties The costs of homeownership-have increased significantly such that fewer than 20 percent of the population can afford to purchase a home. .The disparity between prices and incomes means that opportunities for the security of tenure offered by homeownership are not available to low or moderate income households and represents a significant reduction of the -stock available to families with children. Additions to the stock of market rate housing do not, in the short and middle term at least, respond to these problems. o Problems of Excessive Costs Rents have increased,_though not as swiftly as ownership costs, such that fewer units are available to household of modest means. Additionally, a substantial portion of Santa Monica's tenant population is rent burdened such that they may have insufficient remaining income to support their other day to day needs. o Inadequate Access to Existing Housing Competition for available housing in the City is keen, Aside from its beachfront location, demand for moderately priced rental housing has dramatically increased in Santa Monica due to decreasing ownership opportunities for moderate to higher income households. Increased demand allows landlords to favor smaller, higher income households, such that families, minorities, and lower income households face disadvantage in their search for housing. o Deterioration of the Housing Stock "" About 16~ of the stock has been identified as in need of repair. The regulatory environment governing capital improvements inhibits investment in the maintenance of the stock. Inadequate levels of reinvestment may pose difficulties for residents and owners. Moreover, because the low cost stock cannot, in economic terms, be replaced, the long term effects of undermaintenance will be-the diminution of affordable housing resources. A variety of interventions are required to address these needs. It will be necessary to produce new ownership housing which can serve 12ss affluent households, to reserve affordable housing for families, to encourage preservation of the stock, and to do so in a 4 fashion which does hot further burden current residents with excessive costs or foreclose future- opportunities for low and moderate income households to reside in Santa Monica. Preserving the historic diversity of the population base is never easy. It will be particularly difficult to achieve in Santa Monica because land costs. are. high, developable sites are small, improved property is expensive, and many residents are weary of increased congestion and ather impacts of new development. It is recommended that the Council approve the report and direct: staff to develop procedures and administrative plans for each program to be submitted for Council. review and approval. These programs begin to meet a variety of needs including those expressed by various owners, existing landlords and tenants. The programs also address the needs of residents with different income. It is important to note, however, that the proposed programs represent a preliminary effort designed to test a .variety of approaches. A limited number of units will be affected resulting in no significant change in the density or character of the community. It is possible that some of these programs may not stimulate significant market interest. Others may not provide sufficient .subsidy to be effective in-the Saraa Monica market place< For these -and other .reasons, these programs represent an incremental approach to a complex set of policy objectives and community needs. Ongoing evaluations will undoubtedly result in program modifications. 5 Background and i~ethodolo In September 1982, staff requested and received authorization to review and analyze housing finance programs which the City might offer or market to encourage the provision of standard and secure housing affordable to and available to households of low to moderate income. Following Council approval, staff surveyed a number of individuals and organizations to gain knowledge of the types of programs which had been successful across the country as well as locally. Organizations surveyed or researched include state housing finance agencies (California Massachusetts and Maryland) cities (San Francisco, Santa Barbara, Los Angeles) foundations (San Francisco Foundation, Ford Foundation) non-profit development corporations (Eden Housing, Route 2 Tenants Association, Chinatown Housing Corporation) and non-profit/consortium lenders (New York Community - Preservation Corporation, Minneapolis/Saint Paul Family Trust). This process was extremely instructive for the purpose of assessing the merits of program design alternatives. - As would be expected, there is great diversity of purpose among the organizations surveyed including problems they seek to address, prevailing market conditions, intended beneficiaries, scale of operations, and the like. .Although significant variations were present in the structure of individual financings, the key findin is that each program related Lo a development syG*em which brou ht public and private capital, willin lenders and investors, and capable development entities to ether to undertake activities which would not otherwise occur. 6 To implement t'r,e City's .housing policies and thus to begin +-o develop these programmatic relationships in Santa Monica, the .financial consulting firm of Caine Gressel Midgley Slater was engaged to assist the City in consulting with local lenders, developers, property owners, brokers, and community organizations to identify viable and desirable programmatic options. The firm's experience in devising financing programs for a number of eastern cities as well as San Francisco, Santa Cruz, Santa Clara, Long Beach, Orange County, the California Housing Finance Agency,, and other jurisdictions made it particularly well suited to assist in this effort. Specifically, the firm's concentration on tax exempt financings, which are highly regulated and technically demanding, - permitted a thorough assessment of the City's opportunities and capabilities in this area. Following initial consultation with banks, developers, community organizations and others, a draft report describing the ways in which the City could bring necessary. resources and expertise together to address community housing needs was prepared and circulated to the Council and to initial participants to obtain advice and comments. The final report reflects many of the--modifications recommended as a result of this process. The City's Role To dote, the CS.ty gov~rrment's role in housin.3 has provided extensive benefits to City residents in the form of moderated rent increases, less. displacement, and greater security of tenure. The City has also participated in federal and state housing programs wt;ich provcde rental subsidies in new_ard existing buildings and has 7 considered the- construction of housing among the environmental mitigations for major development projects. Through the Community Development-Program, the City has funded local organizations to provide a number of improvement and advocacy programs which. contribute to both the security and stability of the City's residential neighborhoods. Yet the effort to restore and preserve economic, age, and racial diversity in Santa Monica relies upon the institution of new programs which provide appropriate support and incentives. Precedents There are a number of organizations, foundations, and jurisdictions which have successfully undertaken efforts to enhance housing opportunities which would not otherwise be created by the unassisted market. Many of these organizations are nori-profit housing development corporations which arose out of €ederal programs such Model Cities, or more recently, from CDBG Target. Area programs, and were envisioned as a means to fill the gap between market rate and traditional government housing programs. Partnerships among Federal, State- and local governments, foundations and large corporations have led to the creation of non-profit institutions which act as lenders, developers, or or program administrators. S9hile there are an ample number of precedents, the experience and intent of a few such organizations are recounted below. o Saint Paul/Minneapolis Family Housing Fund Responding to significant population declines in the Twin Cities, "the Saint Paul/r.~irneapolis Family Housing Fund provides capital and interest subsidies fot the production and acquisition of housing. The Fund is 8 concerned with the lack of available hcusing for families and has addressed this issue with constructicn as-well as allocation mechanisms. For example, the Fund supports the construction of smaller ownership units for mature families which is intended to-free .houses for future occupancy by younger families. The Fund also finances new construction, acquisition and rehabilitation of owner occupied and rental housing. The Fund has invested approximately $9.5 million in the development of more than 2500 units. The Fund is capitalized with a grant from the McKnight Foundation, CDBG and bond proceeds from the cities of Saint Paul and Minneapolis, as well as pension fund investment. o New York City Community Preservation Corporation The New York City Community Preservation Corporation is a non-profit originator and servicer of market rate loans which are purchased by a consortium of financial institutions or are sold on the secondary mortgage market. The NYCCPC focuses on moderate rehabilitation and defines its role as the. preservation of the capital stock by bringing credit to areas where institutional capital is lacking. The City of New York provides support in the form of tax abatements and participates in CPC's mortgage loans, providing funds to be loaned at 1~ annual interest. CPC's $92.8 million portfolio includes more than 200 loans representing 9900 units. Approximately 25$ of the CPC project residents are low income. o Eden Housing, Inc. Eden Housing is a non-profit housing development corporation originally fostered by the City of Hayward. Core support and funding for site acquisition are provided by Hayward. Eden had developed bond financed projects with City of Hayward and other Alameda County cities. Since its inception in 1958, Eden has produced about 1000 units for seniors and families. Some projects emphasize solar design, include owner participation in the construction process, or cooperative ownership. Eden has been active in acquiring sites owned by public agencies and has joint ventured with profit motivated developers to provide affordable owner occupied housing. In addition, Eden is working on the development of mixed income projects in which market rate units will be sold to s~fbsidize those which will be sold at an affordable price. o Route 2 Community Development Corporation .The Route 2 CDC was crga~iized ir. the Silverlake area of Los Angeles .where Caltrans had.pur.chased a substantial amount of property for the construction of a freeway. 9 -When plans far the freeway .were abandoned, residents litigated to have the opportunity to repurchase their homes at the acquisition price paid by Caltrans. The Route 2 CDC was the vehicle formed by residents to conduct this process. The CDC, working with Section 8 New Construction and Moderate Rehabilitation subsidies, CDBG site acquisition and rehabilitation loans from the City of Los Angeles, FHA insurance, and conventional financing, assisted tenants. ih purchasing 286 units, including single family homes and cooperatives. All of the CDC's projects are regulated to maintain affordability. The CDC is comprised of residents and accomplished this development in a five year period with technical assistance from the State Department of Housing and Community Development and private consultants. Programmatic O ortunities for Santa Monica Market conditions in Santa Monica are very different than those in which the above described organizations operate. Providing smaller homes for families without children would not release affordable homes for purchase by families with children, nor are there large tracts of land available for residential development. However, the City does have a fairly large stock of reasonably priced housing, some of which is in need of repair, further the City has cash and in-kind capital which it can contribute to the provision of housing affordable to low to moderate income households. To this end, the attached program report specifies three basic housing objectives: n .Encouraging the preservation of the existing stock by rehabilitation; o Facilitating the provision of ,housing opportunities for households of modest means over the long term: and 10 \ o Increasing the supply of hour}ng via new construction. -These objectives are supported by available data an demographic, economic and stock characteristics and the s-trategies specified for pursuing them correspond to a number of Housing Element programs. Additionally, these programs seek to bring together public and private capital, willing lenders and investors, landlords and capable development entities to fill the gap left by the unassisted market. 1. Preservation of the Existin Stock To assist property owners in maintaining their properties while protecting affordability for current residents, two programs are proposed for implementation: o Neighborhood Housing Rehabilitation Program This program relies upon the provision of interest rate subsidies to reduce the carrying costs and hence the rental income necessary to undertake property improvements. A combination of an interest rate reduction and the extension of the loan term will, on the average, reduce monthly debt service payments by -- about 55$ relative to available conventional financing alternatives. The basic financial mechanism proposed, a deferred payment, no interest loan funded with Community Development Block Grant Funds, is used by numerous jurisdictions across tie country. It is estimated that a program investment of $250,000 wczld generate $2,42,_0.00 ira private capital and would involve one full time..-staff person for administration. Approximately 140 units could be assisted and at least half would be occupied by persons of low to moderate income. 11 o Tax Exempt Credit Agreement/CHFA Band Issue Gaining access to the tax exempt capital market would enable the City to provide lower cost financing than is available on the conventional market for the purpose of encouraging the rehabilitation of the stock. The tax exemption is another way to mitigate the rent increases resulting from rehabilitation for tenants and could be combined with the CDBG funded program to increase leverage. The Credit Agreement is basically a short form of a bond issue and would enable the City to reduce issuance costs.. The costs of entering into a $500,000 credit agreement are estimated at $60,000, thus leveraging public dollars at a ratio of 8:1. This sum might support rehabilitation activities for 100 units, a minimum of 20~ of -which would need to be reserved for low to moderate income occupancy for ten years. As a means to test the viability of tax exempt financing in Santa Monica, participation in a larger bond issue is also recommended. The California Housing Finance Agency is offering localities an opportunity to participate in a bond issue for rehabilitation of multifamily rental properties.. The standards for participation, which require that 20~ of the units financed be reserved for occupancy by low-moderate income households for more than 10 years, are comparable to those applicable to the credit agreement. CHFA charges a 3.5~ commitment fee for participation, leading to a very high leverage ratio (CHFA's lower issuance costs result from economies of scale). Because supplemental local funding would be required in many cases, the effective ratio will be lower. Each of -these tax exempt rehabilitation loan programs would involve 25 percent of a staff person's time. The rehabilitation programs suggested-are responsive to Objective B, Program 9 of the Housing Element. They leverage private capital, provide safeguards against displacement, are targeted to neighborhoods in greatest need, and will assist owners. of both single family and multi-family properties. 12 2. Assuring. Long Term Access Recommended efforts to assure long term access are directed to preserving opportunities in the existing stock for low to moderate income households. This approach is less costly and more quickly implemented than new construction, provides a means of allocating moderately priced apartments and homes to those who need them, and provides an opportunity to affirmar_ively promote the provision of housing for families. o Acquisition of Existing Units by Non-Profits To address resident's need for some control over the conditions of tenure and to assure the future supply of affordable housing, support for acquisition of existing housing by non-profit development entities is recommended. This program will require funding to write down acquisition and development costs such that affordable rents can be maintained. The provision of non-amoritized zero interest loans, or other appropriate instrument in conjunction with private, institutional capital is the basic program design. Program funds would be provided subject to the execution of a regulatory agreement requiring that affordable units be maintained for low-moderate income occupancy. _ Non-Prof its .do have specialized financial needs which may entail the provision of specialized instruments. Since non-profits, unless they are well established, generally do not have funds to initiate transactions (earnest money deposits or option fees) or to .support necessary predevelopment activities, providing initial venture capital is essential. In addition,. interim loans and mechanisms to smooth fluctuations in mortgage payments due to variable rate financing may also be needed. Additionally, should a limited equity ccogerative be developed; the City might also assist in the provisior. cf low interest or deferred share loans. Should Gity iaW b2 modified to permit limited equity conversions, tY:e provision of share loans can assure that existing residents are nct displaced and that the entry costs for future residents will not be excessive. The leverage which car, be achieved under this program, ~s ather~, is affected by market interest rates and ranges from 2:1 to 3~i. Current appropriations for this purpose can support the acquisition of 60 to 88 s3 units,. most of which would be affordable to lower income households. Staffing requirements would be about 1.5 full time equivalent positions. This program, which can preserve housing resources in both physical and economic terms, encompasses a number of Housing Element policies concerning rehabilitation, maintaining affordability, encouraging non-profit development and ownership, community participation, and encouraging fuller utilization of the stock. o Refinancing Assistance for Current Owners/Acquisition Assistance for New Owners This program envisions using federal mortgage insurance programs to assist current owners to refinance existing debt or to assist new owners in obtaining acquisition financing at favorable terms. In the former case, technical assistance would be provided to assist owners to obtain FHA Section 223 (f) insurance for refinancing balloon payment or high interest loans. Owners would benefit from having better terms and the normalization of monthly debt service payments. Should demand for fixed-rate level payment financing prove sufficient, the City could issue bonds backed by Section 223 (f) mortgages for acquisitions. This would result in the preservation of long term access for targeted households due to federal requirements for bond financed transactions. This program would involve extensive market testing, and its feasibility would be very dependent on volume. _ The technical assistance aspect of this program can be undertaken without additional staff resources while the provision of FHA .223 (f ) backed bond financing would require 50~ of a staff person's time. This program is responsive to Housing Element Policy C, "Maintain and Increase the Supply of Housing Affordable to Low and Moderate Income Persons," and several sub-objectives concerning working in concert with the private sector. o Rent Subsidy Program The final program suggested to maintain affordability is a rent subsidy program which has been designed to encourage fuller. utilization of available Section 8 subsidies for families as well as to provide assistance to very low income households who are not eligible for Section 8 due to family composition. In addition to _ expanding family participation in the Section 8 proyram, these funds can be used tc off set impacts of necessary rent increases due to rehabilitatian. This 4 program provides a means to address problems of .rent burden experienced 6y the City's residents. 3. New Construction This program has been devised to address Housing Element Goals to provide additional affordable housing, and to assure an adequate supply of housing for all income groups. As federal support for new construction was waned, the potential local costs of subsidizing new construction to achieve affordable rents or carrying costs can exceed $60,000 per unit. Air rights development has been suggested as a possible means to provide in kind rather than cash assistance. This approach will require careful study to determine where and if a desirable project can be developed in this fashion. o Air Rights Development - Rental Housing The air rights concept is presented for both rental and ownership housing. The rental proforma is based upon a model which would not require cash contribution on the part of the City but would involve the issuance to tax exempt bonds. However, the provision of subsidy funds could increase the number of affordable units which might be provided. Based upon the rough development figures included in the report, the costs of increasing the number of affordable units above 30 percent of the total would approximate $40,000 per unit. This program is responsive to a number of Housing Element policies, including exploration of air rights development, and the issuance of tax exempt bonds. Given the need to research this concept thoroughly and the extent of City involvement anticipated in packaging proposals, staffir_g .requirements sre estimated at 1/2 person over a year period. o Ownership Housing The program to produce ownership housing over City-owned property may provide a vehicle to produce ownership oppartunites for moderate and. middle income _- households. Assumine-tax exempt financing, the - projected schedule tvi :'sales prices. would allcw the sale 19 of u:,its priced between $5?,OOO and $120,000, which is well below the median price for a single family income iri Santa Monica. -This progam shares the same research and staffing requirements of the rental alternative. It would address Housing Element goals to provide ownership opportunities to a broader segment of the community, and could be structured as a limited equity cooperative or other ownership form which would preserve accessibility for future owners. In conclusion, the array of program suggested encourages the City to become an initiator in bringing together developers, financial institutions, owners, community organizations and other to undertake transactions which support the provision of affordable housing. Although the opportunities in Santa Monica, are limited, the City, by providing incentives and necessary support can leverage public dollars with private resources and expertise to implement its housing goals. Cumulative Program Im acts Approval of the proposed programs, assuming all are funded per -the program budgets included in the report, would create capacity to rehabilititate, acquire, subsidize, and construct 5~3 ,units, of which more than 313 would be retained or added to the stock of housing available-for occupancy by low to moderate income. households. Of the total, new construction activites would account for 100 units, acquisition/rehabilitation activities for 320 units and rental assistance would account for 133 units. Estimates of the total units to be provided are based on conservative calculations of the capacity of each program. Projections of the number of low and moderate income iunits to be assisted are based on mimimum statutory requirements and it.. is expected than the actual numbers will be )~ significantly higher. However, several of the .programs involve significant market testing and it is not cle«r that they will operate at -calculated capacity. Future evaluations. may yield the need to substitute new approaches and/or to modify program procedures to enhance marketability. City resources needed to implement these programs total $1,468,000 and would leverage $10,46-2,000 in private investment, resulting in an overall private/public investment ratio of 7:1. Additional budget authority will be required to implement the Neighborhood Rehabilitation Program ($60,000) the Rent Subsidy Program ($300,000) and the CHFA Bond Issue ($35,000) in the current fiscal year. Sufficient authority currently exists for the operation of the remaining programs, and will involve account transfers only. With success, it is anticipated that several programs will Yeceive additional funding in future years. Time Line for Pro~ect Im lementation Exhibit 1 is a timeline for program development and implementation which identifies program elements and performance on a monthly basis. It further identifies periods of intense planning versus ongoing program management. Because funds have been appropriated for activities akin to the Neighborhood Rehabilitation Finance Program (Pico Neighborhood Rehabilita*_ion Loan. Fund) ar.d the Non-Profit Acquisition Program (Pico Neighborhood Housinc Trust Funds, Redevelopment Housing Trust Fund), these programs have been scheduled for early approval and implementation. Because the CHFA bond program may. be a one time oppor,tunit_y, it will also be 17 presented fo-~ Council approval along with currently funded programs. It is anticipated that. the remaining programs will be phased in later in the fiscal year to allow staff adequa*_e time to prepare and implement the first set of approved programs. However, initial activities for all programs. will proceed during Fiscal Year 83-84. Staffing Implications As the preceding program decscriptions and Program Summary Chart (attached as Exhibit 2) indicate, the design and implementation programs involve the addition of staff in the Housing Division. For City staff as well as grantees and contractors, the most appropriate measure of staffing needs is the number of projects rather than the number of units as the preparation of applications, documents, site .surveys, and the development tasks must be done whether a project involves two or twenty units. Cumulatively, the programs described in this paper would involve City staff in design, outreach, contractual and documentary arrangements monitoring-and evauation for at least 32 projects which might be originated over an 18 month period. For a non-profit development corporation such as Community Corporation of Santa Monica, the number of projects in development might range between 6 to 10 in a given year. As direct development activities are staff intensive, it is likely that both the City and its contractors will need to hire additional personnel. For the City, staff projects that the effective operation of programs would be served by the authorization for one additional staff person in the Housing Division by the end of the second quarter to administer rehabilitation activit~s. In the 3rd quarter, .additional staff with development finance skills will be required to 18 manage increased volume in operational programs. The total increase- in staffing casts based upon this plan would be approximately $35,000 in the current fiscal year. Community Corporation of Santa Monica will heed additional funding to retain current employees as well as to add the staff projected in its approved budget. The cost of .stabilizing Community Corporation's capacity at an adequate level is expected to increase salary costs by $30,000 in the current fiscal year. If the current year's operating targets are achieved, and in particular if Community Corporation becomes involved in new construction, additional staff may very well be necessary in the upcoming fiscal year. The cumulative effect of stablized and expanded staffing may necessitate a fifty percent increase in funding for salary and benefit expenses for the next fiscal year. Comparative Staffin Patterns The budget for the Housing Division of the Department of Community and Economic Development currently funds two staff members who are responsible for administering a number of programs and projects as well as coordination with other City divisions and departments. Investigation of staffing levels CDBG funding resources, and other features of housing programs- operated by several iurisdications yielded the following information: 13 COMPARISON. OF STAFFING LEVELS SANTA MONICA AND NEARBY CITIES Cities Compton Culver City Gardena Glendale Inglewood Pasadena Santa Moniea CDBG Housing Population Entitlement Programs Staff 85,000 $2.SM rehab loan 7 program, single family bond financing program 38,000 $397,000 rehab program 3 and neighborhood improvements -- 65,000 $400,000 handyman 1.5 150,000 $1.8M rehab loan 5.5 program, housing referrals, grant program, site acquisition 95,000 $1.4M rehab loan 7 programs, grant/ rebate programs, accessibility program 118,000 $2.7M rehab loan 25 program, rental rehab, demonstra- tion, infill housing produc- tion, tool lending, paint rebate, handyman, code enforcement 88,000 $1.2M site acquisition 2 housing produc- tion, contract administration, technical assis- tance, development agreements, multi- service center 20 With the exception of Gardena, it appears .that regardless of population, entitlement amount, number of direct or contracted .programs, Santa Monica carries the smallest housing programs staff. This circumstance becomes clearer when resources devoted to housing are considered. Compton has allocated $700,000 for housing activities while Culver City has allocated $100,000. Resources allocated to housing in Santa Monica (excluding operating costs) exceed $1.1 million. While the information provided by other cities is not sufficiently detailed to generalize about staffing requirements based on units of direct and/or administrative service, it is clear that the cities which implement a full range of programs have allocated staff resources corresponding to that effort. Budget/Financial Impact Approval of the attached document does not have. any immediate financial or budgetary impact. However, to implement the programs, .the following impacts can be anticipated: 1. Requests for additional appropriations for program capitalization or operation. As noted previously, $60,000 dollars will be needed for the Neighborhood Housing Rehabilitation Program, $35,000 for the CHFA Rehabilitation Bond Issue and appropriations of $60,000 and $3O0;QO0-will be needed for the Tax Exempt Credit Agreeme,-at and the Rent Subsidy Programs respectively .(See Exhibit 3). 2. Requests far additional staff. Implementation of the recommended programs will entail-the addition of two staff positions possibly at the Senior Adm istrative Analyst 21 level. Costs, including benefits are projzcted a*_ $35,000 for the current year. 3. Increased funding requests from ancillary institutions-for staff can also be anticipated. Assuming that Community Corporation of Santa Monica will need to stabilize current staffing, approximately $30,000 from the City or other sources will be required. All requests for additional support will be presented for Council approval in conjunction with program designs and implementation plans. Recommendations It is recommended that the City Council: 1. Approve the attached document "Affordable Housing Programs for the City of Santa Monica"; 2. Direct staff to prepare implementation plans for each program. Prepared By: Mindy Leiterman, Housing Administrator Department of Community and Economic Development ?2 EX:3IBIT I s r s m N - S 1 S m M S m ~~ N S m M N M W O M f~ Q. a' W ~ Z CI a -. G ° N W 4 ro m lpp ~ , ° L o • o t~ C m +~ z E l c co ro c 1 c p m y 2 yl oc me w H -.~ a Hro co-~ mm I ro NUl H o w m-•+ a m ro N `~ O G rtt ~.~W G GE H G O E X E aA a o wo ouo Nrn o w.+ wHW off ~m •• W W O+ M U .i ro v E N C U ro 3 •+ O -'I N O H .C C C W G U 1~ N rt -~1 M C O UI ti W CL L U U IT ro 'A W N UI ~.I H N W N H b b ~ N 3 C •.I H H a, '.~ tv ti r m .~ O O H -N > ro O C ro O N N N U O •~ N N ~.i -M L O W H >~ - O 7 O C U ro H ro Oro +~ ro x N N N H A ~.i H O+ U --. 0+ U A O+ H 7 --- O ro H O ro C N G H G -.1 G rt b 3 W b ~/ G C - GL W +~ N .y C >i O E iU .,y N ro O N C .C x C H -.1 N N i~ P. -M ro rJ ro A E .~ +~ H E -~+ •• E ~~ v x A U ro m H O. .~ w ro +~ E c N ..~ m O b O J N +~ W H H ro ro 0 +~ O 7 A ro N A ~^ O '-~ 3 N A ~a H ro O•A T rJ 3 t' O.C Ge.i N L U 'M H rl 7 7 W ..' .N O A +, ^ n C C1 L C U N -.~ H •O 3 v ... ..1 U e 2T q •A H N S E .ti 7 ..i O - W O ro G ~3 ~ > E C C [ C O- F] .a u E (: N A> N ; ~.1 O . I m b _V d N ro rn y N O 3 .-. 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V} 'b >~ N ~ ~ ~+ ~ O O W •.~ !~ +1 -.i O UI UI .,~ ~ ,~ ~ E b 't~ ~ m ~ N ~ >~ ~ ~ U U +~ N -.-1 -V U ~ «S •.i ~ W •,1 ~ ~ o ~ ° ' r! ~ a ri w~ ° ~ a z a ~ a ~ " ° z v a m .p z ., I H N 3a N (Yl EXrirgI1^ 3 O O 'O O ~ O N M ~ N ~ to V1 ~ O~ ri ,-1 ~ m r~ Q1 Sa •~ N N N ~ x a ~ ro w N :7 b ro ~ a a -~ W iv U -F~ +1 rtf •.i •.i ~ U U O .~{ ~ ~ b t6 •.a +' +} T7 E H ~ AFFORIIABLE HOUSING PROGRAMS FOR THE CITY OF SANTA MONICA Department of Community and Economic Development City Hall 1685 Main Street Santa Monica, California September 13, 1983 AFFORDABLE HOUSING PROGRAMS FOR THE CITY OF SANTA MONICA TABLE OF CONTENTS 1.0 Summary 2.0 Proposed 3.0 Proposed Existing 4.0 Proposed Housing 5.0 Proposed Affordab Budget Programs to Encourage Rehabilitation of the Housing Stock Programs to Assure Long-Term Access to Affordable Programs to Encourage the Production of Le Housing Appendix 1: Comparisons of Financing Resources 1 SUMMARY This report outlines a series of affordable housing programs (thE "Program"} for the City of Santa Monica. The Program will be a flexible multi-faceted and multi-year effort. The Santa Monica housing market offers an extremely unusual and difficult environment for the creation of public financing assistance programs. The challenges of the market are immense; the opportunities created by it are not clear. The proposed Program responds to this situation with a wide variety of approaches in order to meet a limited number of goals upon which there is common agreement. In a complex market not all programs will be a61e to serve all needs. Without simplified solutions, a variety of approaches are worth trying. As it is implemented, the Program may require the establishment of a separate Housing Finance Agency, but for the initial phase this is not required. The Program will encourage all participants in the housing market-tenants, owners; lenders-; developers, community groups and public officials to work together in exploring opportunities. As individual transactions are implemented, the efforts can be evaluated and an ongoing methodology and system can be established. However, in the short run, it is critical that all of the parties begin working together, proceeding with an initial transaction and developing the working relationships and hands-on financing experience that will lead to informed decisions in the future. There are a multitude of problems that a public program could respond to in the Santa Monica housing market. In establishing affordable housing finance programs for the City it is appropriate to define a few key overall goals for the effort. These goals can provide the framework for analyzing specific recommendations and resource allocations. The Program will initially focus on three independent but interrelated goals: o To encourage the rehabilitation of the existing housing stock; o To enhance the access of residents to affordable housing opportunities. o To encourage the producticn of new affordable housing units; Achieving these goals is constrained by a number of unique features of the Santa Monica housing market, as well as a few issues that are not kcal in origin. Key constraints will-bee the lack of available sites for new construction; the high costs of land; a real estate market that has seen enormous price inflation in the past five years; and, the lack of conventional 2 financing for apartment acquisition and rehabilitation. Overcoming these local constraints is made more difficult by recent reductions in federal aid for housing. The goal of encouraging the rehabilitation of the existing housing stock responds to the nascent physical decline in some units in certain segments of the stock. Given the shortage of new developable sites in Santa Monica, the preservation and general upgrading of the existing units is key. This rehabilitation can be done in such a manner as to aid owners in the maintenance of their buildings and to provide tenants-with improved living conditions without the fear of displacement. In order to preserve the economic diversity of Santa Monica, ways to preserve and enhance the access of residents to affordable housing must be implemented. By aiding non-profit organizations and private owners to acquire buildings and offer them as affordable units, this diversity may be preserved. The production of new affordable housing opportunities in Santa Monica must be pursued if the pressure on the existing market is to be relieved. New housing units can be developed in both the rental and the homeownership sectors of the market. While there are limited numbers of developable sites and land costs are high, creative responses will help to bring new units on-line. For example, serious consideration can be given to development on the air-rights over publicly owned parking lots. There are a number of resources available to the City of Santa Monica in order to establish the Program and achieve these goals. This report will give particular attention to those resources that are readily available to be applied to the problems outlined above. Resources to be considered include: o Community Development Block Grant funds; o Tax-exempt borrowings by the City; o Federal mortgage insurance programs; o Other State or Local funds as may be available or appropriated; o. Deposit and/or participation agreements With local lenders; Every resource to be used comes with its own set of administrative and regulatory constraints. In order to successfully create a program a number of resources, each with ..their own particular requirements, Will need to be put tcgethFr. The eligibility requirements; the legal restrictions, the transactions casts and the expected benefits of each resource will have to be carerully analyzed. Not ali resources will be '' 3 able to be used in every program. The combination, however, will form a unified program budget.. The following section outlines a budget for all of the proposed programs. It envisions a commitment of $;.1,528~a00 of locally available funds of which $1,073,000 has been appropriated in this year's budget. This commitment will leverage private financing of over $10,462,000 million and will help to create at least 313 affordable housing units. Total staff time is estimated at 8,500 person hours, or 4.5 full-time equivalent persons. The staff requirements can be phased in as planning and market studies allowing transactions to proceed. The staff positions will require persons with prior development finance experience. Utilizing these resources to achieve the above goals will not be easy. A series of policy issues will need to be confronted and decided upon. The Program will likely be expensive - an obvious result of a housing market like Santa Monica. However, by creating a flexible series of initiatives to start, all participants in the Program can gain experience and make a significant start in creating and preserving affordable housing options in Santa Monica. The first phase of the Program will achieve: o the leveraging of a significant amount of private capital into the Santa Monica housing market; o the creation of opportunites for private owners to improve their buildings and to serve a diverse group of occupants; o the creation of a set of financial instruments that will assist in establishing a responsive housing program in changing market conditions. Initial phases of the Program can be implemented immediately utilizing resources, staff, and procedures that already exist. However, as more transactions are brought forward, it may be appropriate to establish a new Housing Finance Agency. Such an Agency would have the benefit of centralizing all financing decisions, cash inflows and expenditures and project processing. By setting it up with an independent Board of Directors, it could become a long-lived institution, operating from project surpluses and an initial City capitalization. This report, discusses a series of potential projects and programs that will help create affordable housing options for th'e citizens of Santa Monica. The next section of the report proposes a budget for each of the different programs. The following sections discuss each program in detail. 4 FINANCING RESOURCES PROPOSED BUDGET This budget displays the resources that will be necessary to implement the proposed programs. For each, the initial amount of local funds and of conventional financing leveraged is shown. The number of low income or affordable units produced is noted as well as the overall number of units. The amount of staff time (in person hours) to design, develop, implement and manage the program over the first year is estimated. In implementing the overall program, the differing elements can have a varying operational timing.. The Neighborhood Rehabilitation Financing Program can be implemented immediately. The Non-Profit Acquisition and Rehabiliation Program is ready for final planning and program decisions. Other elements will require additional planning work and consideration. 1. PROGRAMS TO REHABILITATE THE EXISTING STOCK A. NEIGHBORHOOD REHABILITATION FINANCING PROGRAM EXISTING BUDGET ALLOCATION CDBG/LOCAL FUNDS: $ 190,000 CONVENTIONAL FINANCING: 262,000 NO. OF UNITS: 140 MINIMUM NO. OF AFFORDABLE UNITS: 70 TOTAL ANNUAL STAFF PERSON-HOURS: 2,000 Other Administrative Services 60,000 B. REHAB TAX-EXEMPT CREDIT AGREEMENT CDBG/LOCAL FUNDS: $ 60;000 CONVENTIONAL FINANCING: 500,000 N0. OF UNI`1S: lOp MINIMUM NO. OF AFFORDABLE UNITS: 20 ANNUAL STAFF PERSGN-HOURS: 500 C. CHFA REHABILITATION BOND ISSUE CDBG/LOCAL FITNDSc 35,000 CONV~:PITZONAL FINANCING: 1,000,000 NO. OF UNITS )5 MINIi~1UM N0. OF AFFORDABLE LNITS 15 ANNUAL STAFF PERSON-HOURS 500 2. PROGRAMS TO ASSURE LONG TERM ACCESS A. NON-PROFIT ACQUISITION AND REHABILITATION PROGRAM CDBG/LOCAL FUNDS: $ 883,000 CONVENTIONAL FINANCING: 3,100,000 NO. OF UNITS: 8O MINIMUM NO. OF AFFORDABLE UNITS: 60 ANNUAL STAFF PERSON-HOURS: 2,000 B. REFINANCING FOR EXISTING OWNERS/ACQ. AND REHAB CDBG/LOCAL FUNDS: $ 0 CONVENTIONAL/BOND FINANCING: 2,500,000 NO. OF UNITS: 100 MINIMUM NO. OF AFFORDABLE UNITS: ZO ANNUAL STAFF PERSON-HOURS: 1,000 C. RENT SUBSIDY PROGRAM - - TAX INCREMENT/LOCAL FUNDS: 300 000 SECTION 8 CONTRIBUTIONS: 1,000,000 MINIMUM NO. OF AFFORDABLE UNITS: 133 ANNUAL STAFF PERSON-HOURS: 1,000 3. PROGRAMS TO PRODUCE NEW AFFORDABLE HOUSING. A. AIR-RIGHTS - RENTAL CDBG/LOCAL FUNDS: $ 0 CONVENTIONAL FINANCING: 5,600,000 NO. OF UNITS: 100 MINIMUM NO. OF AFFORDABLE UNITS: 30 ANNUAL STAFF PERSON-HOURS: 1,000 B. AIR-RIGHTS - HOMEOWNERSHIP CDBG/LOCAL FUNDS: $ p CONVENTIONAL FINANCING' 5,600,000 NO. GF UNITS: 100 MINIMUM NG. GF AFFORDABLE UNITS: 3p ANNUAL STAFF PERSON-HOURS: 1,000 6 REHABILITATION OF THE EXISTING STOCK NEIGHBORHOOD REHABILITATION FINANCING PROGRAM HOUSING GOAL To assist existing owners of multi-unit rental and owner-occupied .properties to improve and upgrade the physical condition of the units without causing or encouraging the displacement of existing residents. FINANCING MECHANISM Community Development Block Grant funds will be deposited with a local lending institution and utilized to make deferred payment non-interest bearing, non-amortizing subordinate loans which will-reduce the effective interest rates on conventional property improvement loans to affordable levels. CDBG loans can be structured to be repaid after full amortization of the private loan. A sliding rate schedule will be established offering loans at 0~, 3~, 6$ and 9~. If possible the program may be developed on a tax-exempt basis. as described in the following section. The program will utilize funds already appropriated for the Pico neighborhood. The program will be carefully coordinated with the Rent Subsidy Program described in a following section. OWNERSHIP, MANAGEMENT AND DEVELOPMENT Existing owners will be encouraged to participate in the program. The program will be managed by the Department of Community and Economic Development. PROGRAM DESCRIPTION The program builds upon the currently fended and planned efforts in the-Pica Neighborhood for. which a budget of $190,000 has... been appropriated. This program proposes a mechanism for *_he use of these funds.. As currently planned, 'the Pico Neighborhood Association will conduct an outreach campaign to identify properties in the neighborhood that are eligible for treatment. Properties should have the following minimum characteristics: need for non-cosmetic physical upgrading; sugficient cash flow to afford debt financing ir. accordance with the program's underwriting standards; willingness of the tenants and owners to participate; if a rental, occupancy by at least SOS low and moderate income tenants; and, if an owner-occupied structure, preference will- be given to lower income owners and to 2-4 unit properties. After an initial screening, the City will prepare the loan application and submit it to the participating lender for underwriting. Upon approval by the lender the City will authorize the expenditure of the subsidy funds and the loan will be disbursed. Eligibility for differing interest rates will be tied to the need of the building and the number of affordable units offered. Rehabilitation costs of between $2,000-$5,000 per unit can be supported through the program. CITY ASSISTANCE AND RESOURCES The City's Department of Community and Economic Development will have the key role in managing the program. Responsibilities will include identifying a lender willing to participate in the program, negotiating the rates, procedures and terms for the lender's loans, establishing terms and conditions for participation by owners, creating an in-take review and approval system for subsidized loans, and monitoring performance by all participants. The City will provide technical assistance to owners in processing all required and relevant public approvals, including approval from the Rent Control Board for necessary capital improvement rent increases. As an option, the City should consider the use of outside consultants for various tasks required for the administration of this program, including the preparation of rehabilitation work write-ups, loan counseling and preparation of applications. Construction monitoring will be a joint responsibility of the participating lender and the City and its contractor. The cost of these outside services may be estimated at $1,500 to $2,500 per loan. For a typical property with six dwelling units, this expense will be less than 10~ of the estimated loan amount, or about $350 per unit, a reasonable amount for professional services. The program can be established with $190,000 of Community Development Block Grant funds currently allocated to the Pico neighborhood for rehabilitatior. activities. IMPLEMENTATION ISSUES The issues that must be decided in order to implement this program concern the participating owners, lenders, and the use of the Community Development Block Grant funds. Discussiora with owners in the Pico neighborhood should be quickly undertaken in order to asaure that the project selection criteria are appropriate and reasonable and that the projected subsidy levels are sufficient to encouraee 8 program participation. A lender must be encouraged to participate in this program. This should not be difficult in that the lender is not being asked to do anything other than they normally do in the course of business - i.e., to review loans and make credit decisions. There are multiple benefits to the lender, including the deposit of the Community Development Block Grant funds, the ability to write loans to customers who would not normally qualify for them and the attraction of new business. The lender's own portion of the property improvement loans will be made at market rates. The terms and conditions of the lender's participation in the program should be contained in a deposit agreement to be drafted upon preliminary approval of the concept. The proposed program is an eligible activity for the use of Community Development Block Grant fund. For properties with greater than eight dwelling units, Federal Davis-Bacon wage rules will apply. COORDINATION WITH OTHER SUBSIDY PROGRAMS The loan program may provide financing for buildings in which some or all of the units are assisted under the Section 8 Moderate Rehabilitation or Section 8 Existing programs. The underwriting .standards and regulatory agreements shall be designed to facilitate coordination with these programs. During the marketing and outreach phases the PNA and Depart- ment of Community and Economic Development staff will help owners of buildings qualifying for the Section 8 programs to obtain these subsidies. PROJECTED VOLUME With an initial budget of $190,000 the City should be able to implement a program that will serve 140 units and leverage private participation in the amount of $262,100. NEXT STEPS 1. Finalize program design. a. Meet with PNA/potential borrowers to review proforma operating statements and assess level of CDBG write-dear, funds needed for typical projects. b. Prepare Request for Proposals (RFP? for leaders c. Prepare program procedures and operating manual. 2. Obtain Council approval of .program procedures and cf RFP. :. Issue RFP with 30 day response period. 9 4. Review responses; select lender and negotiate agreement. 5. Determine need for outside technical support in rehabilitation work write-ups, loan packaging, inspections, etc. if necessary prepare and issue RFP for technical support or obtain additional City staff. 6. Proceed with program operations: Task PNA DC/ED Lender Borrower Outreach XX X Marketing XX X Intake XX X XX Loan Underwriting X XX Construction Monitoring XX X Servicing XX XX = Primary Responsibility X = Secondary Responsibility or Technical Assistance i0 REHABILITATION OF-THE EXISTING RENTAL STOCK NEIGHBORHOOD REHABILITATION FINANCING PROGRAM FINANCIAL PROJECTIONS EXISTING BUDGET ALLOCATION COMMUNITY DEVELOPMENT BLOCK GRANT: PRIVATE CONVENTIONAL LOANS: PRIVATE LOAN TERMS: TYPICAL LOAN SIZE: EFFECTIVE INTEREST RATES: ELIGIBLE IMPROVEMENTS: ADMINISTRATIVE SERVICES: STAFF TIME REQUIRED: EFFECTIVE INTEREST RATE 0~ 3~ 6~ 9$ TOTAL CDBG $ 50,000 60,000 40,000 40,000 190,000 $190,000 $232,000 14~, 15 Years Approximately $2,000-5,000 per unit; $3,500 average 0,3,6 Health, Safety, Property Upgrading, Energy-Related and Environmental Mitigation 40 Loans @ $1500/loan or $60,000 2,000 person hours PRIVATE $ 0 65,350 68,750 128,000 262,100 NO. OF UNITS 25 36 31 48 140 11 REHABILITATION OF THE EXISTING RENTAL STOCK CITY-WIDE TAX-EXEMPT CREDIT AGREEMENT AND/OR PARTICIPATION IN CHFA BOND ISSUE HOUSING GOAL To assist existing owners of multi-unit rental progerties to ,improve and upgrade the physical condition of the units without causing or encouraging the displacement of the existing residents. FINANCING MECHANISM Local lenders will make property improvement loans to rental properties throughout the-City of Santa Monica on a tax-exempt basis. All loans will comply with the Mortgage Subsidy Bond Tax Act of 1981 (the "Act") and thus the income on the loans will be tax-exempt to the originating lender. Rates on the loans will be negotiated at the time of origination in relation to the then current rates in the tax-exempt securities market and will be inclusive of fees and profit that would normally be charged thereon. If the program were implemented today a rate of 8-10~ would be attainable. In order to efficiently utilize this tax-exempt mechanism a minimum loan volume of $500,000-will be required. As an alternative a California Housing Finance Agency (CHFA) approved lender may make loans with the proceeds of CHFA issued bonds with the same requirements and rates. OWNERSHIP, MANAGEMENT AND DEVELOPMENT Existing owners will be encouraged to participate Sn the - program. Lenders eriil be encouraged to refer their existing customers for whom participation is appropriate. The Department of Community and Economic Development will be responsible for the management and coordination of the program. The tax-exempt credit agreement or CHFA bond financing may be developed in coordination with the - Neighborhood Rehabilitation Financing Program described above and will reduce the per-unit subsidy required frcm the City if sufficient volume can be achieved. 12 PROGRAM DESCRIPTION This program will allow lenders to make loans on a tax-exempt basis to property owners to upgrade and improve buildings. The City will establish a Tax-exempt Credit Agreement with one or more participating lenders. Under the Agreement, lenders will review applications and make credit decisions on potential borrowers. Approved loans will flow through the City and thus will be considered to be tax-exempt. The security for the lender will be the loans themselves. No revenues, taxes or other funds of the City of Santa Monica will be pledged as security for the loans. All loans must meet the normal underwriting criteria of the participating lender. Proceeds of loans may only be used to make improvements that upgrade the physical characteristics of the properties and not to refinance any existing indebtedness. All loans must meet the requirements of the Act. This requires that at least 20$ of the units in a project be held for occupancy by low and moderate income persons or families for the qualified project period (in this case a period likely to be equal to ten years) and that the property be maintained as a rental property for a similar period. Low and moderate income persons or families are those whose income is less than the Section 8 income limit for a family. of four (80~ of median income). CITY ASSISTANCE AND RESOURCES The Department of Community and Economic Development will have the key role in organizing and managing the program. The Department will be responsible for identifying the participating lender, establishing program guidelines and standards, approving loans to flow through the City in order to achieve tax-exempt status, and assuring compliance with the provisions of the Act. Ongoing credit, underwriting and servicing .responsibility will rest with the participating lender and will require minimal direct administrative time from the City. In order to establish the program it will be necessary for the City to defray the *_ransaction costs associated with a tax-exempt financing. This Agreement will require much of the same documentation and legal work as would be required in the .issuing of tax-exempt securities publicly. Other costs of issuance (such as underwriter's discount, rating agency fees, etc.) will not be incurred. The-major transaction costs to be paid for will be the fees for bond counsel and a financial advisor, estimated to b2 $b0,000. These costs may be able to be-built into the .loan rates charged tc borrowers and thus amortized. However, the proposed budget allocates funds for this purpose. 13 As this effort requires major participation from a local lender, the level of staff work required is reduced. However, there will be a significant amount of time necessary to design the effort and prepare a marketing study as to its feasibility. It is estimated that this will involve a 1/4 time staff person over the course of one year. IMPLEMENTATION ISSUES This may be a complex program to implement and as such is a second priority to the CDBG leveraging program proposed above. Key issues include the suitability of the mechanism for the market, the willingness of a lender to participate and the requirements of the Act. This program will provide advantageously priced rehabili- tation financing for existing property owners to upgrade and improve their assets. The cost of receiving this inexpensive financing is to restrict the use of a portion of the units to low and moderate income occupancy. It is not clear how many property owners will find this option desirable.. Given the transaction costs of establishing the mechanism, a minimum loan volume of $500,000 is required or else it would be less costly and simpler for the City to write down a taxable loan to the tax-exempt rate. Even with a tax-exempt rate it may be necessary. for the City to further write-down the loan to the rates used in the CDBG-funded Neighborhood Rehabilitation Financing Program described above. Prior to developing its own tax-exempt program, the City may participate in the CHFA multi-family rehabilitation bond issue. This alternativehas the advantage of requiring little administrative time to design the program and can be cost- effective with a smaller loan volume. In order to partici- pate the City would pay a commitment fee of 3.5$ to CHFA prior to the issuance of bonds. CHFA would issue the bonds and make the proceeds available to the City and participating owners and lenders. This. fee could be included as part of the write-down for each loan made with the bond proceeds. ,The prcgram should be highly desirable for lenders who are already in the market of making-these types of loans and who have a need for tax-exempt income. The program can be structured to be a profitable undertaking for such'a lender willing to participate. In order to make the Credit Agreement tax-exempt, the City .will need to design procedures to meet the requirements of the Act, including on-going monitoring .and public hearing and notice requirements. 14 PROJECTED VOLUME Without testing the market it is difficult to project the volume of owners Citywide for whom this program will be attractive. NEXT STEPS CREDIT AGREEMENT 1. Survey eligible properties and owners to determine if there is adequate interest in the program. If so, meet with lenders to solicit willingness to participate. 2. Draft program procedures. a. Determine legal requirements with bond counsel. b. Determine subsidy levels and source (s). c. Determine eligibility criteria and need for coordination with other local/federal 3. Select lender and enter into Credit Agreement 4. On-going program operations should be similar to the Rehabilitation Loan program, with the addition of monitoring for compliance with the Act and meeting the public hearing requirements of the Tax Equity and Fiscal Responsibility Act of 1982. CHFA Bond Issue 1. Identify potential projects that meet the require- ments of the Act and of the currently available write-down programs. Draft program guidelines; describing City, borrower, lender responsibilities. Hold required public hearings. 2. Obtain Council approval as necessary for use of CDBG or tax-increment funds. Submit request for commitment with fee to CHFA. 3. When bond proceeds are available package and submit loans for lender approval. Determine additional ;iry subsidy needed; coordinate wish Section 8 Moderate Rehabilitation program. 4. In addition to on-going loan underwriting, packaging and construction monitoring activities establish procedures for monitoring compliance with tax-exempt requirements d>>ring occupancy and management, 15 ASSURING LONG-TERM ACCESS ACQUISITION OF EXISTING UNITS BY NON-PROFITS HOUSING GOAL To acquire, rehabilitate and finance existing properties, converting them to alternative ownership structures with maximum feasible tenant participation, in order to generally improve the quality of the housing stock, to perserve afford- able housing options and to create an ongoing model for rental ownership. FINANCING MECHANISM There are three potential financing mechanisms for this program: conventional financing, tax exempt credit agree- ments and FHA 223(f) mortgage insurance combined with tax-exempt bonds. Portions of the equity necessary for projects may be raised through the sale of limited partnership interests, while City funds may also be able to be used as equity. Capital subsidies needed in order to reduce effective interest rates can be provided with Community Development Block Grant Funds. The Housing Trust Fund current appropriation of $300,000 of Tax Increment Funds and $583,000 of Community Development Block Grant funds can be used to start this program. The program projections below are based on these current appropriations. OWNERSHIP, MANAGEMENT AND DEVELOPMENT Properties will be acquired from existing owners by a non-profit corporation (or a for-profit subsidiary thereof). This entity will be empowered to buy, sell, own, manage and maintain residential property for the beneficial interest of the tenants. This will meet the requirements of the IRS for 501(c)(3) not-for-profit status and 'in the case of a for- profit subsidiary will not jeopardize the parent coro-oration's 501(c)(3). status. The corpcration may in turn form a series of limited partnerships for particular projects for the sole purpose of raising equity capital. The corporation can act as corporate general partner for each partnership and will be responsible for the management of the affairs of the partnership. Limited partners will provide capital to the partnership. In order to increase the attractiveness of these .investment offerings, the non-profit should carsider joint venturing with an established property manager cr a developer with previous :Multi-family development and management experience. 16 For certain properties, it may be useful to explore the creation of an ownersl-iip entity that combines some of the characteristics of both rental and home-ownership. The exact form of this entity will require careful structuring in order to meet local regulations and the various tests that may be applied by the IRS to qualify the project for the use of tax-exempt financing and for the sale of limited partner interests. A potential form for the owner is for it to consist of a joint venture between a developer and/or syndicator and a non-profit corporation. The developer will be responsible for the financial management of the partnership on behalf of its limited partners. The non-profit will be responsible for the establishment of appropriate housing and management policies for the project and may have some responsibility for day-to-day management. The tenants of the property will have the option to be a part of the non-profit co-general partner. The structure of the ownership will allow the tax shelter benefits of the property to be passed along to the limited partner investors, while maintaining appropriate control for the residents. It will also allow the project to be considered a "rental" residential project under the meaning required to be eligible for tax-exempt multi-family financing. PROGRAM DESCRZPTION The City and a non-profit will conduct a survey of properties eligible to be acquired. In general the buildings should have the following characteristics: five units or more; have adequate rental income to service all debt after acquisition; be in accordance with underwriting standards to be developed by the program and participating lenders; be in need of upgrading or renovation; have occupancy in whole or part by low and moderate income tenants; be owned by a seller for whom either bargain sales techniques or tax-exempt income may be appropriate; and, be occupied by tenants who are interested in and desirous of involvement in management. Upon identification of properties meeting some or all of these criteria, it will be necessary to negotiate an option agreement to purchase the site, arrange for mortgage financing and close the transaction. FINAN(;ING PROCEDURES: CONVENTIONAL LOANS Under this financing option, the non-profit and the City will work closely with a local lender to establish procedures and guidelines for conventional loans. In general, it is likely that these loans will have *_o have a idan-t o.-value vatic of 80~ and have an initial debt coverage ratio cf 1Q5-115&. 17 Properties with a small assumable first mortgage and advantageously priced seller financing that can be sub- ordinated will be likely to fit this option. This option has the benefit of allowing the City to develop a working relationship with its lender on a deal by deal basis. In today's market, rates of 12 1/2-14~ with a 20-30 amortization period and a 5 year rate renegotiation are to be expected. If necessary to obtain acceptable terms, the borrower and lender can use FHA - insurance (either 223(f}, 221(d)(3) or 221(d)(4) with conventional, i.e. non-tax exempt rates. FINANCING PROCEDURES; TAX-EXEMPT CREDIT AGREEMENT This financing option will allow either a participating lender or a seller offering a purchase money mortgage to convert income received to a tax-exempt basis. As described in previous sections, mortgage originations and revenues will flow through the City of Santa Monica and thus become tax-exempt. All properties with mortgages financed in this manner must meet the requirements of the Mortgage Subsidy Bond Tax Act, as described above and in Appendix 1. Parti- cular care in the timing of project development will be required to meet the public .hearing requirements of the Tax Equity and Fiscal Responsibility Act of 1982. If a tax- exempt mortgage were made in today`s market an 11$ rate with similar underwriting terms as for conventional loans could be expected. FINANCING PROCEDURES: FHA 223(f) WITH TAX-EXEMPT BONDS If the City and participating non-profits are able to simultaneously identify, acquire and make available for processing a number of buildings, then FHA 223(f) mortgage insurance with tax-exempt bonds may be a viable option. These loans would be originated and partially insured by a FHA certified lender. All loans would have to meet the requirements of the Act. A minimum bond issue of $4.5-6.0 million dollars would require at least. 100 units to be assembled. A mortgage rate of 10-11~ could be expected in today's market. Section 223(f) mortgage insurance is more fully described in Appendix 1. CITX ASSISTANCE AND. RESOURCES City. assistance will be required in the following areas: establishing an agreement with a lender to review and approve packages for conventional financing; creating procedures for a tax-exempt credit program; implementing an FHA 223(f) tax-exempt bond program. The City will be required to -promote the project"with all cf the. potentially involved parties and structure the transaction to meet the -varying needs. Fi.narcial assistance. will be needed to provide non-intexest bearing, non-amortizing deferred payment second 18 mortgages and to write down transaction costs. The subsidized loans range from $6,700-$14-,200 per unit depend- ing on the particular financing mechanism) for a unit that is affordable by households earning $16,000 per year (60~ of median). In order to insure that projects are found and developed in a timely manner, it will be critical that the City be able to provide financial assistance. In designing how the City shall provide such assistance, it is desirable to maintain a great deal of flexibility in the following areas: seed money loans to pay for upfront architectural, legal and financing fees, if required; loans and/or grants to the sponsor to meet initial working capital deficits, net worth requirements and to finance the shortfalls created by the timing of pay-ins . .from equity investors; the creation of a co-insurance fund to partially share in the co-insurance risk that will be undertaken by the participating lender if Section 223(f) insurance is pursued. Assuming the full volume of 125 units is reached in the first year, the full time equivalent of 1 staff persons will be required. IMPLEMENTATION ISSUES In order to implement this project, the key issue will be .the structuring of the legal and financial arrangements between lender, FHA, tenants, developer, seller and non-profit. Concerns in creating a deal amongst these parties will be: establishing. sufficient managerial control by parties with previous expertise in order to satisfy the stringent underwriting concerns of the lender and FHA; creating ar. ownership entity that has credibility amongst potentia L equity investors so as to be able to raise the equity needed; structuring an ownership form that can qualify as a rental project under the IRS tax-exempt financing and under local tests and that provides for adequate tenant participation; acquiring properties at prices and with such timing as to make the financial transactions work. Two of the potential financing options assume that renegoti- able or adjustable rate-financing will be made available by lenders. Clearly fixed rate financing is more desirable for any housing development and :in negotiations with lenders, the Litp.should attempt-to obtain fixed rate commitments. separate deposit agreements utilizing City funds and accounts may provide an incentive to lenders to offer more ' advantageous terms to borrowers sander this grogram. Of particular concern will be the ability of the non-profit to structure its involvement so as to give private lenders and investors an appropriate level of camfort. Recently introduced Federal legislation may affect the ability of not-for-profit corporations to raise the sale through the 19 sale of tax shelter benefits. Careful legal structuring should minimize the effects of this legislation if it is ultimately enacted. The City's involvement in backing up the participating non-profits may be critical in this. Additional issues of concern will be the ability to find a critical number of units that meet the underwriting and eligibility criteria. For the tax-exempt credit agreement and tax-exempt bonds options, transaction costs will be high if at least 100 units are not simultaneously developed. PROJECTED VOLUME An initial appropriation of $883,000 would support the writing down of $50,000 in transaction costs and allow the .acquisition of at .least 80 units,. of which two thirds or more would be affordable. Of the $883,000, $75,000 may need to be set aside depending on the volume and complexity of the transactions, for seed money, options, etc. These costs should however be able to be re-captured upon closing and the putting into place of permanent financing for each transaction. NEXT STEPS 1. Meet with lenders, non-profits and investors to discuss suitability of the program. 2. Survey market by City and non-profits to estimate volume. 3. Discuss legal requirements with bond counsel. 4. Prepare draft organizational and financial plan; 5. Negotiate and enter into an option agreements for properties. 6. Pass an Inducement Resolution authorizing the issuance of bends,. if bond financing is anticipated.. 7. work with Lender to submit initial FHA package and begin processing. 20 8. Begin Program Operations: Non- Task Profit DC/ED Lender Program Design X XX X Marketing X XX Project Packaging XX X Intake XX Loan Underwriting X XX Construction Monitoring XX X Loan Servicing XX XX = Primary Responsibility X =Secondary Responsibility or Technical Assistance 21 ASSURING LONG-TERM ACCESS ACQUISITION OF UNITS BY NON-PROFITS FINANCIAL PROJECTIONS FOR A HYPOTHETICAL PROPERTY ASSUMPTIONS: o Rent at $400 per unit per month. o Sales Price at 8 x rent = $38,400, say $40,000. o Rehabilitation at $4,000 per unit. o Equity contribution at 20~ of project cost. TYPICAL UNIT WITH CONVENTIONAL FINANCING Gross Income Operations and Vacancy Net Operating Income Debt Service Cash Flow $4,800 (1,500) 3300 (3,000) (14~, 30 yrs) 300 First Mortgage Eguity City 2nd Mortgage $ 1,000 $ 8,800 $14,200 TYPICAL UNIT WITH TAX-EXEMPT CREDIT AGREEMENT Gross Income Operations/Vacancy Net Operating Income Debt Service Cash Flow $ 4,800 1,500 3,300 (3,000 (11~, 30 yrs) 300 First Mortgage Equity City 2nd Mortgage $26,200 8,800 9,000 TYPICAL UNIT WITH FHA 223(f) AND BONDS Gross Income Gperations/Vacancy Net Operating Income Debt Service -Cash Flow $ 4,800 1,SC0 3,300 (3,000) (11$, 35 yrs) 300 First Mortgage Equity city 2nd Mortgage 528,500 8;800 6,700 22 ASSURING LONG-TERM ACCESS PACKAGING, TECHNICAL ASSISTANCE AND REFINANCING AID FOR OWNERS HOUSING GOAL To provide technical assistance and packaging aid to existing owners of multi-family properties to aid them in refinancing outstanding debt and reducing negative cash flows. To assist new owners to purchase and rehabilitate existing. properties. FINANCING MECHANISM . FHA 223 (f) mortgage insurance with tax-exempt revenue bonds for new purchasers. Conventional loans with FHA 223(f) mortgage insurance for existing owners. Loans will be originated by private lenders. Bonds will be issued by the City of Santa Monica. OWNERSHIP, MANAGEMENT AND DEVELOPMENT Existing owners will be able to participate, as well as new purchasers of existing properties. PROGRAM DESCRIPTION The Program will be publicized by the City of Santa Monica and be made generally available to property owners. Eligible properties will have some or all of the following characteristics: an average blended constant on the debt of 13-ISB; a balloon payment on the existing debt due in the near term; a need for modest upgrading and renovations; a negative cash flow that can be eliminated through refinanc- ing; and, some number of units renting at controlled rents that are at or below the affordability standard for households at 80~ of median income. CITY ASSISTANCE AND RESOURCES The Department-of Community and Economic Developmen*_ will have the primary responsibility for. implementing this program-. -Steps involved will include performing a market study to estimate potentiai demand for the program from private owners; managing a Request for Proposals in order to solicit applications from owners; performing initial underwriting and eligibility screening of applications; referring eligible applications to participating lenders; ard, providing technical assistance to owners in the packaging of 223(f) applications. 23 It is-assumed that many loans will require no City assistance- other.than technical assistance and packaging aid in utiliz- ing the FHA insurance program. Depending on response to the City's marketing efforts, it may be possible to assemble sufficient number of properties that new owners are in the process of acquiring so as to warrant the issuance of tax-exempt bonds. If so, bond transaction costs will be paid for by participating owners. Staff time necessary to implement this program is merely for marketing, screening, design and for the issuance of bonds. Assuming an initial volume of 100 units a 1/2 time person would be required over the course of a year. IMPLEMENTATION ISSUES ° It is not clear how many owners would be able to utilize an FHA 223 (f) refinancing program at conventional rates. If there are a sufficient number, the program will be less complex to implement than some of the other options described above. The program will need to meet the require- ments of the Section 223(f)-approved lenders. PROJECTED VOLUME Without a market survey and outreach effort it is difficult to estimate the number of owners who could be served. The provision of packaging and technical assistance could be made available on an as needed basis. NEXT STEPS 1. Discuss program concept with lenders and owners 2. Prepare market study to identify potential borrowers. 3. Design and establish City re-insurance and/or subsidy program 4. Begin FHA processing with technical assistance 24 5. Begin Program Operations: Task Market Study Outreach Effort Loan Intake Loan Underwriting Technical Assistance Servicing Borrower Lender DC/ED XX XX X XX XX X XX XX XX = PRIMARY RESPONSIBILITY X = SECONDARY RESPONSIBILITY OR TECHNICAL ASSISTANCE 25 ASSURING LONG-TERM ACCESS REFINANCING ASSISTANCE FOR EXISTING OWNERS FINANCIAL PROJECTIONS ASSUMPTIONS - Rent $400 per unit - Debt $25,000 - Average constant = .15 CASH FLOW BEFORE REFINANCING ° Gross Income $ 4,800 Operations/Vacancy { 1,500) Net Operating Income 3,300 Debt Service ( 3,750) Cash Flow Before Taxes ( 450) CASH FLOW AFTER REFINANCING WITH FHA RATES Gross Income $ 4,800 ' Operations/Vacancy (1,500) Net Operating Income 3,300 Debt Service (2,580) {13~, 35 years) Cash Flow Before Taxes ( 720) CASH FLOW AFTER ACQUISITION WITH FHA 223(F) AND BONDS Gross Income $ 4,800 Operations/Vacancy (1,500) Net Operating Income 3,300 Debt Service (2,910) (10~, 35 years) Cash Flow Before Taxes 490 26 r ASSURING LONG TERM ACCESS RENT SUBSIDY PROGRAM HOUSING GOAL To expand the use of Section 8 Existing rental assistance certificates and thereby reduce the incidence of rent burden in Santa Monica. This program will effectively leverage $333,600 in Section 8 housing assistance payments which would not otherwise be used in Santa Monica. FINANCING MECHANISM Tax increment funds will be used to provide rental subsidies to low-moderate income households. The Redevelopment Agency will create a rental subsidy fund which will support two parallel efforts. One will increase the utilization of the federally funded Section 8 Existing .Housing Assistance Payments program by allowing program participants to rent apartments at rates higher than the maximum rent ("Fair Market Rent") permitted by HUD. Under this component, Agency funds will be used to supplement federal expenditures so that a larger number of units in the marketplace will be available to certificate holders. Agency support will assure that funds. reserved for Santa Monica will in fact benefit Santa Monica residents. The second component of the Rent Subsidy program would involve providing rental subsidies to very low income households who, due to household composition, are ineligible for the Section 8 program. This will increase the number of households who can participate, while the first component will increase the number of units available to participants. OWNERSHIP, MANAGEMENT AND DEVELOPMENT For both components, monthly rental payments would be made to owners of rental property on behalf of eligible tenants. Units assisted under the program would have to meet housing quality standards and funding r:ould be restricted to properties which do not benefit from federal interest-rate or operating subsidies other than: the Section 8 Existing. program. 27 PROGRAM DESCRIPTION She program would operate to expand participation of families in the Housing Authority's Section 8 Existing program. While non-economic factors (such as discrimination} impact a family's access to housing, additional barriers are created by the Fair Market rents set by HUD relative to the cost of available units. Simply put, HUD's rents are too .low for the Santa Monica market. By increasing the effective buying power of family households, participation in the program and use of available federal housing resources will increase measurably. The second component of the program will also ease the incidence of rent burden for very low income households in the City. This segment of the program would serve households who, due to family composition, would not be eligible for Section 8 assistance. Single persons who are neither disabled nor are senior citizens as well as families whose apartments do not meet federal occupancy standards are among those who cannot be served under Section 8, but who could be served by this program. Other restrictions, such as those applicable to certain types of student households would be identical to those of the Section 8 Existing program. For the Section 8 °'piggy-back" program, Agency contributions would not exceed $50 per month per unit and the total rent from all sources could not exceed the maximum permissible under Rent Control. There are 100 two-bedroom family Section 8 certificates not currently under contract. The estimated program cost for these 100 units would be $5000 per month or $60,000 per year. For the second component, the Agency would provide up to $100 subsidy per month or the difference between the maximum allowable under Rent Control and thirty percent of gross household income, whichever is less. This assistance would be targeted to households earning less than 50~ of the area median income as established by HUD. Properties acquired or rehabilitated under the other programs described in this paper would receive priority for this funding. For such properties, this type of subsidy can moderate the impacts of necessary rent increases for existing tenants. It is expected that the rental assistance program will be utilized with the Neighborhood Rehabilitation Financing Prcgram ar.d the .Non-Profit Acquisition effort. CITY ASSISTANCE AND RESOURCES The City's Department of Community and Economic Development will have a primary role in implementing this program, including negotiating appropriate agreements and procedures with .the Housing Authority, deeeloping applicable financial management systems, and possibly administering the non-federal component of the program. 28 One option for administering the non-Section 8 component would be to contract with the Housing Authority to determine income eligibility and to perform housing quality inspections. Interest income revenues from the fund, estimated at $15,000 annually, should be sufficient to cover these expenditures. One hundred and thirty-three households could be served at anthree year cost of $300,000 under this program. IMPLEMENTATION ISSUES This program can be fairly simple to administer and can be implemented quickly. It can be funded on a multiple year basis, and could assist Section 8 participants for three years at a cost of $180,000, and 33 rental subsidy program participants for a three year period at a cost of $120,000. Assuming the continuation of the Section 8 program, a three year commitment would leverage in excess of $1 million in federal housing assistance. The program will be very desirable for Section 8 applicants who have faced significant difficulties locating a unit within the Fair Market Rents established by HUD and will ease the burdens of excessive housing payments for those who are not eligible or for whom federal and state. housing assistance are not available. PROJECTED VOLUME For a three year program, 100 Section 8 participants and 40 non-Section 8 participants would be assisted. NEXT STEPS 1. Prepare program standards and operating procedures. 2. Negotiate operating agreement with the Housing Authority. 3. Conduct outreach program. 4. Begin Program Operations: 2g Task Design Program Conduct Outreach to Owners Conduct Outreach to Tenants Execute Agreements Manage Housing Housing Owner Authority DC/ED Non-Profits X XX X XX X X XX X X XX XX XX XX = PRIMARY RESPONSIBILITY X = SECONDARY RESPONSIBILITY OR TECHNICAL ASSISTANCE 30 ASSURING LONG TERM ACCESS RENT SUBSIDY PROGRAM FINANCIAL PROJECTIONS PROPOSED BUDGET ALLOCATION--TAX INCREMENT $ 300,000- SECTION 8 PAYMENTS 1,000,000 TOTAL RENT SUBSIDY PAYMENTS $1,300,000 Section 8 Piggyback 10 units @ $SO/month = $5000 x 12 x 3 = $ 180,000 Rent Subsidy--Non-Section 8 33-40 units @ $100/month = $3300 x 12 x 3 = 120,000 Total Units 140 Total Local Cost $300,000 31 PRODUCING NEW AFFORDABLE HOUSING PARKING LOT AIR-RIGHTS DEVELOPMENT - RENTAL HOUSING GOAL To develop replacement rental units on currently under- utilized City-owned parking lots and to make a percentage of these units available for low and moderate income occupancy. FINANCING MECHANISM The development of newly constructed rental units will be financed by multi-family tax-exempt bonds issued by the City of Santa Monica. The projects will be required to meet all of the requirements of the Act. Additional security for the bonds will be provided for by either a bank letter of credit, FHA insurance, or as a general obligation of a participating lender. Assuming the contribution of the development rights by the City, 30$ of the units will be available for low and moderate income occupancy. Additional low and moderate income benefit may be able to be obtained with additional City contribution. OWNERSHIP, MANAGEMENT AND DEVELOPMENT Rental properties to be developed under this option will be owned, managed and developed by private developers. Developers will be selected through a Request for Proposal issued by the City. The RFP will set forth the development incentives the City intends to offer and request developer responses to utilize these incentives. Selected developers will agree to abide by the management, ownership and development requirements established by the City. PROGRAM DESCRIPTION Parking lot sites owned by the City will be ideretified as to their suitability fcr residential development. L~owntewn sites will be specifically targete3. Zoning and density approvals will be processed by the City to allow for the maximum feasible and appropriate development. Such density bonuses may be critical to making development feasible. Sites may be developed with a mix of market rate and low income units, at a ratio of '0$ to 30$. Through the 32 provision of cash subsidies higher numbers of low income - units will be able to be obtained. The low income units will be scattered throughout the project and will be of equivalent quality and size as the market rate units. The developer will agree to maintain the property as a rental project and keep 20$ of the units low income for a period of at least 10 years. Additional public benefits may be able to be offered by developers to the City; the amount and type of benefits could be a competitive part of the RFP responses. Under current law, new rental units produced in the City are exempt from Rent Control. It is assumed that the policy will be continued and assured to the developers of these sites. After selection of a developer, financing details will be put into place. In order to make the air-rights development feasible, the City may have to provide the land at no cost (or at a price based on future project performance). These ° incentives are characteristic of concessions that the City will have to provide in order to encourage development. The benefit will be the gain of low income units at no or modest public cash cost. CZTY ASSISTANCE. AND RESOURCES City assistance to this project will includes all processing of zoning, density and development public approvals; the management of a Request for Proposal process; and the issuance of tax-exempt bonds. Based on the provision of 30~ of the units for low and moderate income occupancy no financial commitment should be required; indeed, the project should create surpluses, in kind or cash, for the City. Staff time will be needed to manage the RFP process, help developers with processing and assist in negotiations with developer. A 1/2 time person over the course of a year is necessary. IMPLEMENTATION ISSUES The first issue to be determined is the marketability of rental units in the selected sites at $1,000/month. A survey of potential developers should be undertaken. A major concern in implementing this financing will be the management of-the public approval process to allow for the development of the air-rights. A wide variety of zoning and cost issues will have to be addressed. Issues of particular concern include the provisior. of temporary parking during the construction; the selection of the most appropriate sites for this type of development; the cost of two levels of structured parking (assuming no excavation); and, anv possible ..environmental effects. Of equal. concern will be the ability to attract-high qualit_r developers to engage in a complex development process. 33 PROJECTED VOLUME An .initial site of at least 100 units should be identified. Additional sites with the potential for development will have to be identified by staff. NEXT STEPS 1. Identify all potential sites and select initial site. 2. Prepare analysis and schedule of required zoning approvals. 3. Meet with potential lenders and potential developers to gather information on concerns/issues. 4. Prepare draft RFP. 5. Begin Program Operations: Task DC/ED Developer Lender Survey and Selected Sites XX _ Prepare environmental review and development plan XX Prepare RFP XX Submit Proposals XX Negotiate Agreement XX XX Prepare Financing Plan X XX XX Monitor Project Development X XX XX Construction X XX X - Management X XX X XX = Primary Responsibility X =Secondary Responsibility or Technical Assistance 34 PRODUCING NEW AFFORDABLE HOUSING PARKING LOT AIR-RIGHTS DEVELOPMENT - RENTAL FINANCIAL PROJECTIONS DEVELOPMENT COSTS (PER UNIT)* Construction (steel and concrete $.60,.000 Premium for Structured Parking 10,000 Soft Costs 10,000 Overhead/Profit 10,000 Total Project Cost $ 100,000 SOURCES OF FUNDS First Mortgage 80,000 Equity 20,000 OPERATING PROJECTIONS (Monthly Per Market Rate Unit) Principal & Interest (10$,30yrs) $ 700.00 Operations 150.00 Rent Skewing Allowance for Lower Income Units 200.00 Required Market Rental $ 1,050.00 No. of Market Rate Rentals: 70~ - $1,050/Unit month No. of Affordable Rentals: 30~ - $430/Unit month *Estimated Costs - Subject to Change 3S PRODUCING NEW AFFORDABLE HOUSING PARKING LOT AIR RIGHTS DEVELOPMENT - LIMITED EQUITY HOMEOWNERSHIP HOUSING GOAL To develop new housing units for moderate and middle income persons on currently under utilized City-owned parking lots and to make some or all of these units available for ownership on a limited equity basis, as either cooperatives or condominiums. F%NANCING MECHANISM In one option individual mortgages for eligible homeowners will be financed with the proceeds of single-family tax-exempt bonds issued by the City of Santa Monica or Los Angeles County under a Cooperation Agreement with the City. Borrowers will have to meet all requirements of the Act, including that they be first-time home buyers and that the purchase prices of homes meet the limitations imposed by the Act. In order to meet the purchase price limitations the land costs must be minimized. All loans will have 100$ private mortgage insurance and will be originated by a participating lender. Unless the "sunset" provisions of the Mortgage Subsidy Bond Tax Act of 1981 are relaxed (as it is expected they will be) bonds may only be issued until the end of 1983. In order to issue bonds, .the City must request an allocation of authority to issue bonds from the State. If tax-exempt bonds are not able to be used conventional financing can be substituted. If conventional financing 'can be used a number of units can be sold at market with the surpluses used to subsidize affordable units. OWNERSHIP, MANAGEMENT AND DEVELOPMENT Projects•wi1J. be built and sold by developers selected through a Request for Proaosal (RFP) process mar.aaed by the City. The RFP will outline the incentives the City intends to offer in making available the parking let sites: A portion of the units will be sold as either limited equity cooperatives or limited equity condominiums, with resale prices calculated as to offer some of the equity appreciation benefits of homeownership to the our_going seller, while serving ongoing affordability of ti:e units fer the incoming purchaser. Units will be made available to persons or families earning betwen 80~ and 150 of the median income. 36 PROGRAM DESCRIPTION Downtown parking lots sites will be identified and selected by the City for development. All necessary zoning and building approvals will be expedited by the City, in a similar manner as described for the rental development option. Developers will be selected by RFP and upon selection will pay a commitment fee in order to allow the sale of the bonds to proceed. The program will be structured to create units affordable to persons earning between 80~ and 150$ of the median income and to meet the needs of these people for homeownership units. An alternative mechanism to explore is to allow developers to develop 70~ of the units at market prices, with the balance made available through the bond program at concessional prices. The attached financial projections show prices of units could be skewed under different financing options in order to offer affordable units. These schedules of prices show that a minimum of 30~ of the units will be affordable, without the provision of any City subsidy. CITY ASSISTANCE AND RESOURCES City assistance for this project will include: all processing of zoning, density and other required public approvals; the selection of a developer; the establishment of program guidelines and procedures; and the issuance of tax-exempt bonds. no financial commitment should be necessary to implement the project and obtain 30$ of the units as affordable other than 'free' land and tax-exempt financing. Staff time will be required to manage, design and implement this project is estimated at a I/2 time person annually. Initially all tasks will be of a planning and design nature, leading to the issuance of bonds and/or negotiations with developers. IMPLEMENTATION ISSUES Implementation of this option of air-rights development raise similar issues as the .rental option. PROJECTED VOLUME Same as for rental NEXT STEPS Same as for rental 3% PRODUCING NEW AFFORDABLE HOUSING FARRING LOT AIR-RIGHTS DEVELOPMENT - LIMITED EQUITY HOMEOWNERSHIP FINANCIAL PROJECTIONS DEVELOPMENT COSTS (PER UNIT)* Construction $70,000 Premium For Structured Parking 10,000 Soft Costs 10,000 Overhead/Profit 10,000 SALES PRICE $100,000 AFFORDABILITY Down Payment (10$) $ 10,000 Mortgage $ 80,000 Monthly Payments $ 700 (10~, 30 yrs) _ Income Required $ 32,800 (120 median) SCHEDULE OF SALES PRICES (TAX-EXE MPT FINANCING) ~ of Units Income Purchase Price Available 80$ 57,000 10$ 100 71,000 2pg 120 100,000 40~ 150 120,000 30~ SCHEDULE OF SALES PRICES (CONVENTIONAL FINANCING) $ of Units Income Purchase Price Available 808 57,000 15~ 100 71,000 15$ Market 180,000 7pg * Estimated Costs - Subject to Change 3fi '' APPENDIX 1 FINANCING RESOURCES PROGRAMS Rehab Production Access RESOURCES Tax-exempt Revenue Bonds x x x Tax-exempt Credit Agreements x x Community Development Block Grant Funds x x x Section 8 Certificates x x Local Fund Appropriations x x x Conventional Mortgages x x FHA Insurance x x x Air-Rights over Under-Utilized Land x Zoning/Density Bonuses x Equity Investments-Syndication x x x Bargain Sales for Acquisition x 39 APPENDIX 1 FINANCING RESOURCES SUMMARY OF KEY REQUIREMENTS OF PUBLIC PROGRAMS EXPECTED TO BE UTILIZED COMMUNITY DEVELOPMENT BLOCK GRANTS AVAILABILITY: Annual entitlement grant from the federal Department of Housing and Urban Development. ELIGIBLE USES: Virtually all costs associated with the rehabilitation of existing housing and certain costs for new construction, as long as purposes of the enabling legislation are met. KEY RESTRICTIONS: Projects must serve low and moderate income persons, generally taken to mean that 50% of the recipients of assistance should be eligible. PROPOSED USES: To provide deferred-payment subordinated loans to non-profit organizations for acquisition and property improvements in con- junction with private financing. To pay for certain administrative costs of establishing the Program. TRANSACTION COSTS: None EXPECTED INTEREST Sliding schedule of effective RATES: rates of borrowing from 0%-9%. Qa TAX EXEMPT FINANCING - MULTI FAMILY AVAILABILITY: City may issue notes and bonds as projects meeting legal and credit requirements are developed. ELIGIBLE USES: Acquisition, acquisition and rehabi- litation and new construction of rental residential property. No refinancing of existing debt. KEY RESTRICTIONS: Legal: Projects must meet requirements of Mortgage Subsidy Bond Tax Act of 1980 including arbitrage limita- tions, low and moderate income usage, rental status limitations. Credit: Projects must be capable of receiv- ing an investment grade credit rating, in general requiring some form of credit enhancement (Letter of Credit, FHA Insurance) above and beyond the real estate mortgages. PROPOSED USES: To acquire existing multi-family projects in order to preserve long- term affordable housing options, to provide rehabilitation financing. TRANSACTION COSTS: Costs of Issuance and Underwriter's discount estimated to cost 3 1/2-4~ on a bond sale of a minimum of $4,000,000 substantially all of which should be paid for by participating developers. Tax-exempt credit agreements to cost approximately $60,000. EXPECTED INTEREST RATES: For 'AA'and `AAA' a martgage rate of could be achieved tax-exempt credit of 8-10, 10 years (as of 6/1/83). rated issues 9/5-11~, 30 years (as of 6/1/83). For agreements a rate could be expected al FHA 223(f} MORTGAGE CO-INSURANCE PROGRAM AVAILABILITY: Approved lenders may process loans for FHA insurance on an expedited basis by agreeing to co-insure 15~ of any losses through default. Initial program activity now beginning. Insurance may be used as security for tax-exempt borrowing. ELILGIBLE USES: Acquisition of existing multi-family projects or refinancing of existing multi-family debt without substantial rehabilitation. Rehabilitation limited to $6,500 per unit. Properties must be 5 units KEY RESTRICTIONS: Lenders must be approved by FHA, meeting various credit experience and net worth tests. Lender's co-insurance risk may be re-insured with a .25~ fee passed on to the mortgagor although that will increase the amount of co-insurance the lender must assume. Properties must meet FHA's and Lender's under-writing criteria. Local rent controls are pre-empted by HUD, although rents continue to be regulated HUD. PROPOSED USES: To aid non-profits to acquire existing properties. To assist existing owners to re-finance balloon mortgages and rehabilitate buildings, in ex- change for restricting a percentage of the units for low and moderate income use. TRANSACTION COSTS: Costs of Issuance of Bonds and Underwriter's Discount estimated to cost 3 1/2-48 on a minimum bond financing of $4,000,000. FHA insurance premium of 1$ initially and 4/10 of 1~ annually. Re- insurance premium of .25~ For financings less than $4,000,000 the use of Section 223(f) without bonds should be considered. EXPECTED INTEREST RATES: Assuming an 'AA' rated issue (FHA 223(f) plus re-insurance) a mortgage rate of 9.5-11~, 30 years could be achieve-d (as of o/1/83), 42