sr-092083-11cC/ED:HD:ML:p
Council Mtg._9/13/83
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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.
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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:
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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
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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.
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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.
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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
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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
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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.
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-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
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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.
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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.
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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
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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
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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
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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
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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:
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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
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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
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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),
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