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sr-021412-9aCity of Santa Monica' To: Mayor and City Council City Council Meeting: February 14, 2012 Agenda Item: q =d\ From: Andy Agle, Director of Housing and Economic Development Subject: High Place East Affordable Housing Development Recommended Action Staff recommends that the City Council: 1. Approve the repurpose of High Place East (1943, 1949, 1955, and 1959 High Place) housing development from an affordable homeownership model to affordable rental housing; and 2. Adopt the attached resolution approving the issuance of tax - exempt bonds by the California Statewide Communities Development Authority to assist in the financing of affordable rental apartments at High Place East. Executive Summary High Place East was originally conceived as an ownership development that would be affordable to moderate - income households. Community Corporation of Santa Monica (CCSM), the developer, has received all necessary entitlements to construct the development as affordable condominiums. However, after seeking construction financing from commercial lenders during the past few years, CCSM has been unable to secure a construction lender for the development as an ownership model. Conversely, financing such as tax - exempt bonds and tax credits is currently available for the development as affordable rental housing. The issuance of tax exempt bonds requires City Council approval, although the City will neither issue the bonds nor be responsible for their repayment. Therefore, staff seeks City Council approval to proceed with this development as affordable rental housing. Background CCSM is a local nonprofit agency committed to the development and management of affordable housing in Santa Monica. In 2003, CCSM held two community forums to bring the residents of the Pico neighborhood together to discuss affordable housing 1 issues. At these forums, community members expressed interest in the creation of affordable homeownership in their neighborhood that could be targeted toward first -time homebuyers. In response to this feedback, CCSM convened a study group comprised of Pico community leaders to explore and consider all aspects of affordable homeownership. The study group resulted in the Pico Neighborhood Affordable Homeownership Report which endorsed affordable ownership for moderate - income households. High Place East would occupy nearly one acre of land and was designed for 45 affordable, three - bedroom condominiums. High Place East is part of a larger development that also includes High Place West, an affordable rental development with 47 residences. The following summarizes the development history: • On October 25, 2005, City Council and the Redevelopment Agency approved: 1) the homeownership concept for moderate - income households at High Place East; and 2) authorized the City Manager and Executive Director to negotiate and execute agreements necessary to effect the proposed homeownership development at High Place East; • On December 12, 2007, High Place East and High Place West developments were approved by the Planning Commission; • On September 16, 2008, as the design of these adjacent developments were predicated on vacating the High Place cul -de -sac, Council approved the vacation; and • To date, the City has approved $13,016,025 in financing from its housing trust funds for High Place East. Discussion Homeownership vs. Rental The benefits of High Place East as a homeownership development include equity accumulation resulting from paying a mortgage and some limited price appreciation, potential income tax relief from mortgage and property tax deductions, and housing stability. Homeownership also involves corresponding responsibilities, such as expenses associated with maintenance, repairs, insurance and homeowner association 2 (HOA) dues. One challenge for moderate - income homeowners can be HOA dues or maintenance requirements that increase above a moderate - income family's ability to pay. Further, publicly funded homeownership typically requires resale price restrictions that, while creating long -term affordability, results in limited equity gains for the homeowner upon resale. Some potential homeowners perceive the (limited- equity) limitation as outweighing the benefits of the affordable (below- market) home price and prefer the potential price appreciation that can be realized in unrestricted market -rate homeownership. Finally, homeowner mortgage default can result in lost affordability for a (below- market price) condominium that becomes bank - owned. Alternatively, rental housing owned by nonprofit housing corporations and which is deed - restriction as affordable housing provides households with housing stability without the associated expenses of maintenance, repairs, insurance and HOA dues for the renter household. Additionally, High Place East as an affordable rental development would provide deeper levels of affordability by targeting low- income households rather than moderate - income households established in the homeownership model. Below are several features of the High Place East affordable homeownership model that are unattractive to lenders and perceived as increasing risk, resulting in banks' unwillingness to offer financing at satisfactory terms: • Deed - Restricted Units: The public funding sources for affordable ownership housing targeted to low and moderate - income households require restricted sale prices for fifty five years to income - eligible buyers. This means buyers must have sufficient income to afford the mortgage and other homeownership costs yet not exceed certain income levels. Therefore, the pool of credit - qualified and income - eligible buyers is small. • Limited - Equity Ownership: The structure of the project offers only limited- equity appreciation to homebuyers upon sale of their deed - restricted homes. This limited return -on- investment for buyers makes the condominiums less desirable to potential homebuyers. • Community Land Trust Structure (CLT): The CLT structure adds another layer of restrictions and requirements that, while instrumental in protecting the long -term 3 affordability of the units, also requires an additional layer of approvals and controls that complicate sales. ® Complicated Qualification Process for Homebuyers: The structure and restrictions associated with publicly funded affordable homeownership make the buyer qualification process more complicated than a typical homeownership purchase. This multilayered qualification process increases the drop -out rate of potential buyers who will complete the sale. The challenges are complicated by the current mortgage lending environment, where underwriting standards are extremely tight and many families are unable to secure mortgage loans. Tight underwriting standards are even more difficult to overcome for families with limited means. As a result, prospective construction lenders have questioned the ability of moderate - income buyers to secure mortgages and ensure the eventual sale of the condominiums. The proposed deal structure for the ownership model is necessary to protect the public investment in affordable homeownership, ensure long -term price affordability and verify the eligibility of buyers. Staff would not recommend revising the structure of this affordable homeownership model in an attempt to obtain bank financing, as it would undermine key public benefits associated with the affordable ownership model. Rather, staff recommends proceeding with High Place East as affordable rental housing. Affordable rental housing demand exceeds supply, can be financed feasibly, and is currently eligible for financing that includes tax - exempt bonds and tax credit equity. Financing as Rental Housing Staff has evaluated High Place East as an affordable rental development and concluded that approach is feasible without increasing the current City subsidy. High Place East as an affordable rental development would be eligible for both an allocation of tax credits and tax - exempt bonds. The tax - exempts bonds would provide the primary source of construction financing, while equity from the sale of tax credits would provide El a portion of the construction financing and repayment of the construction financing portion of the bonds. This same type of financing was successful for the adjacent High Place West development, currently under construction, and for which the City Council approved the issuance of tax exempt bonds on December 14, 2010. Each tax - exempt bond financing requires an allocation of bond authority from the State of California's Debt Limit Allocation Committee ( CDLAC). Such allocations of authority are obtained through a competitive application process. Additionally, the federal Tax Equity and Fiscal Responsibility Act requires that the public be afforded an opportunity to comment on the issuance of tax - exempt bonds, and that the local legislative body (City Council) approve the issuance of bonds for a development located in its jurisdiction. The City of Santa Monica will not issue the bonds for High Place East, and neither the City of Santa Monica nor its residents will be responsible for repayment of the bonds. Instead, with City Council approval, the California Statewide Communities Development Authority (CSCDA) will issue the bonds. Established in 1987 as a California Joint Powers Authority, CSCDA is a public agency jointly sponsored by the League of California Cities and the California State Association of Counties. It offers a broad range of tax - exempt financing programs to assist local agencies in achieving economic, financial, and social goals. CSCDA takes responsibility for reviewing proposed bond financing, ensuring that the proposed financing meets all CSCDA guidelines, ensuring the development satisfies the public benefit requirements for tax - exempt bonds, and recommending the development for bond allocation by CDLAC. The total development cost for High Place East is estimated at $23.9 million. The attached resolution authorizes up to $18 million of tax - exempt bonds. CCSM anticipates submitting an.application to CDLAC in early 2012 seeking tax - exempt bond financing authority for the project. Most of the bond financing would serve as short-term construction financing, with approximately $3 million serving as permanent financing. This .financing structure also facilitates an award of federal low- income housing tax credits conditioned upon issuance of the tax - exempt bonds. The tax credits are sold to a professional investor and the proceeds of the sale of the credits would be used to provide a portion of the construction funding and to repay the construction portion of the tax - exempt bond. Rental revenue from the development would be used to repay the permanent portion of the bond. Repayment would be the sole obligation of CCSM and the City has no obligation to repay the bonds in the event of a default. Commission Action At its January 19, 2012 meeting, the Housing Commission voted unanimously to advise the City Council to approve the repurpose of High Place East from an affordable homeownership model to affordable rental housing. Alternatives If the Council wishes to continue forward with High Place East as an affordable ownership model, an alternative would be for the City to act as the construction lender by providing a construction loan of approximately $10 million. However, given the recent demise of redevelopment, such funds are not available from housing trust funds and would need to come from another City revenue source. Additionally, this scenario would increase the City's investment in the development from $13 million to $23 million. Another alternative would be for the City to guarantee repayment of approximately $10 million in construction financing provided by a commercial lender. This second alternative would not require the immediate availability of $10 million implicit in the first alternative, but would represent a $10 million liability by the City owed to a commercial lender in the event the affordable condominiums are not sold in time to meet the construction loan repayment deadline. It would also force the City to assume the development risk while the bank would earn profits with minimal risk. 9 Financial Impacts & Budget Actions There are no financial or budgetary impacts associated with approving the High Place East development as an affordable rental development, unless the City Council selects one of the options outlined in the Alternatives section of this report. A funding commitment of $13,016,025 from housing trust funds has previously been issued for the development and the amount of the commitment would not change. Also, City approval of the issuance of tax - exempt bonds by CSCDA for this development has no financial or budgetary impact. Prepared by: Jim Kemper, Housing Administrator Andy Agle, Director Housing and Economic Development ATTACHMENTS: Forwarded to Council: Rod Gould, City Manager Attachment A: Resolution Approving the Issuance of Bonds by CSCDA for the Purpose of Financing a Multifamily Affordable Housing Development 7 Reference Resolution No. 10658 (CCS).