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
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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
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(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
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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
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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.
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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
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Reference Resolution No.
10658 (CCS).