SR-07-22-2014-8A - 407-003-03City Council Meeting: July 22, 2014
Agenda Item: a -A
To: Mayor and City Council
From: Andy Agle, Director of Housing and Economic Development
Subject: Disposition of City -Owned Properties at 419 and 1616 Ocean Avenue
Recommended Action
Staff recommends that the City Council authorize staff to request proposals from
nonprofit affordable housing organizations to acquire the occupied, City -owned
apartment buildings at 419 Ocean Avenue and 1616 Ocean Avenue and to operate the
sites as affordable housing.
Executive Summary
The Housing Division currently oversees the property management of two residential
rental properties consisting of 26 rent - controlled apartments in two buildings at
1616 Ocean Avenue and 419 Ocean Avenue. At its December 11, 2012 meeting,
Council directed staff to explore the disposition of all City -owned properties managed by
the Housing Division, acknowledging that residential property management does not fit
well within the core competencies of City operations.
Staff has evaluated several options for disposing of the City -owned properties located at
419 Ocean Avenue and 1616 Ocean Avenue, from open- market sale to restricting
apartments permanently as affordable housing. Staff believes that transitioning these
properties to nonprofit ownership is consistent with Santa Monica's longstanding
commitment to maintain and increase affordable housing opportunities, including Rent
Control protections. Nonprofit organizations whose mission is to own and operate
affordable housing are better equipped than the City is to address the daily
responsibilities of operating residential rental property.
Staff recommends seeking proposals from nonprofit affordable housing organizations to
acquire and operate these two properties for the benefit of low and moderate income
households.
Background
At its December 11, 2012 meeting, Council directed staff to explore disposition of all
City -owned properties managed by the Housing Division, including 419 Ocean Avenue.
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The City -owned property at 1616 Ocean Avenue was not specifically discussed at that
time because the property had previously been identified for use as a supportive
housing site for homeless persons. Staff has found this approach to be impractical for a
variety of reasons, including funding infeasibility and existing building design /layout.
The property at 419 Ocean Avenue contains seven apartments, and is located one
block south of San Vicente Boulevard. The building was constructed in 1942 and
granted to the City in 1977 by the Estate of Louise S. Towneley. The property at
1616 Ocean Avenue, located just south of the Pier, consists of 17 apartments and two
small commercial spaces. The building was constructed in 1953 and purchased by the
City in 1973. Both properties are subject to the City's Rent Control law and have been
partially rehabilitated.
Owning and operating the City -owned properties at 419 Ocean Avenue and
1616 Ocean Avenue requires significant staff resources, including property
management company selection and oversight, preparing and monitoring property
budgets and expenditures, assisting with resolving tenant complaints, and conferring
with the City Attorney's Office regarding landlord /tenant legal issues. Disposing of these
properties would allow staff to focus more directly on its core mission of increasing
affordable housing opportunities through funding strategies.
Discussion
Staff has considered three disposition options for the two City -owned properties, as
described below.
Option 1 — Open Market Sale to Highest Bidder
One option would be to sell the properties in the open market by accepting bids and
negotiating for the highest possible price among bidders. This approach would generate
one -time revenue for the City. Funds from the sale of 419 Ocean Avenue could be
dedicated for affordable housing; however, the sales proceeds from
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1616 Ocean Avenue likely could not be used for affordable housing because the
property was purchased using gas -tax funds related to a road - widening project and
would be deposited into the Gas Tax Fund.
The prime location of both properties would represent an attractive purchase, but could
lead to long -term redevelopment of the sites. Redevelopment typically is achieved
using the Ellis Act to withdraw the apartments from the rental market and then
demolishing them in conjunction with a new development. Such redevelopment would
result in the loss of existing housing stock with Rent Control protections, as well as the
displacement of long -term residents.
Option 2 — Sell with Rental Housing Covenants
Another approach would be to sell the two properties as a package, including certain
covenants recorded on the properties' titles. Covenants could establish that the
properties are to be used as multifamily rental housing. Such an approach would
minimize the likelihood that the properties would be redeveloped, while ensuring
protections for long -term tenants. Apartment rents would be allowed to increase to
market rates when apartments become vacant, consistent with the Costa - Hawkins
vacancy decontrol law. Prospective buyers of the properties likely would be drawn to
the prospect of long -term income that would increase over time, though the sales value
would be expected to be significantly lower than a sale without restrictions.
Option 3 — Convey to Nonprofit Housing Provider
A third option would be conveying the properties to a nonprofit housing organization in
conjunction with affordability covenants requiring both properties to be operated as
affordable housing for low- and moderate - income households. This approach would
formally dedicate the apartments for use as affordable housing, establish income
eligibility and rent limit standards, and protect tenants from displacement that could
result from redevelopment of the sites by market -rate developers. Dedicating these
properties as affordable housing may require a one -time capital investment from
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available City Housing Trust Funds estimated at one to three million dollars for initial
property rehabilitation and reserve funding for future repairs.
Staff recommends the third option in order to protect existing tenants and to preserve
and expand affordable housing opportunities in the City. These outcomes would both be
consistent with City priorities regarding affordable housing and tenant protections.
In the long run, it also supports the City's efforts to support geographical diversity in the
City's affordable housing supply by creating new affordable housing resources in some
of the most costly neighborhoods of Santa Monica.
Recommended Request for Proposals
If Council directs staff to proceed with the recommended approach, staff would issue a
request for proposals (RFP) targeted to nonprofit housing organizations. The RFP
would seek proposals to acquire the properties and operate them indefinitely as
affordable housing for the benefit of low- and moderate- income households. The RFP
would seek a nonprofit housing provider with demonstrated experience and capacity to
own and operate affordable housing. Proposals would be evaluated on:
• thoroughness, completeness and responsiveness to RFP
• financial feasibility of the proposal
• approach to managing and operating the properties
• financial capacity of the organization
• demonstrated experience and capacity owning and operating affordable housing
• knowledge and understanding of local laws concerning landlord /tenant rights and
responsibilities.
Staff would evaluate the proposals and then return to Council with a recommended
nonprofit housing provider, suggested parameters regarding the final deal structure, and
other details associated with income targeting and rent limits.
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Alternatives
Council could direct staff to take another one of the approaches outlined in this report.
Council could also elect to retain these properties, understanding the staffing and
operational challenges related to City oversight of property management functions.
Council could also provide alternate direction to staff relating to the disposition of these
two City -owned properties.
Financial Impacts & Budget Actions
There is no immediate financial impact or budget action necessary as a result of the
recommended action. Staff estimates a possible one -time capital investment from
available City Housing Trust Funds estimated at one to three million dollars for initial
property rehabilitation and reserve funding for future repairs. Upon returning to Council,
any proposed expenditure of Housing Trust Funds would be identified and presented for
Council approval.
Prepared by: Jim Kemper, Housing Administrator
Forwarded to Council:
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Andy Agle, Direct or /� Rod Gould
Housing and Economic Department City Manager
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