SR 09-27-2016 3F
Ci ty Council
Report
City Council Meeting : September 27, 2016
Agenda Item: 3.F
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To: Mayor and City Council
From: Andy Agle, Director , Housing and Economic Development, Housing Division
Subject: Proposed Revisions to TORCA Home Ownership Loan Terms
Recommended Action
Staff recommends that the City Council :
1. Allow modifications to the loan terms for up to 17 remaining participants of the
Tenant Ownership Rights Charter Amendment (TORCA) loan program to be
revised from a fixed due date to due -on -sale or transfer .
2. Authorize the City Manager to execute all necessary documents to modify t he
terms of up to 17 remaining TORCA loans to due -on -sale or transfer of the
condominium, upon request by the borrower , and based on a determination that
the borrower would be economically unable to repay the loan on the fixed due
date.
Executive Summary
Santa Monica administers the Tenant Ownership Rights Charter Amendment (TORCA )
loan program, which provided deferred payment loans from 1994 -2001 to qualifying
borrowers in exchange for a proportionate share of the property’s appreciated value.
The TORCA loan program has enabled over 50 Santa Monica low - and moderate -
income households to purchase their apartments as they converted to condominiums.
In order to facilitate continued housing stability for households with outstanding shared -
appreciation loans , staff recommends creating an option for income -qualified
households to extend loan terms from fixed due dates to terms that would require
repayment upon sale or transfer . The City’s proportionate share of appreciation would
be retained during the extensi on period.
Background
From 1991 to 2001, the City’s Tenant Ownership Rental Conversion Act (TORCA ) loan
program provided deferred -payment, shared -appreciation , second -mortgage loans to
assist low - and moderate -income renters in purchas ing their apartment s as they
converted to condominiums. TORCA loans financed the gap between the purchase
price and the bank loan for which the resident qualified and covered from 14 percent to
60 percent of the original purchase price. On average, the original purchase pric e for
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TORCA residences was $128,000. The TORCA program issued 53 loans of which 36
have been repaid and 17 remain outstanding.
On December 11, 2012, City Council authorized staff to allow the option of 10 -year
extensions to the original 20 -year loan terms to coincide with the typical 30 -year term of
a TORCA homeowner’s primary mortgage (see Attachment A). Currently, eight loans
have 30 -year terms with fixed payment due dates between 2023 and 2031 (two of the
eight originally had 20 -year terms and have been granted 10 -year extensions). Nine
loans are in the initial 20 -year term, with due dates through 2018.
The deferred payment aspect of the TORCA loan means no payment is required during
the loan term. However, at the loan due date, the shared -appreciation f eature of the
loan requires the borrower to repay the City the original loan amount plus a share of the
appreciated value of the condominium. The City’s share of the appreciation is equal to
the proportion of the City loan relative to the original purchas e price, and is calculated
on the difference between the original purchase price and the market value on the loan
due date, as determined by an appraiser. The following provides an example of how
the shared -appreciation calculation works:
TORCA Shared -App reciation Loan
Repayment Scenario
Original Purchase Information
Original Purchase Price $125,000
TORCA Loan $54,000
TORCA Percentage of Price 43%
Appreciation Calculation
Current Market Value: $525,000
Original Sales Price: ($125,000)
Apprec iation: $400,000
TORCA Repayment Calculation
City Share of Appreciation (43%) $172,000
TORCA Loan Amount: $54,000
Repayment Due to City: $226,000
The pending balloon payment associated with TORCA loans presents a financial
challenge for remain ing low - and moderate -income borrowers who wish to stay in their
homes after the loan due date, rather than sell their residence to repay the loan. In the
past year, staff has spoken to several borrowers who are concerned that loan
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repayment at the end of the fixed term would be economically infeasible or a
significant hardship. Using July 2016 estimates from Zillow.com , staff calculates that
TORCA condominiums for the remaining 17 borrowers have appreciated by an average
of 268 percent since their origina l purchase. Borrowers may have retired in recent years
and live on fixed incomes. Others may be elderly, and their age, or combination of age
and income, may be a barrier to securing new mortgages that could repay the
City loans .
On February 11, 2016 and July 21, 2016, the Housing Commission considered potential
options for TORCA borrowers regarding loan repayment (see Attachments B and C).
Several ideas about repayment were discussed by Commissioners, including:
City’s ‘fair share’ of the TORCA loan in vestment in any extension scenario;
Decreasing the owner’s share of appreciation in exchange for a loan extension;
Historic fair return;
Risk of not being repaid after some form of extension;
Family members possibly contesting a loan extension;
C ity buying TORCA condominium at loan maturity, then renting to former owner
at 30 percent of household income; also, City selling or transferring the
condominium when the resident vacates (for a profit or to another low -income
household); and
Available i nformation about how many of the remaining TORCA borrowers would
actually need a loan extension.
The Housing Commission discussed that allowing the extension of TORCA loans for
borrowers unable to refinance or to repay the TORCA loan would avert potential
displacement. At its July 21, 2016 meeting, the Housing Commission recommend ed
creating an option (see Option 1 below) for the remaining TORCA borrowers to extend
their loan due dates.
Discussion
To address the challenge of TORCA borrowers who are unable to repay the loan at the
due date, three options could be offered:
Option 1: Extend the loan term via loan amendment to due -on -sale or
transfer , wherein the City receives the same shared -appreciation
proportion as the original loan during the extended lo an term; or
Option 2: Extend the loan period via loan amendment to due -on -sale or
transfer , wherein the City receives an increased shared -
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appreciation proportion during the extended loan term; or
Option 3: City purchases the condominium for the owner’s por tion of
appreciated value (i.e., owner’s equity), then rents to the former
owner at 30 percent of the owner’s household income; when the
former owner vacates, the City:
sells the condominium for market value and dedicates the
proceeds for affordable hou sing uses; or
sells the condominium to a low - or moderate -income family at
an affordable sales price; or
transfers the condominium to a nonprofit housing organization
willing to own and operate it as affordable housing.
Staff and the Housing Commissi on recommend Option 1 as th e approach would assist
TORCA borrowers who are elderly or with low or moderate incomes. Option 1 allows
owners to remain in their homes and to retain ownership of a valuable and likely
appreciating asset during an extended term when the first mortgage will likely be paid -
off, thus freeing up household income to pay for living expenses. A ‘due -on -sale or
transfer’ loan provision would retain the City’s proportion of appreciation throughout the
extended loan term. Option 1 is consi stent with TORCA loan program’s original goals of
prevent ing resident displacement, enhanc ing housing stability, and facilitat ing affordable
homeownership.
Eligibility measures for allowing the conversion of the TORCA loan from a fixed date to
due -on -sale or transfer would involve the following: 1) assessment of borrower income
category (i.e., low - or moderate -income household); 2) proportion of income used for
housing costs (mortgage, property taxes, homeowner association fees, and property
insurance); 3) assets in excess of the equity in the TORCA residence; and 4) feasibility
of obtaining a bank loan to repay the TORCA loan. Additionally, as a condition of
amending the loan terms, the City’s deed of trust for the TORCA loan must remain in
the same lien position and would not be subordinate to additional debt secured
subsequent to the original TORCA loan, unless otherwise agreed to by the City in its
sole discretion.
Specific eligibility criteria would include borrower situations in which assets are less than
three times the amount of the TORCA loan repayment (excluding the TORCA residence
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equity), and include one or more of the following conditions:
housing costs (including the aforementioned new bank loan) would exceed 40
percent of gross income;
ag e or permanent disability prevents gainful employment; or
inability to obtain a new mortgage to repay the TORCA loan is documented by
bank lenders.
Alternatively, the City could implement Option 2 or Option 3.
Option 2 would allow residents who are unabl e to obtain or afford market -rate loans to
repay the TORCA loan, to remain in their homes beyond the loan due date in exchange
for increasing the City’s share of appreciation. While the City could benefit financially
from th e approach compared to Option 1, th e option shifts the proportionate share of
appreciation from the homeowner to the City. Th e option reflects a direct but deferred
cost to the borrower in exchange for the loan extension. Determining the ‘fair’ amount
of increased appreciation share fo r the City under this scenario could be challenging,
and may compel the resident to sell their home rather than accept the City’s terms for
extending the loan.
Option 3 would transition the resident from an owner to a renter and the City from a
lender to a landlord, until the former owner vacates. Th e approach would require the
City to employ cash resources and assum e landlord responsibilities, which entails
significantly more liabilities and staff resources than performing the role of lender.
Converse ly , owners with limited financial resources could benefit from the opportunity to
cash -out on owner equity. Subsequently, the condominium could be: 1) sold and the
proceeds targeted to affordable housing uses; 2) sold with an affordability covenant to a
qu alifying low - or moderate -income household; or 3) transferred to a nonprofit
organization to operate as affordable rental housing. The scattered locations of the 17
TORCA residences could make it challenging for either the City or a nonprofit
organization to operate as affordable rental properties.
If City Council approves an approach for extending the remaining TORCA loans, staff
w ould contact the borrowers about the potential for extending the loan due date and the
process for applying for an extension.
Financial Impacts & Budget Actions
There is no immediate financial impact or budget action necessary as a result of the
recommended action. Staff will return to Council if specific budget actions are required
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in the future. The financial impact of allow ing loan extensions to due -on -sale or transfer
is expected to defer loan repayment revenue, from the existing due dates over the next
15 years to future dates. As many as 17 loan due dates may be extended for qualifying
borrowers. The amount of the outsta nding loan principal of the 17 loans is $907,659 ,
and the current estimated City accumulated appreciation is approximately $2,350,000.
Staff cannot reasonably predict how many of the 17 remaining borrowers may request
and qualify for an extension, and if g ranted, when the condominiums w ould be sold or
transferred (triggering the loan repayment). During any extension period, the City share
of appreciation for each loan remains the same as during the initial loan period.
Historical trends indicate that real e state value s increase over the long -term but can
decrease in the short -term . Therefore, the City’s share of accumulated appreciation
associated with extended loans may increase or decrease from the amount otherwise
expected at the original loan due date.
Prepared By: Jonathan Carr, Administrative Analyst
Approved
Forwarded to Council
Attachments:
A. Attachment A - Affordable Housing Policy (Dec 11, 2012)
B. Attachment B - Revisions to the AHPP (Housing Com. Feb 11, 2016)
C. Attachment C - Proposed Revisions to TORCA Home Ownership Loan Terms
(Housing Com. July 21, 2016)