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SR 03-05-2019 3B City Council Report City Council Meeting: February 26, 2019 Agenda Item: 8.B 1 of 9 To: Mayor and City Council From: Andy Agle, Director, Housing and Economic Development, Housing Division Subject: Proposed Affordable Housing at 1834-1848 14th Street Recommended Action Staff recommends that the City Council: 1. Authorize the City Manager to negotiate and execute all necessary documents to make a Housing Trust Fund loan to Community Corporation of Santa Monica, for the acquisition and development of the property located at 1834 -1848 14th Street, in an amount consistent with Housing Trust Fund Guidelines loan limits, to construct a proposed affordable housing development with more than 50 residences; and 2. Approve the staff recommendations outlined in this report regarding the amount of developer fees and implementation of the local priority policy. Summary Community Corporation of Santa Monica has requested a Housing Trust Fund (HTF) loan for property acquisition and construction of 55 affordable residences at 1834, 1840, 1844, and 1848 14th Street. The requested loan amount, loan terms, and proposed affordable housing are consistent with the Council-approved HTF Guidelines. However, City Council approval is required for loans that fund affordable housing developments of more than 50 residences. Discussion Community Corporation of Santa Monica (CCSM) is a local nonprofit organization founded in 1982 that develops and manages affordable housing in Santa Monica. CCSM currently owns and operates 89 affordable housing developments, totaling 1,719 residences, throughout Santa Monica. CCSM has entered into a purchase agreement and opened escrow for 1834, 1840, 1844, and 1848 14th Street (Property). An aerial map is included as Attachment A. The Property currently contains commercial buildings on four adjacent properties 2 of 9 totaling approximately 30,000 square feet of land. CCSM has applied to the City for a Housing Trust Fund (HTF) loan to acquire and develop affordable housing on the Property. Staff has evaluated the loan request and conceptual affordable housing development, which is discussed below. Proposed Affordable Housing CCSM proposes to acquire the Property and begin the predevelopment process with the intention of developing 55 residences for low-income households. The target population is small and large families earning between 30 percent and 80 percent of the area median income. The requested per-residence loan amount is below the loan limits established in the HTF Guidelines. The conceptual development would maximize the allowable building envelope, including 55 affordable residences and 3,500 square feet of space for CCSM’s maintenance department, for a total of 44,615 square feet. The zoning district requires a Development Review Permit for 100 percent affordable housing developments of more than 50 residences. If Council approves an HTF loan for the Property, CCSM would initiate at least two community meetings seeking design input prior to submitting a formal development proposal to the City. The proposed development would be required to seek approvals from the Planning Commission and Architectural Review Board. Proposed Rent and Apartment Mix The proposed rent levels for the development would comply with affordability requirements and goals in the HTF Guidelines. The following table shows the proposed affordability levels and residence types for the development: 3 of 9 Proposed Affordability Levels and Residence Mix Residence Type % of Area Median Income Number of Affordable Residences 30% 40% 50% 60% 80% One-Bedroom 3 4 12 8 - 27 Two-Bedroom 2 5 4 1 2 14 Three-Bedroom 2 2 1 7 2 14 Total 7 11 17 16 4 55 Proposed Funding Sources and Uses CCSM has applied for an acquisition and predevelopment loan of $14,112,228 to acquire the Property and start the predevelopment process, which includes community meetings regarding design, securing land-use entitlements, preparation of construction drawings, competing for Low-Income-Housing Tax Credits, and obtaining bank financing. CCSM estimates that the proposed development would require an additional $1,342,993 for construction, for a total City HTF loan of $15,455,221. CCSM proposes to leverage the City’s HTF loan with $23,747,625 of tax-credit equity, a bank loan of $1,531,105, and a proposed capitalized lease payment of $1,785,000 for the proposed replacement of CCSM’s maintenance facility from an adjacent site (1826 14th St.) to the Property. The capitalized lease payment and the bank loan will fund the pro rata costs for development of CCSM’s maintenance facility so that the City’s HTF loan will only fund the development costs of the residential portion of the project. The following table illustrates the anticipated financing sources and uses for the proposed affordable housing development. Descriptions of the funding sources are presented in Attachment B. 4 of 9 1834-1848 14th Street Estimated Funding Sources and Uses SOURCES Amount Per Residence Per Bedroom Bank Loan $1,531,105 $27,838 $15,785 City of Santa Monica $15,455,221 $281,004 $159,332 Tax Credit Equity $23,747,625 $431,775 $244,821 Capitalized Lease Payment for CCSM Maintenance Facility $1,785,000 $32,455 $18,402 Deferred Developer Fee $249,406 $4,535 $2,571 Total Sources $42,768,357 $777,607 $440,911 USES Amount Per Residence Per Bedroom Acquisition Costs $11,970,877 $217,652 $123,411 Construction Costs $23,309,093 $423,802 $240,300 Soft Costs $7,488,387 $136,153 $77,200 Total Uses $42,768,357 $777,607 $440,911 Staff has reviewed the estimated costs and proposed sources of funds and determined that the construction costs, soft costs, and proposed funding sources are reasonable. At $281,004 per residence of City subsidy, the request falls below the HTF loan limits. Merits of the Application Under the HTF Guidelines, staff evaluates the merits of a loan r equest and proposed development based on the criteria identified below: 5 of 9 Criteria Merits of the Loan Request (1) Significantly increases affordable housing opportunities for households who have difficulty finding housing including the homeless, large families, the disabled, seniors, and persons traditionally served by Single-Room Occupancy housing. The proposed development would increase affordable housing opportunities for large families in Santa Monica who typically have difficulty finding appropriately sized housing in the city. The unit mix includes 14 two-bedroom residences and 14 three-bedroom residences, or 51 percent of the development. (2) Cost-effective or achieve the lowest possible subsidy per unit for City resources. The proposed City subsidy would be leveraged by approximately $23,747,625 in tax credit equity (or 56% of the total permanent financing) from the 9% Low Income Housing Tax Credits from the State of California, $1,531,105 in a permanent bank loan (4% of the total permanent financing), and $1,785,000 in a capitalized lease payment (4% of the total permanent financing). CCSM will continue to explore other funding sources such as the state’s Affordable Housing and Sustainable Communities Program during the predevelopment period to ensure that the proposed development is cost-effective and achieves the lowest possible subsidy per unit for City resources. (3) Benefit a high percentage of very low- and low-income households by ensuring deeper affordability. 51 of the 55 residences would target low-income households at or below 60% of the area median income (AMI). 3 of the remaining 4 residences would target households at or below 80% of the area median income (AMI). The remaining residence would be reserved for an onsite manager. Additionally, the proposed development would provide deeper affordability with seven residences at 30% AMI, 11 residences at 40% AMI, and 18 units at 50% AMI. 6 of 9 Criteria Merits of the Loan Request (4) Located in areas currently underserved by affordable housing developments. The proposed development is in the Pico Neighborhood. See Attachment C which includes a map illustrating the locations of City-funded affordable housing and further discusses the geographic distribution of City-funded affordable housing. Given the proximity to transit (both the Expo Line and bus routes), schools, supermarkets, parks, and other services, the proposed development would provide new affordable housing opportunities for low-income households as well as convenient access to valuable community amenities. (5) Address an area of need identified in the Housing Element of the City of Santa Monica. Santa Monica’s Housing Element includes the goal of producing housing for all income categories (Goal 2.0), including providing financial assistance to nonprofit housing developers for affordable housing (Objective 2.c) and facilitating the development of special-needs housing which includes large families (Objective 2.f) (6) Addresses a particular need identified in the Council- approved Housing Trust Funds Plan. The HTF Guidelines Initial Plan was approved by City Council in July 2018 identifying affordable housing for four target populations: seniors, persons living with disabilities, larger families, and small families/individuals. The proposed development addresses the identified need of affordable housing for large families and small families/individuals. (7) Loan Applicant’s past and projected effectiveness implementing the City- established local preferences (i.e. households which live or work in Santa Monica). CCSM has achieved moderate success in ensuring that Santa Monica residents and workers are beneficiaries of their affordable housing through outreach and local marketing strategies. CCSM has been working with City staff on improving implementation methods to increase the intended outcomes anticipated by the local priority policy. Below is an additional recommendation regarding local preferences. 7 of 9 Staff Recommendations Staff believes the proposed affordable housing development reflects appropriate target populations, affordability levels, and leveraging of non-City funding. However, staff has identified two additional recommendations related to the proposed loan: Proposed Developer Fee Most affordable housing financing programs, including the HTF Guidelines, allow an affordable housing developer to be paid a “developer fee” from the financing to offset costs associated with development. The HTF Guidelines establish maximum developer fees that can be paid from housing trust funds for developments of 50 residences or fewer. The HTF Guidelines stipulate that developer fees are to be negotiated for larger developments, without providing specific direction or criteria to assist in determining an appropriate negotiated developer fee. For context, the HTF Guidelines establish that new construction developments between 31 and 50 residences qualify for a developer fee of $18,456 per residence, which would equate to $1,015,080 for the proposed 55 - residence development. CCSM has requested a developer fee of $34,076 per residence, or $1,874,180 in total. The requested developer fee is included in the requested $15,455,221 City Loan, with $249,406 of the requested developer fee to be deferred until completion and to be paid through the development’s operating income. The maximum developer fees established by the HTF Guidelines are lower than the amounts allowed by most other funding entities. However, Santa Monica typically provides higher loan amounts per residence than other jurisdictions. Staff believes that the additional work and extended timeline associated with discretionary land use approvals for the proposed 55-residence development (i.e., development review permit) may warrant a modest increase above the maximum per-residence developer fee established for developments of 31-50 residences. However, the requested developer fee represents a substantial premium that staff does not believe is warranted. For the proposed development, staff recommends a developer fee of five percent (5%) above the HTF Guidelines’ established maximum of $18,456 per residence for smaller developments, or $19,379 per residence, for a total of $1,065,845. If Council approves the staff recommendation, the requested loan amount mentioned earlier in the report 8 of 9 would be decreased accordingly. Approximately $250,000 of developer fees would continue to be deferred to be recaptured through operating income. Local Priority Policy The HTF Guidelines include a local priority policy, which requires that priority in affordable housing is to be given to households who live or work in Santa Monica as a condition of City funding. The proposed affordable housing development is located in the Pico neighborhood. Some residents in the Pico neighborhood have expressed concern regarding barriers to obtaining affordable housing in CCSM prop erties. Under the HTF Guidelines, CCSM is required to follow the local preference policy and market affordable housing opportunities to Santa Monica residents and workers. Additionally, CCSM proposes to complete targeted marketing to Pico Neighborhood re sidents and has committed to offering credit-repair workshops in the coming months, as poor credit histories can act as a barrier for housing applicants. While staff is supportive of the proposed targeted marketing, staff has concerns that CCSM’s implementation of the local priority policy does not align with City protocols for achieving prioritization for locals. CCSM and staff have been discussing approaches for implementation of the local priority policy to increase the effectiveness and achievement of desired outcomes. Staff recommends that the proposed loan be conditioned upon CCSM utilizing the existing City-administered waitlist for the development, which the City will update the waiting list as needed. The existing City-administered waitlist implements the local priority policy in a manner that is consistent with the City’s methodology, which sorts by, and gives priority to, households that live or work in Santa Monica. Housing Commission Input At its January 17, 2019 meeting, the Housing Commission voted unanimously to support providing an HTF loan to CCSM for a 55-residence affordable housing development at the Property. The Commission shared staff concerns about the requested developer fee and implementation of the City’s local priority policy. 9 of 9 Past Council Actions 07/25/2017 (Attachment D) Current Version of the Housing Trust Fund Guidelines 07/24/2018 (Attachment E) Housing Trust Fund Initial Plan Financial Impacts and Budget Actions Funding to make a loan to Community Corporation of Sa nta Monica for the affordable housing development at 1834-1848 14th Street is available in the Citywide Housing Trust Fund. Prepared By: Natalie Verlinich, Senior Development Analyst Approved Forwarded to Council Attachments: A. Proposed Development Location B. Description of Funding Sources C. Dispersal of Affordable Housing D. Current Version of the Housing Trust Fund Guidelines (Web Link) E. Housing Trust Fund Initial Plan (Web Link) Attachment A Proposed Development Location 1834, 1840, 1844 & 1848 14th Street, Santa Monica, CA Attachment B Description of Funding Sources Bank Loan Community Corporation of Santa Monica (CCSM) anticipates obtaining an amortized bank loan estimated at $1,531,105 based on the development’s projected available cash flow after paying all operating expenses. City Loan CCSM has requested a loan from the Citywide Housing Trust Fund estimated at $15,455,221 ($14,112,228 during the acquisition and predevelopment phase). Tax Credit Equity CCSM anticipates applying for, and receiving, an award of Low Income Housing Tax Credits (LIHTC) from the State of California. LIHTCs awarded to CCSM (a nonprofit, with no tax liability) would then be sold to private investors who provide funding (i.e., equity) for construction of the development in exchange for use of the tax credits. Capitalized Lease Payment CCSM proposes to utilize 3,500 square feet of commercial space to replace its existing maintenance facility (currently at the adjacent 1820 14th Street site, which will be demolished as part of a new affordable housing development for seniors). To finance the construction of the new maintenance facility, CCSM is proposing to contribute $1,785,000 in the form of a capitalized (i.e., lump sum) lease payment for the first 17 years. The amount of the lease payment is based upon market value lease rates in the area, discounted to reflect the prepayment of 17 years rent in a lump sum. After Year 17, CCSM proposes an annual lease payment based on the market lease rate for commercial space. Deferred Developer Fee CCSM is proposing a portion of the developer’s fee ($249,406) be deferred, not be paid as part of the development expense. Instead the deferred portion of the developer fee would be paid from operating cash flow for a maximum of ten years. Attachment C Dispersal of Affordable Housing The HTF Guidelines include a priority for developments which “are located in areas currently underserved by affordable housing developments”, so that affordable housing opportunities are dispersed throughout the City. However, the HTF Guidelines do not preclude funding affordable housing in neighborhoods which have been served by previous affordable housing developments. The proposed development is in the Pico Neighborhood. Residents in the Pico neighborhood have previously expressed concerns about a concentration of affordable housing in the Pico neighborhood, as well as gentrification. The proposed loan to create affordable housing can help mitigate gentrification and promote diversity without displacement of any residents. City-funded affordable housing since 2014 has been distributed as follows: City-Funded Affordable Housing Since 2014 # of Properties Neighborhood 2 Pico 2 Sunset Park 1 Downtown 1 Mid-City 1 Mid-City/Pico 1 North of Montana 1 Ocean Park The following map illustrates the distribution of City-funded affordable housing throughout all multifamily neighborhoods in the City. Attachment C (continued) Dispersal of Affordable Housing