City Council Meeting: Date

City Council and Redevelopment Agency Meeting: June 10, 2008

Agenda Item: 8-A

To: Mayor and City Council

Chairperson and Redevelopment Agency

From: Andy Agle, Director of Housing and Economic Development

Subject: Disposition and Development Agreement for the Civic Center Village

Recommended Action

Following a public hearing, staff recommends that the Redevelopment Agency (Agency):

1) Adopt the attached Resolutions (Attachments A and C) making specific findings and approving the Disposition and Development Agreement and Lease Agreements between the Agency and Related/Santa Monica Village, LLC (Related) for the Civic Center Village; and

2) Authorize the Executive Director to execute all documents, and take all necessary actions, to complete the Disposition and Development Agreement and Lease Agreements for the Civic Center Village.

Staff recommends that the City Council:

1) Approve an amendment to contract 8556 (CCS) with Keyser Marston Associates, Inc. in the amount of $40,000 for real estate economics services associated with this development; and

2) Adopt the attached Resolutions (Attachments B and D) making specific findings and approving the Disposition and Development Agreement and Lease Agreements between the Agency and Related/Santa Monica Village, LLC (Related) for the Civic Center Village.

Executive Summary

The design, public benefits and conditions for the development of the Civic Center Village (Village) component of the Civic Center Specific Plan (CCSP) were approved by the City Council on May 13, 2008. The Redevelopment Agency (Agency) owns the land on which the Village is proposed to be developed, with exclusive development and land-lease rights to the developer, Related/Santa Monica Village, LLC. The business terms and conditions under which this Agency-owned property is proposed to be provided to Related are contained in the Disposition and Development Agreement (DDA), ground leases, affordable housing loan documents, and other attachments to the DDA (Attachment E). The proposed business terms are as follows:

Land will be leased to Related for 99 years beginning July 2009 if all conditions precedent to escrow closing are met;
Base Land Lease payment of $19,400,000 will be capitalized and paid to Agency at close of escrow, and represents the fair reuse value of the leasehold;
Additional Land Lease payment not to exceed $4,423,000 will also be due at escrow closing;
Agency will provide Related with an affordable housing loan not to exceed $23,823,000 to support development of 160 affordable residences.
Repayment of affordable housing loan is from net available cash flow after payment of all other debt and operating costs;
Affordable residences will be constructed in advance of, or concurrently with, market-rate residences;
DDA will contain a performance guarantee from the developer’s parent company, The Related Company LP, with assets of approximately $4 billion;
Agency will receive 30 percent of gross condominium sales that exceed projected sales proceeds, after a fifteen percent adjustment to projected sales revenue to mitigate construction cost uncertainties.

The Village property comprises approximately 3.7 acres and will enhance the Civic Center area with 324 residences (including 160 that will be affordable to low-income households, including families and artists), public open space, an extension of Olympic Drive, public art, sustainable design and construction and additional contributions towards transportation management and the Civic Center Early Childhood Development Center. The May 13, 2008 City Council staff report includes detailed information regarding the design elements and public benefits of the Civic Center Village.

Background

In 1994, the City Council established the Earthquake Recovery Redevelopment Project Area (Project Area). The implementation goals and requirements of the Redevelopment Plan include increasing the supply of affordable housing from tax increment revenue generated in the Project Area. In April 2000, the Agency purchased 11.3 acres of property from the RAND Corporation with tax increment revenue.

Following the Agency’s acquisition of the former RAND property, the City embarked on a comprehensive update to the original CCSP, which was adopted on June 28, 2005. The CCSP includes the Village Special Use District which is bounded by Main Street, Ocean Avenue, Pico Boulevard, and the future extension of Olympic Drive from Main Street to Ocean Avenue. See Attachment F for an illustration of the CCSP and the approved Village design.

During 2005, a competitive developer selection process was initiated for the Village site, culminating in the January 2006 selection of Related as the developer. Subsequently, the Agency entered into an Exclusive Negotiation Agreement with Related regarding the Village property and the development of the site. Several community workshops and commission and Council meetings were held during 2006 and 2007 to consider and refine the design for the Village, with the project parameters and entitlements approved by the City Council on May 13, 2008. Concurrently, staff has been negotiating with Related regarding the business terms and project economics of the proposed development and land transaction.

Discussion

The Civic Center Village represents 3.77 acres of the total 11.3 acres of former RAND property owned by the Agency. The proposed lease of the land will implement the Redevelopment Plan by increasing the supply of affordable housing and revitalizing the Project Area with mixed-income housing, neighborhood-serving retail and public open space. The CCSP program for the Village is achieved by leveraging the Agency-owned land and using the proceeds from the land-lease to finance the affordable housing in the Village. In addition, the Village includes numerous public benefits and the project budget is absorbing the cost of these benefits, estimated at more than $10 million. See Attachment G for Related’s development pro-forma and Attachment H for an independent pro-forma analysis prepared by the Agency’s advisor, Keyser Marston Associates (KMA). KMA’s independent analysis of condominium sale revenue, development costs, affordable housing finance and residual land value are within one percent of Related’s estimates. The following summarizes the key elements of the DDA and its attachments.

Project Summary

The Village development is comprised of three legally separate but integrated sites, referred to as Sites A, B and C. Site A is proposed to provide 66 market-rate condominiums and approximately 10,000 square feet of retail space. Site B will contain 160 affordable apartments restricted for occupancy by very-low-income and low-income households (28 one-bedroom, 56 two-bedroom, and 66 three-bedroom), including ten affordable live-work units suitable for artists, a community room and a protected play area for children. Sites A and B will contain roughly 26,000 square feet of pedestrian-friendly public open space designed as a public plaza and walk-street through the site, and share a common subterranean parking garage containing 377 spaces that is accessed from First Court Alley and. Site C will contain 98 market-rate condominiums, approximately 7,400 square feet of retail space and a subterranean parking garage with 241 parking spaces. The Village project will embody numerous sustainable elements including alternative energy generation, and is required to achieve a LEED ‘Silver’ rating. The May 13, 2008 City Council staff report includes detailed information regarding the design elements and public benefits of the Civic Center Village. .

Project Economics

The total cost of developing the entire Village site is projected to be approximately $248 million, with $77 million estimated for Site A, $63 million for Site B and $108 million for Site C, excluding land costs and developer return. The per-unit development costs of Sites A and C (condominiums) are significantly higher than for Site B (affordable apartments) due to the different construction types (concrete/steel vs. wood- framed over podium) and product types (ownership vs. rental), and because the costs of the public benefits for the entire project must, as a practical matter, be borne primarily by the market-rate component rather than the affordable component. The developer return on cost (excluding land) of 20 percent reflects typical market standards and the developer’s original development proposal to the City. In order to fully fund the development gap for the affordable apartments on Site B, the DDA requires a capitalized lease payment to the Agency from Related in the amount of $8,600,000 for Site A and $10,800,000 for Site C, the two sites that will contain the condominium residences. Related has also agreed to pay the Agency an additional land lease payment not to exceed $4,423,000, equal to the difference between the $19,400,000 base land lease payment and the estimated $23,823,000 financing subsidy needed for Site B. A development cost summary is provided as Attachment I.

Residual Land Value

Residual land value is a function of the anticipated revenue generated by a development, less the cost of creating the development. The residual land value of the Village site is $19.4 million according to Related’s analysis and $19 million according to the Agency’s analysis. Site B is not considered to have any residual land value due to the restrictive affordable housing covenants applicable to that component of the Village. To proceed with the development of the Village, Related has agreed to increase their land value payment to the Agency by up to $4,423,000 to equal the financing subsidy needed for the development of Site B ($23.8 million). Related has accepted this risk on the premise that either they can reduce construction costs by that amount through ‘value engineering’ or if not successful in those efforts, they must accept a lower return on investment.

The Agency purchased the former RAND property in 2000 at a cost of approximately $113 per square foot. The land lease payment offered by Related equals approximately $300 per square foot (for Sites A and C; Site B has no land value due to affordability restrictions of this component of the Village). Comparable private properties are expected to command sales prices of $500 to $600 per square foot. Sites A and C cannot support these sales prices due to two primary factors, prevailing wages and extensive public improvements and public benefits required as part of the development. In the absence of prevailing wages and public improvements, the imputed land payment price for the Village site would exceed $550 per square foot. A Summary Report required by redevelopment law has been prepared regarding the disposition of the Agency-owned land and is provided as Attachment J. The Summary Report provides details on several aspects of the proposed DDA, including the cost to the Agency of proceeding with the DDA and the imputed land value of the Village site given the current zoning and allowable uses.

Affordable Housing Loan

The 160 affordable residences proposed for Site B will be reserved for a range of low-income households, including 58 rented to households earning less than 30 percent of the Los Angeles County median income, 47 rented to households earning less than 50 percent of median, 53 rented to households earning less than 60 percent of median, and two rented to on-site managers. Construction of the affordable housing will require a financial subsidy from the City, as is typical for developments where all residences are restricted for affordability. Related will pursue several funding sources to construct the affordable housing, including:

Tax Credit Equity	22,302,000	From private investors
State Multifamily Housing Program	10,000,000	Competitive process
Bank Loan	5,126,000	From project rents
Deferred Developer Fee	1,300,000	To be paid from cash flow

The remaining financing gap is $23,823,000. Pursuant to the Council-approved Housing Trust Fund Guidelines (Guidelines), the terms of the proposed loan are summarized as follows:

Interest rate	0% (for financial feasibility)
Term	55 years from completion
Repayment	annually from ‘residual receipts’ (i.e., net income available after all other expenses)
Security	promissory note, deed of trust, and regulatory agreement

The proposed loan will be funded with the proceeds of the capitalized land-lease payment. The proposed loan equates to $148,893 per unit and is significantly less than the $386,000 per unit limit established in the Guidelines for newly constructed units.

Schedule of Performance and Performance Guaranty

The DDA establishes a schedule of performance that requires construction of Sites A and B to begin by August 2009 (unless the anticipated State affordable housing financing is not obtained) and completion within thirty months. The DDA requires Related to begin construction on Site C no later than eighteen months after construction commencement of Sites A and B. The DDA requires a performance guaranty from the developer’s parent company, the Related Companies LP. Should the developer fail to perform any of its obligations under the DDA, the parent company would be required to fulfill the DDA obligations. As one of the largest and most financially secure developers in the nation, with assets of nearly four billion dollars, the parent company’s guaranty is an important tool to ensure that the Civic Center Village will be completed according to community expectations.

Participation Formula

While the terms of the DDA ensure that the Agency is paid a fair reuse price for lease of its land, the DDA also allows the Agency to receive a share of additional profits in the event sales revenue from the condominiums exceed projections. Under the terms of the participation payment formula, the Agency will receive 30 percent of gross sales revenue that exceed projected sales proceeds, after a fifteen percent adjustment to projected sales revenue to mitigate construction cost uncertainties.

Consultant Contract Amendment

Keyser Marston Associates has completed the scope of work of its existing contract, which coincides with Council consideration of the DDA. Staff recommends that the existing contract be extended to provide additional services following DDA execution, including support for low income housing tax credit, tax exempt bond and State affordable housing funding applications, as well as final review of the method of financing details prior to close of escrow.

Next Steps

If the DDA is approved, applications to the Architectural Review Board and California Coastal Commission will be initiated, as will a funding application to the California Multifamily Housing Program (MHP). The MHP application deadline is October 2008, with funding commitments expected to be announced in January 2009. Construction is anticipated to begin in Spring 2009, with completion targeted for 2012. Staff is also exploring funding opportunities for the Palisades Garden Walk park from State bond proceeds that are targeted toward infrastructure for mixed-income infill developments.

Environmental Analysis

The Environmental Impact Report (EIR) for the entire CCSP, which includes the proposed Village development, was certified by the City Council in June 2005. An addendum to this EIR, in conjunction with the City Council consideration and approval of the land use entitlements (Development Agreement), was approved by Council on May 13, 2008.

Public Outreach

The public, commissions and Council have engaged in an extensive planning and design process for the Civic Center Village. In addition, notice of the Redevelopment Agency hearing was published in the Santa Monica Daily Press on May 23, 2008 and May 30, 2008.

Financial Impacts & Budget Actions

The Agency will receive a payment from Related for the value of the land-lease in the amount of $23,823,000 which is scheduled to occur in July 2009. The appropriations related to this transaction will be included in the FY2009-10 budget process.

Prepared by:

Jim Kemper, Acting Housing Administrator

Approved:

Forwarded to Council: