City Council Meeting: September 11, 2012
Agenda Item: 3-F
To: Mayor and City Council
From: Andy Agle, Director of Housing and Economic Development
Subject: Extension and Forgiveness of Housing Trust Fund Loans
Staff recommends that the City Council:
1. Authorize the City Manager to forgive an existing loan to the Mountain View Mobile Inn Residents Association (Residents Association) in the amount of $124,977.01 for 1930 Stewart Street; and
2. Authorize the City Manager to execute a loan term extension until December 2014 for an existing acquisition and predevelopment loan to Community Corporation of Santa Monica (CCSM) in the amount of $1,161,185 for 1342 Berkeley Street.
This report discusses two Housing Trust Fund (HTF) loans and seeks City Council approval to forgive one of the loans and authorize an extension of the term for the other loan. In 1996, a loan was issued to the Residents Association for the purpose of performing due diligence associated with the conversion of the property to cooperative housing and the anticipated acquisition of the mobile home park by residents. That approach was ultimately not feasible and the City subsequently purchased the property to preserve it as affordable housing.
Staff recommends forgiving the loan to the Residents Association because the goal of acquiring the property and preserving it as affordable housing has been achieved. Another loan involves a typical acquisition and predevelopment loan to CCSM, a local nonprofit affordable housing developer.
The loan to CCSM was issued in 2004 for the acquisition and predevelopment of a small lot in conjunction with a larger, adjacent lot that has since been developed as 47 affordable residences. The development of the small lot is challenging due to the elimination of redevelopment funding in California and its size, which affects its ability to compete for private financing. City staff recommends extending the term of this loan until December 2014 to allow sufficient time to create an approach to developing this site for affordable housing.
1930 Stewart Street – Mountain View
Prior to the City’s December 2000 purchase of the Mountain View Mobile Home Park (Mountain View) located at 1930 Stewart Street, the property was privately owned by the Ring Trading Company. During the early 1990’s, the Ring Trading Company expressed interest in selling the property and the Residents Association intended to purchase the property and convert it to resident-owned, limited-equity cooperative housing pursuant to the City’s Tenant Ownership Rights Charter Amendment (TORCA). Since Mountain View served mostly very-low and low-income households, the City Council supported the effort toward resident ownership and maintaining affordability of this housing resource.
Also during the 1990’s, the Residents Association estimated a total cost of $7.5 million for acquiring ($5.5 million), converting to cooperative ownership and rehabilitating ($2 million) Mountain View and approached the City for financing assistance involving $4 million of the total cost. To analyze the feasibility of this goal, the City Council directed staff to work with the Residents Association to provide technical assistance related to the intended purchase of Mountain View by the residents. The City then entered into a loan agreement with the Residents Association for an amount not to exceed $272,000 to cover the estimated cost of due diligence regarding property acquisition and conversion to cooperative resident ownership. Less than one-half of the loan proceeds were actually disbursed ($124,977), as the feasibility of resident ownership became insurmountable.
Since the City’s purchase of Mountain View in 2000, more than $5 million in infrastructure upgrades of the property have been completed. Additionally, 19 travel trailers and mobile homes, obtained by the City as part of the property acquisition, have been replaced with affordable and sustainable manufactured homes. Furthermore, a financing program was approved by the City Council in 2010 and all nine resident-owners’ applications for financing have been approved. The manufacture and installation of these nine new homes are pending.
1342 Berkeley Street
1342 Berkeley Street is a 7,850-square foot vacant parcel currently owned by CCSM. In 2003, CCSM requested housing trust fund financing from the City for the cost of site acquisition, predevelopment activities and holding costs. The purpose of the loan was for the development of affordable housing. Purchase of the site was required by the seller in conjunction with the purchase of a much larger, adjacent parcel across the alley (northwest corner of Santa Monica Blvd. and Berkeley Street) that CCSM has since developed into 47 affordable residences for low-income families. At the time of acquisition, both properties were owned by one entity, who refused to sell them separately. The City approved CCSM’s financing application and entered into an Acquisition/Predevelopment Loan with CCSM on February 10, 2004 in the amount of $1,161,185.
Housing Trust Fund (HTF) loans are made pursuant to Guidelines approved by the City Council for the purpose of preserving or creating affordable housing. Predevelopment loans are often used as “seed money” to assist eligible borrowers to fund due diligence expenses, such as environmental studies, soils tests, site surveys, legal work and feasibility studies, prior to potential site acquisition. Additionally, acquisition/predevelopment loans are issued to eligible borrowers to fund site acquisition, holding costs and predevelopment activities such as preparation of architectural and engineering plans. As the pending development of proposed affordable housing achieves certain milestones, such as total financing and land use entitlements, these loans are ‘rolled’ into larger City loans that are required to close the funding gap between total development cost of affordable housing and private, state or federal financing.
The City’s HTF loans are intended to facilitate long-term affordability of housing and complete repayment is generally not feasible. To ensure affordability and in lieu of loan repayment, properties receiving HTF loans are subject to covenants requiring 80 years of affordability. During the affordability (i.e. covenant) period, loan repayment is deferred and may be forgiven ultimately. However, to the extent a property has net cash flow after paying all of the operating expenses, debt service (bank loan) and depositing required amounts into replacement reserves for future capital improvements, one-half of those funds are remitted to the City and deposited into the HTF.
1930 Stewart Street – Mountain View Mobile Home Park
The City approved a $272,000 Predevelopment Loan with the Residents Association on April 3, 1996 to cover the costs of due diligence work associated with intended resident acquisition of the property and conversion to cooperative ownership, such as legal, survey, inspection, and environmental studies. Only $124,977 of the Loan amount was actually disbursed, primarily for legal fees ($110,000) related to the preparation of a TORCA conversion application. The balance of the loan disbursement funded site surveys ($11,000), inspections and other miscellaneous costs.
As mentioned in this report, the resident purchase of Mountain View and conversion to cooperative ownership was ultimately not feasible. Many of the members of the Residents Association are no longer living at Mountain View, most of the current residents are very low-income and low-income households and the Loan was not secured (i.e., residents did not own the property). Additionally, HTF loans are intended to create affordable housing and are not premised on repayment. The goal of City HTF loans is long-term affordability. The goal of preserving Mountain View as affordable housing was achieved when the City purchased the property in the year 2000 and restricted it for occupancy by low-income households. In accordance with the HTF Guidelines, the loan proceeds were used for expenses associated with attempting to acquire the property for cooperative ownership and preserving affordable housing. Therefore, staff recommends that the HTF loan provided to the Residents Association, in the amount of $124,977, be forgiven.
1342 Berkeley Street
Since executing the acquisition/predevelopment loan in February 2004, the development of 1342 Berkeley Street was given low priority to allow CCSM and the Housing Division to focus on several other affordable housing developments that were in the pipeline. The low priority reflected the fact that the small lot would only accommodate a very small project (5-8 units) that could be difficult to finance. Tax-credit financing is awarded on a competitive basis and typically provides funding to cover approximately one-half of the total development costs. To be successful in obtaining an allocation of tax-credit financing, a typical affordable housing development would involve more than 30 units, as the larger scale achieves an economy of scale. City staff and CCSM determined it was preferable to have CCSM hold off on pursuing tax-credit financing for this small property and proceed with tax-credit financing applications for large affordable housing developments, which likely would be much more competitive in obtaining funding awards. This strategy proved fruitful in the award of tax-credit allocations for several affordable housing projects.
To allow additional time to determine the best approach to developing this small lot, the City granted two extensions of the 2004 acquisition and predevelopment loan for this property. The HTF Guidelines currently limit the term of an acquisition and predevelopment loan to 4.5 years, inclusive of the allowable extensions. During late 2010, City staff had reviewed a CCSM application for City HTF financing and in 2011 was preparing to issue a funding commitment for this property. However, during this time, the State legislature passed a law eliminating redevelopment agencies throughout California. Santa Monica Redevelopment Agency funding (referred to as ‘tax-increment financing’) had been the primary funding source for affordable housing. The current challenge regarding development of this site involves providing funding for the development of this property, in light of the elimination of Redevelopment Agency financing. Therefore, staff recommends the term of this loan be extended until December 2014 to allow City staff and CCSM sufficient time to pursue alternative funding approaches for the development of this property.