SAN JOSE CAPITAL OF SILICON VALLEY

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1 COUNCIL AGENDA: 9/22/15 ITEM: q (J CITY OF SAN JOSE CAPITAL OF SILICON VALLEY Memorandum TO: HONORABLE MAYOR, CITY COUNCIL AND SUCCESSOR AGENCY BOARD FROM: Jacky Morales-Ferrand Jennifer A. Maguire SUBJECT: SEE BELOW DATE: September 8, 2015 Approved Date COUNCIL DISTRICT: 3 REPLACEMENT SUBJECT: POTENTIAL ACQUISITION OF 226 BALBACH FOR A FUTURE AFFORDABLE HOUSING DEVELOPMENT REASON FOR REPLACEMENT The report is replaced in order to incorporate the due diligence analysis completed by the Housing Department to substantiate the acquisition of the site by the City. RECOMMENDATION It is recommended that the City Council: (a) Adopt a resolution authorizing the Interim Director of Housing, on behalf of the City, to negotiate and execute a purchase and sale agreement to acquire that certain real property located at 226 Balbach Avenue from the Successor Agency to the Redevelopment Agency (SARA) of the City of San Jose for $2.41 million from the Low and Moderate Income Housing Asset Fund for a future affordable housing development; and (b) Adopt the following Appropriation Ordinance amendments in the Low and Moderate Income Housing Asset Fund: (1) Increase the appropriation to the Housing Department for Housing Loans and Grants by $2,410,000; and (2) Decrease the Housing Project Reserve appropriation by $2,410,000.

2 Page 2 OUTCOME Approval of the recommended actions will allow the City to acquire the 226 Balbach site and determine its most appropriate use as a future affordable housing development. BACKGROUND Disposition Process for SARA Property As part of the dissolution process of the former Redevelopment Agency (RDA), SARA was required to prepare a Long Range Property Management Plan ("LRPMP"), which addressed the disposition and use of the real properties owned by SARA. Final approval of the LRPMP by the Oversight Board and the State Department of Finance ("DOF") was obtained in September The Property is designated for sale in SARA's LRPMP. In connection with approving the LRPMP, the Oversight Board also approved a Disposition Process which provides two methods of selling SARA owned property: an open solicitation process and a direct sale process. Under the direct sale process, taxing entities and certain non-profit organizations were allowed to acquire property directly from SARA at the appraised value of the property as established by an appraiser approved by the Oversight Board. On September 17, 2014, SARA staff sent a letter to the City Manager stating that the City had until October 21, 2014, to indicate interest in acquiring any of the SARA owned properties that were designated for sale. The City responded to SARA within the applicable time period, indicating an interest in acquiring the following properties: The Central Place Parking Garage located at 88 East San Fernando Street, two adjacent parcels located at 5647 Gallup Drive and 1171 Mesa Drive in the Hoffman Via Monte area of San Jose, a parking lot located at 226 Balbach Street, and a small 10,000 square foot strip of land located adjacent to the Mexican Heritage Plaza at 1770 Alum Rock Avenue. 226 Balbach Street 226 Balbach Street is a acre parking lot located adjacent to South Almaden Boulevard ("the Property"). The former Redevelopment Agency acquired the site as part of a land assemblage in the mid 1980s for the expansion of Almaden Boulevard. This parcel was not needed for the expansion. The book value of the property carried by the former Redevelopment Agency was $3,377,573. The property is currently a public parking lot with annual revenues of approximately $37,000. All revenues go to the Successor Agency. The Property is a site that may be suitable for the development of supportive housing for the homeless or it may be more suitable for a mixed-income affordable housing development.

3 Page 3 ANALYSIS Appraisal Pursuant to the Disposition Process, the City selected J Kaeuper & Company (Kaeuper) to prepare and complete an appraisal. Kaeuper was instructed to appraise the site at its highest and best use at fair market value in accordance with the Disposition Process. In March 2015, the Housing Department received the Appraisal from Kaeuper; the fair market value of the property was determined to be $2.41 million. Proposed Approach If directed to acquire the Property, the Housing Department, working with SARA staff, would first seek to obtain the approval of the Oversight Board to purchase the Property for its appraised value of $2.41 million (as well as up to $10,000 to cover closing costs). Oversight Board approval of any sale would also need to be approved by DOF. Acquisition of the Property would occur within thirty (30) days after DOF approval of the sale. Staff estimates the sale of the Property will be completed before the end of the calendar year. Once the Housing Department purchases the Property from SARA, a developer for the site will be selected. If the proposed development plan includes a supportive housing component serving homeless households, the Housing Department will select a partner from one of the nonprofit housing organizations chosen through the November 2014 solicitation process. This process identified three development teams with demonstrated experience creating supportive housing communities in urban areas. If it is determined that the development plan will not include a supportive housing component, then a new RFP will be released to select a developer that can implement the proposed development plan for the site. Due Diligence The Housing Department completed internal due diligence before advancing its recommendation to acquire the Property. As noted previously, the Housing Department commissioned an appraisal of the Property, resulting in a value of $2,410,000 or $150 per square foot. This figure is similar to or below other appraisals that the Housing Department has commissioned recently - including the Plaza Hotel which was valued at $165 per square foot. Further, the per square foot cost for the 226 Balbach Property is significantly lower than the $200 per square foot value that the SARA received for the Car Wash site located directly across the street from City Hall. The Property's acquisition cost of $2.41 million is priced at a level that will make a future affordable housing development feasible. The Housing Department recently conducted an analysis of the previous five affordable projects that the City funded. This analysis showed that the average purchase price of each of the five development sites was nearly $6.2 million or $62,000 per unit. Taking into account the Housing Department's goal of developing a minimum 70 apartments on the Property, the per-unit acquisition cost of $35,000 per unit is very reasonable.

4 Page 4 Once the Property is under ownership of the City, the Housing Department, in partnership with the developer, will identify the target population, proposed affordability, and income mix for the site, the Housing Department and developer will explore the possibility of setting aside a limited number of the project's apartments for chronically homeless individuals. However, given its location, the Housing Department is exploring additional possibilities to provide worker housing to support economic development opportunities in the downtown. In addition to developing supportive housing to serve and house the homeless, local artists are another target population that could be served by the Property. Due to the Property's location near the cultural and creative urban center of Silicon Valley, there is an opportunity to provide housing for artists in support of efforts to retain cultural workers in San Jose. Artists across disciplines provide professional services for nonprofit art organizations through their work as creative entrepreneurs. The development team will explore the feasibility of programming the site to target this population. Finally, the development team will conduct extensive due diligence to research and determine the appropriate number of units for the future affordable housing development based on numerous factors including: Conformance with the General Plan; Determination regarding the site's zoning; Analysis on the site's density potential; Compliance with the California Environmental Quality Act (CEQA); and Potential for securing Federal, State, and Local funding sources to develop a future affordable housing community. At the conclusion of the due diligence period, when the development opportunities are better understood and a proposed development plan is deemed appropriate for the site, the Housing Department may provide the non-profit developer with a predevelopment loan of up to $100,000 so that planning for the project can proceed. If the funding required to complete the necessary predevelopment work is greater than $100,000, the Department will seek authorization from City Council. It is uncertain when the site will be developed because developments with 100% supportive housing for the homeless, or developments in the Housing Department's approved pipeline of projects, will receive priority for available funding. EVALUATION AND FOLLOW-UP The status of the site will be reported to the public in the Housing Departments periodic Production report, posted to its website in the Data and Reports section at Housing staff will return to Council to seek funding for the site if/when the development plan has been finalized and a developer has been selected. If for some reason the site does not support the proposed development, the City would either build a smaller affordable rental development, a for-sale affordable development, or it would sell the site.

5 September 8, 2015 Page 5 POLICY ALTERNATIVES To arrive at this proposal, staff considered the following option: Alternative: Pros: Cons: Reason for not recommending: Look for opportunities other than 226 Balbach as a future affordable housing development site. 226 Balbach would be sold to the highest bidder which would allow for private development of the property but might prevent the City from acquiring the property. Finding suitable sites that are near transit and services is difficult to locate at a reasonable price, making it more difficult for the City to help create housing options for very-low and low-income individuals. 226 Balbach presents a viable opportunity to serve a wide range of income levels including downtown workers and potentially including chronically homeless individuals. PUBLIC OUTREACH This memorandum will be posted on the City's Council Agenda website for the September 22, 2015, City Council meeting. COORDINATION Preparation of this report was coordinated with the Office of the City Attorney. FISCAL/POLICY ALIGNMENT The expenditure is consistent with the General Plan 2040 Goal H-2 Affordable Housing - Preserve and improve San Jose's existing affordable housing stock and increase its supply such that 15% or more of the new housing stock developed is affordable to low, very low and extremely low income households. In the downtown core, there are a total of 3,369 units under construction, approved or pending approval. There are a total of 101 affordable units under construction with an additional 305 planned affordable units. This represents 14% of the total new housing stock being developed.

6 Page 6 COST SUMMARY/IMPLICATIONS 1. AMOUNT OF RECOMMENDATION/COST OF ACQUISITION: Land Acquisition Balbach Street $2,400,000 Closing Costs to Acquire the Property $ 10,000 TOTAL $2,410, SOURCE OF FUNDING: Low and Moderate Income Housing Asset Fund (346). 3. FISCAL IMPACT: Any minor costs associated with the due diligence period or other predevelopinent work less than $100,000 are anticipated to be provided by existing funding sources within the Low and Moderate Income Housing Asset Fund. Should predevelopment costs exceed $100,000, the Housing Department would return to the City Council with a recommendation to access additional funding from the appropriate reserve. BUDGET REFERENCE The table below identifies the fund and appropriation proposed to fund the project recommended as part of this memorandum. Fund # Appn # Appn. Name Total Appn. Rec'd. Budget Action Proposed Operating Budget Page* Last Budget Action (Date, Ord. No.) Housing Loans and Grants $1,300,000 $2,410,000 XI-52 6/23/15, Housing Project Reserve $24,000,000 ($2,410,000) XI-53 6/23/15, The Operating Budget was adopted on June 23, CEOA Determination of Consistency with the Downtown Strategy 2000 EIR, Resolution # Interim Director of Housing Senior Deputy City Manager/ Budget Director For questions, please contact Jacky Morales-Ferrand, Director of Housing, at (408)