FUNDING COMMITMENT TO ABODE SERVICES FOR ACQUISITION OF A 56 UNIT SANTA CLARA INN FOR TRANSITIONAL AND SHORT- TERM HOUSING FOR THE HOMELESS

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1 COUNCIL AGENDA: 12/1/15 ITEM: 4,5 CITY OF SAN JOSE CAPITAL OF SILICON VALLEY Memorandum TO: HONORABLE MAYOR AND CITY COUNCIL FROM: Jacky Morales-Ferrand Jennifer A. Maguire SUBJECT: SEE BELOW DATE: Approved Date COUNCIL DISTRICT: 6 SUBJECT: FUNDING COMMITMENT TO ABODE SERVICES FOR ACQUISITION OF A 56 UNIT SANTA CLARA INN FOR TRANSITIONAL AND SHORT- TERM HOUSING FOR THE HOMELESS RECOMMENDATION (a) (a) Adopt a resolution: (1) Approving a funding commitment to Abode Services or its designated affiliate for up to $8,650,000 in the form of an acquisition/permanent loan ("Loan") for the purchase and operations of the Santa Clara Inn, located at 2811 The Alameda ("Property"); (2) Authorizing a Loan to Value of more than 100%; (3) Authorizing the Director of Housing to negotiate and execute all legal documents to effectuate this action. Adopt the following Appropriation Ordinance amendments in the Multi- Source Housing Fund: (1) Increase the appropriation to the Housing Department for Housing Loans and Grants in the amount of $6,885,000; and, (2) Decrease the Housing Project Reserve appropriation in the amount of $6,885,000. OUTCOME Approval of the recommended actions will enable Abode Services to: 1) acquire the Santa Clara Inn in early 2016 for the purposes of housing 27 homeless households in a manner that is relatively expedient and financially feasible; and, 2) own and operate the facility in a manner that responds to neighborhood concerns by mitigating the current level of criminal activity at the Santa Clara Inn.

2 Page 2 EXECUTIVE SUMMARY On June 17, 2014, the City Council amended Title 20 of the San Jose Municipal Code to allow for "hotel supportive housing" at commercial hotel and motel sites in defined regions of San Jose, referred to as the Hotel/Motel Master Lease Program (MLP). In late 2014, staff released a Request for Qualifications (RFQ) to find an operator to manage hotels/motels as part of the MLP, but no agencies responded. Subsequently only Abode Services indicated a potential interest in exploring the MLP. As a result, staff directed Abode Services to include the option of acquiring motels in its inquiries with owners. Abode Services identified the Santa Clara Inn as a suitable site to to provide transitional housing for homeless households. The Property presents a viable opportunity for the City to house homeless individuals in a relatively short period of time for a multitude of reasons discussed in this memorandum. If approved, Abode Services would be required to: acquire the property; operate the property in accordance with San Jose Municipal Code requirements; complete the required Conditional Use Permit process; make any required improvements to meet housing code; and lease up to 49% of the motel rooms in accordance with the MLP. Staff recommends that the City Council approve the issuance of an acquisition/permanent loan of up to $8,650,000 to Abode Services for the purposes of acquiring the Santa Clara Inn and operating a portion of it to house homeless rental coupon holders. Staffs analysis indicates that acquisition of this Property is a cost-efficient way to house homeless households in the near-term as compared to building new income-restricted apartments. It is expected that the Santa Clara Inn's monthly operating costs per unit will be less than the cost of leasing a comparable motel unit from a private motel owner. Therefore, this proposal will result in the provision of more services to residents and lower operating costs than would a simple motel voucher strategy. BACKGROUND Homelessness and the lack of available housing continues to be a pressing issue for the City of San Jose and Santa Clara County as a whole. According to the U.S. Department of Housing and Urban Development's 2014 Annual Homeless Assessment Report, among the 48 Major City Continuums of Care, Santa Clara County has: The seventh largest number of homeless persons on any given night The third largest number of chronically homeless persons The fourth largest number of homeless individuals The fourth largest number of unaccompanied homeless youth The fifth largest number of homeless veterans.

3 Page 3 Establishment of the Hotel/Motel Master Lease Program In response to growing concerns about the need to house the city's homeless residents, and in an effort to mitigate the negative impacts of illegal activities occurring at hotels and motels in specific geographic areas, the Mayor and City Council added a review of the use of underutilized hotels to house the homeless to the Council's FY workplan. From March 2013 to February 2014, the Housing Department worked with the Planning Department and the Community and Economic Development Committee (CEDC) to design a program that allows incidental use for supportive housing of targeted populations, such as homeless individuals in San Jose. On June 17, 2014, the City Council amended Title 20 of the San Jose Municipal Code to allow for "hotel supportive housing" at commercial hotel and motel sites in defined regions of San Jose, referred to as the Hotel/Motel Master Lease Program (MLP). Under the MLP, a nonprofit provider may obtain a Conditional Use Permit (CUP) for the transitional, incidental, and provisional use of hotels and motels for supportive housing for the homeless. For any selected site within a Commercial or Downtown Commercial Zoning District to be considered for provisional and incidental use, the "Hotel Supportive Housing" use would need to maintain the underlying commercial hotel use as the primary use. Compliance with this requirement dictates that the "Hotel Supportive Housing" use must be limited to no more than forty-nine percent (49%) of the guest rooms and no more than forty-nine percent (49%) of the total floor area in any given hotel. As part of the CUP application process, an applicant (the nonprofit provider) is required to submit a proposed management plan that would address property management issues including, but not limited to, good neighbor relations, transportation access, security, maintenance and repair responsibility, case management of residents, services for residents, and food services. Further, an applicant is required to correct existing code violations before tenants occupy the property pursuant to the MLP. The CUP for "Hotel Supportive Housing" would be limited to a term not to exceed five (5) years, which could be renewed by the Planning Commission with approval of a timely renewal (CUP Amendment) application. However, each "Hotel Supportive Housing" use is limited to a total maximum of 10 years, and the "Hotel Supportive Housing" program sunsets in Selection of an Operator for the MLP In late 2014, staff released a Request for Qualifications (RFQ) to find an operator to manage. hotels/motels as part of the MLP, but no agencies responded. Staff subsequently invited all of the service providers who had reviewed the RFQ to a meeting to discern their reasons for not submitting a proposal. Only one agency, Abode Services, indicated a potential interest in exploring the MLP. On December 16, 2014, the City Council directed staff to use funds obtained through the Irvine River Oaks Development Agreement to support homeless projects, including projects under the MLP, if a suitable property could be identified. Following this action, Abode Services began outreach to hotel and motel owners with the goal of identifying potential properties for participation in the MLP.

4 Page 4 During this outreach process, several motel owners expressed disinterest to Abode Services regarding the MLP for the following reasons: 1) the economy had improved, resulting in low vacancy rates as compared to when the City Council first identified the priority; 2) the 49% limit on the total number of master-leased rooms was too restrictive; and, 3) they were unwilling to participate due to demanding requirements and other restrictive limitations related to the CUP process. In addition, an initial expense analysis revealed that the costs to lease a motel unit could be as high as $2,200 per unit per month, effectively mirroring market-rate rental costs. As a result, staff directed Abode Services to include the option of acquiring motels in its inquiries with owners. Identification of a Suitable Property - Santa Clara Inn Abode Services identified the Santa Clara Inn as a suitable site to acquire and to provide transitional housing for homeless households. The Property is an approximately 0.92-acre parcel of land comprised of three motel building structures that have a total of 59 motel rooms. Of these rooms, half function as traditional motel rooms and half have characteristics that are similar to apartments, with dedicated living areas, kitchens, and bedrooms. At this time, ten of the hotel rooms are already occupied by homeless individuals who are funded by temporary motel vouchers from the County. According to data provided by the San Jose Police Department (SJPD), the Santa Clara Inn is one of the five motel business properties with the highest incidence of multiple types of reported criminal activity. From January 1, 2010 to June 30, 2015, there were 202 total calls for service from the SJPD, of which 24% of incidents resulted in an arrest or citation. Types of incidents occurring at the Property include public disturbances, violent crimes, narcotics, and prostitution. ANALYSIS The Property presents a viable opportunity for the City to house homeless individuals in a relatively short period of time for the following reasons: 1. The City has been actively pursuing underutilized hotels for the purpose of housing homeless individuals since 2014, when the City Council established the MLP. 2. The Property is located in an eligible Zoning District for the MLP. 3. The Property currently functions as a hotel, meaning that it is ready to be utilized immediately. 4. The current Property owner is willing to sell, which has been uncommon in the San Jose real estate market. Abode Services has surveyed numerous hotel/motel owners and found that the majority are unwilling to sell their property. 5. Use of the Property would help to revitalize the surrounding neighborhood by providing a solution to greatly reduce the level of criminal activity occurring at the Property for the past several years.

5 Page 5 6. The Property presents an opportunity for the City to partner with the County of Santa Clara, leveraging shared resources to create additional housing opportunities for the homeless. As of September 2015, there were more than 130 homeless individuals with either County vouchers or City coupons who are searching actively for housing and could utilize apartments created through this effort. Concept for the Santa Clara Inn Staff recommends supporting the proposal by Abode Services to acquire the Santa Clara Inn as a motel to house homeless individuals who have either a City or County housing coupon. Due to the fact that the Property includes both traditional motel units and units that function as apartments, the Property offers a blend of living environments to house both transitionally homeless individuals in short-term motel units, and more vulnerable individuals in the apartments where a stable environment is more conducive to their needs. Of the existing 59 motel rooms, Abode Services intends to repurpose three rooms for office and managers' space, leaving 56 rooms to rent.. If the City Council approves staffs recommendations, Abode Services would then be required take the following actions: 1. Acquire the Property prior to the expiration of the Purchase and Sale Agreement or its extension; 2. Own and operate the Property under the current San Jose Municipal Code requirements; 3. Apply for and complete the CUP process, including making any required improvements to meet housing code; and, 4. Lease up to 49% of the motel rooms in accordance with the MLP. Below is a short list of requirements of the MLP with which Abode Services will need to comply: Lease each room to a homeless individual or family; Coordinate residential and supportive services; Collect tenant rents; Provide on-site 24-hour front desk services and secured access; Prohibit loitering outside the facility; Maintain and operate the facility; and, Proactively respond to neighborhood concerns. As noted above, the Property has been the site of numerous criminal activities, contributing to an environment that negatively impacts the surrounding neighborhood. As a requirement of receiving the proposed loan from the City, Abode Services will be charged with being an engaged member of the neighborhood by responding expeditiously to issues that may arise from or be attributed to the Property.

6 Page 6 Acquisition Loan Staff recommends that the City Council approve the issuance of an acquisition/permanent loan of up to $8,650,000 to Abode Services for the purposes of acquiring the Santa Clara Inn and operating a portion of it to house homeless rental coupon holders. The loan of $8,650,000 will cover the cost to acquire the Property as well as an additional $50,000 to cover Abode's due diligence and escrow costs. The City will not fund any physical improvements to the Property. On September 21, 2015, Abode Services entered into a Purchase and Sale Agreement (PSA) to acquire the Property from a private owner for the sale price of $8,600,000. The PSA provides Abode Services with a 90-day due diligence period so that Abode can commission the following reports: an appraisal to determine the Property's fair market value; a Property Needs Assessment to affirm the Property's condition; and a Phase I Environmental Report. Further, the PSA stipulates that, by the end of the 90-day period, Abode Services must obtain a financial commitment from the City Council. Upon receiving approval from the City Council, the PSA provides an additional 90 days for the City and Abode Services to draft, execute, and record all relevant legal documents and loan agreements prior to the close of escrow. As of the date of submission of this Memorandum, Abode Services has satisfied the due diligence requirements, with the following results: An appraisal of the Property as of September 23, 2015, was prepared by Karen Mann & Associates at Abode's request and was received on October 14, The appraisal supports a Property value of $8,600,000. Staff has required a third-party verification of value which, to its satisfaction, supports a reimbursable purchase price. A Physical Needs Assessment was completed on October 19, The report affirmed that the Property is in habitable condition, and identified desirable minor repairs mostly attributed to typical wear and tear. Abode intends to address this scope of work within the first few months of ownership. Phase I Environmental Report was completed on October 14, 2015, which recommended a Phase II study. The Phase II study is currently in process and soil borings are being taken to test for a) underground tanks, b) seepage from nearby dry cleaners, and c) toxic fumes from chemicals. All recommendations will be addressed and integrated into the scope of work, as appropriate, prior to Loan closing to ensure the Property is safe for occupancy. The proposed Loan of up to $8,650,000 would cover 100% of the Property's purchase price and up to $50,000 for soft costs attributed to the acquisition. While the Loan to Value exceeds 100%, it exceeds it only by 0.06%, and therefore presents little to no additional risk to the City. As is often appropriate when financing housing for homeless households, the interest rate on the Loan will be 0% simple interest. Principal payments on the loan will be payable from residual receipts during operations on an annual basis, with any balance due in full at maturity in 10 years. The 10-year loan term coincides with the time limit assigned to each "Hotel Supportive Housing" use as well as the sunset provision of the MLP, which is currently At the end of

7 Page 7 10 years, it is anticipated that Abode will either sell the property for operation as a budget motel, or retain its ownership and refinance any remaining debt, in order to pay off the City's loan. In addition to the City Loan of up to $8,650,000, it is anticipated that the County of Santa Clara will provide a loan to Abode Services of up to approximately $1,115,000 to fund repairs, security upgrades, further due diligence activities, and a capitalized operating reserve. The occupancy will be limited to extremely low-income (ELI) residents, consistent with requirements of the MLP. Also per the MLP, prior to occupancy of the target population, Abode will obtain a CUP from the City. Typically, the CUP process would be approved by the City's Planning Commission. However, as the Property is located in a Neighborhood/Community Commercial zoning district, its use for the MLP requires City Council approval. Therefore, after Abode Services applies for the CUP, the City Council will be asked to approve a conditional use of the Property that allows it to be used in accordance with the MLP. Cost-effectiveness of the Loan Staffs analysis indicates that acquisition of this Property is a cost-efficient way to house homeless households in the near-term as compared to building new income-restricted apartments. City's Loan amount of $8,650,000 plus the expected approximate County commitment of $1,115,000 will produce 27 homes available for 10 years to the homeless. It will also enable Abode Services to lease the remaining 29 rooms to other formerly homeless residents possessing motel vouchers. By comparison, according to data from the previous five affordable projects funded by the Housing Department, the average cost to acquire and build each newlyconstructed affordable apartment was $407,000. While these apartments offer restricted rents for 55 years, rehabilitating the Santa Clara Inn clearly costs less per unit up-front. After factoring in acquisition costs, due diligence expenses, and funding for improvements of internal finishes, the cost of each of the 56 units at the Santa Clara Inn would be approximately $175,000, with 27 of the 56 units restricted exclusively to formerly homeless households for 10 years. Given that Abode can almost immediately utilize these existing motel units to house homeless individuals and thereby meet an urgent need to provide shelter for vulnerable populations, staff concludes that the acquisition price of up to $8,650,000 represents considerable value for the community. In addition, property operations costs are expected to cost less per night than would a comparable motel voucher strategy. Abode Services' staff will offer on-site case coordination, social service provision, 24-hour desk coverage, and typical property management functions. These operations costs plus those needed to physically operate the Property are expected to be fully covered by residents' rental voucher or coupon payments. Tenants residing in the Santa Clara Inn's 27 restricted units are expected to possess the City and/or County's rent vouchers/coupons, which would pay rents of approximately $1,485 per month (approximately $50 per night), for a oneperson household. Other voucher-holders in the remaining 29 units are expected to pay typical motel rents of more than $70 per night. It is expected that the Santa Clara Inn's monthly operating costs per unit will be less than the cost of leasing a comparable motel unit from a private motel owner which was estimated in the

8 Page 8 ' initial expense analysis at $2,200 per unit per month. It is not expected at this time that the City would be required to commit any additional funds to cover the Property's operation costs, other than those already being expended through the City's rent coupon program. Therefore, this proposal will result in the provision of more services to residents and lower operating costs than would a simple motel voucher strategy. EVALUATION AND FOLLOW-UP The Housing Department posts quarterly reports on the status of its affordable properties undergoing rehabilitation or construction to its website, If the recommended actions are approved, and Abode Services is successful in acquiring the property, the Santa Clara Inn would be included in these reports. POLICY ALTERNATIVES To arrive at this proposal, staff considered the following option: Alternative: The City could deny the request for a commitment of funding. Pros: Cons: The funds being requested could be used for other affordable housing projects and programs. The City will lose an opportunity to:. Provide housing for homeless individuals in a manner that is relatively expedient and financially feasible; and. Address neighborhood concerns associated with the current level of criminal activity occurring at or around the Property. Reason for not The Housing Department continues to explore multiple options for viable recommending: homeless housing. The Santa Clara Inn presents a financially efficient opportunity to house homeless individuals in a timely manner. PUBLIC OUTREACH This Memorandum will be posted on the City's Council Agenda website for the December 1, 2015, City Council meeting. In addition, in conjunction with a future application for a CUP, a sign will be erected on the site, notifications to neighbors within a 500-foot radius of the site will be mailed, and the City Council will hold a public hearing per procedures under the MLP for those sites located in a Neighborhood/Community Commercial zoning district.

9 Page 9 COORDINATION Preparation of this report was coordinated with the Office of the City Attorney. FISCAL/POLICY ALIGNMENT This expenditure is consistent with the following policy documents: the City's Envision 2040 General Plan and the Adopted Housing Element in that it will help the City meet its Regional Housing Needs Allocation; the City's current Housing Investment Plan ill that it increases San Jose's supply of affordable housing; the City's HUD Consolidated Plan in that it will provide rental homes affordable to very low- and extremely low-income households; and, the Community Plan to End Homelessness approved by the City Council in February 2015 in that it is providing supportive housing for homeless residents. COST SUMMARY IMPLICATIONS 1. AMOUNT OF RECOMMENDATION: DEVELOPMENT USES AMOUNT Acquisition Costs Soft Costs $8,600,000 $50,000 TOTAL $8,650, SOURCE OF FUNDING: $ 1,765,000 from Housing Trust Fund; $6,885,000 from Multi-Source Housing Fund. 3. FISCAL IMPACT: Funding in the amount of $ 1,765,000 was previously appropriated to the Housing and Homeless Projects appropriation in the Housing Trust Fund for this project. The recommended adjustments of $6,885,000 in the Multi-Source Housing Fund will appropriate revenue received from Irvine Development Agreement to fund the proposed Loan.

10 November 13,2015 Page 10 BUDGET REFERENCE The table below identifies the funds and appropriations proposed to fund the loan commitment recommended as part of this memorandum Adopted Operating Last Budget Action (Date, Ord. Fund # Appn # Appn. Name Total Appn Proposed Budget Action Amount For Project Budget No.) Housing and $4,430,000 N/A $1,765,000 XI-46 6/23/15, Homeless Projects Ord Housing Loans & $3,250,000 $6,885,000 $6,885,000 XI-67 6/23/15, Grants Ord Housing Project $10,580,000 ($6,885,000) XI-68 10/20/15, Reserve Ord Total $8,650,000 CEOA File No. PP /s/ JACKY MORALES-FERRAND Director of Flousing JENNIFER A. MAGUIRE Senior Deputy City Manager/ Budget Director Attachment: Site Map For questions, please contact Patrick Heisinger, Senior Development Officer, at

11 ATTACHMENT Site Map p. Sarita Clara University. t> School of Law \ \ % ft"" Harrington Learning Commons, Sobrato,,. ft ft i^-pat Malley Fitness 1 1 -ft and Recreation Center V ' 'ft ennedy MalK Benson Memorial Center V-& <& >2811 The Alameda p\\ sv o ' M -o' Pizza My Heart '.. qo : - ^ -. "ft.,-- 'to-