REPORT. DATE ISSUED: February 3, 2006 ITEM 103. Loan to San Diego Youth and Community Services for Transitional Housing (Council District 3)

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1 1625 Newton Avenue San Diego, California / FAX: 619/ REPORT DATE ISSUED: February 3, 2006 ITEM 103 REPORT NO.: HCR06-11 For the Agenda of February 10, 2006 SUBJECT: Loan to San Diego Youth and Community Services for Transitional Housing (Council District 3) SUMMARY Issue: Should the Housing Commission approve a loan to San Diego Youth and Community Services (SDYCS) for acquisition and rehabilitation of an eight-unit apartment complex as transitional rental housing for young adults at risk of homelessness? Recommendation: That the Housing Commission recommend Housing Authority approval of a $413,000 residual receipts loan, with unpaid principal and accrued interest forgivable at the end of 55 years, to fund acquisition and rehabilitation of th Street and authorize the President and Chief Executive Officer (CEO) to execute any and all documents necessary to make the loan. Fiscal Impact: Approval of this recommendation would result in the expenditure of up to $413,000 in Housing Commission funds. Certificate of Funding Availability: Certificate No.: FY Amount: $413,000 Revenue Source: HOME-CHDO / HTF Division: Housing Finance and Development Line Item: Loans Affordable Housing Impact: The Housing Commission would restrict rents and occupancy of two one-bedroom units and five two-bedroom units to households with incomes of 50 percent or less of Area Median Income (AMI), which is currently $24,150. The developer would

2 Loan to SDYCS for transitional housing For the Housing Commission Agenda of February 10, 2006 Page 2 deepen the affordability of seven units by charging rents affordable to residents earning 46 percent of AMI. To make the units affordable to the targeted tenant population of homeless young adults, eligible tenants would have their rent subsidized for two years through vouchers from the County of San Diego Health and Human Services Agency which would make up the difference between the restricted rents and rents the tenants can afford to pay (thirty percent of adjusted gross household income for rent and utilities; typically $250 per month or less). Housing Commission Covenants, Conditions, and Restrictions would be recorded against the property with a 55-year term requiring use of seven units as housing for homeless young adults or young adults at risk of homelessness. The following table shows a breakdown of the proposed initial subsidized rents for the seven restricted units. One unrestricted two-bedroom apartment would be reserved for occupancy by a resident manager. Unit Type No. Of Units Unit Size (sq. ft) Restricted Rent Less Utilities Monthly Utility Allowance Estimated Monthly Tenant- Paid Rent And Utilities Estimated Monthly Rent Subsidy Per Unit Total Rent And Utilities Monthly Market Rent Percent of AMI of Eligible Tenants Annual Rent Savings Over Market Rate 1br/1ba $606 $28 $250 $384 $634 $ % $ 2,928 1br/1ba $606 $28 $250 $384 $634 $ % $ 2,928 2br/1ba $678 $35 $250 $463 $713 $1,050 50% $17,856 2br/1ba $678 $35 $250 $463 $713 $1,050 50% $ 4,464 Mgr Total 8 $28,176 Environmental Review: The City of San Diego, as the responsible entity, on January 31, 2006, issued a certification of categorical exclusion pursuant to the applicable provisions of the National Environmental Policy Act (NEPA) 24CFR Part 58, Section 58.35(A)(3). Further, in accordance with the Statutory Worksheet, the responsible entity determined that the project is exempt per 24CFR 58.34(A)(12) and funds may be drawn down for an exempt project without the processing of a Request For Release Of Funds (RROF). Further, the acquisition and rehabilitation of existing facilities is categorically exempt from the provisions of CEQA under the provisions of 14 California Code Of Regulations Sections 15301, 15302, and among others. Previous Related Actions: On January 24, 2006, the Loan Committee recommended a $413,000 loan for this project. Future Related Action: The recommended loan exceeds the Housing Commission s approval limit of $250,000 and requires Housing Authority approval.

3 Loan to SDYCS for transitional housing For the Housing Commission Agenda of February 10, 2006 Page 3 Community Planning Group Review: The proposed development was presented to the Normal Heights Community Planning Committee for review and comments on July 5, The project was favorably received; no vote was taken because a planning group vote to approve the project is not required. Home Program Compliance: The proposed development is an allowable activity under HOME Program rules. The proposed rents are below HOME guidelines. BACKGROUND SDYCS submitted an application for funding under the Housing Commission's current Notice of Funding Availability (NOFA) for the Construction, Acquisition, and Operation of Affordable Rental Housing. DISCUSSION The Borrower SDYCS is a California 501(c)(3) nonprofit corporation and certified Community Housing Development Organization (CHDO) established in 1970 with the mission of providing supportive services, affordable housing, and community development to benefit low-income youth and families in San Diego. The organization s primary focus is emergency shelter and transitional housing for homeless young adults and young adults at risk of homelessness. SDYCS operates its programs at 12 sites in San Diego; it currently owns and operates 36 units of housing for young single mothers and other young adults at risk of homelessness. The organization would be the sole owner and the operator of the proposed development; property management would be provided by SDYCS s on-staff management professionals. This would be the third affordable housing development for SDYCS. The Housing Commission provided the organization with approximately $858,000 in loans and grants to finance acquisition of a 33-unit apartment complex at 3255 Wing Street in the San Diego neighborhood of Midway, and a loan of $85,000 for rehabilitation of three units on Herman Avenue and on Redwood Street in North Park. SDYCS successfully operates its properties in compliance with Housing Commission loan requirements. The nonprofit received a Best Practices Award from HUD in 2001 and an Energy Efficiency Award from the San Diego Housing Federation in 2005 for its Take Wing development. The development team for this proposed project is the staff of SDYCS; the relocation consultant is Overland, Pacific and Cutler. SDYCS s Executive Director is Mr. Walter Philips; its Housing Director and project manager for this development is Mr. Kevin Sweeney. The

4 Loan to SDYCS for transitional housing For the Housing Commission Agenda of February 10, 2006 Page 4 applicant s financial statements were reviewed by Housing Commission staff and found to be satisfactory (see Attachment 5 Financial Statements). The Development The subject property, located at th Street in the community of Normal Heights, is in an older established neighborhood consisting of single family residences and low-density multifamily housing. The complex is located six blocks west of Interstate 15 and approximately one block north and within walking distance of the bus stops and the retail and service establishments of the Adams Avenue business corridor (see Attachment 1 Location Map). The project is located within the Adams Avenue Business Improvement District and would pay an assessed Business Improvement District fee as a expense of operation. The two-story structure, built in 1963, consists of two one-bedroom apartments, six twobedroom apartments, and a laundry facility. The building is structurally sound; however, it will benefit from the planned interior and exterior renovation which will include energy conservation measures, updating of major systems, and correction of safety issues. Implementation of the proposed project requires permanent relocation of seven households. SDYCS budgeted $18,571 per family for relocation based on information provided in the relocation consultant s Preliminary Relocation Plan, including moving costs. Under the California Code of Regulations and the Federal Uniform Relocation Assistance Act, SDYCS would pay relocation benefits to eligible residents prior to vacating the property for rehabilitation of the existing improvements. A survey of available rental units included in the Preliminary Relocation Plan indicates that the displaced households would not have difficulty obtaining replacement housing near the project area. Occupancy and rents for seven units would be restricted to households earning 50 percent or less of AMI. Tenants would be graduates of SDYCS s Take Wing independent living program and young adults and single mothers referred by the County of San Diego Health and Human Services department. Capable of independent living, the tenants would be employed, attending school, or enrolled in bona fide employment training programs. While residing at the site, the tenants would have access to SDYCS s off-site programs to help them obtain education, employment, health care, child care, personal finance instruction, and other services to help them maintain their independence. Each tenant would pay a maximum of 30 percent of their adjusted gross income for rent and utilities. The two bedroom apartments would generally house two tenants who would each be responsible to pay half of the approved housing cost for their unit. A County program provides two-year tenant-based rent subsidies for qualified emancipated youth that can be applied to these units. The vouchers pay the difference between what the tenant can afford to pay and the total housing cost of their unit or share of their unit. It is expected that residents participating

5 Loan to SDYCS for transitional housing For the Housing Commission Agenda of February 10, 2006 Page 5 in the program would have sufficient stability and income at the end of two years to transition into permanent housing at another location. The rent subsidy program of the County s Health and Human Services department has been in effect for five years. The vouchers are undersubscribed because most landlords of suitable units are unwilling to participate. There are currently 57 utilized vouchers out of 80 made available to date. If the County program expires or otherwise becomes unavailable, SDYCS would use other resources to subsidize the rents for this project. The Funding Request The total development cost for eight units is estimated at $1,529,887 ($191,236 per unit). A Housing Commission loan for this project would be a maximum of $413,000 ($51,625 per unit). Financing would consist of the proposed 55-year residual receipts loan from the Housing Commission and a revocable grant of $1,116,887 from the Redevelopment Agency of the City of San Diego. The Redevelopment Agency grant would be from local funds reserved for the homeless assistance component of the Naval Training Center (NTC) reuse plan, which was formed in 1996 following closure of NTC. To make the most efficient use of the $7.5 million fund reservation, the plan was revised in 1997 to require the use of those funds for development of transitional housing outside the NTC site. The Redevelopment Agency grant requires use of the proposed development as housing for the homeless in perpetuity. Any change in the use of the property or disposition of the site would require repayment of the Redevelopment Agency grant. SDYCS would use its 50 percent share of the residual receipts to pay for tenant services and other costs of operation (the residual receipts split is estimated to be $10,856 to SDYCS and $10,856 to the Housing Commission at the end of the first year). Full repayment of the proposed loan by the end of its 55-year term would require average minimum annual payments of $15,425 to the Housing Commission. Because this would be a small development with low rents, project income is unlikely to result in residual receipts payments in excess of the estimate. Because Redevelopment Agency use restrictions would make sale or refinancing of the property to pay off the Housing Commission debt undesirable, the borrower could chose to surrender the property to the Housing Commission in lieu of using cash to satisfy the balloon payment. To maintain the development for its intended use, it is recommended that unpaid principal and accrued interest of the Housing Commission loan be forgiven at the end of the 55-year loan term.

6 Loan to SDYCS for transitional housing For the Housing Commission Agenda of February 10, 2006 Page 6 The Financial Plan Total Development Cost: The estimated total development cost is $1,529,887 including relocation, acquisition, rehabilitation, contractor overhead and profit, contractor fees, and a developer fee. Cost per Unit: Appraised Value: Loan Amount: Loan-to-Value: Security: Rent Restrictions: Occupancy Restrictions: The estimated total development cost per unit of $191,236 includes relocation of existing tenants and significant building upgrades such as bathroom fixture replacements, heater replacements, a new roof, window replacements, and landscaping. The property was appraised at $1,150,000 in its as-is condition on September 21, The after-rehab value was appraised at $1,250,000. The acquisition price of $1,125,000 is less than the appraised as-is valuation. The proposed loan would leverage $413,000 of Housing Commission funds against a $1,116,887 grant from the Redevelopment Agency. Loan-to-value of the Housing Commission loan would be 37 percent. The Housing Commission loan would be secured by a second trust deed recorded against the property. A Housing Commission Declaration of Covenants, Conditions and Restrictions would be recorded against the property to restrict rents for seven units at 50 percent of AMI for 55years. A Housing Commission Declaration of Covenants, Conditions, and Restrictions, with a 55-year term of affordability recorded against the property, to restrict occupancy of seven units to households earning no more than 50 percent of AMI.

7 Loan to SDYCS for transitional housing For the Housing Commission Agenda of February 10, 2006 Page 7 First Trust Deed: Second Trust Deed: A revocable grant of $1,116,887 from the Redevelopment Agency of the City of San Diego would be secured by a first trust deed recorded against the property. The Redevelopment Agency restrictions do not expire; they would be enforced in perpetuity. A 55-year residual receipts Housing Commission loan of $413,000 at three percent simple interest would be secured by a second trust deed recorded against the property. Payments on the Second Trust Deed: Payments to the Housing Commission would be 50 percent of residual receipts. Unpaid principal and interest would be forgiven at the end of the 55-year loan term if the borrower is in compliance with the requirements of the Housing Commission Loan Agreement. Recourse: Loan Term: Management Plan: Operating Expense: Pro Forma Assumptions: Reserves: With the approval of the Redevelopment Agency, the loan would be a recourse loan to SDYCS. 55 years A Management Plan was approved by Housing Commission staff. Operating expenses are estimated to be $2,398 per month ($300 per unit). Income increases are projected at 2.5 percent per year; operating expenses at 3.5 percent per year; vacancy rate at 5 percent per year. An annual $2,400 replacement reserve is included in the proforma. Risks and Mitigations It is important to note that the deep affordability of this development would result in residual cash flow insufficient to pay for both tenant services and payoff of the Housing Commission loan. Because the first position Redevelopment Agency use restriction is in perpetuity, there is

8 Loan to SDYCS for transitional housing For the Housing Commission Agenda of February 10, 2006 Page 8 the risk that SDYCS would be unable to sell or refinance the property to retire the Housing Commission debt at the end 55 years and would default on the loan. For this reason, it is recommended that unpaid principal and accrued interest of the Housing Commission loan be forgiven at the end of the 55-year term. In the past, this concession has been made by the Housing Commission when a Redevelopment Agency grant is recorded in first position on a transitional housing project. Because the Housing Commission loan would be subordinate to the Redevelopment Agency s grant, in the event of a monetary default by the borrower any proceeds from disposition of the property would be paid first to the Redevelopment Agency. The Housing Commission would be reimbursed only to the extent of equity remaining after the senior encumbrance is repaid. The Housing Commission will seek to mitigate this risk by obtaining cure rights to step in and assume responsibility for the borrower s obligation to the Redevelopment Agency and locate a successor nonprofit to acquire and operate the project in the event of a default. A release of Housing Commission funds for this project would be conditional upon SDYCS receiving the Redevelopment Agency grant. Conclusion In its Housing Needs Assessment of the rental housing market, the City's Consolidated Plan identifies transitional housing and housing for persons at risk of homelessness as a high priority. In San Diego, high building costs and other factors prohibit for-profit and most nonprofit affordable housing providers from developing housing to meet the requirements of these residents. Gap financing provided by this proposed loan of $413,000 would allow SDYCS to reduce a shortage of transitional housing for young persons who are at risk of becoming homeless by leveraging a $1,116,887 grant of local redevelopment funds that are earmarked specifically to provide housing for homeless residents. ALTERNATIVES A requirement for full repayment of the Housing Commission debt would likely result in borrower default at the end of the 55-year term if there is unpaid principal and interest is due in a balloon payment. The Housing Commission could approve the loan as a forgivable loan, or deny approval of the loan. Because the amount of the Redevelopment Agency commitment is insufficient to cover the costs of this development, a decision to not approve the loan would result in the withdrawal of a proposal to provide eight units of transitional housing for a population of young adults in critical need of assistance.

9 Loan to SDYCS for transitional housing For the Housing Commission Agenda of February 10, 2006 Page 9 Submitted by, Approved by, Cissy Fisher Director of Housing Finance and Development Elizabeth C. Morris President and Chief Executive Officer Attachments: 1. Location Map 2. Development Summary 3. Development Timeline 4. Disclosure Statement * 5. Financial Statements * 6. General Application Forms *Distribution of this attachment is limited. A copy is available for review at the Housing Commission office at 1625 Newton Avenue and the office of the City Clerk, 2 nd floor, 202 C Street. Information: Mr. Dan Cady (619) g:hfshare\hcreport SDYCS 35 th Street.doc(02/10/06)

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11 ATTACHMENT 2 DEVELOPMENT SUMMARY February 10, 2006 Name: Location: Description: Sponsor: SDYCS 35 th Street Apartments th Street Transitional Rental Housing For Homeless Young Adults San Diego Youth and Community Services Unit Affordability Total # of units: 8 Assisted units: 7 Restricted rents: 2 $606 5 $678 Market rents: Percent of AMI: Affordability: one-bedroom units rent for approximately $850 per month two-bedroom units rent for approximately $1,050 per month rents for 5 two-bedroom units and 2 one-bedroom units at 46 percent of Area Median Income. 55 years Development Cost Total development cost: $ 1,529,887 HC development cost: $ 413,000 Total per unit development cost: $ 191,236 HC cost for 8 units: $ 51,625 HC subsidy per bedroom (14 br s): $ 29,500 Sources of Funds Redevelopment Agency Grant $ 1,116,887 Housing Commission Loan $ 413,000 Pro Forma Summary Estimated annual income: $ 52,890 (year 1) Estimated annual expense: $ 28,779 (year 1) Annual debt service: $ 0 (total annual debt service payments) Estimated residual receipts $ 21,711 (year 1)

12 ATTACHMENT 3 SAN DIEGO YOUTH AND COMMUNITY SERVICES ESTIMATED DEVELOPMENT TIMELINE February 21, 2006 March 15, 2006 March 30, 2006 June 30, 2006 July 30, 2006 Loan to the Housing Authority for approval Loan closing Start of rehabilitation Completion of rehabilitation Complete occupancy

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