CONDITIONAL GRANT COMMITMENT AND SITE LEASE FOR REHABILITATION OF VERMONT HOUSE

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Mercy Lydia Douglas
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1 CITY OF <2 SAN JOSE CAPITAL OF SILICON VALLEY TO: HONORABLE MAYOR AND CITY COUNCIL COUNCIL AGENDA: 11/10/15 ITEM: yf i t Memorandum FROM: Jacky Morales-Ferrand SUBJECT: SEE BELOW DATE: A " P "'T_I^ DaK /d/?6/r COUNCIL DISTRICT: 6 SUBJECT: CONDITIONAL GRANT COMMITMENT AND SITE LEASE FOR REHABILITATION OF VERMONT HOUSE RECOMMENDATION Conduct a Public Hearing and adopt a resolution: 1. Approving a conditional grant commitment ("Grant") to Housing for Independent People ("HIP" or "Developer"), a nonprofit public benefit corporation merged with Abode Services, Inc. ("Abode"), of up to $3,017,000 to rehabilitate the City-owned Vermont House, located at 1072 and 1082 Vermont Street ("Property") to provide 16 rooms in two residential houses for homeless individuals or couples ("Project"); 2. Accepting the summary of costs and findings of the Summary Report pursuant to Section of the California Health and Safety Code ("33433 Summary") for the disposition of the Property to Developer under the terms and conditions of the proposed Ground Lease, and approving the Ground Lease; 3. Authorizing the Interim Director of Housing to enter into the Ground Lease with Developer for a term of not more than thirty (30) years at a nominal rent; and 4. Authorizing the Interim Director of Housing, or her designee, to set the specific business terms and to negotiate and execute any and all documents necessary to implement the Project, including, but not limited to, the Grant Agreement, applications, agreements, amendments, and payment requests which may be necessary in connection with the Grant.

2 Page 2 OUTCOME Approval of the recommended actions will enable the City-owned Vermont House to undergo significant rehabilitation in order to provide permanent supportive housing for 16 unhoused veterans. BACKGROUND Focus on Creating Housing Opportunities for the Homeless The Mayor and City Council have identified solving issues related to homelessness as a high priority for the City. The City administration has been tasked with making recommendations on strategies to support homeless outreach services, encampment clean-ups, and creation of permanent housing opportunities for this vulnerable population. The Housing Department and its partners have found that homeless individuals are experiencing significant difficulties, even with a rental subsidy in hand, in accessing apartments in nonsubsidized developments in San Jose. The top barrier to securing rental housing is the very low vacancy rate in the local market. When given a choice between a prospective tenant with decent credit and employment history, versus a person with little to no employment, poor credit, and/or minor criminal infractions, landlords select the former as tenants. Homeless veterans with rental vouchers face similar challenges in finding housing. The Housing Authority for the County of Santa Clara ("Housing Authority") reported in September 2015 that the utilization rate of issued portable rental vouchers for homeless veterans is only 55%. This - means that almost half (45%) of veterans with rental vouchers have been unsuccessful in finding a landlord to accept the voucher. As of the first week of September 2015, approximately 210 veterans possessed vouchers and were actively searching for housing. This is an unusually low utilization rate. - The Housing Department is seeking approval of funding to rehabilitate an existing restricted affordable property that the City currently owns in order to create 16 new supportive housing opportunities for homeless veterans, both individuals and couples. Site and Developer The City-owned Vermont House consists of a 0.33-acre parcel containing two single family houses located at 1072 and 1082 Vermont Street (buildings plus ground, collectively, the "Site"). The two buildings have a combined total of 17 bedrooms. The structures were first constructed in the 1920s and are in need of significant repair. The Site was previously used as a residential service facility for lower-income individuals in need of drug and alcohol treatment and housing for people with living with HIV/AIDS. The City acquired the property via foreclosure on January 12, 2009.

3 Page 3 In August 2009, the Housing Department issued a Request for Proposals (RFP) to find a developer to rehabilitate the Vermont House. Funding for rehabilitation of the site were not included in the RFP. The City did not receive any proposals in response to the RFP. A new RFP was issued in August 2013 for the rehabilitation Vermont House and its future use as housing for the homeless. City funding for construction was identified in the RFP. An evaluation panel selected Abode to rehabilitate the Site and operate it as transitional or permanent housing for a homeless population. On June 10, 2014, the City Council approved an Exclusive Negotiating Agreement ("ENA") and $125,000 predevelopment loan to Abode for Vermont House. Abode and HIP combined their organizations on January 1, HIP was formed in 1980 to provide housing to persons with developmental or psychiatric disabilities. Since the merger, Abode has led the organization's development functions and has used HIP's legal entity for real estate-related commitments. Abode will be the lead developer and operator for Vermont House. (For purposes of simplicity, the HIP/Abode entity is referred to herein simply as "Developer.") The City's predevelopment loan provided the necessary funding for Developer to apply for a Conditional Use Permit that the City approved on August 1, Developer has also determined a rehabilitation scope of work, developed rehabilitation plans, and obtained environmental reviews. On September 22, 2015, the Board of Commissioners of the Housing Authority for the County of Santa Clara ("Housing Authority") awarded a preliminary commitment of project-based vouchers for veterans ("VASH vouchers") to the Vermont House project. The purpose of this memorandum is to request approval of a rehabilitation grant and a long-term Site lease to Developer. ANALYSIS Site Rehabilitation The scope of work for Vermont House requires interior demolition down to the framing studs. The rehabilitation will include complete replacement of all systems and reconstruction of the interior, as well as a new roof, exterior upgrades, and required soil remediation. Total rehabilitation cost is projected to be slightly under $3,017,000 and expected duration will be eight months. As mentioned, Abode is the lead developer selected for the site. Habitat for Humanity East Bay/Silicon Valley will be the General Contractor for Abode and will utilize paid contractors and volunteer labor to complete the rehabilitation. Once rehabilitated, 16 of the bedrooms will be leased as permanent housing for unhoused veterans, and one bedroom will be occupied by a resident manager. The Vermont House is currently vacant except for a caretaker-tenant who will vacate the property prior to rehabilitation commencement. Per an executed lease agreement with the caretaker, the City has no obligation to relocate the tenant. Regardless, the City is working actively with the tenant to find a new home in another restricted affordable property in San Jose.

4 Page 4 Compared to the costs to construct new affordable rental homes, the relatively low cost of rehabilitating the Vermont House makes it financially inefficient to seek other sources of financing (such as low-income housing tax credits or conventional debt) for this project. Given the target population and the low number of units generating rental income, net operating income would be insufficient to support additional debt. Therefore, staff recommends that the City fund the entire rehabilitation in the form of a grant. Under the Grant agreement, staff will reimburse actual costs incurred up to a maximum of the Grant amount. The City's existing predevelopment loan of up to $125,000 will be repaid in full from the Conditional Grant for reconstruction, as is customary with City loans. The City's rehabilitation/ permanent Grant will be secured on the leasehold interest and will not be repayable to the City so long as its terms and conditions are fulfilled. The expected timeline for rehabilitation is approximately eight months. Construction is anticipated to start in early 2016 and complete in fall Residents would move into their new homes in fall Source The City currently possesses approximately $2,600,000 in tax-exempt redevelopment bond proceeds which were deemed unused under a previous capital grant commitment for the San Carlos Seniors development and returned to the City. These funds need to be used in the nearterm in the form of a grant. Rehabilitation of restricted affordable housing, both "hard" costs (materials and labor) and "soft" costs (i.e. predevelopment, legal fees, reports) are eligible uses for these funds. Two other small development-related commitments are expected to use some of the available bond proceeds, leaving $2,122,758 in available bond proceeds. The total cost of the project is $3,017,000. Construction hard costs comprise $1,936,800 while $1,080,200 will fund soft costs including financing, project design, and other non-construction costs. San Carlos Seniors tax-exempt redevelopment bond proceeds ($2,122,758) will be used for a portion of the Grant. Rehabilitation of restricted affordable housing, both "hard" and "soft" costs are eligible uses for these proceeds. The remaining portion of the Grant ($894,242) is proposed to be funded from the Low and Moderate Income Housing Asset Fund (Fund 346), which is eligible to pay both hard and soft costs for capital projects in the form of grants. Operations and Services Formerly homeless residents cannot typically pay rents in an amount sufficient to support operations. Therefore, another source of funding is needed to cover the cost of operations and to provide critically-needed services to this vulnerable population. The Developer has applied for 16 project-based VASH vouchers from the Housing Authority, and received a conditional award on September 22, The vouchers pay the difference between a specified proportion of a resident's income and the actual rent on the apartment. As such, they provide the level of income to a property necessary to support ongoing operations.

5 October 23,2015. Page 5 The Veterans Administration ("VA") supports project-basing the 16 VASH vouchers at this location and is in the process of executing a letter of support which they will provide to the Housing Authority shortly. If approved, the VA's Palo Alto Health Care System will provide support services to the veterans living at Vermont House and will screen and refer veterans to the Property. The Housing Authority will execute a 15-year voucher contract with Developer after completion of environmental approvals, satisfaction of all other federal requirements, and completion of rehabilitation. Federal requirements include analysis of poverty concentration, site and neighborhood impact, and housing quality standards analysis. By designating these apartments for homeless veterans, VASH participants can be directly referred to fill the vacant units and will be eligible to move to other housing sites with continued tenant-based VASH after one year, if the VASH vouchers are available. If the VASH vouchers expire and are not able to be renewed or replaced with other project-based vouchers during the Ground Lease period, the Housing Department will work with Abode to determine other sources of ongoing operating support. Ground (Site! Lease The City will lease the Site (ground plus buildings) to Developer through a Ground Lease for an initial term of 15 years at $1 per year paid at closing. The Ground Lease also carries an option to extend the lease for another 15 years, subject to City approval. The document states that it is the responsibility of Developer to provide an operating subsidy and case management services to residents. The Ground Lease also contains the City's standard provisions, which include the following obligations: Operate the Development for affordable housing purposes; Comply with the affordability covenants that will restrict occupancy of 16 the bedrooms for the duration of the ground lease; Provide on-going property management services and services appropriate for the population; Pay all taxes, operating expenses, insurance costs, utility expenses, charges, and impositions associated with the Site during the term of the Ground Lease; Maintain the Development in good repair and tenantable condition; and Indemnify the City from all claims, loss, damage, injury, actions, and liability of every kind arising from the Developer's use of the Site. By maintaining control over the Site and leasing it, the City can determine the most appropriate use for the site after the Ground Lease matures Summary Report Although redevelopment agencies have been dissolved, redevelopment law still applies to Successor Housing Agencies (such as the Housing Department) as they develop affordable housing utilizing redevelopment funds. This includes loan proceeds or repayments from

6 Page 6 affordable housing developments funded by redevelopment. Prior to the disposition of any property acquired with tax increment funds for development, Section requires that a summary report disclosing the financial aspects of the transaction be prepared and made available for public inspection at least two weeks prior to the date of the public hearing. Accordingly, staff prepared a Summary Report Pursuant to Section of the California Health and Safety Code ("33433 Report") analyzing the costs and benefits related to the disposition of the Site to the Developer under the Ground Lease. Notices of public hearing for the Report will be published in the Post Record prior to the City Council's consideration of this action as required under Code. Section also requires that the City make a finding that the consideration to be received by the City, as Housing Successor that owns the Site, is not less than the fair market value or the fair reuse value of the Site. The Report concludes that the Site has a nominal reuse value until expiration of its recorded affordability restrictions. The City will also receive full consideration for the Site upon expiration of the Ground Lease. Given these facts, the Report concludes that "the consideration to the City is not less than the fair reuse value of the land based on the current use and with the affordability and other covenants provided under the Ground Lease." The Site will also be used to provide restricted affordable housing and will eliminate blight. Therefore, the terms under which the Site will transfer satisfy the requirements of Section Affordability Restrictions There is an existing City affordability restriction on 14 of the 16 bedrooms at Vermont House. The other two bedrooms are unrestricted managers" rooms. This restriction was written to restrict rents and incomes to residents at or below extremely low- or very low-income persons. In reviewing the affordability restriction, staff has determined that it should be amended to be more consistent with current Community Redevelopment Law and other supportive housing properties. The revised restrictions, which currently describe transitional housing requirements and run until October 2031, will be amended to: a) require annual services reporting; and b) to run at least as long as the Ground Lease. Veterans and other unhoused residents have incomes far less than 30% of Area Median Income. For a one-person household, that annual income limit is currently $22,350. However, the City's Affordability Restrictions and the Ground Lease together will be structured to allow residents with incomes that rise above 30% AMI to remain in their residences so as to minimize their displacement. The restrictions will also be structured to enable compliance with the type of awarded rental vouchers, which have different rent calculations than does the City. EVALUATION AND FOLLOW-UP The Housing Department posts periodic reports on the status of City-facilitated affordable housing developments in its Production Report at on the "Reports & Data" webpage. If approved, the Vermont House rehabilitation will be included in these reports.

7 Page 7 POLICY ALTERNATIVES The following alternative was considered in determining the actions recommended in this report: Alternative #1: Do not award Grant funds and Ground Lease to Developer. Pros: Cons: The funds being recommended for the Vermont House project could be used for other affordable housing developments. The City is facing a tremendous need for housing for its homeless population. The City's funding source available for this Project represents a time-limited opportunity to help meet this need and because they are bond funds, they must be spent in an expeditious manner. The Housing Authority has already awarded project-based VASH vouchers to the Project, which are not easy to obtain. The property has existing recorded affordability restrictions that are not easily moved and that require that the buildings be occupied by lowerincome persons. Abode is experienced with this population and is a City partner in helping to address needs of the homeless in San Jose. Reason for not There are available resources, time-limited opportunities, and a capable recommending: partner experienced in permanent supportive housing committed to the Project. The City Council's approval of this request will enable the Vermont House to house and serve homeless veterans. PUBLIC OUTREACH This Memorandum, the Ground Lease and the Report were posted on-line for the City Council's meeting on November 10, In addition, a public notice was published in the Post-Record on October 27, 2015 and November 3, 2015 to make the public aware that the City Council would hear this item on November 10, 2015 and that the Ground Lease and the Report were available for review in paper form at City Hall for the two weeks prior to the City Council meeting. In addition, in conjunction with the Developer's application for the Conditional Use Permit (CUP), file number CP , a sign was erected on the site and notifications to 127 neighbors within a 500-foot radius of the site were mailed on July 24, The CUP application materials were available for review for one week prior to the Planning Commission hearing on August 12, 2015, at which time the CUP was approved without public comment. COORDINATION Preparation of this memorandum was coordinated with the City Manager's Budget Office and the Office of the City Attorney.

8 Page 8 FISCAL/POLICY ALIGNMENT This expenditure is consistent with: 1) The City's HUD Consolidated Plan in that it will provide apartments that will be affordable for very low- and extremely low-income households; and, 2) the Community Plan to End Homelessness approved by the City Council in February 2015 in that it is providing permanent supportive housing for unhoused people. COST SUMMARY/IMPLICATIONS 1. COST OF DEVELOPMENT: DEVELOPMENT USES AMOUNT Hard (Construction) Costs $1,936,800 Soft (Financing & Other) Costs & Reserves 1,080,200 TOTAL $3,017, SOURCE OF FUNDING: Low and Moderate Income Housing Asset Fund (346) and Multi-Source Housing Fund (448). 3. FISCAL IMPACT: The project will be funded by both the existing Capital Grant Program appropriation ($2,122,758) in the Multi-Source Housing Fund and the existing Housing Loans and Grants appropriation ($894,242) in the Low and Moderate Income Housing Asset Fund. This project would allow for the use of the remaining balance of $2,122,758 in returned bond proceeds received in the Multi-Source Housing Fund (448). BUDGET REFERENCE The table below identifies the fund and appropriation proposed to fund the grant commitment recommended as part of this Memorandum. Fund # Appn # Appn. Name Housing Loans and Grants Capital Grant Program Total Appn Adopted Budget Action Adopted Operating Budget* Last Budget Action (Date, Ord. No.) $17,075,000 $894,242 XI-52 10/20/15 Ord $4,450,495 $2,122,758 XI-67 6/23/15 Ord

9 Page 9 CEOA Exempt, File No. PP /s/ JACKY MORALES-FERRAND Interim Director of Housing For questions, please contact Jacky Morales-Ferrand, Interim Director of Housing, at (408) Attachment: Site Map

10 ATTACHMENT SITE MAP VERMONT HOUSE

SAN JOSE CAPITAL OF SILICON VALLEY

CITY OF SAN JOSE CAPITAL OF SILICON VALLEY TO: HONORABLE MAYOR, CITY COUNCIL AND SUCCESSOR AGENCY BOARD SUBJECT: SEE BELOW COUNCIL AGENDA: 10/6/15 ITEM: Cj_ 2 Memorandum FROM: Richard A. Keit Jacky Morales-Ferrand