SAN JOSE CAPITAL OF SILICON VALLEY TV OV-.L. Memorandum. FROM: Jacky Morales-Ferrand Jennifer A. Maguire TO: HONORABLE MAYOR AND CITY COUNCIL

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1 CITY OF SAN JOSE CAPITAL OF SILICON VALLEY TO: HONORABLE MAYOR AND CITY COUNCIL SUBJECT: SEE BELOW COUNCIL AGENDA: 08/18/15 ITEM: Zi ) Memorandum FROM: Jacky Morales-Ferrand Jennifer A. Maguire DATE: Approved TV OV-.L. Date COUNCIL DISTRICT: 7 SUBJECT: APPROVAL OF THE SUBSTITUTION OF FEDERAL HOME FUNDS FOR A PORTION OF MULTI-SOURCE HOUSING FUNDS COMMITTED TO THE EXISTING CONSTRUCTION/ PERMANENT LOAN FOR THE METROPOLITAN APARTMENTS NORTH PHASE RECOMMENDATION (1) Adopt a resolution approving a change in funding source for $7,915,000 of the City's total of up to $15,145,000 loan commitment for the Metropolitan Apartments North Phase, affordable apartments to be constructed at 2112 Monterey Road, from the Multi- Source Housing Fund to the Home Investment Partnership Program Fund and authorizing the Interim Housing Director to negotiate and execute any documents necessary to implement such substitution, including but not limited to an Amendment to the existing Loan Agreement, HOME Affordability Restrictions, and a HOME Regulatory Agreement with 2112 Monterey Road LP ("Developer"); and (2) Adopt the following Appropriation Ordinance and Funding Sources Resolution amendments in the Home Investment Partnership Program Fund: (a) Increase the estimate for Earned Revenue in the amount of $7,915,000; and (b) Increase the appropriation to the Housing Department for Housing Loans and Grants in the amount of $7,915,000. OUTCOME Substituting federal HOME funds into the Metropolitan Apartments North Phase enables the City to utilize HOME funds by their federal expenditure deadlines. A delay by the City Council in hearing this item may jeopardize staffs ability to meet these federal deadlines.

2 Page 2 BACKGROUND On March 10, 2015, the City Council approved an increase to the construction/permanent loan commitment of up to $2,164,000, to a total of up to $15,045,000 during construction and up to $15,145,000 during permanent, to reflect both the reallocation of existing debt between phases and up to $100,000 in capitalized construction period interest if needed, for the development of the North Phase of The Metropolitan Apartments ("Development") located at 2112 Monterey Road ("Site"). This multifamily affordable project with 71 apartments, sponsored by Charities Housing Development Corporation, is the first phase of a planned two-phase development to be constructed at that location. It will offer apartments affordable to working individuals and families who will make between approximately $22,350 and $47,835 per year, depending upon family size. As of projections in March 2015, the monthly rents will range between approximately $535 and $1,187 significantly below market. The March City Council action enabled Charities Housing to close construction financing on March 20,2015, and to begin construction. As of the date of this Memorandum's submission, construction is approximately 10% complete. Completion is expected to occur in mid The federal government provides HOME funds to eligible cities for the purpose of creating housing opportunities for low-income individuals. In order to ensure that HOME funds are spent expeditiously for this purpose, the U.S. Department of Housing and Urban Development (HUD) establishes deadlines for expenditure and commitment of funds. Deadlines are determined by the year in which HOME funds are allocated by formula to Participating Jurisdictions (PJ) such as San Jose. The amounts of HOME a PJ must commit and expend can vary according to the amount of HOME-funded loan repayments received in a given timeframe. On April 30 th, the Department received a significant repayment of an existing HOME-funded loan, which added to the existing amount that the City has to commit and expend in a short timeframe. Based on these factors, the Housing Department has calculated that it must expend approximately $2.34 million by August 31, 2015, and that it must commit approximately $8 million by August Failure to meet these deadlines would result in the forfeiture of funds and jeopardize the City's ability to obtain new HOME allocations. Because HOME rules place numerous requirements on how and when the HOME funds must be spent, the City's opportunities to spend and commit funds to developments that meet all the eligibility requirements at the correct time are limited and somewhat difficult to navigate. The original source for this $15.1 million loan commitment was derived from the payment of inclusionary policy in-lieu fees deposited in the Multi-Source Housing Fund. While $7,230,000 from the Multi-Source Housing Fund was previously allocated and/or disbursed in support of the Development for purposes of acquisition, demolition and predevelopment soft costs, the recommended action would shift $7,915,000 for the remaining hard and soft construction-related costs from the Multi-Source Housing Fund to the HOME Investment Partnership Program Trust Fund.

3 Page 3 ANALYSIS In addition to federal HOME funds' strict commitment and spending deadlines, there are numerous rules on the eligibility of uses. The Metropolitan North Apartments is eligible for the use of HOME funds for several reasons. First, the planned Development expenditures include HOME-eligible hard and soft costs associated with construction of the restricted affordable apartments. Second, as federal Neighborhood Stabilization Program round 2 (NSP2) funds from HUD are part of the Development's current financing structure, the Development already will follow HOME rent and income limit rules as NSP2 requirements synchronize with HOME. Third, similarly, federal Davis-Bacon wage rates were already issued and are being used for this Development given its NSP2 funding source. Fourth, environmental NEPA clearance has already been granted to the Development. Fifth, other federal requirements such as the provision of apartments already accessible for disabled occupants are part of the current scope of work. Finally, Charities Housing is experienced in using HOME funds, with a track record of successfully using HOME and correctly following federal HOME rules and regulations. The City's commitment of these funds will enable it to meet both its current HOME expenditure deadline on August 31, 2015, as well as most of its commitment requirement for its deadline in August In order to effectuate the use of HOME funds in this Development, a HOME Agreement between the City and the Developer will be executed, the existing Loan Agreement will be amended, and 20-year HOME affordability restrictions will be recorded on the site. As this Development is already under construction and funders have already recorded on title, the HOME affordability restrictions will be subordinated to existing financing. The subordination of the affordability restrictions carries with it a small risk in that, in the case of foreclosure, the 20-year obligation for the Development to offer HOME rents to tenants at or below the HOME income limits may be wiped out. In that case, the City may be obligated to repay the federal government the amount of HOME funds. However, staff has evaluated the HOME foreclosure risk to be extremely small. The many layers of financing in restricted affordable developments ensure that several organizations are monitoring the physical and financial health of the project. Foreclosure rates for this type of Low Income Housing Tax Credit deal are well under 1% nationwide. 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

4 Page 4 PUBLIC OUTREACH This memorandum will be posted on the City's Council Agenda website for the August 18, 2015, City Council meeting. COORDINATION This Memorandum was coordinated with the City Attorney's Office. COST SUMMARY/IMPLICATIONS As described above and in the memorandum for the March 10,2015, City Council meeting that approved an increase to the construction/permanent loan commitment up to $15,145,000, all of the funding was to be supplied by the inclusionary policy in-lieu fees deposited in the Multi- Source Housing Fund. However, given the need to expedite the use of federal HOME funds as previously discussed, the funding allocation for the construction/permanent loan commitment is recommended to be shifted as follows: Acquisition, demolition and predevelopment soft costs (already disbursed) Other hard and soft construction costs (to be disbursed) Multi-Source Housing Fund (Fund 448) $7,130,000 HOME Investment Partnership Program Trust Fund (Fund 445) $7,915,000 Capitalization of up to $100,000 in construction-period interest (noncash) BB Total "Up To" Permanent Loan Amount $100,000 $7,230,000 $7,915,000 $15,145,000

5 Permanent Loan for The Metropolitan Apartments North Phase Page 5 BUDGET REFERENCE The table below identifies the funds and appropriations proposed to fund the commitments recommended as part of this Memorandum at this time. Fund # Appn. # Appn. Name Total Appn. Rec. Budget Action Proposed Operating Budget* Last Budget Action (Date, Ord. No.) Housing Loans and Grants $5,122,310 $7,915,000 XI-45 6/23/15, R002 Earned Revenue $5,715,875 $7,915,000 XI-45 * The Operating Budget was adopted on June 23, /23/15, CEOA CEQA: Mitigated Negative Declaration, File Nos. GP and PDC /s/ JACKY MORALES-FERRAND Interim Director of Housing -fer JENNIFER A. MAGUIRE Senior Deputy City Manager/ Budget Director I hereby certify that there will be available for appropriation in the Home Investment Partnership Program Trust Fund in the Fiscal Year monies in excess of those heretofore appropriated therefrom, said excess at least $7,945,000. JENNIFER A, MAGUIRE Senior Deputy City Manager/ Budget Director For questions, please contact Jacky Morales-Ferrand, Interim Director of Housing, at

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