FROM: CITY MANAGER DEPARTMENT: PLANNING AND COMMUNITY ENVIRONMENT DATE: APRIL 11, 2005 CMR:213:05

TO: HONORABLE CITY COUNCIL FROM: CITY MANAGER DEPARTMENT: PLANNING AND COMMUNITY ENVIRONMENT DATE: APRIL 11, 2005 CMR:213:05 SUBJECT: PRESERVATION OF TWO BELOW MARKET RATE UNITS AT 777-57 SAN ANTONIO ROAD AND 444 1D SAN ANTONIO ROAD: 1) APPROVAL OF A BUDGET AMENDMENT ORDINANCE IN THE AMOUNT OF $266,900 TO PROVIDE ADDITIONAL FUNDS FOR ACQUISITION, RENOVATION AND RESALE COSTS; 2) APPROVAL OF THE CITY S ACQUISITION OF EACH UNIT FOR THE PURPOSE OF RESALE TO A NEW BMR BUYER AFTER RENOVATION; 3) APPROVAL OF THE METHOD FOR SETTING THE RESALE PRICES RECOMMENDATION Staff recommends that the City Council: 1. Approve the attached Budget Amendment Ordinance to transfer $266,900 in funds from the Residential Housing Fund to the Below Market Rate (BMR) Emergency Fund and to appropriate the $266,900 in the Budget for FY 2004-05 for costs related to preserving two units as BMR housing; 2. Approve the acquisition by the City of the Below Market Rate (BMR) units located at 777-57 San Antonio Road (Greenhouses) and 444 San Antonio Road, Unit #1D (Rosewalk) pursuant to the terms of separate settlement agreements negotiated by the City Attorney for the purpose of renovation and resale as BMR units; and 3. Approve the resale of each BMR unit to a qualified BMR buyer identified in the normal manner by the Palo Alto Housing Corporation (PAHC) with first preference to buyers from the BMR program waiting list, with 777-57 San Antonio Road to be resold for up to $180,000 and 444 San Antonio Road Unit 1D to be resold for up to $250,000 with the final price for each unit to be approved by the City Manager; and 4. Authorize the City Attorney to carry out and enforce the provisions of each settlement agreement; and 5. Direct the City Manager or his designee to execute the certificate of acceptance in connection with the City s acquisition of each unit and to execute the grant deed to transfer ownership to the selected BMR buyer of each unit and to execute any other documents necessary to implement the settlement agreements and to preserve the units in the BMR program. BACKGROUND Council authorized the BMR Emergency Fund in September 2002 as a housing program special revenue fund. The main reason that a separate housing fund was established was to clearly identify CMR:213:05 Page 1 of 6

and set aside housing funds within each annual budget for the sole purpose of preserving the City s BMR housing stock, typically through the acquisition of units threatened with foreclosure. A secondary purpose of the BMR Emergency Fund was to provide deferred loans to extremely lowincome BMR owners for special capital assessments. The BMR Fund does not have its own revenue source at this time; rather, it has been funded by transfers from the Residential Housing Fund, which in turn is primarily composed of BMR in-lieu fees from housing developers. For FY 2004-05, approximately $165,000 was budgeted in the BMR Emergency Fund. Resolution of two separate enforcement matters regarding BMR ownership units has recently been reached by the City s outside counsel and approved by Council in closed sessions. Under each settlement agreement, the City is to acquire the BMR unit pursuant to its right to purchase under the BMR deed restrictions for the purpose of resale to a new qualified BMR buyer. The two cases are completely unrelated and it is just a coincidence that the timing for acquisition and resale of each one will be running concurrently. Rosewalk Unit at 444 1D San Antonio Road: In mid-august 2004, one of the co-owners of this BMR unit contacted PAHC with information that the unit was in foreclosure, that a notice of default had been recorded and that the two loans on the property exceeded its BMR deed restricted resale value. This unit is a three-bedroom, 2.5 bath, 1,800 square foot townhouse that was purchased new in 1988 for $115,000; its current value under the BMR deed restrictions is about $142,000. The market value of similar units in the Rosewalk complex is almost $800,000. In 1993, the owners refinanced their original purchase loan with a new loan for $113,200. In 1997, they took out a home equity line of credit for $10,000, which they shortly increased to $100,000. By late 2003, the owners had ceased paying the monthly condo association dues and were delinquent in their loan payments with the combined principal balance due on both loans exceeding $200,000. GMAC, the holder of both loans, recorded a Notice of Default on the equity line loan on May 18, 2004 and a Notice of Sale on September 24, 2004. Both co-owners signed and delivered a notice of intent to sell to the City Manager on September 30 and on the same date the City exercised its right to purchase under the BMR deed restrictions in order to prevent the loss of the unit through the foreclosure sale. The City was forced to file a Temporary Restraining Order to stop the lender s scheduled October 20 foreclosure sale. Greenhouse Unit at 777-57 San Antonio Road: This unit is a 1,200 square foot, three-bedroom, twobath unit that was purchased by the current owners as a new condo in 1975. Council approved a settlement agreement, resulting from recent court-ordered mediation, on February 2, 2005. The City had sued the owners to force them to sell the unit through the BMR program due to the owners repeated lack of occupancy and past use of the property as a rental without City permission. The current BMR deed restricted value of this unit is about $124,000, however, the owners refinanced the unit in 1989 and the outstanding principal balance of that loan is currently about $152,000. DISCUSSION Rosewalk Unit: Council approved a settlement agreement among the co-owners, the lender and the City in closed session on March 21, 2005. The settlement agreement provides that GMAC will reconvey its two loans (with a total principal balance owing of about $198,000, plus over one year of unpaid interest) in return for payment by the City of the property s current (approximately $142,000) BMR deed restricted price. The co-owners will execute a grant deed to convey title to the City. The CMR:213:05 Page 2 of 6

City will be taking title to the property subject to outstanding liens for back association dues and property taxes totaling about $10,000. Escrow must close 90 days after all parties execute the settlement agreement. PAHC and City staff viewed the unit before it was vacated in late September and found that normal housekeeping and maintenance had been neglected for some time and the unit was extremely dirty. Since then, the unit has been empty and uncared for with the utilities disconnected, so further damage is likely to have occurred. An allowance of $25,000 has been included in the budget for replacement of appliances, counter tops, bath fixtures, flooring, painting, repair of possible water damage and cleaning. Costs to Acquire the Rosewalk Unit: BMR Formula Purchase Price (paid to lender, GMAC): $142,000 Homeowner s Association Unpaid monthly dues 2/04 to 6/05: $5,500 Homeowner s Association Estimate of interest, penalties for unpaid dues: $1,500 Property taxes & penalties for FY 2004-05: $2,200 Title and escrow fees for the acquisition transaction: $3,550 Sub-total Minimum Costs to Acquire Unit: $154,750 Holding, Renovation & Resale Costs: Estimate of major renovation & cleaning costs: $25,000 PAHC- estimated fees for management of renovation & resale: $5,000 Holding Costs: (Property taxes, HOA dues, utilities through December 2005): $4,900 Title and escrow fees for the resale transaction: $4,300 City s outside counsel legal fees: $12,000 Sub-Total Costs to Resell: estimated renovation, holding & legal costs: $51,200 Total Estimated City Outlay of Funds for the Rosewalk Unit: $205,950 Greenhouse Unit at 777-57 San Antonio Road: This unit s settlement agreement requires that the City close escrow and take title by April 20, 2005. The only contingency is that the owners deliver the unit completely vacant and unoccupied by tenants or other persons. The City is to be permitted to view the unit prior to closing. The last time that PAHC and City staff saw the unit s interior was in November 2001. Because the unit is one of the oldest in the BMR program, staff is assuming that it will require a thorough upgrading of all major systems and finishes and $25,000 has been included in the budget for renovations such as new appliances, new cabinets, counter tops, plumbing fixtures, flooring, wiring, lighting, painting and cleaning. The City will incur other costs in acquiring and reselling the unit. The following estimates include all expenses known at this time and assume that escrow will close before the April 20 deadline and that the unit will be resold by the end of 2005. Costs to Acquire the Greenhouse Unit: Payoff of Existing Loan (Principal & Interest): $155,000 Homeowner s Association Allowance for two months unpaid dues: $650 Property taxes & late penalties for FY 2004-05: $1,000 Title and Escrow Fees for the acquisition transaction: $3,100 Sub-total Minimum Costs to Acquire Unit: $159,750 Holding, Renovation & Resale Costs: Estimate of major renovation & cleaning costs: $25,000 PAHC- estimated fees for management of renovation & resale: $5,000 Holding Costs: (Property taxes, HOA dues, utilities through December 2005): $4,000 Title and escrow fees for the resale transaction: $4,300 CMR:213:05 Page 3 of 6

City s outside counsel legal fees: $16,500 Sub-Total Costs to Resell: estimated renovation, holding & legal costs: $54,800 Total Estimated City Outlay of Funds for the Greenhouse Unit: $214,550 Funds Needed for the BMR Emergency Fund: The BMR Emergency Fund currently has an available balance of $163,600. As shown below, total funding of $430,500 needs to be available to cover the cash outlays for the two BMR units from their acquisition through their resale about the end of 2005. Total Estimated Outlay for both BMR Units: $420,500 Contingency for Unforeseen Costs $10,000 Total Funds That Need to Be Available $430,500 Funds Currently Available in the BMR Emergency Fund $163,600 Amount Needed to be Transferred with the BAO $266,900 Proposed Resale Prices for Each BMR Unit: Staff is recommending, based on past practice, that the two units should be resold for a combined sum that will cover the City s direct expenditures in preserving the units as BMR housing and that the sales proceeds should be returned to the BMR Fund. The proposed resale prices are well within the current affordable housing price guidelines for the BMR program. Thus, other than the costs of the staff time involved, there will be no net cost to the City in preserving the two units. The current price range for newly constructed three-bedroom BMR units, for households at the lower end of moderate income, is from $224,500 to $392,900, depending on household size. By taking title to a BMR unit, the City can set a resale price that is sufficient to re-coup its expenditures and also appropriate for program goals. This was done in the two previous situations in which the City acquired BMR units. The resale price in these situations is not controlled by the deed restriction formula; the units only need to be resold at prices within the overall BMR program s price guidelines. Rosewalk is a newer complex and its market units command good prices; the average market sales price in 2004 of three units identical in type and size to the BMR unit was $785,000. While both BMR units are three bedroom, two-bath units, the Rosewalk unit is much larger, at 1,800 square feet, than the one at the Greenhouses, and is 15 years newer. However, the Rosewalk complex, while very attractive, has little common open space and no recreation facilities. The current deed- restricted formula price of the Rosewalk unit is $142,000. The City s expected total outlay for this unit is almost $206,000. However, staff proposes to shift some of the costs (about $35,000) from the Greenhouses unit and to also add any other unforeseen costs for either unit to the Rosewalk unit s resale price and to set its resale price at $250,000. Overall, staff believes the Rosewalk unit will be better able to bear a higher price and still remain appealing and marketable as a BMR unit. At $250,000, its BMR price will be at a similar percentage to its market value (32 percent) as the Greenhouses unit. A further advantage to pricing the two units in different ranges of affordability is that a different income range of households will be eligible to buy each one. This will help with the marketing effort and will avoid having the same families competing for what is perceived as the better of the two units. Under its deed restriction appreciation formula, the Greenhouse unit would be priced for resale at about $125,000, as is without renovation. Staff proposes to set its resale price at $180,000, with an expected $35,000 of its costs shifted to the Rosewalk unit. Even though the estimated $180,000 resale CMR:213:05 Page 4 of 6

price is much higher than any other BMRs have sold for in that development, it will still only be a third of the unit s open market value. Staff believes that this townhouse with its 1,200 square feet of living area, three bedrooms and a large garage, together with the project s location and amenities will still be appealing to family buyers. The City Manager will review and approve the final price for each of the two BMR units. Resale Risks: There are some uncertainties and risks with the City acquiring, renovating and reselling BMR units. In both of these cases, the costs incurred by the City, including paying off former owners debts such as unpaid taxes, back HOA dues, or mortgage principal, together with the outside counsel s legal fees, holding costs and renovation work pushes the resale prices needed to recoup the City s costs well over the resale value for other BMR units in each project. There is a risk that the pool of potential buyers in the correct income bracket will be low and that additional outreach will extend the time to find qualified and interested buyers. The holding time is a factor in the total outlay of funds. Staff has budgeted for holding costs through December 2005 for both units and has also included a $10,000 contingency. Once the first unit is resold, the sales proceeds would provide a source of funds to cover any additional costs with the second unit. PAHC s Management of Renovation and Resale: Staff proposes to enter into a separate contract with PAHC for its services to manage and supervise the renovation of the two units and to carry out the tasks normally handled by the BMR owner during resale. These tasks are not included in PAHC s normal BMR program administration contract s scope of services. PAHC s property management staff has specific skills in the renovation of housing including inspecting and writing up the work, evaluating contractor bids and overseeing construction work. City housing and real property staff does not have these skills, or the time available. Staff estimates that up to 80 hours of PAHC s time will be required for each property. The contract will reimburse PAHC for its time at its current hourly billing rates not to exceed the $10,000 maximum for both units. RESOURCE IMPACT Based on past experience, $165,000 was budgeted in the BMR Fund for FY 2004-05; this amount was considered sufficient to handle one BMR unit acquisition. However, resolutions of both the Greenhouse and Rosewalk legal cases are occurring simultaneously, generating the need for $266,900 in additional funds and budget authority at this time. Staff recommends that the sales proceeds for both units (estimated at up to $430,000) remain on deposit in the BMR Emergency Fund to be immediately available for any future needs related to the preservation of BMR ownership units. However, leaving the funds in the BMR Emergency Fund means that those monies will not be available for future affordable housing development projects. The BAO (Attachment A) requests an additional appropriation of $266,900 into the Emergency BMR Fund from a transfer from the Residential Housing Fund. No future General Fund ongoing costs are anticipated as a result of this BAO. The Residential Fund has a current available balance of approximately $1,013,000 (net of notes receivable and encumbered funds); this $266,900 transfer will reduce the available fund balance to $746,100. Attachment B summarizes the BAOs approved to date in FY 2004-05 that impact both the BMR Emergency Fund and the Residential Housing Fund. POLICY IMPLICATIONS This action does not represent any change to existing City policies. CMR:213:05 Page 5 of 6

TIMELINE The settlement agreement on the Greenhouse unit has an April 20, 2005 deadline for closing escrow and transferring title the City. Funds already budgeted in the BMR Emergency Fund will be used to close the escrow as this will be the first of the two units to be acquired. Staff expects acquisition of the Rosewalk unit to occur by the end of May. Once the City and PAHC have access to the units inspections will be conducted, a work write-up for the renovations completed by PAHC and the work put out to bid. The actual renovation work should take about two months and the resale process three to four months, with the resale closing expected in late 2005. ENVIRONMENTAL REVIEW The provision of City funds to preserve a single-family ownership unit as affordable housing is categorically exempt under Section 15326 of the California Environmental Quality Act (CEQA). ATTACHMENTS A) Budget Amendment Ordinance B) Budget Amendment Ordinances Impacting Special Revenue Fund Reserves Approved to Date in 2004-05 PREPARED BY: Catherine Siegel, Housing Coordinator DEPARTMENT HEAD REVIEW: STEVE EMSLIE Director of Planning and Community Environment CITY MANAGER APPROVAL: EMILY HARRISON Assistant City Manager CC: Palo Alto Housing Corporation CMR:213:05 Page 6 of 6