STAFF REPORT Date: March 13, 2019 To: Thru: Subject: From: Mayor and City Council Sabra Newby, City Manager C.11. Staff Report (For Possible Action): Discussion and potential approval of the terms and conditions of grants or loans, and authorization of the preparation and execution of agreements including a request by Tablerock Capital, LLC for a loan or grant in the amount of $643,000 of City of Reno Community Development Block Grant funds, $450,000 of Reno Affordable Housing Funds, and $1,007,000 of City of Reno General Funds to assist with the financing of a project to acquire, preserve and improve an existing 256 unit affordable housing complex in downtown Reno known as the City Center Apartments at 160 Sinclair Drive, and to maintain the project for affordable housing until the project can be re-syndicated with more tax credits again in 2034. Cylus Scarbrough, Management Analyst Summary: The City Center Apartments located at 160 Sinclair Drive is a three-story affordable multi-family property that was opened in 2001. The building has 258 studio and one-bedroom units fully-affordable to households at or below 60 percent of the area median income (AMI). Households must make less than roughly $31,000 to $36,000 per year in order to be eligible to reside in these units, and the average asking rent is currently $791 per month. The average asking rent for comparable units in Reno was $1,020 per month in May 2018 according to a rent comparable survey, which by HUD s standards is unaffordable to the occupants of the City Center Apartments. More details on the project are in the offering memorandum in the attachments. The City Center Apartments were built using financing through the State of Nevada Low-Income Housing Tax Credit program (LIHTC), and is within the post-15 year compliance period. The IRS created a provision within the tax code that allows owners of tax credit properties the option to request that the Nevada Housing Division (NHD) find a new owner through the Qualified Contract (QC) sales process once the property enters the post-15 year compliance period. Through the QC process, prospective buyers must maintain and operate the property in accordance with the LIHTC program, administered by the Nevada Housing Division. The current owner bought the City Center Apartments and Courtyard Centre Apartments (695 W
Third Street) in downtown Reno several years ago, and requested the QC with the State of Nevada Housing Division in the Spring of 2018. The IRS has a formula to determine a sales price, and the state agency, NHD, has one year to find a qualified buyer to buy the property at the IRS price to keep the property in the program. If a buyer is not found through the QC process by May 9, 2019, which is one year after the owner requested the QC, then the property may be sold to an owner that is no longer obligated to maintain the tax credit affordability restrictions. Only a small number of properties complete the QC sales process every year, and rents at these locations sometimes do not rise substantially beyond the previous restrictions. Tenants with existing leases are allowed to maintain the tax credit restrictions for a period of three years after the project completes the QC sales process. If the City Center Apartments complete the QC process, there is a risk that the new owner will aggressively force tenants to leave in order to raise rents to comparable levels with the region, which are unaffordable to those same tenants. Downtown Reno, furthermore, does not have the existing inventory of housing units to absorb these residents that will be displaced. While many residents will still find affordable housing elsewhere in the region, it may not be as centrallylocated and convenient as the downtown location, and in general, the impacts and the disruption to the affordable housing situation in Reno would be exacerbated greatly by the termination of the low-income rents at the City Center Apartments. Financing Gap and Property Tax Exemption Status The difference between the IRS price and the market value of the building is $6,700,000, as shown in the table below. This difference is known as the gap, and is created by the IRS formula. Conventional lenders and investors will not loan money for the entire IRS sales price because the return on this level investment is not usually adequate for their mission. Table 1. Financing Gap Gap IRS Price Market Value Gap to Fund $20.3M ($13.6M) $6.7M This property would routinely qualify for a full property tax abatement for affordable housing as allowed by NAC 365, worth approximately $3 million, helping to fund the gap between the appraised value and the IRS price. However, the property is located within the Redevelopment District of downtown Reno and the property taxes need to be paid in order to fulfill bond obligations and avoid a default. Given that situation, it is proposed that the property remain in
the Redevelopment Area One and not receive a property tax exemption. The property currently does not have a property tax exemption. To offset the loss of $3 million in property tax exemptions, Tablerock is asking the City to fill the gap in the form of loans or grants (see Funding Sources below for more details). Potential Buyers Vintage Housing Development, LLC, was originally in discussions with the City of Reno and the NHD in order to fill the financing gap and purchase both the City Center and Courtyard Centre (695 West Third Street, 240 units), but decided to withdraw their purchase offerings after it was discovered that both of those properties are within the Redevelopment Area One and might not receive a property tax exemption. Despite efforts to reach an agreement to fill the financing gap, Vintage Housing Development decided not to pursue the properties. Vintage Housing was planning to use four percent tax-credit financing from the State to help rehabilitate the properties, which would have kept the properties fully affordable at 60 percent AMI. Tablerock Capital, LLC previously contacted Reno staff about receiving City and State assistance for the acquisition and preservation of both downtown properties, but their offer was not accepted because the properties were already under contract with Vintage Housing. Once Vintage withdrew their efforts, staff contacted Tablerock Capital to see if they would still be interested in making an offer, and they did shortly after, but for only the City Center property. Due to the substantial gap that would have resulted with the acquisition of both the City Center and Courtyard Centre projects, as well as due to the unique status of the QC sales request by the current owner (who owns both the City Center and Courtyard Centre Apartments), the NHD and the City of Reno decided to encourage Tablerock Capital to make an offer for only the City Center Apartments, and not the Courtyard Centre Apartments. In exchange for the soft loans and grants, Tablerock Capital will waive the property s Qualified Contract process eligibility. It is also proposed that the restrictions run for a total of 15 years, after which time the property will be eligible again for a re-syndication of tax credits in 2034, further ensuring the project remains affordable for a minimum of 30 more years and providing an infusion of federal money to update the project and fulfill its useful life. Since Tablerock Capital is proposing to use private equity rather than four percent tax credits for the costs of rehabilitating the property, there is a little more flexibility to raise rents. The presence of other forms of grants and loans, however, will still limit their ability to raise rents beyond 80 percent of the AMI for the majority of the units. Tablerock Capital is proposing the following affordability mix (the annual income limits are approximate for 1-2 person households, and reflect 2018 figures):
Two (2) units restricted to households at or below 50 percent of the AMI ($25,750 - $29,400); 100 units restricted to households at or below 60 percent of the AMI ($30,900 - $35,280); 52 units restricted to households at or below 80 percent of the AMI ($41,200 - $47,050); 102 units restricted and affordable to households at or below 90 percent of the AMI ($46,305 - $52,920). Even though this means that the City Center Apartments will no longer be fully affordable below 60 percent of the AMI, existing vacant units could be designated for the new 80 to 90 percent AMI households in order to reduce displacement of very low-income renters. Since Tablerock Capital s proposal does not rely on new tax credits, more tax credits will remain available to build new projects in northern Nevada. In addition, the cost to preserve these units, inclusive of all funding sources (see below), is approximately $12,000 per unit, compared to nearly $200,000 to build new construction. The Courtyard Centre Apartments are likely to complete the QC process and be sold to a private buyer who will convert to the rents closer to market-rate levels, unless other sources of gap financing are confirmed. Existing tenants with leases at Courtyard Centre will be able to maintain the LIHTC affordability restrictions for the next three years, but as noted previously, eviction laws in Nevada do not favor tenants, and residents without leases can be asked to leave for no-cause with only 7 to 30 days notice. Although this is not a favored outcome, given the circumstances of these two properties staff believes it is more effective to focus on preserving the affordable units at the City Center Apartments. Possible Funding Sources Table 2 shows how staff is suggesting filling the $6.7 million dollar gap, by using various forms of soft financing that may include low-interest loans and grants. There are three amounts of funding that are being requested from Council with this report, in bold in the table below: Reno General Fund loan or grant ($1,007,000), Reno CDBG loan or grant ($643,000), and a loan or grant from the Reno Affordable Housing Fund ($450,000). Table 2. Possible Funding Sources Sources a. NHD GAHP Loan $3,000,000 b. Reno General Fund $1,007,000 c. HOME Loan $900,000
d. Reno CDBG $643,000 e. Private Capital $700,000 f. Reno Affordable Housing Fund $450,000 Total $6,700,000 a. NHD GAHP Loan. The NHD is offering $3 million in Growing Affordable Housing (GAHP) funds. b. Reno General Fund. The $1,007,000 could be in the form of a loan or a grant, or could be structured to be repaid only upon the sale, transfer, or refinance of the property for purposes other than affordable housing. Staff does not recommend this amount of General Funds be provided as a grant or loan. c. HOME Loan. The Washoe County HOME Consortium is currently reviewing a request to use $900,000 in FY19/20 HOME funds for this project. Staff for the HOME Consortium is supportive of using these funds for the acquisition and rehabilitation of the City Center Apartments, and the Technical Review Committee of the Consortium has been updated and understands the importance of this project. The use of 19/20 HOME funds will be ratified by the Truckee Meadows Regional Planning Governing Board on April 11, 2019. For this level of investment, there would need to be 10 HOME designated units, affordable for a minimum of 15 years. The HOME-assisted units will consist of two (2) units affordable at 50 percent of the AMI, and eight (8) units at 60 percent of the AMI for the next 15 years. Use of HOME funds typically triggers the property tax exemption. As noted above, the project needs to pay property taxes in order to maintain cash flow for debt service needs of the redevelopment area. Due to this need, the applicant will enter into an agreement with the City to not pursue the exemption that comes with the use of HOME funds with the County. d. Reno CDBG Loan/Grant. There are currently two prior Community Development Block Grant (CDBG) allocations, which projects have not come to fruition and need adjustment. First is the acquisition for Low/Moderate Income Housing, which was included in the PY 16/17 Annual Action Plan (AAP). Second is the Evans Street acquisition project, which was included in the PY 17/18 AAP. The total unspent between the two projects is $643,150. Although there are many allowable uses for CDBG funds other than acquisition and rehabilitation, reallocation of these funds for alternative use types would
trigger a substantial amendment to the respective AAP. These funds have remained unspent, as staff had been unable to identify a viable housing acquisition project up to this point. Housing acquisition/rehabilitation is an eligible use of CDGB funds and would be consistent with the original use identified in the PY 16/17 and PY 17/18 AAP s. Staff recommends this be provided as a grant. e. Private Capital. The applicant is bringing $700,000 in private capital to the project. f. Reno Affordable Housing Fund Loan/Grant. The $450,000 could be in the form of a loan or grant, or could be structured to be repaid only upon the sale, transfer, or refinance of the property for purposes other than affordable housing. Staff recommends this be provided as a grant. If Council follows staff recommendation, the City of Reno would be contributing, separate from any HOME funds, an additional $1,093,150 to preserve existing affordable units. Tablerock would be left with a gap of $1,007,000 to fund from other sources. Written Agreements Separate written agreements will be required for the HOME and CDBG agreements. The CDBG funds will be used for eligible acquisition costs that lead to the preservation and improvement of affordable housing below 80 percent of the AMI. Additionally, another agreement to use the City of Reno funds is recommended by staff, and would govern the restrictions for the units that are reserved for households that make between 80 to 90 percent of the AMI and the intent to pay property taxes on the project and not pursue an exemption. The City of Reno has a Monitoring Agreement with the Nevada Housing Division Monitoring staff to complete annual site visits to all HOME properties, and the City Center property would be included in this list. Financial Implications: The City of Reno is requested to provide $2,100,000 in funds for the acquisition and improvement of an existing 256 affordable housing project in downtown Reno. Legal Implications: Loan or grant documents will need to be prepared in accordance with Nevada and federal law. Recommendation: Staff recommends that the City of Reno provide $450,000 from the Reno Affordable Housing Fund (General Funds) and $643,000 in CDBG funds, to assist with Tablerock Capital, LLC's offer to purchase the City Center Apartments, for the purpose of maintaining affordable housing in downtown Reno. In exchange, Tablerock Capital will maintain the affordability guidelines below for a minimum of 15 years and remain in compliance
with any funding source agreement to use federal, state or local funds: 102 units (40 percent of the total units) are restricted and affordable to households below 60 percent of the AMI 52 units (20 percent of the total units) are restricted and affordable to households below 80 percent of the AMI. 102 units (40 percent of the total units) are restricted and affordable to households below 90 percent of the AMI. This action would leave a gap of $1,007,000 in funds to effectuate the purchase. Proposed Motion: I move to approve staff recommendation. Attachments: City Center - Application to Use HOME Funds by Tablerock Capital (PDF) Offering Memorandum CityCenterApartments 160 Sinclair 9 18 2018 (PDF)