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  Agenda Item   6.    
City Council Meeting
Meeting Date: 11/17/2020  
FROM: Bill Gallardo

Subject:
Discuss assistance options for Innovative Housing Opportunities/Acacia Apartments Project and provide direction to staff.
RECOMMENDATION
Discuss and consider assistance options for Innovative Housing Opportunities/Acacia Apartments Project and provide direction to staff.
BACKGROUND/DISCUSSION
In 2007, the Brea Redevelopment Agency (Agency) acquired 16 residential units, known as Acacia Apartments (Project), located at 125, 131, 137, and 211 East Acacia Street.  The purchase was part of the City's Neighborhood Enhancement Plan, with the intent of eliminating overcrowded conditions and rehabilitating the 16 units.  Between 2007 and 2014, the Agency owned and managed the units, spent $5.5 million to acquire the Project, temporarily relocated tenants to perform minor rehabilitation of the units, and place 55-year affordability covenants on the property (provided as Attachment No. 1).  The Project consists of two-bedroom and three-bedroom units, offered to households in the Very-Low and Low-Income categories.  In 2012, the Agency was dissolved and the Project was transferred to the Housing Successor for the Agency (City of Brea, City).  The City sold the Project to Innovative Housing Opportunities (IHO) for $1.9 million in 2014.

IHO financed the purchase of the Acacia Apartments project with the following loans:
  1. $650,000 from the City of Brea Housing Successor Fund - interest rate of 3% due by February 24, 2034 (provided as Attachment No. 2)
  2. $900,000 from the City of Brea Housing Successor Fund - no interest, due by December 8, 2066 (provided as Attachment No. 3)
  3. $350,000 from NeighborWorks Orange County (NHSOC) - interest rate of 5% due February 25, 2024
Before purchasing the Project, IHO commissioned Lane Construction Services in 2013 to assess capital improvement needs at the Project.  The Capital Needs Assessment estimated $640,000 in total rehabilitation which included, but were not limited to:  guard railings, paving and surface parking, lighting, new roof, doors, flooring, insulation, exhaust systems, and HVAC.  To assist with the immediate repairs, the City also provided IHO with a no-interest $100,000 Community Development Block Grant (CDBG) loan, due by February 24, 2034 (provided as Attachment No. 4). 
 
Status of IHO Loans
As of November 2020, below is a status of the four loans.
  1. $650,000 from Brea – monthly payments of $3,605 are current ($43,260 annually).
  2. $900,000 from Brea – payments are to be made with 50% of residual receipts, none paid to date.
  3. $350,000 from NHSOC – currently making interest-only payments, principal due in 3.5 years.
  4. $100,000 from CDBG – no payments have been made; however the County of Orange has approved amending the terms to a forgivable loan, which would require Council action for City approval.
Improvements and Financial Constraints
IHO has reported they have made improvements and repairs such as:  installing energy efficient water heaters, stairwell handrails, carport lighting, repaired plumbing and roof leaks, as well as asbestos remediation in one unit.  It should be noted that the major systems in the property have not been replaced since it was built in the 1960s.

Based on 2019 updated figures from Lane Construction, the total cost of needed rehabilitation has increased to $1,858,000.  Improvements include, but are not limited to:  parking lot paving, plumbing, electrical, roofing, painting, flooring, windows and doors, insulation, and HVAC.
 
Since taking over the Project in 2014, IHO has expressed to the City financial constraints they have experienced to include frozen affordable rent increases due to the State income limits not increasing for several years.  IHO and the City assumed that rental income and cash flow would increase sufficiently to allow for IHO to refinance the NHSOC loan.  Utility and maintenance costs have increased higher than expected, and the Orange County Housing Authority has increased utility allowances by 22-25%, further decreasing affordable rental rates.
 
The NHSOC loan of $350,000 will come due in 2024.  IHO’s request to NHSOC about making modifications to the loan has been declined due to the loan being governed by the State of California Department of Housing and Community Development. 

Based on a financial analysis of the Acacia Apartments project (provided as Attachment No. 5), done by the subject matter experts at Keyser Marston Associates (KMA), the net operating income is projected to be negative starting in year 2053 through the end of the affordability restrictions period in 2066.  Therefore, IHO has turned to the City of Brea with a proposal for assistance to keep the Project afloat.

IHO Request for Assistance
IHO's proposal consists of both financial assistance from the City, as well as Regulatory Agreement modifications.  Below is a summary of their proposal:

Financial Requests
  • Additional loan of $2,083,000 in estimated rehabilitation of the property.
    • $1,858,000 in capital improvements identified in 2019.
    • $225,000 in asbestos remediation of remaining 15 units.
    • Terms of loan:
      • 3% simple interest
      • 46-year term (expiring in 2066)
      • 50% residual receipts payments, after City Loans No. 1 and No. 2 are paid in full.
      • Annual principal forgiveness of $44,319 through 2066 (47 years).
  • Modify $650,000 loan repayments from fixed to residual receipts payments, with no interest.
  • Modify Residual Receipts Definition to include IHO loan repayment from cash flow, replenishment of replacement reserve, and reasonable contributions to operating reserve.  (Existing definitions for Residual Receipts and Annual Operating Expenses can be found in Attachment No. 3).
  • Annual principal forgiveness of all City loans.
Regulatory Agreement Modifications
  • Allow annual maximum rent increases to be 5%, instead of current 3%.
  • Allow over-income tenants to remain in units and pay increased rent above the current maximum of ‘Low.’
  • Modify rent calculation so that three-bedroom rents can be increased higher.
KMA's analysis of IHO's proposal to the City is provided in Attachment No. 6.

Options for Council Consideration
Staff has prepared a few options for Council’s consideration and asks for direction on how they wish for staff to proceed in negotiations with IHO.  For reference, the approximate balances of the Housing Funds are:
 
Affordable Housing Trust Fund (270) - $2,695,915
Housing Successor Fund (280) - $5,379,802

Option No. 1 – 100% of IHO’s Requests
Based on IHO’s proposal above, the City would need to identify $2,083,000 in funds from either the Affordable Housing Trust Fund or the Housing Successor Fund, which would place additional requirements on the Project, as well as the City’s future use of the funds.  The City would also lose guaranteed annual cash payments in the amount of $43,260 (from Loan No. 1) through the year 2034.  The net impact to the City is estimated to be negative $1,110,000 in net present value terms.  However, IHO and the Acacia Apartments project would be in a more secure financial position and not likely to return the units to the City.

Option No. 2 – Partial Financial Assistance and Regulatory Agreement Modifications (KMA Recommendation)
Loan Modifications
  • Provide $500,000 loan for immediate rehabilitation needs and asbestos remediation.  Add this amount in additional principal to the $900,000 residual receipts loan and extend the term an additional 55 years.  Do not allow annual principal forgiveness.
  • Modify Residual Receipts Definition to include:
    • Add $300 per unit annual Replacement Reserve deposits to Operating Expenses definition.
    • Require Operating Reserve deposits to be funded with IHO’s share of Residual Receipts.
    • Restrict the Asset Management Fee to $7,500.
    • Allow NHSOC loan to be paid off with 100% cash flow.
    • Allow IHO loan to be repaid after NHSOC loan repayment with 100% cash flow.
  • Do not change the terms of City Loan No. 1 so that the City will continue to receive $43,260 annually through year 2034.
  • Do not change the terms of City Loan No. 3.
  • Do not allow City loans to subordinate to a third-party loan.
Regulatory Agreement Modifications
  • Do not change three-bedroom rent calculation.
  • Allow maximum annual rent increase to change to 5%.
  • Allow IHO to maintain waiting list instead of City.
Option No. 3 – Regulatory Agreement Modifications Only (Staff Recommendation)
  • Allow maximum annual rent increase to change to 5%.
  • Allow over-income tenants (above Low-income) to remain in the units and pay 30% of their household income, up to market value.
  • Allow IHO to maintain waiting list instead of City.
FISCAL IMPACT/SUMMARY
Option No. 1 - 100% of IHO's Requests
If the City were to provide 100% of IHO’s requested assistance, this would reduce the Affordable Housing Trust Fund or Housing Successor Fund balance by $2,083,000.  The Housing Successor Fund money has income targeting requirements that need to be met every five years.  Use of this money in an amount over $2 million on this project would require the City to commit a substantial amount of the remaining funds to a future project for extremely-low income units by year 2024.
 
The City would also lose guaranteed annual cash payments in the amount of $43,260 (from Loan No. 1) through the year 2034.  The net impact to the City is estimated to be negative $1,110,000 in net present value terms.
 
Option No. 2 - Partial Financial Assistance and Regulatory Agreement Modifications (KMA Recommendation)
If the City were to provide partial financial assistance, this would reduce the Affordable Housing Trust Fund or Housing Successor Fund balance by $500,000.  As stated above, the Housing Successor Fund money has income targeting requirements that need to be met every five years.  Use of this money would require the City to commit future use of these funds on an extremely-low income project by year 2024.
 
Option No. 3 - Regulatory Agreement Modifications Only (Staff Recommendation)
If the City were to agree to Regulatory Agreement modifications only, there would be no negative impact to the Housing Funds.  This option does; however, allow IHO and the Acacia Apartments project to increase their cash flow by allowing a maximum annual rent increase of 5%, plus the ability to raise rent on over-income tenants beyond the Low-Income cap.  If this option is selected, staff can revisit the Project in approximately one-year to follow up on the status.
 
None of the above options results in a negative impact to the General Fund.
RESPECTFULLY SUBMITTED:
William Gallardo, City Manager
Prepared by:  Marie Dao, Management Analyst, Community Development
Concurrence:  Tracy Steinkruger, Community Development Director
 
Attachments
Attachment No. 1 - Regulatory Agreement
Attachment No. 2 - Promissory Note - $650k
Attachment No. 3 - Promissory Note - $900k
Attachment No. 4 - Promissory - Note $100k
Attachment No. 5 - KMA Report - History & Status of Project
Attachment No. 6 - KMA Report - IHO Proposal

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