EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: April 5, 2022
TO: Honorable Mayor and Members of the City Council
VIA: Jaime M. Fontes, City Manager
BY: Rachel Horst, Housing and Economic Development Manager SUBJECT: Below Market-Rate Housing Program Administration Update Recommendation
Accept the report on the City’s Below Market Rate Housing Program administration.
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
Priority No. 3: Increase Organizational Effectiveness and Efficiency Priority No. 6: Create a Healthy and Safe Community
Background
The City’s current stock of Below Market Rate (“BMR”) homeownership units primarily consists of homes that were created through either monetary assistance from the former Redevelopment Agency or market rate developer obligations to create inclusionary units.
These homeownership units typically have a resale restriction agreement between the City (as the successor to the former Redevelopment Agency) and the homeowner. The resale restriction agreement regulates the price at which the homeowner may resell the property and gives the City an option to purchase the home if the homeowner wishes to sell.
Following the dissolution of Redevelopment Agencies in 2011 and subsequent staffing cuts, the City had no consistent monitoring of its BMR units. Regular transactions such as refinances, loan subordinations, and re-sales required significant time and involvement of the City’s Community and Economic Development Department, Office of the City Attorney and outside counsel.
To build back capacity after several years of limited oversight and administration of this affordable housing portfolio, in 2018, the City Council directed staff to issue a Request for Proposals (“RFP”) to identify a consultant to assist with creating a more efficient and costeffective program.
EPACANDO and the Bay Area Affordable Homeownership Alliance (“BAAHA”) were selected through this RFP process, and on February 5, 2019, by Resolution No. 5080, the City Council awarded the team of EPACANDO and BAAHA a 3-year contract (“Agreement”) totaling $125,000, with a three-year term that commenced in May 2019 and allows for two optional one-year extensions at the discretion of the City Manager.
The staff report from February 5, 2019 states there are “approximately 105 homes” in the City’s BMR portfolio. EPACANDO’s review of each file has shown this initial figure of 105 required further clarification. Across all BMR units citywide, there is a combination of City BMR units with a City-recorded restriction; Habitat for Humanity BMR units that the City monitors but does not have the ability to enforce; and units with a Downpayment Assistance Loan. The exact breakdown of unit types and totals is shown in the Analysis section below.
The purpose of this report is to provide an update on program operations since EPACANDO and BAAHA assumed the role of BMR Administrator in 2019.
Analysis
BMR Program Set-Up
One of the goals of the RFP was to identify a BMR Administrator that would institute a full BMR program by establishing a proper filing system, protocols and guidelines, and a point of contact for public inquiries.
To that end, the scope of work for the Agreement included several important “start-up” tasks:
• Hire a full-time Program Associate to oversee all aspects of the BMR program • Determine the number of BMR homes remaining in the City’s BMR portfolio • Review all case files for completeness and load basic information into a database • Conduct a basic “risk assessment”
• Re-instate an annual monitoring regimen
• Hold workshops or one-on-one homeowner consultation
Number of BMR Units in City Portfolio
Table 1 below summarizes all BMR units in the City’s portfolio. Initial estimates of peak program size were based on the existence of program files associated with 108 property addresses. EPACANDO found that historically, there were 74 BMR homes with a Cityrecorded restriction, before 14 planned contract expirations and 7 unplanned losses in years past. These unplanned losses were due to foreclosure or sale in violation of the BMR Resale Restriction Agreement. No homes have been lost out of the City’s BMR portfolio since 2013.
Table 1. Number of BMR Units in City Portfolio
Total # of files 108
Less files for rental BMRs, not in ownership BMR program (3) Less files for Habitat for Humanity, not in the City BMR program
(27)
Less files for down-payment assistance loans, not for BMRs (3) Less files for coordination of volunteer work to rehab a home (1) Files for properties that are now, or were, in BMR program 74 Less properties with 5-year affordability contract expiration (14) Less properties lost to foreclosure; City not able to intervene (4) Less properties sold in violation of resale agreement (3) Files for properties currently in ownership BMR program 53 As shown above, the City has enforcement authority over the units in its BMR program (74), though it also monitors the availability of other non-profit sponsored, permanently affordable homeownership units, including those built by Habitat for Humanity, as important community assets.
It should be noted that attrition in BMR programs is a challenge all jurisdictions experience over time. As a point of reference, a 2010 Regional Assessment of BMR Program Administration in San Mateo County, which the City participated in, provided findings and recommendations for best practices in affordable housing program administration. The assessment is provided as Attachment 1.
Other Start-Up Tasks
EPACANDO has reviewed all files, basic information has been loaded into the Homekeeper database, annual monitoring is now in its third cycle, and the initial risk assessment has been completed. A description of the monitoring and the findings of the risk assessment are presented under Current Operations, below.
Current Operations of BMR Program Administration
Operations comprise transactions, monitoring and enforcement. Transactional services include marketing new BMRs, conducting resales, and processing refinances, title changes and general inquiries. During the three years 2019, 2020, and 2021 there have been:
• No new BMRs to market
• Three resales
• Four refinances
• One title change
• Over 50 consultations
BMR Resales
For each of the three BMR resales conducted, more than 50 households applied, more than 25 households qualified for the lottery, and the ultimately successful buyer was an East Palo Alto resident. This result is attributable to focused outreach to current and former East Palo Alto residents, and to incorporation of the City’s local preference into the lottery – a system that increases the chances of locally employed individuals and local residents.
Other Transactions
Other transactional work, including refinances, loan payoffs, title changes, and other inquiries, is less complex but typically requires coordination among all parties involved: homeowner, BMR administrator, City staff, and a finance and real estate professional who may or may not be familiar with BMRs.
Monitoring & Education
EPACANDO is currently conducting its 2022 annual monitoring. As in 2020 and 2021, each BMR homeowner is asked to complete a notarized affidavit to confirm residency and acknowledge familiarity with BMR program regulations: notably, the requirements to not rent out the unit, refinance, remodel or change title without City approval.
The monitoring process now runs smoothly but required efforts up-front to gain homeowner cooperation, as many had not contacted by the City for such information for several years.
There are also variations in requirements. Though the current version of the Buyer’s Occupancy and Resale Restriction Agreement explicitly requires cooperation with monitoring and secures a right for the City to inspect interiors, neither of these conditions are in the agreements for 14 of the earliest BMR homes.
Except as detailed below, BMR homeowners are in compliance. EPACANDO reports that, primarily through conversations triggered by the monitoring process, BMR homeowners have refreshed their understanding of their regulatory documents and are now frequently initiating discussion of ordinary topics such as changes in family size, implications of the title-holders aging, family and extended family returning to or joining the household.
Compliance Concerns
Within the City’s BMR portfolio, there are 11 instances of probable violation that merit putting the homeowner on notice of potential enforcement, as summarized in Table 2 below.
TABLE 2: Compliance Concerns
Delinquent Down-Payment Assistance Loan 1
Non-Compliant Occupancy 1
Non-Compliant Refinance, Lower Risk 7
Non-Compliant Refinance, Higher Risk 2
Total 11
These are cases in which continued consultation has not resulted in the homeowner complying with the BMR regulations or relinquishing the home for resale. As shown above, these cases include not repaying a relatively small City loan; living out of state; and refinancing without permission, and for amounts originally above the restricted resale value. The “lower risk category” includes those that are no longer over-financed, as their resale value has risen; while those in the “higher risk” category are still over-financed, meaning the homeowner owes more than the restricted resale value of their home.
EPACANDO and City staff are currently coordinating next steps for these 11 cases.
Future BMR Administration
BMR program growth depends on construction of new for-sale or rental homes in developments covered by the City’s Inclusionary Housing Ordinance (“Ordinance”). The Ordinance requires that 20% of new units in a residential development be restricted at certain levels of affordability, and these units become part of the City’s BMR program. This will require technical assistance and oversight for developers and property managers, from marketing and lease-up or sale of the new units, and for all changes in ownership or tenancy in the future.
At this time, there are a small number of for-sale inclusionary units in the City’s pipeline, with only one unit under construction. EPACANDO will continue to monitor the portfolio and act as BMR Administrator for the duration of the Agreement term.
As the BMR program grows, the City Council may wish to revisit the administration of the program and make updates to the program structure and the City’s investment in it.
Fiscal Impact
There is no fiscal impact associated with the items described in this staff report. BMR administration is funded through the term of the Agreement with EPACANDO.
East Palo Alto, like most cities with a BMR program, does not pass any program administration costs through to BMR homeowners. EPACANDO estimates this cost to be $75 to $125 per unit per month. This would be a substantial cost for most low- or moderate-income BMR homeowners. Some cities charge an administrative fee and lower the price of the BMR unit accordingly. In the future, the City may wish to consider incorporating an administrative fee into the program.
Public Notice
The public was provided notice via publication in the Palo Alto Daily News on March 4, 2022, and by making the agenda and report available on the City’s website and at the San Mateo Co.
Library located at 2415 University Avenue, East Palo Alto.
Environmental
The action being considered does not constitute a “Project” within the meaning of the California Environmental Quality Act (CEQA), pursuant to CEQA Guideline section 15378 (b)(5), in that it is a government administrative activity that will not result in direct or indirect changes in the environment.
Attachments
1. San Mateo County Regional Assessment of BMR Program Administration