EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: March 7, 2023
TO: Honorable Mayor and Members of the City Council
VIA: Melvin Gaines, City Manager
BY: Karen Camacho, Housing & Economic Development Manager SUBJECT: 2023 Application for CalHOME ADU/JADU Grant Program Recommendation
Adopt a Resolution that authorizes the City Manager (or designee) to submit an application for the Homeownership Super Notice of Funding Availability (“HOSN”) to the Department of Housing and Community Development (“HCD”), issued on January 19, 2023, to issue deferred-payment loans of up to $250,000 to qualifying homeowners to support repair, rehabilitation, and new construction of second units in East Palo Alto, and, if awarded, to negotiate, execute, and deliver a State of California Standard Agreement, and any and all other documents required or deemed necessary or appropriate to receive the grant funds.
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
2023 Homeownership Super NOFA
On January 19, 2023, the California Department of Housing and Community Development (“HCD”) issued a Homeownership Super Notice of Funding Availability (“HOSN”), a one-stopshop for affordable homeownership projects and programs, due on February 28, 2023. Given the short turnaround time, and City Council support for ADU streamlining efforts, staff submitted an application for the CalHOME program to supplement the City’s current CalHome ADU/JADU Loan Program, in partnership with the program administrator, East Palo Alto Community Alliance and Neighborhood Development Organization (EPACANDO). Staff is now seeking a resolution providing the authorization for the City Manager or authorized designee to execute any documents necessary to receive the funds, shall the City be granted the additional funding.
CalHOME is a program under the HOSN administered by HCD that supports acquisition, rehabilitation, repair, and construction activities through issuance of deferred-payment loans to low-income homeowners. Jurisdictions or qualified nonprofits may apply for CalHOME funds in multiple project areas, including:
· Homeownership Development Project Loans
· First-Time Homebuyer Mortgage Assistance
· Owner-Occupied Rehabilitation (OOR) Assistance
· Technical Assistance for Self-Help Housing Projects
· Technical Assistance for Shared Housing Programs
· Accessory Dwelling Units (ADU)/Junior Accessory Dwelling Units (JADU) Programs · Acquisition Of Manufactured Housing
An applicant jurisdiction may apply for up to two programs. The maximum amount for up to two programs (except for the Homeownership Development Project Loans with or without Technical Assistance for Self-Help Housing Projects) is $5 million. The maximum loan amount for an individual project varies by program activity and is up to $250,000 for new construction of an ADU/JADU (compared to up to $100,000 in the 2019 HOSN).
ADU/JADU Incentives
Over the past three years, the City has actively promoted the production of accessory dwelling units (“ADUs”) through key community partnerships such as the Second Unit and AntiDisplacement Task Force and successor ADU Technical Working Group. These groups included individual community stakeholders, faith communities, community-based organizations, and City staff.
On November 22, 2019, the Second Unit and Anti-Displacement Task Force released a final report with recommendations for a comprehensive Second Unit strategy. These recommendations, which were presented to City Council as part of the semiannual update on the City’s Affordable Housing Strategy in January 2020, included a dedicated funding source for low-income households to build ADUs.
As part of the City’s response to the Second Unit and Anti-Displacement Task Force recommendation, staff pursued a CalHome grant from the Department of Housing and Community Development (“HCD”) to provide loans to low-income homeowners to build an ADU or junior accessory dwelling unit (“JADU”).
Funding for a CalHome ADU/JADU loan program was first made available with the CalHome NOFA released in 2019 (the deadline was February 17, 2020). On March 3, 2020, via Resolution 04-2020, the City Council authorized the City Manager to apply for a CalHome grant from HCD to advance ADU initiatives in the City, and, if successful, to execute a Standard Agreement and any other documents required by HCD on behalf of the City. This resolution was rescinded and a corrected version was submitted to HCD via Resolution No.155-2020 on December 15, 2020.
In 2020, the City submitted a joint application with EPACANDO for a CalHome award in the amount of $2,000,000 to provide loans up to $80,000 to up to 20 income-qualified homeowners interested in building, reconstructing, repairing or rehabilitating ADU/JADUs, in exchange for renting their units to income-eligible East Palo Alto households at or below 80% of the Area Median Income (“AMI”).
On July 23, 2020, the City was notified by HCD that its application was successful. The CalHome Standard Agreement with HCD (“Standard Agreement”) was executed on June 8, 2021. The City was one of the first cities, and the only one in San Mateo County, to receive the newly updated CalHome Program’s Notice of Funding Availability (NOFA) that included ADUs and Junior ADUs.
On October 19, 2021, via Resolution No. 141-2021, the City issued an agreement with East Palo Alto Community Alliance and Neighborhood Development Organization (“EPACANDO”) to help administer the CalHome program until June 2024. The City worked with EPACANDO, HCD, and Meriwest Credit Union (“Meriwest”) to establish program guidelines and launched the program on January 19, 2022 via a webinar. The City account with Meriwest for loan disbursement was finalized at the end of September 2022. On October 6, 2022, EPACANDO and the City held another informational webinar to seek more potential eligible applicants.
Table A shows the loan assistance amounts.
Table A: CalHome ADU/JADU Program
Junior
ADU
Attached
ADU
Detached
ADU
Maximum Award Total1 $70,000 $75,000 $80,000
Plans & Permits2 Reimbursement of
plan design costs and city application fees
$25,000 $25,000 $25,000
Necessary Site Upgrades3
Reimbursement of infrastructure cost
upgrades needed to complete the project
$25,000 $25,000 $25,000
Construction Assistance
Reimbursement of
construction costs
$20,000 $25,000 $30,000
¹ Maximum assistance shall not exceed fifty percent (50%) of total project cost ² ³Up to $25,000 or 20% of project cost; whichever is smaller Since the program launch, EPACANDO has been working with several potential applicants who have reached the building phase and who are income-qualified. EPACANDO has worked with over 77 East Palo Alto households through its “CANDO ADU” program and identified a pipeline of potential CalHome applicants, has assisted over 16 potential CalHome applicants in identifying pre-qualification, has successfully pre-qualified five households, and is currently working with four pre-qualified households.
Analysis
A major challenge for many applicants in the City’s CalHome ADU/JADU Loan Program has been having the primary financing needed to build the ADU or JADU. At the December 6, 2022 staff update on ADU programs and policies, the City Council considered multiple approaches to supporting the construction and legalization of ADUs, including financial incentives such as City fee waivers or reductions, and additional funding through grants or loans.
Staff and community partners could not foresee, in addition to the global health pandemic, East Palo Alto homeowners' difficulties in obtaining conventional financing. In many cases, program applicants need conventional financing to fill an additional gap beyond what the City’s loan program can support. The cost of constructing an ADU has skyrocketed during the 18 months between the award and program launch: a standard 1-bed, 1-bath, 500 sq ft detached ADU total development cost went from $180,000 in 2020 to $280,000 in 2022, 156% of the initial anticipated price in 2019. The total cost to design and construct an ADU can now easily exceed $250,000, and the $80,000 loan limit in the current CalHome ADU/JADU Loan Program, while sizable, is still insufficient for many homeowners.
In the future, City Council may want to consider supplemental financing such as Measure HH or Measure O/Measure L funds. In the meantime, the City may take advantage of this year’s HOSN, since there is currently no indication that a similar stream of funding will be available soon. The 2023 HOSN has increased the maximum lending amount for ADU/JADU construction from $100,000 to $250,000. With a HOSN grant size of $3,000,000 for loans up to $250,000 per individual, and $600,000 for administrative costs (20% of the construction loan budget), the City can support a minimum of 12 more applicants, if not, more.
A low-income borrower with a high debt-to-income ratio may be able to obtain other financing for about 20 percent of a $280,000 ADU project. Once qualified for the new proposed Loan Program, the Program would cover 80 percent, or $224,000, while the Borrower puts in $56,000. In exchange, the Borrower deed restricts the ADU and houses a low-income household.
Difficulties obtaining financing is a common systemic issue for communities of color like East Palo Alto. It is not uncommon for people of color impacted by systemic issues like remnants of lending discrimination, predatory lending, redlining, and resource deprivation to experience barriers as they seek financial resources. Additionally, communities of color are more likely to experience overcrowding, poverty, financial instability, and housing insecurity. Many interested households seeking to build ADUs are larger families experiencing overcrowding and wanting more livable spaces.
The CalHome ADU/JADU Loan Program has seen unprecedented interest from East Palo Alto homeowners. Given that the City is working to reduce barriers to ADU construction through comprehensive code clean-up, objective design standards, process improvements, prereviewed or pre-approved ADU model plans, potential grandfathering/legalization program, fee waivers or reductions, and additional financial incentives, staff anticipate an increase in funding need.
Next Steps
As previously indicated, staff submitted the application for this funding source on February 28, 2023 given the quick turnaround time, as HCD indicated they would accept a draft resolution. If directed, staff will advance with the CalHome application and execute all documents required or deemed necessary or appropriate to receive the grant funds.
Fiscal Impact
There is no net fiscal impact with the activities discussed in this staff report. If awarded, the City will receive pass-through funds of up to $250,000 per applicant up to $3 million total, and an additional 20% of the individual loan amount for administrative costs (totaling up to $600,000), to be split between the City and the subcontractor EPACANDO, for a total grant amount of $3,600,000.
Public Notice
The public was provided notice of this agenda item by posting the City Council agenda on the City’s official bulletin board outside City Hall and making the agenda and report available at 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. Resolution