EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: March 21, 2023
TO: Honorable Mayor and Members of the City Council
VIA: Melvin E. Gaines, City Manager
BY: Benjamin Toney, Partnership for the Bay’s Future Fellow Karen Camacho, Housing & Economic Development Manager
Amy Chen, Community & Economic Development Director
SUBJECT: Funding for Affordable Homeownership Opportunities as an Affordable Housing Preservation Strategy
Recommendation
By motion:
· Provide direction to staff to pursue funding application(s) for affordable homeownership and housing preservation; and
· Establish a timeline for Council consideration of affordable housing preservation and homeownership policy, the East Palo Alto Opportunity to Purchase Act.
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
Priority No. 6: Create a Healthy and Safe Community
Background
On October 16, 2018, the City Council adopted the City’s Affordable Housing Strategy which laid out the City’s affordable housing goals and objectives through 2023 (see Attachment 1).
One of the key goals of the strategy involved preserving affordable housing. While the City of East Palo Alto has approved and planned for projects to meet the community’s housing needs, it is unlikely that construction can move quickly enough to account for the housing deficit in the immediate future. Further, new construction can mostly be expected to serve households with higher incomes, and thus existing residents with lower incomes may not be immediately served by new construction.
As housing has become an urgent priority, affordable housing preservation has emerged as a viable option for jurisdictions to more quickly increase the number of units that remain affordable over time in coordination with construction goals. In other words, the strategy to add net new units to the overall housing stock must be accompanied by a strategy to increase the units in the affordable housing stock to ensure that growth enables stability of the existing community.
The purpose of this staff report is to respond to the March 1, 2022 City Council request to provide an update on programs and opportunities to preserve affordable housing and support affordable homeownership. On March 1, 2022, Council discussed a policy option for affordable homeownership and affordable housing preservation called the East Palo Alto Opportunity to Purchase Act (“EPA OPA”).1 Council and staff discussed key policy components, including policy implementation and concerns about the mechanics and effects of the policy as it was drafted. As a result, Council directed staff to conduct additional research. This staff report is aimed at focusing on the funding opportunities from regional and state sources for affordable housing preservation and homeownership opportunities, irrespective of the policy. Staff also seeks Council direction to return to present additional research findings requested on March 1, 2022, so that Council and the public may engage on the discussion around policies to address the City’s affordable homeownership and affordable preservation objectives.
Analysis
Goals and Objectives of Affordable Housing Preservation Attachment 2 of the staff report provides a detailed overview of the challenges the City faces and attempts to address through a housing preservation strategy. Affordable housing preservation can take many forms, including: acquisition of deteriorating properties for rehabilitation; property owners raising funds, and receiving local, regional, state or federal funds to repair, fix-up, and rehabilitate their old properties; and placing affordability requirements, upon receipt of government aid, on properties that are being quickly sold and flipped through speculation to promote first-time homeownership.
Homeownership support and affordable housing preservation of single-family and multi-family properties (“Preservation”) can go hand in hand – by using Preservation resources to help tenants, homeowners, non-profit developers, or the City to purchase and/or rehabilitate properties while adding to the number of available affordable housing units in the City.
Preservation as a vehicle to add affordable units to the affordable housing stock is likely to be critically important in coming years. Funding is an important condition for policy and program development.
1 See March 1, 2023 City Council meeting, available at:
http://eastpaloalto.iqm2.com/Citizens/SplitView.aspx?Mode=Video&MeetingID=1489&MinutesID=1515&F ileFormat=pdf&Format=Minutes&MediaFileFormat=mpeg4.
Alignment with Housing Element Goals
Affordable housing preservation aligns with 6th Cycle (2023-2031) Housing Element Goal 1 – “Create more housing opportunities, and more housing that is affordable to East Palo Alto residents.” This goal includes efforts to develop long-term, sustainable funding sources that are flexible and may be used for affordable housing production and preservation and to prevent displacement and homelessness.
Preservation is also an important component of Housing Element Goal 4 – “Prevent displacement of East Palo Alto residents.” By leveraging local, state, and regional resources, the City can promote the preservation of existing housing stock and rehabilitation of housing that is at-risk due to age, structural deficiencies, habitability issues, and more. The City can develop a preservation strategy that identifies funding, properties, and partnerships that can be leveraged to add affordable units to the housing stock by preserving affordable housing in East Palo Alto.
Affordable housing preservation also aligns with Housing Element objectives related to Affirmatively Furthering Fair Housing (“AFFH”). For example, habitability conditions are an AFFH concern because longstanding maintenance deferrals can coincide with patterns of residential segregation. Deferred maintenance also coincides with the effects of discrimination, compounded by issues such as siting of environment hazards, lack of job access, flood exposure, and more. In addition to adding units to the affordable housing stock, which remain affordable over time and enable housing for lower income households, bringing regional and state preservation funding to the city can support acquisition and rehabilitation of buildings to mitigate building decay.
In addition to other efforts, this may require that the City identify and maintain a list of at-risk and substandard buildings throughout the city and study improvements to a City process for addressing code violations on residential properties. The ability to set tasks in motion can be enhanced by developing and advancing an affordable housing preservation policy or program.
Housing Policy and Program Landscape
The City’s Affordable Housing Strategy includes multiple policies across the “Three P’s” objectives of: 1) protection for existing residents, 2) production for net new units, and 3) preservation for improving living conditions and increasing the total number of units in the affordable housing stock. While the City has enhanced its policies and programs for affordable housing production and protection, affordable housing preservation is a component of the 2019-2023 Affordable Housing Strategy and 2023-2031 Housing Element that is underresourced and would benefit from added funding, programs and policies.2 Figure 1 below provides an overview of the City’s housing policies and programs to present day. As demonstrated, the City has been a leader in implementing tenant protections, being one of the first cities to adopt rent stabilization and just cause for eviction in the region. The City has also adopted policies that encourage housing production, and while only required to meet one hundred percent of the Regional Housing Needs Allocation (“RHNA”) for the 2023-2031 Housing Element, has planned to meet over 200 percent (over 1700 homes) of the required RHNA.
2 See Revised and Adopted 2023-2031 Housing Element, available at:
https://www.cityofepa.org/housing/page/housing-element-update-1.
Currently, the City is at a disadvantage for affordable construction because it has been designated as “low” or “moderate-resourced” by the California Tax Credit Allocation Committee (“CTCAC”). This designation makes the City less competitive than other jurisdictions in receiving crucial Low-Income Housing Tax Credit (“LIHTC”) funding for new affordable housing construction, a source of funding that a majority of affordable housing developers rely on. The City has partnered with similar jurisdictions to challenge that characterization on the grounds that East Palo Alto is in fact an area with high resources despite historic underinvestment; but until that decision is reversed it does likely encumber affordable housing production to some degree.
Figure 1: East Palo Alto Affordable Housing Policies
While much of the strategy to address the housing crisis hinges on production, preservation is also an important piece of the puzzle for many reasons. Preservation can be the fastest way to address displacement, since new affordable construction can take from 4-6 years while preservation tends to take 1-2 years. Preservation of affordable housing through acquisition and rehabilitation offers a distinct tool to renovate housing stock and decelerate blight, add to the affordable housing stock, and enable tenant residents of East Palo Alto to become homeowners.
Preservation can also add units to the affordable housing stock on a cheaper per unit basis than new construction. Structural impediments, like the bottlenecking of Federal Tax Credit resources as in 2021, and California’s deprioritization of “Low-Resource Areas” in 2022, reduce the ability of many communities to compete for affordable housing production funds.
Measure O
(2016)
Measure L
(2022)
Transient
Occupancy
Tax (1998)
Measure
HH (2018)
Preservation can add affordable units in locations where production may not be feasible, and thus is a necessary addition for a robust housing system that works for all.
Funding Sources for Housing Preservation
Below is an overview of Preservation funding at the state, regional, and local levels. With the help and support of the City’s new grants coordinator, the City may be able to apply for preservation funds to provide loans to residents interested in purchasing homes in exchange for adding the homes to the City’s Below Market Rate (“BMR”) program, which currently consists of fifty-three affordable homes. The City may also apply for preservation funds to acquire multi-family buildings facing habitability or substandard housing conditions and in need of rehabilitation. Attachment 3 provides the list of eligible funding source recipients.
Figure 2: Funding Sources for Housing Preservation
Funding Source Funding Type Eligible Uses Max Financial Assistance
Golden State
Acquisition Fund
Below market debt Acquisition $13,950,000
Foreclosure
Intervention Housing
Preservation Program
Grants, debt Predevelopment,
acquisition,
rehabilitation, temporary
relocation. operating
subsidy
$500,000 per unit
Project Homekey Grants Acquisition,
rehabilitation, of eligible
dwelling types and
operating support
Varies
HOME Investment
Partnerships Program
Varies Acquisition,
rehabilitation
Varies
Community
Development Block
Grant (CDBG)
Grant Acquisition,
rehabilitation
Affordable Housing
Fund
Below market debt Predevelopment,
acquisition, rehabilitation
$100,000 per unit or the
amount needed for
project financial
feasibility
Community Housing
Fund
Below market debt Variety of loan products;
predevelopment through
permanent financing
$15,000,000
Supportive and
Transitional Housing
Varies Acquisition,
Predevelopment,
Construction, MiniPermanent
$6,000,000 with larger
loan size sizes
evaluated on a case-bycase basis
Affordability
Preservation and
Production
Varies Acquisition,
Predevelopment,
Construction,
Rehabilitation
$6,000,000 with larger
loan size sizes
evaluated on a case-bycase basis
Figure 2: Funding Sources for Housing Preservation (continued) Funding Source Funding Type Eligible Uses Max Financial Assistance
Workforce Housing Varies Acquisition,
Predevelopment,
Construction
$7,500,000 with larger
loan size sizes
evaluated on a case-bycase basis
Enterprise-Level Line
of Credit
Varies Revolving Line of credit
for acquisition,
predevelopment,
working capital allowed
with acquisition or
predevelopment
$6,000,000
Bay Area TransitOriented Affordable
Housing (TOAH) Fund:
Predevelopment Loan
Below market debt Predevelopment costs
for acquisition of Eligible
Properties
$750,000
Bay Area TransitOriented Affordable
Housing (TOAH) Fund:
Acquisition Loan
Below market debt Acquisition $10,000,000
Community
Development Financial
Institutions (CDFI's)
Varies Varies by program;
predevelopment,
acquisition, bridge
financing, some limited
permanent financing.
Varies
Regional Early Access
Planning 2.0
Below market debt Acquisition $250,000 per unit
State and Regional Funding Sources
The City may choose to leverage state and regional programs like the Foreclosure Intervention Housing Preservation Program (“FIHPP”) and the Regional Early Action Program 2.0 (“REAP
2.0”) to help support acquisition and rehabilitation of properties, by adding financial resources to support affordable homeownership. These two programs are expected to activate in Fiscal Year 2023-2024.
FIHPP ($500 million total statewide)
• Designed for properties at risk of foreclosure, including properties that local government has identified as at-risk of foreclosure or cited for habitability problems • Includes very substantial funding ($500,000/unit for multifamily, $600,000/unit for single family)
• Flexible uses include acquisition and rehab
• Eligible applicants include nonprofits or community land trusts with acquisition and rehabilitation experience in California
REAP 2.0 Preservation Fund ($15 million total regionally) • Designed to support preservation projects of varying sizes across the Bay Area Region • Includes substantial funding ($250,000/unit)
• East Palo Alto is included as a Priority Area for funding criteria Eligible applicants are development organizations and community land trusts (cities can partner)
FIHPP is important because its development is a response to the foreclosure crisis which devastated communities nationwide, including here in East Palo Alto. By leveraging public funding to secure distressed properties, the funding applicants can reduce the rate at which properties slip into decay. Considering that substantial habitability claims have been raised regarding a number of properties in East Palo Alto, this funding source will be an important tool moving forward.
REAP 2.0 is an important regional source of funding because projects funded will help regional government bodies like Bay Area Housing Finance Authority (“BAHFA”) and Association of Bay Area Governments/Metropolitan Transportation Commission (“ABAG/MTC”) establish program guidelines for future Preservation funding that can benefit the City. The 2024 Bay Area Housing Finance Authority initiative to raise $10-20 billion for housing production, preservation, and protection will be informed by this first round, and 15% of the total public funding raised for that pool is dedicated to affordable preservation.
Local Matching Funds
Establishing and funding first time homebuyer’s program is included in the 2023-2031 Housing Element. The City may offer Transient Occupancy Tax (“TOT”), Measure HH, Measure O, or Measure L funds as a local match to increase local organizations’ competitiveness for state and regional Preservation funds. The following is a list of the potential local funding sources:
• TOT – a special tax passed by voters in 1998, intended for affordable housing development, acquisition and/or rehabilitation, among other things. • Measure HH – a special tax passed by voters in 2018, intended for the maintenance of affordable and supportive housing programs, with an emphasis on creating net new housing.
• Measure O – a general tax passed by voters in 2016, intended for affordable housing and protecting local residents from displacement and homelessness. • Measure L – a general tax passed by voters in late 2022, intended for affordable housing programs, providing tenant rental support, and protecting local residents from displacement and homelessness.
Ultimately, advancing a Preservation policy which enables staff to begin developing administrative guidelines, criteria for which non-profit developers are qualified to work within the City and apply for state and regional funds, and educational materials for tenants and owners to take advantage of these funding sources, will help advance Preservation projects. It is also important to note that for lenders of preservation funding sources, having an approved policy and implementation guidelines improves competitiveness over other applicants.
City Efforts on Housing Preservation
Policy and Program Considerations
To address affordable housing preservation and homeownership, City Council officially adopted as a Council Priority in 2021 to “Advance the Concept of TOPA/COPA and Other Homeownership Opportunities.” TOPA/COPA is a proposed policy that stands for the Tenant Opportunity to Purchase Act and Community Opportunity to Purchase Act. From October 2021 to March 2022, City staff actively analyzed and prepared five presentations to the City Council on this policy. The City, at the suggestion of community feedback, also included a Jurisdiction Opportunity to Purchase option that the City can exercise to acquire affordable housing assets.
Collectively these programs are referred to as the East Palo Alto Opportunity to Purchase Act (“EPA OPA”).
An EPA OPA, as presented at the March 1, 2022 meeting, would require the owners of certain properties planning to sell to provide advance notice and an opportunity to the local market (tenants living in the building, qualified non-profit affordable housing developers, and/or the City of East Palo Alto) before commencing conventional at-large marketing. EPA OPA is designed to enhance homeownership among residents who are historically disenfranchised, and stabilize multi-family housing tenants at immediate risk of displacement.
City Council requested research on options for affordable housing preservation and homeownership as well as funding sources which might support those objectives. City Council may, at a later date, choose to leverage current and forthcoming state and regional preservation resources to support affordable housing in East Palo Alto.
Regional Partnerships and Funding Sources
In 2022, the City of East Palo Alto was awarded the Partnership for the Bay’s Future (“PBF”) Breakthrough Grant for housing production and preservation, and as a result, the PBF Policy Grant Fellow, Benjamin Toney, joined the City in June 2022 to add staffing capacity. Since then, the Policy Grant Fellow has engaged with local community partners East Palo Alto Community Alliance and Neighborhood Development Organization (“EPACANDO”), Preserving Affordable Housing Assets Long Term, Inc. (“PAHALI”), Youth United for Community Action (“YUCA”), and Community Legal Services in East Palo Alto (“CLSEPA”) (collectively, the “Community Partners”), and the City to research and advance affordable housing preservation goals. The Policy Grant Fellow has also been involved with and/or interviewed the following groups:
• South Bay Preservation Lab, a convening of housing affordability, anti-displacement, cooperative ownership and mission driven developer organizations sharing information, best practices, and resources to strategically deploy affordable housing preservation tools.
• The California Community Land Trust Network, which provides strategic and technical support for mission driven development and cooperative housing, can also offer training and best practice resources.
In late 2022, the Policy Grant Fellow submitted comments on ABAG/MTC’s REAP 2.0 Draft Term Sheet. These comments included encouraging prioritization of jurisdictions with high displacement risk, and providing incentives for prioritizing extremely low-income and very lowincome housing units in close proximity to transit.
Research on Preservation Best Practices
The Policy Grant Fellow conducted several interviews among key leaders in the San Francisco affordable housing preservation arena to understand mechanics of transactions under San Francisco’s small sites program and best practices for affordable housing preservation. Further research and interviews have also revealed Preservation best practices from government agencies, financial intermediaries, and practitioners. Interviewees and expert practitioners include:
• Richard Hurlburt – IMPACT (Realtor/Broker facilitating COPA transactions) • Fernando Marti – Council of Community Housing Organizations (Policy Design) • Keith Cooley - San Francisco Community Land Trust (COPA purchaser) • Somaya Abdelgany - Preservation Program Coordinator at Bay Area Housing Finance Authority (Preservation Funding)
• Caroline McCormack – Preservation Program Director Enterprise Community Partners (Preservation Funding and Implementation)
Figure 3 summarizes the best practices for housing preservation shared in these interviews.
Figure 3: Best Practices for Housing Preservation
California Housing Partnership Best
Practices
Enterprise Community Partners Best
Practices
Develop Local Government Capacity Engage Local Stakeholders Early Expand Technical Assistance Conduct Local Landscape Analysis Strengthen Regulatory Protections Earmark Resources for Capacity Building Develop Fitting Financial Tools Plan for Public Education Coordinate with other Agencies and
Departments
East Palo Alto is already executing many of these best practices and can continue to exercise them moving forward. Below are key lessons learned.
1. Outreach and Education
Outreach and Education will be essential components of best practices for implementing an affordable homeownership program using affordable preservation funds. The City at a future date may desire to develop an outreach plan as part of implementation to inform residents, including property owners and tenants, how to use local, state or regional funds. The outreach plan may also include collaboration with other professionals and organizations involved in the development and rehabilitation process committed to coordinating with the City to develop and distribute educational materials.
2. Local Government Capacity
Providing political and economic commitment to affordable housing preservation could increase government capacity and make preservation projects in East Palo Alto competitive for regional and state resources. The City can begin by identifying opportunities to leverage local match funds and outside funding to invest in preservation and affordable homeownership. The City can also begin by establishing a local policy or program framework.
3. Regional, State and Private Resources
Since the last City Council discussion on affordable preservation and homeownership opportunities on March 1, 2022, the affordable housing preservation funding landscape has further developed. Multiple regional and state resources for affordable housing preservation are expected to be available in 2023, and the City can compete for those resources. The purchaser is typically the funding applicant for these sources of affordable housing preservation funding, so regional and state funding sources could be available to affordable housing developers and in some cases the City, if poised to do so. To increase jurisdictions’ competitiveness for preservation funding during the funding application process, ongoing capacity building and technical assistance support is available. For example, available through the Partnership for the Bay’s Future are Enterprise Community Partners, as well as from the Local Initiatives Support Corporation. Because Community Development Finance Institutions (“CDFIs”) which commonly administer preservation funds need to be discerning about projects to resource, projects in jurisdictions with active preservation policies can receive advantage in funding prioritization. Passing a preservation policy also helps increase the ability to capture preservation funds by enabling city staff and community partner organizations to begin performing the work needed for implementation like developing administrative guidelines, property identification, public education materials, etc.
Next Steps
City Staff seek City Council direction on moving forward with funding applications to continue the City’s affordable housing preservation efforts while the City continues to consider adoption of a policy or program. Staff recommends pursuing REAP 2.0 and FIHPP funding through local partnerships.
Staff also seek City Council direction to return with the EPA OPA discussion for City Council consideration in May.
Fiscal Impact
There is no fiscal impact associated with this staff report. Should staff successfully apply for funding, added staffing capacity will be needed for funding implementation.
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 County Library located at 2415 University Avenue, East Palo Alto.
Environmental
The proposed action does not constitute a “project” with the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines sections 15378(b)(4) and (5) in that it is a governmental fiscal, organizational or administrative activity that will not result in direct or indirect changes in the environment.
Attachments
1. Affordable Housing Strategy 2019-2023
2. Affordable Housing Preservation Challenges and Goals
3. Affordable Housing Preservation Funding Recipients