STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of September 27, 2022
TO: Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
SUBJECT: Authorization to Negotiate an Agreement with the Contra Costa County Housing Authority to Transfer Hercules Housing Successor Assets and Functions to the City
RECOMMENDED ACTION
Direct staff to negotiate an agreement with the Contra Costa County Housing Authority (“Housing Authority”) to transfer Hercules Housing Successor assets and functions to the City of Hercules (“City”). If the Housing Authority agrees on the terms of a transfer, an agreement will be drafted and presented to City Council and the Housing Authority Board for consideration at a later date.
FISCAL IMPACT OF RECOMMENATION
Authorization of negotiations has no immediate fiscal impact. If an agreement is negotiated, the fiscal impact will be detailed when it is presented to City Council.
BACKGROUND
The Hercules Redevelopment Agency (“Former Agency”) was dissolved on February 1, 2012, under California Dissolution Law (Health and Safety Code or “HSC” Section 33000 et seq.). The City elected to become the Successor Agency to the Hercules Redevelopment Agency (“Successor Agency”) to wind-down non-housing assets and liabilities. The City did not elect to become the Housing Successor to the Hercules Redevelopment Agency (“Housing Successor”) to retain housing assets and functions. The City declined the role of Housing Successor in 2012 because there was no funding for the management or monitoring of housing assets and functions, and because the City believed the Housing Authority would take responsibility of Former Agency housing assets.
HSC 34176(b) states if a city does not elect to become Housing Successor, that role shall be transferred to the local housing authority. The Housing Authority automatically became the Housing Successor by operation of law. However, when the City attempted to transfer Former Agency assets to the Housing Authority, the Housing Authority declined Housing Successor responsibilities. The California Department of Finance (“DOF”) wrote a letter to the Housing Authority dated September 17, 2012, explaining they do not have the legal basis for declining the role of Housing Successor (see Attachment 1, Exhibit A). Regardless, the Housing Authority has not initiated the transfer of Former Agency housing assets to date.
The Housing Authority’s refusal of Housing Successor responsibilities has left 108 loans with an outstanding balance of $3.9 million and $4.9 million in deposits from loan repayments in a state of limbo since 2012. The City does not have the legal authority to administer loans and spend money generated by Former Agency housing assets (“Housing Funds”) because the Housing Funds are restricted as Housing Successor assets under HSC 34176 and 34176.1.
City staff is requesting City Council’s authorization to initiate discussions and negotiate an agreement with the Housing Authority to legally transfer the role of Housing Successor, including all housing assets and functions of the Former Agency, from the Housing Authority to the City. This will allow the City to actively administer the $3.9 million in outstanding loans and access the $4.9 million in Housing Funds to pay for Housing Successor administrative costs and affordable housing development.
Why Now?
Ten years have passed since the dissolution of the Former Agency. The earlier years of dissolution were a rocky period. The City was in litigation with DOF over the repayment of a City loan advanced to the Former Agency to cover debt service shortfalls. The City and DOF entered into a settlement agreement in March 2020 and the City continues to make settlement payments totaling $3.6 million (final payment due May 2023). Now that these issues have been resolved, the City can allocate more resources to become the Housing Successor.
After the Housing Authority refused Housing Successor responsibilities, City staff has responded to requests on a case-by-case basis from borrowers to pay off Former Agency housing loans upon the sale or refinance of their homes. Loans have not been actively administered otherwise due to a lack of funding and legal authority to do so.
Homeowners with outstanding loans have been negatively impacted because their loans have not been actively administered by the Housing Authority. This has led to frustration among some loan holders who find that the balance is due upon the sale or refinance of their homes because the loans are secured by a lien on their property. The City would like to help homeowners by having the legal ability to actively administer loans and communicate payoff requirements.
The Housing Fund has collected $4.9 million from loan repayments since dissolution. Becoming Housing Successor would allow the City to use these funds to cover loan and other Housing Successor administrative costs. The City could also use Housing Funds to pay for development of housing for affordable to extremely low to low-income households under HSC 34176.1.
Housing Successor Assets
Former Agency housing assets include:
108 loans receivable with an outstanding balance of $3.9 million owed to the Housing Successor 18 loans receivable with an outstanding balance of $2.9 million are delinquent or received a notice of default from their third-party lender. $4.9 million in cash from loan repayments deposited into the Former Agency’s Low- and Moderate-income Housing Fund; these monies would be transferred to a new Low- and Moderate-Income Housing Asset Fund set up by the City as Housing Successor (“Housing Fund”) The Housing Asset Transfer List (see Attachment 1, Exhibit B) provides a detailed list of loans receivable.
Housing Successor Responsibilities and Costs
If the City becomes Housing Successor, it will incur costs to administer loans, prepare annual reports due to the California Department of Housing and Community Development (“HCD”), and report on the Housing Fund in the City’s audited financial statements.
Administrative costs are estimated to be $200,000 to $225,000 in the first year to set up the Housing Fund, catch up on annual reports, and review outstanding loan balances and payoff status. Ongoing annual administrative costs are estimated to be $100,000 to $150,000 based on a review of other housing successors. State law permits a maximum annual administrative allowance of $200,000 per year adjusted for inflation. The limit in fiscal year 2020-21 was $223,400.
The Housing Successor may also incur costs to fund affordable housing development and homeless prevention and rapid rehousing activities described in the next section.
Housing Successor Opportunities
Housing Funds may be spent on affordable housing development for extremely low to low-income households. There are three major requirements on how the funds may be spent:
at least 30% of Housing Funds must be spent assisting extremely low-income rental housing, no more than 20% of Housing Funds may assist low-income households (60-80% of the Area Median Income), and no more than 50% of units assisted may be restricted to seniors.
Housing Successors may also spend up to $250,000 per year on homelessness prevention and rapid rehousing services, if eligible. Hercules is most likely eligible because the Former Agency met its inclusionary housing production obligations as of 2009; eligibility would be confirmed after analyzing housing activity between 2009-2012.
If the City becomes Housing Successor, it should set-aside at least $500,000 to $1 million in Housing Funds for administrative costs from the $4.9 million Housing Fund balance funded by prior loan repayments. The remainder could be used assisting affordable housing. It is important to note there is no ongoing revenue source for housing successors. The only revenue source for the Hercules Housing Successor is loan repayments. If the Housing Successor assists affordable housing development, the assistance is commonly structured as a 55-year loan.
Next Steps
If City Council authorizes negotiations, City staff will request a meeting with Housing Authority staff to discuss a proposed Term Sheet (Attachment 1) that describes the housing assets and functions to be transferred. If the Housing Authority agrees, an agreement will be drafted and presented to the City Council and Housing Authority Board (County Board of Supervisors) at a later date.
If City Council does not authorize negotiations, or if the Housing Authority refuses the role of Housing Successor and declines to transfer the role to the City, City staff will return to City Council to obtain direction on next steps, including whether to request that all Former Agency housing assets be transferred to the Housing Authority. It would likely involve appealing to DOF or local legislators for assistance.
ATTACHMENTS
Proposed Term Sheet
Exhibit A: DOF Letter to Housing Authority
Exhibit B: Housing Asset Transfer List
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