CITY COUNCIL STAFF REPORT
Meeting Date: April 04, 2022
TO: THE HONORABLE MAYOR AND CITY COUNCILMEMBERS
SUBJECT: ADOPT RESOLUTION NO. ___ -22 APPROVING, AUTHORIZING, AND DIRECTING EXECUTION OF: (1) AFFORDABLE HOUSING
REGULATORY AGREEMENT BETWEEN THE CITY OF PLEASANT
HILL AND THE POST PRESERVATION LP (THE “DEVELOPER”) TO
PRESERVE 50% OF THE UNITS AT THE POST APARTMENTS (1460
CONTRA COSTA BLVD; APN 127-050-070-3) (THE “PROJECT”) FOR LOW-INCOME HOUSEHOLDS EARNING 80% OR LESS OF AREA
MEDIAN INCOME FOR A PERIOD OF 10 YEARS; (2) LOAN TO THE DEVELOPER IN THE AMOUNT OF $10,000 TO FACILITATE
ACQUISITION OF THE PROJECT
SYNOPSIS
In early January, Iman Novin, President of Novin Development Corporation (“Developer”), an affordable housing developer, approached City staff with a proposal to preserve existing, naturally occurring affordable housing for low-income residents of The Post apartment complex at 1460 Contra Costa Boulevard. As presented to staff, the Developer has volunteered to enter into a 10- year regulatory agreement with the City to preserve 50 percent of the leasable apartments (35 units) for income-qualified households earning 80 percent or less of Area Median Income (AMI).
The Developer has also requested a loan of $10,000 from the City of Pleasant Hill to facilitate acquisition of the asset and potentially qualify the property for a welfare tax exemption to preserve affordability.
DISCUSSION
Background
The Post Apartments is a three-story, 71-unit1apartment complex constructed in 1961 on 1.34 acres at 1460 Contra Costa Boulevard, adjacent to the north of the Sherwin Williams and TAP Plastics business locations. Within the 41,000-square-foot apartment complex, there are 39 onebedroom, 25 two-bedroom, and seven three-bedroom units ranging from approximately 450 square feet to 950 square feet in size. Amenities include an onsite pool, picnic and barbecue areas, and other recently refurbished common area enhancements. Additionally, the complex has been
1 Of the 71 apartments onsite, 70 are leasable to tenants, and one unit, reserved for the property manager, will not be leased or subject to any income restrictions.
rehabilitated recently: the roof was replaced, the building façade and landscaping were refreshed, and several units were refinished within the last five years.
Analysis
Overview of the Proposal
The Developer is in negotiations to purchase The Post Apartments from the current property owner, PTLA Real Estate Group, which acquired the complex in 2016 for approximately $22,500,000, and is actively marketing the asset for sale. Novin Development Corporation has expressed an interest in acquiring The Post to preserve the existing, naturally occurring affordable housing in the City and avoid displacing the existing low-income residents, many of whom earn less than 80 percent of AMI. The Developer contends that existing tenants would be unlikely to afford any potential rent increases associated with acquisition of the asset by a market rate developer.
As part of its approach to the creation of new, or preservation of existing affordable housing opportunities in the Bay Area, Novin Development has teamed with national affordable housing non-profit, Enterprise Community Partners, to finance the acquisition of The Post complex.
Further, the Developer has approached local non-profits to join the effort to provide additional services and housing opportunities onsite for underserved or vulnerable populations at The Post, including low-income veterans. As previously noted, the site is generally in good condition and was recently refurbished, including upgrades to common areas and the interiors of several units onsite.
Financial Liability for the City
Welfare Tax Exemption. The Developer is pursuing a strategy that allows immediate acquisition of the asset and preservation of the existing affordable rents through a combination of capital investment from Enterprise Community Partners and approval of a welfare tax exemption (property tax abatement) from the State Board of Equalization. Pursuant to California Revenue and Taxation Code, an applicant for a welfare tax exemption must demonstrate the following: 1) approval of a regulatory agreement; 2) financial contribution from local jurisdiction; and, 3) inclusion of a recognized non-profit as a general partner. The Developer is seeking the City Council’s assistance with the first two components (i.e., the affordable housing agreement and the $10,000 loan), and is actively pursuing a non-profit general partner to qualify its application for exemption to the State Board of Equalization.
Novin Development has indicated that tax abatement combined with the financial support of Enterprise would facilitate financing the project during the 10-year term of the agreement, or until the firm refinances through HUD or Low-Income Housing Tax Credits (LIHTC) issued by the California Tax Credit Allocation Committee, a process that can take five to seven years to materialize. If after 10 years, the Developer fails to secure alternative financing, the regulatory agreement would expire, and the asset would no longer be required to include the designated number of income-restricted units. However, should the Developer succeed in refinancing the deal within the term of the agreement, the firm has voluntarily offered to enter into a new regulatory agreement to preserve all of the units onsite for income-qualified households earning at or below 80 percent AMI.
Loan. City staff has identified Fund 34, the City’s In-Lieu Housing Fee Fund, as the appropriate source for this loan request. Fund 34 has a balance of approximately $568,000, of which $400,000 has been committed to Habitat for Humanity for development of affordable housing at 250 Cleaveland Road. The remaining balance is sufficient to provide the loan, if the City Council desires. According to the terms of the Promissory Note (see attachments), the $10,000 loan must be repaid in full within one year of the date of execution of the regulatory agreement.
Property Taxes. Based upon the most recent sales price, the current property owner paid approximately $225,000 in property taxes last year to the county taxing entities, of which the City received 5.66 percent, or approximately $12,750. If the project were to qualify for a welfare tax exemption, the discount in property taxes would correspond to the number of income-qualified households onsite, as verified through the City’s annual compliance process. Preliminary review of existing tenants’ incomes indicates that approximately two-thirds of The Post residents earn 80 percent or less of AMI. Using the sales price from 2016 and applying a discount of 66 percent, the City would have received approximately $4,250 in property tax revenue last year by comparison.
Staff notes that the property tax revenue will continue to diminish over the term of the agreement as more households qualify. Lastly, staff notes that if the Developer succeeds in refinancing the project with LIHTC, the entire property would automatically qualify for property tax abatement, and low-income affordability restrictions would apply to all units and extend for a period of 55 years. Using the most recent 2016 sales price as a basis, the estimated loss of property tax revenue to the City under this refinancing scenario would be at least $12,750 per annum.
Affordable Housing Agreement
Term. The term of the proposed regulatory agreement is 10 years during which time 50 percent of the units leased (35 units) will be reserved for low-income households that earn 80 percent or less of AMI, as verified through the City’s annual compliance monitoring process. Based on preliminary analysis of existing rent rolls, approximately 90 percent of the units are leased, and roughly two-thirds of households living in those occupied units earn at or below the low-income threshold.
Displacement. The agreement protects current residents from displacement, including those households earning more than 80 percent of AMI. Further, the agreement does not require residents to move if an increase in household income elevates them above the 80-percent threshold.
In that case, NDC would be required to reserve the next available unit of comparable size/amenity within the complex as an income-restricted unit for lease to an income-qualified household. The agreement requires notification of the City in the event this occurs.
Rent Increases. The terms of the regulatory agreement limit rent increases to the annual adjustments in the income limits for qualified households, as established by HUD and the State of California Department of Housing and Community Development. This condition is standard for the City’s affordable housing projects, and the City typically shares the HCD rent limits with property owners during the annual compliance monitoring process.
Duration and Administration. Affordability levels, income-restrictions, and other requirements, as memorialized in the regulatory agreement between the City and Developer, would remain in place for 10 years with the City responsible for monitoring and enforcement. As a term of the agreement, staff has negotiated an annual compliance monitoring fee of $150/unit made payable to the City for each of the 35 apartments subject to income restrictions. The compliance monitoring ensures that the units remain available and affordable to income-qualified tenants, and the fee will offset the City’s cost of administering compliance with the regulatory agreement.
Agreements in Other Cities
NDC successfully executed a similar project with the City of Alameda in 2021 to acquire the 53- unit Surfside Apartments complex, a similarly situated naturally occurring affordable housing development. Though the terms of that deal were slightly different (e.g., 15-year term), the fundamentals were the same: affordable agreement and de minimis financial contribution in exchange for preservation of a percentage of the units for low-income households. In discussions with staff, the Developer also relayed that the City of Oakland has executed similar deals to preserve affordable housing.
Credit for Regional Housing Need Allocation (RHNA)
City staff does not believe this proposal can satisfy the terms of AB 787, the bill recently signed into law that allows a city to satisfy a small percentage of its Regional Housing Needs Allocation (RHNA) through affordable housing market-rate conversions. However, though the probability of success is low, there is a process by which the City can petition the Department of Housing and Community Development to receive RHNA credit for this preservation project. Novin Development has repeatedly expressed a willingness to work with City staff and HCD to explore this possibility further.
FISCAL IMPACT
The City’s in-lieu housing fund (Fund 34) has sufficient reserve balance to accommodate the request for a $10,000 loan, which must be repaid within one year of the execution of the regulatory agreement. Further, the City will receive from the Developer an annual compliance monitoring fee of $150/unit for each of the 35 units subject to income restrictions. The fee will offset the City’s cost of administering compliance with the regulatory agreement.
PUBLIC CONTACT
Public contact was made through posting of the City Council agenda on the City’s official notice bulletin board, at the Pleasant Hill Senior Center and at the Pleasant Hill Police Department. The agenda and staff report are posted on the City’s web page.
CEQA
The California Environmental Quality Act (Public Resources Code Sections 21000 et seq.) (“CEQA”), imposes no conditions on the City’s consideration and approval of this Agreement, because pursuant to CEQA Guidelines Sections 15060(c), 15061(b)(2) and (3), 15273, 15378, and Public Resources Code Section 21065, funding of a proposal is not subject to environmental review under CEQA as it does not constitute a “project.” Further, it does not commit the City to a definite course of action, does not constitute discretionary approval of a specific project, and will not result in a direct or reasonably foreseeable indirect physical change in the environment, and in the alternative is exempt from CEQA.
RECOMMENDED ACTION
City staff recommends that City Council adopt the proposed resolution to: (a) execute an affordable housing regulatory agreement with the Developer to preserve 50 percent of the units at The Post Apartments (1460 Contra Costa Boulevard) for tenants earning 80 percent or less of Area Median Income for a period of 10 years; and (b) provide a loan of $10,000 to the Developer to facilitate acquisition and financing of the asset, subject to the terms of both the Promissory Note and Deed of Trust.
ALTERNATIVE TO RECOMMENDED ACTION
City Council may choose to decline to execute a regulatory agreement and deny the request for the loan, which may effectively nullify the Developer’s attempt to acquire the property and may result in the potential displacement of existing low-income residents of The Post Apartments.
ATTACHMENTS
Proposed Resolution authorizing execution of an affordable housing regulatory agreement, and approving a loan for $10,000 to assist in acquisition and financing of the project Exhibit 1 – Affordable Housing Regulatory Agreement
Exhibit A – Property Description
Exhibit B – Notice of Affordability
Exhibit 2 – Deed of Trust
Exhibit A – Property Description
Exhibit 3 – Promissory Note
Prepared by: Ethan Bindernagel, Director of Community Development / Assistant City Manager Approved by: June Catalano, City Manager