City of Sacramento
City Council - 2PM Report
915 I Street Sacramento, CA 95814
www.cityofsacramento.org
File ID: 2022-01667 10/11/2022 Discussion Item 5.
Middle Income Housing Bond Program Workshop
File ID: 2022-01667
Location: Citywide
Recommendation: Receive and provide direction.
Contact: La Shelle Dozier, Executive Director, (916) 440-1319, [email protected]; Christine Weichert, Director of Housing Finance, (916)-440-1353, [email protected]; Sacramento Housing and Redevelopment Agency
Presenter: La Shelle Dozier, Executive Director, (916) 440-1319, [email protected]; Christine Weichert, Director of Housing Finance, (916)-440-1353, [email protected]; Sacramento Housing and Redevelopment Agency
Attachments:
1-Description/Analysis
2-Middle Income Bond Policy Draft
Description/Analysis
Issue Detail: Missing Middle, or Moderate Income Housing Bond Programs, allow public entities such as the City of Sacramento to become a member of a Joint Powers Entity (JPA) which can then issue tax-exempt public purpose bonds. These bonds can then be used for the development of multifamily properties affordable to low and moderate income households (generally households earning 80-120% of the Area Median Income). Properties funded under this program would be tax- exempt and would no longer pay their proportionate share of property tax to the City and to other taxing entities such as school districts and the County of Sacramento.
The Sacramento Housing and Redevelopment Agency (SHRA) was asked to review the potential for the City to form a JPA for this purpose in 2021. At that time, the JPA proposal was linked to two specific proposed housing developments. As a policy had not yet been proposed or developed for these types of middle income projects, it was difficult to City of Sacramento Page 1 of 2
File ID: 2022-01667 10/11/2022 Discussion Item 5.
determine if the proposed projects were beneficial to the City’s overall housing goals.
In 2022, SHRA staff began working with HR&A advisors on an overarching policy that would assist SHRA and City staff in evaluating whether or not a JPA is desirable for the City, if it would meet the City’s housing goals, and if SHRA might be able to serve as the JPA. At the October 11, 2022 meeting, SHRA, City, and HR&A staff will review the draft policy with the Council, discuss any changes/updates that may need to be made, and discuss next steps.
Policy Considerations: Not applicable.
Economic Impacts: Not applicable.
Environmental Considerations: Not applicable.
Sustainability: Not applicable.
Commission/Committee Action: Not applicable.
Rationale for Recommendation: Not applicable.
Financial Considerations: Not applicable.
Local Business Enterprise (LBE): Not applicable.
City of Sacramento Page 2 of 2
MIDDLE INCOME HOUSING POLICY
Sacramento Housing & Redevelopment Agency
October 4, 2022
DRAFT
SHRA Middle Income Housing Policy DRAFT | 1
Contents
Executive Summary ............................................................................................................................................................. 2 Overview of Middle-Income Housing in Sacramento .................................................................................................. 4 Housing Production & Public Financing ...................................................................................................................... 6 Summary of Statewide Joint Power Authority Middle-Income Housing Transactions ........................................... 7 Middle Income Housing Policy .......................................................................................................................................... 9 Overall Goals ................................................................................................................................................................. 9 Middle Income Housing Bonds Issued by Statewide Joint Power Authorities ..................................................... 9 Example JPA Project ..................................................................................................................................................... 9 Potential Scale of Middle-Income Support in Sacramento ................................................................................. 10 Statewide Joint Power Authority Bond Financing ...................................................................................................... 11 Underwriting Standards ............................................................................................................................................ 11 Joint Powers Authority and Sponsor Team Member Qualifications: ................................................................. 12 Transaction & Annual Fees ........................................................................................................................................ 13 Tenant Protections & Occupancy Process ............................................................................................................... 13 Reporting Requirements ............................................................................................................................................. 14 Application Process ..................................................................................................................................................... 14 Middle-Income Housing Bond Application Information Checklist .................................................................. 16
SHRA Middle Income Housing Policy DRAFT | 2
EXECUTIVE SUMMARY
Accessing quality affordable housing is increasingly difficult for middle income households in California.
Before 2012, California local governments focused on providing housing for households earning up to 120 percent of area median income (“AMI”) through the local redevelopment agencies. When state law dissolved all redevelopment agencies, most of the remaining local funding support for housing shifted to target projects for households earning below 60 percent of AMI. As a result, many communities have a gap between unsubsidized market-rate development, affordable to high-income households, and the subsidized units for low-income and very-low-income households. The result is often referred to as the “missing -middle” where middle-income households, defined as household income between 80 percent of AMI and 120 AMI, struggle to find affordable unsubsidized housing units. To track the issue, regional governments across the state project the demand for housing across all income groups that they then use to set targets known as the Regional Housing Needs Allocation (“RHNA”).
Middle-income households in Sacramento have experienced increasing rents and fewer homeownership opportunities indicating a growing issue that requires new policy tools to avoid the affordability crisis faced by lower income groups. According to the American Community Survey, in 2019 11 percent of households making $75,000 to $100,000 per year, which is approximately 80 percent to 100 percent of AMI, were considered rent burdened or paying more than 30 percent of their income on rent. Rent burden rates are much higher for lower income brackets. Furthermore, current market rents indicate that households with one to four people pay just slightly more than 30 percent of their income on a Class B apartments but more than 40 percent for a Class A apartments. The combination of these data points suggests that middle -income households are not presently severely cost burdened, but affordability is deteriorating. Both single-family home values and rents continue to rise rapidly , putting pressu re on middle-income households with the potential to create an issue over time. Fewer middle-income households are able to purchase a home and are staying in rental units longer, which in turn puts pressure on lower income groups to find affordable housing. This is despite Sacramento exceeding their RHNA requirements for this income bracket. This data implies that Sacramento does not have a current missing middle housing issue for multifamily properties, but the trends indicate it could become a bigger problem in the future that requires policy action.
To address the need for missing-middle housing, the Sacramento Housing and Redevelopment Agency (“SHRA”), a local government Joint Powers Agency that has administered affordable housing for the City of Sacramento since 1982, has received ad hoc requests for support for middle-income projects. Requests range from approving new bond financing instruments to traditional tax exemptions. For instance, SHRA was approached by a statewide JPA, California Municipal Finance Authority (“CMFA”) , to participate in their Middle-Income Housing bond program that provides 100 percent financing for the purchase or construction of multifamily buildings that are restricted to households making less than 80-120 percent of AMI. This bond financing approach provides middle-income housing without upfront investment , but the tax exemption implies a local fiscal impact. Although this fina ncing approach has been deployed across the state since 2019 there are limited regulations related to the public benefit offered in return for the fiscal impact.
Through this policy SHRA will provide more clarity and ensure the public benefit of an individual bond offering. The policy will help assess future requests, ensure a more inclusive approach , and support the increased provision of middle-income housing. Note that this policy addressees statewide JPA Bonds only.
The objectives of this policy are as follows: 1) to increase housing supply for middle income households, 2) to provide this additional housing stock with limited direct financial support from the City’s housing resources, 3) to ensure that the project model is economically feasible and continues to support affordability over the specified term, and 4) to ensure maintenance and housing quality of the property over the same term.
SHRA Middle Income Housing Policy DRAFT | 3
The following document outlines terms for SHRA and the City to use as guidelines when considering a project requesting property tax exemption in return for restricting rents for middle-income households.
SHRA Middle Income Housing Policy DRAFT | 4
OVERVIEW OF MIDDLE-INCOME HOUSING IN SACRAMENTO
Middle-income households are not currently heavily cost burdened in Sacramento, but the combination of increasing rents and few homeownership opportunities is putting pressure on middle-income households.
Middle-income households are defined as those making between 80 percent and 120 percent of area median income. As reflected in Figure 1, at prevailing rents households earning between 100 and 120 percent of AMI are generally not rent burdened except for households at 100 percent AMI renting some unit types in Class A buildings. At 80 percent AMI, there are higher rates of rent burden though no unit types require households to become heavily cost burdened and it is generally Class A rents that are unaffordable.
At 60 percent AMI, prevailing rents in all unit types are unaffordable suggesting a housing cost burden for all household sizes. This data reinforces survey data from 2019, summarized in Figure 2, that indicates that approximately 11 percent of households making between $75,000 and $100,000 are housing cost burdened which is approximately equal to 80 – 100 percent of AMI for a four person household.1 This data does not reflect housing cost shocks resulting from California’s response to COVID-19 that led to higher migration to the larger Sacramento metropolitan statistical area from the Bay Area.2 Nonetheless, this shock is not expected to dramatically alter the relationship between income and affordability. In fact, Sacramento remained one of the most affordable rental markets in the country and housing prices have been amongst the fastest in the nation to contract in response to rising interest rates. 3 This policy addresses the increasing affordability pressure on middle income households.
Figure 1:Percent of Income Spent on Rent per AMI Band, by building class 2022 YTD Rents
Studio Apartments / 1 Person HH
AMI Rent / mo. Including
UA 120% AMI 100% AMI 80% AMI 60% AMI
1 Person HH Income $85,850 $71,550 $56,750 $42,600 Average Rent $1,337 $1,489 21% 25% 31% 42%
A $1,560 $1,712 24% 29% 36% 48%
B $1,521 $1,673 23% 28% 35% 47%
C $1,176 $1,328 19% 22% 28% 37%
1 Bedroom Apartments / 2 Person HH
AMI Rent / mo. Including
UA 120% AMI 100% AMI 80% AMI 60% AMI
2 Person HH Income $98,100 $81,750 $64,850 $48,660 Average Rent $1,405 $1,561 19% 23% 29% 38%
A $2,037 $2,193 27% 32% 41% 54%
B $1,592 $1,748 21% 26% 32% 43%
C $1,174 $1,330 16% 20% 25% 33%
1 https://www.census.gov/programs-surveys/acs/
2 https://www.sacog.org/post/sacramento-region-grows-while-state-loses-population-overall and https://public.tableau.com/shared/48NCMJGNM?:showVizHome=no 3 https://www.realtor.com/research/tag/apartments/ and https://investors.redfin.com/news-events/press- releases/detail/752/redfin-reports-bay-area-housing-market-is-cooling-more
SHRA Middle Income Housing Policy DRAFT | 5
2 Bedroom Apartments / 3 Person HH
AMI Rent / mo. Including
UA 120% AMI 100% AMI 80% AMI 60% AMI
3 Person HH Income $110,400 $92,000 $72,950 $54,720 Average Rent $1,647 $1,812 20% 24% 30% 40%
A $2,465 $2,630 29% 34% 43% 58%
B $1,789 $1,954 21% 25% 32% 43%
C $1,451 $1,616 18% 21% 27% 35%
3 Bedroom Apartments / 4 Person HH
AMI Rent / mo. Including
UA 120% AMI 100% AMI 80% AMI 60% AMI
4 Person HH Income $122,650 $102,200 $81,050 $60,780 Average Rent $1,941 $2,116 21% 25% 31% 42%
A $3,414 $3,589 35% 42% 53% 71%
B $2,141 $2,316 23% 27% 34% 46%
C $1,554 $1,729 17% 20% 26% 34%
Source: HR&A Advisors Inc. from CoStar and SHRA Income and Rent Limit Table July 2022 , CoStar Sacramento Geography Pulled Sept 2022
Figure 2: Housing Cost Burden in Sacramento County
HOUSEHOLD
INCOME $50,000 - $74,999 $75,000 - $99,999 $100,000 +
Approx. AMI Band
(4-person household) 60% - 80% 80% - 100% 100%+
30% - 35% 17.3% 5.9% 1.2%
30% + 37.7% 11.4% 3.1%
50% + 1.6% 0.7% 0.0%
Source: HR&A Advisors Inc from American Community Survey 2019 1-year estimate table B25074
Fewer middle-income households are making the transition into homeownership as the share of housing cost burdened households continues to rise. Homeownership in Sacramento, and across California, has become increasingly out of reach for middle income households. Over the last decade Sacramento, as in other parts of the country, has experienced a significant increase in home prices. Home values in the Sacramento region have increased 226% in the last 10 years to $511 ,000.4 A house at this price would require a household income of almost $120,000, just below what 120% AMI households with four people make in Sacramento, and beyond reach for those making less than 100% AMI.
As a result, more households remain in rental housing despite limited new supply where rents are increasing rapidly. Figure 3 shows that for four-person household the AMI for middle-income households in Sacramento in 202 2 ranged from $ 81,050 to $122,650. Figure 4 shows that between 2010 and 2019 for approximately the same income band the share of owner-occupied units decreased by 22 percent while the share of renter occupied units increased by 15 percent. Furthermore, rental units occupied even higher income households increased by 126 percent indicating that middle-income households are likely seeing more pressure on rents and competition for obtaining housing. This dynamic reflects the overall housing shortage
4 Home Values July 2012 – July 2022, City of Sacramento Geography
SHRA Middle Income Housing Policy DRAFT | 6
in the region but also implies an opportunity to restrict rents on some buildings to provide relief to middle income households so that they can save more and eventually move into homeownership.
Figure 3. Sacramento Middle Income Limits by Number of Household Members AMI 80% 100% 120%
1 PERSON $56,750 $71,550 $85,850
2 PERSON $63,850 $81,750 $98,100
3 PERSON $72,950 $92,000 $110,400
4 PERSON $81,050 $102,200 $122,650
Sources: SHRA Income and Rent Limit Table July 2022
Figure 4: Change in Housing Tenure by Income (2010 - 2019)
Source: American Community Survey 2010 and 2019, HR&A Advisors Inc.
Housing Production & Public Financing
Sacramento permitted the development of more moderate-income or middle-income housing between 2013 and 2020 than projected demand but failed to meet overall housing production goals. For the 5 th Cycle Regional Housing Needs Allocation (RHNA), Sacramento permitted the development of 15,456 housing units between 2013 and 2020 leaving 3 6 percent of its allocation unfulfilled. 5 Nearly half the permitted units were moderate income units, 7,178, which exceeded the RHNA target of 4,482. Sacramento failed to meet their permit goals in all other categories resulting in a gap of 8,645 units. Furthermore, continued population growth in Sacramento still resulted in almost double the allocation of total units and four times the allocation for moderate-income housing in the 6 th Cycle RHNA. These trends indicate that housing supply continues to be a growing issue for Sacramento across all levels of affordability.
5https://sacramento.granicus.com/MetaViewer.php?view_id=21&event_id=4341&meta_id=679870
SHRA Middle Income Housing Policy DRAFT | 7
Figure 5: Housing Production Gap
Sources: HCD RHNA APR Dashboard,6 SACOG RHNA Plan February 2020;7 HR&A Advisors, Inc.
SUMMARY OF STATEWIDE JOINT POWER AUTHORITY MIDDLE-INCOME HOUSING TRANSACTIONS In response to similar challenges for middle -income households across the state, several statewide JPAs began structuring proposals for local governments to participate in government-owned middle-income rental housing projects funded by tax-exempt bonds. Since 2020, three JPAs have issued more than $6 billion in middle-income housing bonds. This group of JPAs serve as conduit issuers of financing for local governments across the state. Traditionally, by participating in a Public Benefits Agreement associated with the bonds the local government’s power to purchase, own and finance existing or newly constructed apartment buildings is passed through to the JPA, which also provides an exemption from ad valorem property tax during the term of JPA bond financing and ownership. Tax exemption applies to all local taxing authorities and reduces the overall tax revenue. The local government is not a party to the regulatory agreement between the statewide JPA and the project administrator, or real estate investor/developer, therefore the local government has no enforcement powers over issues at the property level – including the property falling into disrepair and becoming blighted, unless other agreements are put into place. This is a key distinction between this structure and financing that is directly provided by the local government. In return, the JPAs restrict some or all of the units to moderate-income households, which are defined as those who earn between 81 percent and 120 percent of AMI for each county. These rent levels remain based on project agreements and are not typically subject to long -term deed restrictions. Middle -Income Housing transaction Sponsor teams typically include the JPA, a Project Administrator that acts as an asset manager and often identifies properties for acquisition and/or development, a Property Management company working under contract with the Administrator, investment firms and bond counsel.
Middle-Income Housing bonds offer the Sponsor a means of 100 percent project financin g required to purchase or build the apartment buildings including all associated financing and transaction fees. The bonds are generally structured with a series of senior bonds and a subordinated bond. The senior bonds pay for acquisition, financing, reserves and other costs. The senior bonds for most middle-income proposals do not fully amortize, leaving a principal balance to be paid at the end of the bond term (typically year 30 to 35 for acquisition of existing buildings). The subordinate bond is given to the Project Administrator who initiated the project. The subordinate bond, effectively a form of preferred developer equity, carries a tax-exempt interest rate that is typically 10 percent, and is required to be paid prior to the local governm ent in the ultimate sale proceeds schedule. The subordinate bond is often structured as a capital appreciation bond that compounds accrued interest until it is paid in full. Bond investors require that the subordinate bond be
6https://sacramento.granicus.com/MetaViewer.php?view_id=21&event_id=4341&meta_id=679870 7 https://www.sacog.org/sites/main/files/file-attachments/proposed_rhna_plan_2020-1-27_0.pdf?1588205260 Very Low-
Income
( <50% AMI)
Low-Income
(50-80% AMI)
Moderate-
Income
(80-120% AMI)
Above
Moderate
(>120% AMI)
Total
5th Cycle RHNA
RHNA Sacramento,
2013-2021
4,944 3,467 4,482 11,208 24,101
Building Permits Issued
2014-2019
814 1,174 7,178 6,290 15,456
Housing Production
Gap/Surplus
-4,130 -2,293 +2,696 -4,918 -8,645
6th Cycle RHNA
RHNA Sacramento,
2021-2029
10,463 6,306 16,769 20,266 45,580
SHRA Middle Income Housing Policy DRAFT | 8
structured to pay off when the building sells as a n incentive for the investor/developer to maintain the property.
The household income restrictions terminate at the end of the bond financing term, which is typically 30 to 35 years, unless extended by the local government using new financing. The Public Benefit Agreement typically provides the local government the ability to force a sale of the apartment building at its then appreciated value at any point between the 15th year of the bond financing and the end of the term of the bonds, pay off any outstanding bond debt and realize the net sale proceeds. Otherwise, the JPA sells the property on its own initiative at the end of the term of the bonds, repays any outstanding debt, and reverts any additional net sale proceeds to the local government.
The affordability term expires with the bond financing making it difficult to obtain credits for RHNA, which according to California Assembly Bill 787 (“AB 787”) from the 2021-22 session must have a 55-year term to comply, unless a longer affordability period is required . AB 787 authorized up to 25 percent of a jurisdiction's moderate -income RHNA in an existing multifamily building that were converted to deed - restricted rental housing for 55 years . The exception applies only to units that are not converted from affordable to very low, low -, or moderate -income households prior to the covenant and the initial post - conversion rent for the unit is at least 10% less tha n the average monthly rent charged over the 12 months prior to conversion to income-restricted housing.
SHRA Middle Income Housing Policy DRAFT | 9
MIDDLE INCOME HOUSING POLICY
To address the current market conditions and ensure that there is a not an acute housing shortage for middle- income households in the future, City and SHRA Staff have developed draft guidelines to be used when a project is presented for possible City parti cipation. It is envisioned that SHRA would serve as the City’s staffing entity for these types of projects as authorized in SHRA’s JPA with the City and all projects will be presented to the Council for final approval once a final version of the guidelines is adopted.
Overall Goals
The following goals and objectives will be of primary consideration for future middle income housing proposals:
1. Housing Production and Conversion: Middle -Income Housing transactions are intended to encourage the production and conversion of market-rate units to deed-restricted, moderate-income units.
SHRA seeks to maximize the number of units that will qualify for RHNA credit, either through conversion of market-rate units pursuant to AB 787 and/or new construction of deed -restricted and market-rate units, subject to state legislation on RHNA allocations.
2. Housing Affordability: The Sponsor should provide for a minimum of one-third of units at rents affordable at or below 80 percent of AMI, one-third of units at rents affordable at or below 100 percent of AMI, and one-third of the units at or below 120 percent of AMI using current versions of the State Income Limits. Rents should be at least 10 percent below current market rents, as defined by submarket as agreed between the Sponsor and SHRA.
3. Other Public Benefits: Middle-Income Housing transactions that demonstrate unique public benefits including but not limited to rapid conversion of all project units to Middle-Income Housing, provision of other tax revenues (e.g., new sales tax revenue from ground floor commercial uses or net new household spending), other net new local economic benefits (e.g., jobs and economic activity), adaption from one use to another, redevelopment projects or preservation of older properties, may receive priority application review and/or justify modifications to terms and conditions. These other benefits will be determined on a case-by-case basis.
Middle Income Housing Bonds Issued by Statewide Joint Power Authorities Public Benefits Agreements with a statewide or project-specific JPA enables a full property tax exemption along with 100 -percent bond financing for acquisition or constriction of multifamily income restricted properties. These projects, will be required to meet a set of minimum requirements as laid out in this policy.
Under the conditions of the project-specific JPA structure, SHRA will be limited in oversight as they will not participate in the regulatory agreement . As such, SHRA will not have enforcement means on these agreements, unless otherwise negotiated, but SHRA on behalf of the City will have participation in the Public Benefit Agreement along with the relevant JPA. This agreement will enable 100-percent bond financing for acquisition or construction of a multifamily income restricted project.
Example JPA Project
A hypothetical scenario is posed in which financing is requested for a 150-unit recently completed building in downtown Sacramento. This project could be financed using a statewide JPA for $ 300,000 per unit for a total purchase price of $45 million, with sources and uses as shown in
Figure 6.
SHRA Middle Income Housing Policy DRAFT | 10
Figure 6: Sources and Uses Class A Multifamily Acquisition Example
Sources of Funds Total
Per
Unit
Series A $53,375,000 $355,833
Series B $3,000,000 $20,000
Total $56,375,000 $375,833
Uses of Funds Total
Per
Unit
Purchase Price $45,000,000 $300,000
Reserve Funds $5,495,000 $36,633
Project Administrator Fees $500,000 $3,333
Project Administrator Bond $3,000,000 $20,000
Issuance & Broker Fees $2,380,000 $15,867
Total $56,375,000 $375,833
Source: HR&A Advisors Inc., based on data from CoStar and previous bond offering memos
If the building were 70 percent occupied at acquisition the building could lease up 30 percent of units to income-restricted households with the rest of the units converting as households move out. At stabilization, the building would be one-third of households at 80 percent AMI and below, one-third at 100 percent of AMI, and one-third at 120 percent of AMI. Assuming the rents account for a maximum of 30 percent of household income, the building’s net operating income could almost support a sale in year 22 with a $3 million surplus and a $38 million surplus by year 30. More details on the cash flow are provided in the appendix.
Potential Scale of Middle-Income Support in Sacramento
The impact of the policy is likely to be limited by the number of transactions per year where JPA bond financing is an appropriate financing approach, where a long-term affordability covenant is attractive to a Sponsor in exchange for a property tax exemption. For instance, in the last three years there were just over 177 multifamily transactions for Class B and C buildings in the City of Sacramento. Most of these deals had between 4 and 25 units and were scattered across the city. Historically cap rates have decreased implying that investors are willing to pay more per unit compared to existing rents. In more recent month’s interest rates have been on the rise, potentially reflecting a future price decline. Nonetheless, a property tax exemption might be sufficient to strategically support the preservation and conversion of existing units into middle income housing units.
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Figure 7: Multifamily transactions in City of Sacramento 2020 2021 2022 Total
Building Size
1 - 4 units 9 24 7 40
4 - 25 units 18 60 34 112
+25 units 2 13 10 25
29 97 51 177
Location
CBD 10% 6% 14%
Suburban 41% 51% 45%
Urban 59% 45% 49%
Cap Rate
5.49 5.04 4.42
Average Price per unit
$235,940 $210,464 $269,002
Sources: CoStar, HR&A Analysis City of Sacramento Geography
STATEWIDE JOINT POWER AUTHORITY BOND FINANCING
To achieve the above goals and objectives, future Middle -Income Housing transactions will be reviewed against the following terms and conditions: SHRA will consider preliminary applications on a rolling basis to accommodate market transactions and tight timeframes. Within 30 days project proposals will be notified if the proposed transactions meet the basic parameters of the program and would be supported to move forward towards full underwriting. The full application process and required documentation is outlined in the appendix to this memorandum.
Underwriting Standards
All applications will be reviewed against the following basic prudent underwriting standards.
1. Additional Debt: For bond financed projects, after the initial bond issuance, SHRA shall have the right to approve the amount and terms of any additional subordinate debt exceeding $50,000.
2. Accrual: Interest payments on bond series related to sponsor returns shall be applied to principal first, then accrued interest. No capitalization of accrued interest is allowed.
3. Annual Administration Fee: All projects will be required to pay the SHRA’s annual monitoring fee.
SHRA will also receive a Fee equal to $50 per each regulated, non-bond unit per year. For mixed- income projects, the Annual Administration Fee amount shall be determined based on the number of affordable units.
4. Annual Rent Growth: Rents charged on all units shall not increase more than three percent per year.
5. Asset Management Fees: Asset Management fees not to exceed two percent of the subordinate bond amount and may increase up to three percent annually and may accrue interest.
6. Capital Expenditure Reserves : A minimum of $300 per unit per year escalating at no less than 3 percent per year. The required level of annual reserves may increase based on the type and age of property. A Sponsor-provided, third-party physical needs assessment over the entire bond term or affordability restriction summarized as a capital repairs program will be evaluated in
SHRA Middle Income Housing Policy DRAFT | 12
determining these requirements. Furthermore, replacement reserves shall be part of Net Operating Income calculations and used in sizing the Bond.
7. Construction Cost: If applicable, t he hard costs for new construction projects must be verified by SHRA’s construction cost estimating team and methodology for determining must be provided. The construction costs should include a contingency of at least 10 percent.
8. Cumulative Rent Discounts : Over the bond term, the value of cumulative rent discount shall be approximately equal or greater than the value of cumulative foregone property tax revenue to all taxing entities.
9. Debt Service Coverage Ratio Minimum : The financing package, including all series of bonds where relevant, must have a minimum debt service coverage ratio of 1.00 in each year the bonds for the project are outstanding.
10. Deed Restriction: For consistency with AB 787, the affordability restrictions will include a 30-year deed restriction for new construction projects, 55-year deed restriction for acquisition projects, and otherwise be subject to review and approval by SHRA.
11. Forced Sale: With necessary action by the City Council of the City of Sacramento, ability to force sale shall occur at any point after year 15 of the Bond term.
12. Maximum Rents: Affordable rents shall not exceed 3 0 percent of household income, net of utility allowances published SHRA.8 The maximum affordable rents shall be least below market rents for a given type and size of unit or comparable within the submarket. Fair market rents are determined by the United States Department of Housing and Urban Development.
13. Ongoing Fees : The tota l ongoing fees to all entities potentially including the owner, property administrator, property manager shall be evaluated to ensure they don’t exceed market standards.
14. Operating Expense Growth: Expenses should be projected to grow at a minimum of three percent per year. Accumulated capital reserves should be used to conduct major renovation as laid out in the capital repairs program, as well as address unplanned emergencies.
15. Operating Expenses: Total operating expenses shall be no less than the minimum amounts allowed by California Tax Credit Allocation Committee.
16. Unit Mix : The specific project unit mix by number of bedrooms, location within the project and allocation by middle-income household income category will be subject to review and consideration of all project benefits.
17. Vacancy: Vacancy should be assumed at no less than five percent.
18. Debt Obligations: There shall be no additional debt obligations issued on the property without consent of SHRA.
Joint Powers Authority and Sponsor Team Member Qualifications:
The following professional experience parameters for members of the JPA and/or Sponsor’s project team members is required:
1. Joint Powers Authority or Other Sponsor : The JPA or other Sponsor shall demonstrate reasonable satisfaction that it operates with responsible leadership and financing practices, as evidenced by information on current performance on other Middle -Income Housing and/or Affordable Housing transactions. The JPA or other Sponsor shall provide evidence of at least three succe ssfully closed deals.
2. Project Administrators or Asset Managers: Asset management companies will evidence no less than 40 years of combined experience of key principal staff in the following areas: identifying real estate properties for acquisition, negotiating terms, conducting due diligence, documenting, and closing acquisitions; borrowing or underwriting debt and/or equity investments in multifamily transactions; developing properties from the ground up; overseeing substantial rehabilitation of multifamily
8https://www.shra.org/wp-content/uploads/2021/07/Project-Based-Voucher-Utility-Allowance.pdf
SHRA Middle Income Housing Policy DRAFT | 13
projects of 100 units and up subject to a recorded regulatory agreement; experience managing development and ownership of multifamily rental affordable housing projects, including having received affordable housing finance resources of tax-exempt mortgage revenue bonds and low- income housing tax credits; and performing high-quality full asset management of properties under control, including hiring and overseeing reputable property management companies experienced with affordable housing compliance and operations, as well as financial workouts and restructuring.
Property specific requirements on past projects may include confirmation of positive cash flows and that required reserves were funded throughout ownership period.
3. Property Managers: The Property Manager shall have successful experience managing at least five large-scale affordable housing apartment developments in the Sacramento Metropolitan Area over 40 units in size as well as extensive experience managing apartment buildings with deed-restricted affordable units and associated compliance administration. Property Management companies should have experience working diligently and cooperatively with local governments to resolve apartment building condition and safety problems. Property Managers shall submit their portfolio of currently managed properties as well as other managed properties within the last five years, a list of projects with regulatory agreements restricting rents, and the designation of subsidies for those projects.
Transaction & Annual Fees
The Sponsor’s annual fees must comply with the following terms:
1. Asset Management Reserves : For existing buildings, reserves for asset management fees, which contribute to a property's overall debt load, shall be initially funded at a minimum of three years’ worth of payments.
2. Closing Fees : Initial closing fees shall be evaluated to ensure that they do not exceed market standards and are fully accounted for in the information provided by the Sponsor. Closing fees will include bond origination costs, if applicable, or financing fees, project administrator and ownership fees. Total fees should not exceed two percent of either the total development cost for new construction or the acquisition price for an existing building.
Tenant Protections & Occupancy Process
For acquisition of existing projects, the Sponsor is required to take the following measures to avoid involuntary displacement of existing tenants within the 12 months following a property’s acquisition:
1. Noticing: Each tenant shall be provided with a written notice advising them of their rights under the terms of the approved transaction and deed restrictions and ongoing compliance procedures to maintain their eligibility to reside in any market-rate or income and rent restricted units by category, as applicable. The notice shall include procedures for the conversion of tenants of any market-rate units to deed -restricted units in a way that does not cause involuntary displacement of existing tenants.
2. Maximum Household Income: Following conversion to deed-restricted rents of all occupied market - rate units at the commenc ement of lease -up, no units shall be rented to tenants with incomes that exceed 120 percent of AMI.
3. Existing Tenants: Existing tenants who meet household income requirements should be transitioned first into more deeply affordable units at their option, pr ioritizing those with the highest proportion of income spent on rent payments.
4. Section 8: In accordance with SB 329, the Property Manager shall not discriminate in renting units to Housing Choice or VASH (for veterans) voucher holders including those rece iving rental assistance from any local, federal, state, or non-profit agency.
5. Smoke-Free: 100% of buildings and units must be smoke free (including all forms of smoking that create secondhand smoke that impacts health of nonsmokers). In addition, all indoor common areas must be smoke-free. Clearly marked designated smoking areas must be provided. Exceptions may
SHRA Middle Income Housing Policy DRAFT | 14
be given to supportive services developments and existing tenants may be grandfathered in for rehabilitation developments.
6. Renters Insurance: Owners may not make payment of rental insurance premiums a condition of occupancy.
Reporting Requirements
The following annual reporting is required:
1. Application Fee. A transaction pre-application and full application review fee. At the time that the full application is submitted, the Sponsor mu st pay a non-refundable “good faith” deposit of $15,000 to cover SHRA staff costs in determining feasibility.
2. Property Condition: The Property Management Company shall continually maintain the affordable units in a condition which, at a minimum, satisfies the Uniform Physical Conditions Standards promulgated by the Department of Housing and Urban Development (24 CFR §5.705). Property shall also be subject to the City’s rotation of property inspections set forth by the City’s Code Compliance Division of the Community Development Department.
3. Property Financial Report: The Sponsors will provide an annual financial report that details operating revenues and expenses and debt metrics associated with the property.
4. Annual Assessment Report: The Sponsors will provide an annual assessment report indicating the property conditions.
5. Tenant Summary: The property manager will provide an annual rent roll summary of tenant attributes including household size, income and rent information on a form acceptable to the SHRA.
6. Requests for Other Information: The Sponsor project team shall respond within 10 calendar days in writing to any reasonable written request from SHRA for other information about the project’s property maintenance conditions or leasing practices.
Application Process
SHRA staff will prepare a recommendation for City Council for a proposed Middle-Income Housing bond financing or tax exemption request using the guidelines outlined in this policy . Review of the application contents, including its degree of adherence to SHRA terms and conditions for such transactions, and City Council action will include the following: steps, all of which may require 90-150 days depending on project specifics:
1. Initial Consultation Meeting . A Middle -Income Housing Application Sponsor must fir st request a meeting with SHRA staff to introduce and discuss the proposed transaction and obtain an understanding of the application and review process.
2. Submittal of Application. The Sponsor must provide all the information listed below in the Middle- Income Housing Application Information Checklist.
3. Application Completeness Review. SHRA staff, with advice from a 3rd party transaction reviewer/s, if necessary, will review the application and required information and make a “completeness” determination within 30 days. Sponsors will be notified if their application is complete, or if deemed incomplete, what additional information is required to deem the application complete.
4. Application Analysis Review. SHRA staff will conduct analysis of the proposed transaction, including its degree of adherence to the required terms and conditions and seek to clarify any questions or need for additional information from the Sponsor to complete their analysis. This process may take 60 days or more, depending on project specifics.
5. Application Consideration by the City Council. When SHRA staff determines that the foregoing meet and confer process has reached a conclusion, the matter will be scheduled for a City Council hearing in not less than 45 days, to allow for preparation and distribution of a staff report and publication of a public notice about the hearing. Final approval to enter into the transaction and approve
SHRA Middle Income Housing Policy DRAFT | 15
required documents, or to disapprove the application, or ta ke other related action(s) will be by majority vote of the City Council.
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Middle-Income Housing Bond Application Information Checklist The following information must be submitted to the satisfaction of SHRA staff to deem a Middle-Income Housing (MIH) transaction application complete for review and consideration by the City Council:
Requested Item Description
Completed SHRA
Application
Requirements
In addition to components summarized below, applicants should ensure inclusion of components in the Full Application Requirements outline as well as all reports and studies required in the Middle-Income Housing (MIH) Terms and Conditions.9 Sponsor Team
Narrative & Org
Chart
Include a narrative description of the experience and roles of each of member of the Sponsor project team including Principal(s), Executive Director or President of the firm with the project manager specified . Include information on current Middle -Income Housing bonds as well as real estate portfolio performance. Documents to include description of ownership entity, org chart and ownership interests, declaration of non - profit status if applicable, tax returns for the last three years for all ownership interests, financial statements, legal status, and information on other consultants including but not limited to general contractor, attorney, architect, underwriter, and property manager.
Applicant should refer to Management Agent Approval Required Documentation10 for required background on Management Company and Management plan. Applicant should reference the scope narrative templates for Rehab 11 and New Construction 12 Projects.
Sponsor team narrative should include contact list of the firm, address, phone number, fax and e-mail for the applicant and associated consultants.
Development Team
Credentials
A resume from each member of the development team should be provided which demonstrates their qualifications to develop, own, and/or operate the proposed project, and should include specifically the qualifications listed in the Full Application Requirements.
Full Project Financial
Pro Forma
A “live” or dynamic Excel version of the financial pro forma with formulas for the proposed transaction, reflecting current and projected income and expenses, reserves, bond payments, debt coverage ratio, proposed basis for annual rent increases and a schedule of all transaction fees for the Project, and estimated sale disposition and net proceeds scenarios at year 15 and termination of the bond term, along with notes on all key assumptions. To Submission to include a narrative description of financing arrangements, including commitment status or evidence of commitment of proposed financing. Proforma to include the final maturity date under the bond documents.
Additional Cashflow Considerations to account for in underwriting proforma include:
- Cash flow from project operations subsequent to loan approval and prior to conversion of construction to permanent financing must be shown as a source of income in the proforma.
- Cash flow from commercial income will not be included in calculating the debt service for affordable housing units.
- Income from laundry, vending, storage units and/or resident parking fees, if any, will be included in project income for purposes of underwriting. Though
9https://secureservercdn.net/198.71.233.235/d8a.500.myftpupload.com/wp-content/uploads/2020/12/Full- Application-Instructions-Dec-3-2020.pdf
10https://secureservercdn.net/198.71.233.235/d8a.500.myftpupload.com/wp-content/uploads/2020/09/MA_RS- Required-Info-9_2020.pdf
11https://secureservercdn.net/198.71.233.235/d8a.500.myftpupload.com/wp-content/uploads/2020/09/Scope- of-Development-Rehab-Template.pdf
12https://secureservercdn.net/198.71.233.235/d8a.500.myftpupload.com/wp-content/uploads/2020/09/Scope- of-Development-New-Construction-Template.pdf
SHRA Middle Income Housing Policy DRAFT | 17
resident parking fees may be included in project income, parking fees must be voluntary and cannot be required of tenants in affordable units.
Project Narrative
Summary
Project narrative will be a summary of the overall project, construction type, number of units and size (bedrooms, bathrooms and square footage), affordability levels for units, amenities, and any exceptional circumstances for the project.
Project Financing
Summary
Include a narrative description of financing arrangements, including commitment status or evidence of commitment of proposed financing. Financing summary to include sources and uses of funds, including construction, and permanent financing, evidence of commitment, or commitment status of proposed financing. Evidence of project -based assistance, such as rent or operating subsidies, if applicable. If proposing to request project-based assistance, be sure to include that information and timeline. Itemized and detailed total development budget, for which the applicant can refer to the SHRA Budget Template, as well as operating expenses.13
Development or
Redevelopment
Narrative
Applicant to provide a description of current buildings and a matrix of existing unit types. If major renovation or redevelopment is proposed, then the applicant should include relocation and tenant protection plans for existing tenants.
New construction projects must include a description of the proposed construction and design, component budgets, description of work scope for each budget line item, design drawings including architectural plans (to include unit floor plans with gross and net square footage for each unit type) and site plans (to include parking, square footage, and ame nities highlighted), building renderings, landscape plans, design and architectural features of the building, and sustainability compliance evidence. All projects shall adhere to the applicable section of the SHRA Rental Property Minimum Construction Standards.14
Property Information SHRA Site data form completed, detailed information about the location, age, size and current uses of the property, evidence of site control, preliminary title report not more than 90 days old, flood plain status, including back-up documentation, evidence of land use entitlements or status of City application.
Property Tax History Copies of property tax bills for all project parcels over the last five years, if available Existing Rent Roll Trailing 12-month rent roll at the property, if applicable.
Historic Revenue and
Expenses
Full accounting of revenue and expenses over the past five years, if applicable.
Payroll and Staffing
Plan
Detailed payroll and staffing plan for the proposed project.
Capital Expenditure
Plan
Detailed capital expenditure plan with estimated financing levels over the entire bond term.
Purchase and Sale
Agreement
A copy of the executed purchase and sale agreement.
Public Benefit
Agreement
A copy of the draft Public Benefit Agreement between the JPA and the City of Sacramento
Partnership and
Management
Agreement
A copy of the draft agreement between JPA and project administrator if relevant.
Public Offering
Statement
A copy of the draft documents for the proposed transaction or a comparable recently closed transaction by the same Sponsor team.
Offering
Memorandum
Broker offering memorandum from marketed deals or similar marketing materials.
13 https://www.shra.org/multi-family-housing-financing-lending-resources/ 14https://secureservercdn.net/198.71.233.235/d8a.500.myftpupload.com/wp- content/uploads/2020/09/Minimum-Construction-Standards-Adopted-2019.pdf
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Property Conditions
Assessment
Property Condition Assessment report for the Project if available.
Application
Eligibility Timeframe
An application is to be eligible within 18 months of submission, after which time the applicant is required to provide updated application information.
Property Plans
Proposed
Management Plan
A Management Plan drafted by a property management company meeting the minimum program requirements that outlines how the property will be managed, staffed, and maintained. This shall include
a. Affordable Unit Schedule
b. Tenant Selection Criteria and eligibility forms
c. Tenant Application and Waiting List procedure
d. Rent Collection, Inspection Schedule and Work Order Procedures e. Tenant Lease and all lease addenda
f. House Rules and Crime Free Policy
g. Visitation and Guest Policy
h. Smoke Free Policy
i. Procedures for Appeal and Grievance
Security
Questionnaire
A filled-out version of the SHRA Security Questionnaire of Multifamily Projects to be completed for the subject property. 15
Third Party Reports
and Plans
Third Party
Appraisal
The acquisition price of existing properties and/or land for a new construction project must be verified by a third -party appraisal from a licensed appraiser with the cost covered by the Sponsor or lender. Appraisal must be an MAI appraisal that takes restricted rents and the value of below -market financing and tax credits into consideration.
Market Rent Study SHRA requires a Rent Comparability Study at time of full applications. Market studies consistent with California Tax Credit Allocation Committee requirements.
Rehabilitation
assessment
A Physical Needs Assessment (PNA) of the property must be submitted that details the conditions and remaining useful life of the building’s major components, includin g but not limited to electrical, plumbing, HVAC, foundation, and roofing. The scope of rehabilitation work identified in the application should match the findings of the Physical Needs Assessment and comply with SHRAs Minimum Construction Standards for rehabilitation buildings. (if applicable)
i. PNA must be prepared by the project architect or a qualified independent third- party, neither of whom has a conflict of interest with any member of the development team or sponsor. The PNA must be performed no earlier than 120 days prior to application.
ii. The PNA shall include a reserve study for the length of the bond term , which indicates the expected dates and costs of future replacements of all major building components that are not being replaced immediately. The PNA shall also include a schedule of reserve contributions needed to fund those replacements.
15 https://www.shra.org/multi-family-housing-financing-lending-resources/
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Phase I or Phase II
environmental
Assessments
Applications must include a Phase I Environmental Assessment following the standards outlined in the American Standards of Testing and Materials (ASTM) to discover the potential presence of on-site and neighboring property contamination. The assessment must have been completed within six months of the project’s application. If the Phase I assessment indicates the need for further study, a Phase II report must be submitted.
The cost of any remediation must be included and discussed in the project’s budget.
Additional environmental reports may be required pursuant to SHRA’s review, including, but not limited to, soils, arborist reports, cultural resources reports, wetland delineation report, etc.
Utility Allowance
Analysis
Housing Authority utility allowance based on project and utility type.
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Appendix: Cash Flow Summary of a Feasible Bond Financing Example
Assumptions:
Units: 150
Type: Existing Class A Multifamily Residential Building Location: Downtown, City of Sacramento
Capital Improvements: Assumes a $10,000 per unit, $1,500,000, capital expense account is funded at origination
Cap Rate: Assumes that cap rate starts at 5% and increases to 8% by year 30
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Issuance Premium: Assumes there is an issuance premium of 1.75% Year 1 5 10 15 20 25 30
Revenue
Converted Units 10 120 150 150 150 150 150
Non-Converted Units 40 30 0 0 0 0 0
Converted Unit Rent
80% AMI $1,554 $1,749 $2,028 $2,351 $2,725 $3,159 $3,662 100% AMI $1,983 $2,232 $2,588 $3,000 $3,477 $4,031 $4,673 120% AMI $2,198 $2,474 $2,867 $3,324 $3,854 $4,467 $5,179 Market Rent $2,565 $2,887 $3,347 $3,881 $4,499 $5,215 $6,046 Gross Potential Rent $4,316,343 $4,241,884 $4,584,314 $5,187,905 $5,966,124 $6,898,108 $7,989,860 Vacancy (515,371) (212,094) (229,216) (259,395) (298,306) (344,905) (399,493) Bad Debt (43,821) (43,065) (46,541) (52,669) (60,570) (70,032) (81,115) Non-Revenue Units (37,299) (41,980) (48,666) (56,418) (65,403) (75,821) (87,897) Effective Rental Income 3,719,852 3,670,089 4,107,265 4,761,446 5,519,820 6,398,985 7,418,177 Other Income 30,900 34,778 40,317 46,739 54,183 62,813 72,818 Total Other Income 30,900 34,778 40,317 46,739 54,183 62,813 72,818 Effective Gross Income 3,750,752 3,704,867 4,147,582 4,808,185 5,574,004 6,461,798 7,490,995 Operating Expenses
Payroll 189,881 213,712 247,751 287,211 332,957 385,988 447,466 Marketing 7,725 8,695 10,079 11,685 13,546 15,703 18,204 Admin 20,394 22,954 26,610 30,848 35,761 41,457 48,060
Turnover 30,900 34,778 40,317 46,739 54,183 62,813 72,818 Repairs & Maintenance 34,763 39,126 45,357 52,581 60,956 70,665 81,920 Utilities 312,399 351,608 407,610 472,532 547,794 635,043 736,189 Professional Fees 6,489 7,303 8,467 9,815 11,379 13,191 15,292 Total Controllable Expenses 1,019,280 1,147,209 1,329,929 1,541,752 1,787,314 2,071,986 2,402,000 0 0 0 0 0 0 0
Management Fee 75,015 79,590 86,004 97,323 111,921 129,403 149,883 Insurance 50,213 56,515 65,516 75,951 88,048 102,072 118,329 Real Estate Taxes 0 0 0 0 0 0 0
Direct Assessments 24,682 26,717 29,497 32,568 35,957 39,700 43,832 Total Fixed Expenses 149,910 162,822 181,017 205,842 235,926 271,175 312,044 Total Operating Expenses 1,169,190 1,310,030 1,510,947 1,747,594 2,023,239 2,343,161 2,714,044 NET OPERATING INCOME 2,581,563 2,400,330 2,639,688 3,061,750 3,551,205 4,118,804 4,777,014 Debt Service
Project Administrator Fee $0 ($200,000) ($200,000) ($200,000) ($200,000) ($200,000) ($200,000) Other Admin Expenses $0 ($80,000) ($80,000) ($80,000) ($80,000) ($80,000) ($80,000) Capital Reserves ($45,000) ($45,000) ($45,000) ($45,000) ($45,000) ($45,000) ($45,000) Investment Earnings $88,706 $87,386 $87,386 $87,386 $80,156 $80,156 $80,156 Total Bond Specific Net Expenses $43,706 ($237,614) ($237,614) ($237,614) ($244,844) ($244,844) ($244,844) CF Avail for Debt Service $2,741,976 $2,906,347 $3,080,036 $3,438,360 $3,920,729 $4,494,365 $5,168,173 Series A Bond
Series A Bonds Outstanding $49,855,059 $49,855,059 $49,595,639 $46,682,539 $40,874,721 $30,423,634 $13,561,327 2020 A Bonds Interest $2,525,000 $2,525,000 $2,525,000 $2,525,000 $2,525,000 $2,525,000 $2,525,000 Debt Service Series A $2,566,865 $2,581,414 $2,956,302 $3,398,631 $3,902,804 $4,487,469 $5,165,466 Series B Bond
Series 2020B Bonds Outstanding $3,600,000 $4,419,665 $5,115,645 $5,115,645 $5,115,645 $5,115,645 $5,115,645 Series B Bonds Interest Total $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 Debt Service Series B $0 $76,365 $250,053 $300,000 $300,000 $300,000 $300,000 Net Debt Service 2020A & 2020B $2,741,276 $2,818,961 $2,992,650 $3,018,651 $2,859,011 $2,529,610 $1,940,343 DSCR
No reserves 1.059 0.941 0.976 1.168 1.478 2.077 3.731
Reserves 1.266 1.140 1.163 1.168 1.478 2.077 3.731
CF Available after Debt Service 2.562 2.377 1.266 1.308 1.696 2.515 5.341 Exit Scenario
Est Value (5% Cap Rate increasing to 8%) 40,000,000$ 44,000,000$ 43,700,000$ 44,400,000$ 51,500,000$ 59,700,000$ Closing Fees (5%) -$ (2,000,000)$ (2,200,000)$ (2,185,000)$ (2,220,000)$ (2,575,000)$ (2,985,000)$ Oustanding Debt (53,455,059)$ (54,274,724)$ (54,711,284)$ (51,798,184)$ (45,990,367)$ (35,539,279)$ (18,676,972)$ Excess Proceeds (53,455,059)$ (16,274,724)$ (12,911,284)$ (10,283,184)$ (3,810,367)$ 13,385,721$ 38,038,028$