CITY OF SAN MATEO
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CITY OF SAN MATEO
Agenda Report
City Hall
330 W. 20th Avenue
San Mateo CA 94403
www.cityofsanmateo.org
Agenda Number: 27 Section Name: {{section.name}} Account Number: 25-3112 File ID: {{item.tracking_number}} TO: City Council
FROM: Alex Khojikian, City Manager
PREPARED BY: Community Development Department
MEETING DATE: August 19, 2024
SUBJECT:
2000 S. Delaware Street Affordable Housing Development Transfer to MidPen Housing - Reassignment and Amendment of Ground Lease and Conditional Loan Commitment Term Sheet RECOMMENDATION:
Approve: (1) a reassignment of the ground lease for the affordable housing project at 2000 S. Delaware Street from Westlake Reality Group to MP 2000 Delaware, LLC and amendments to the ground lease to deepen the affordability of the units in the Project to households at or below 80% of Area Median Income; and authorize the City Manager to execute the reassigned and amended ground lease in substantially the form provided; (2) a Term Sheet that includes a conditional loan commitment of $500,000 in exchange for deepening the affordability of the 60 rental units in the Project from moderate to low-income; and direct staff to return to City Council by end of November with a regulatory agreement, loan agreement, and other documents required to fulfill the commitments in the Term Sheet, for City Council approval.
BACKGROUND:
The 2000 S. Delaware Street affordable housing project (2000 S. Delaware) is 60-unit, deed-restricted affordable development for moderate-income households (at or below 120% Area Median Income, or AMI) on City-owned land at 2000 S. Delaware St., owned by Westlake Realty Group (Westlake). 2000 S. Delaware is located adjacent to a 60-unit, deed-restricted affordable development for households at 40-90% AMI owned by MidPen Housing (MidPen, operating as MP 2000 Delaware, LLC). The projects were developed at the same time pursuant to a 2011 Disposition and Development Agreement (DDA; amended in 2012 and 2016) following a Request for Proposal (RFP) process to develop affordable housing on a former police station site. The City remains the owner of the property upon which both projects are located (Property); the City is party to two separate ground leases with the respective developers of 2000 S. Delaware and Delaware Pacific that each restrict the affordable units for a 55-year period.
In late 2023, Westlake informed the City that it was exploring options for selling its 60-unit development and assigning the Ground Lease for 2000 S. Delaware. In March of 2024, Westlake informed the City that after reviewing various offers, it was proceeding with a deal with MidPen to sell the development and assign the Ground Lease for 2000 S. Delaware.
Assignment of the 2000 S. Delaware Ground Lease may occur only with City approval. In addition to acquiring the 2000 S.
Delaware development, MidPen proposes to deepen the affordability level of the units from moderate-income to at or below 80% AMI (also referred to as “low-income”).
Staff has met regularly with MidPen and Westlake to discuss the transfer of the 2000 S. Delaware Ground Lease and deepening of affordability at 2000 S. Delaware. The two parties are currently negotiating the sale of 2000 S. Delaware and working towards a closing date in late September, after the date of this City Council meeting. They are requesting that the City take the following actions:
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Approve MidPen Housing as the assignee of the 2000 S. Delaware Ground Lease; Make amendments to the Ground Lease and execute a Regulatory Agreement for 2000 S. Delaware that restricts the units to low-income households, rather than moderate-income households; and Make a financial contribution to subsidize the deepening of affordability of the 60 units at 2000 S. Delaware.
Proposed Loan Commitment
To purchase and lower the affordability of the units at 2000 S. Delaware to 80% AMI, MidPen has obtained a loan from Housing Trust Silicon Valley. MidPen is also providing a loan to the project, which it expects to be repaid over a 15-year period. To cover the financing gap, MidPen initially requested a City loan commitment (City Loan) of $1,000,000, or approximately $16,950 per unit in the form of a residual receipts loan.
The requested subsidy amount is low relative to that required for new construction of affordable units. Furthermore, staff is aware that many tenant households at 2000 S. Delaware are in the low and very low-income range and are currently paying rents below the moderate-income maximum. At the same time, the City has received several other formal and informal requests from affordable housing developers for funding over the last year. Considering the limited amount of City funding and the fact that 2000 S. Delaware consists of existing deed-restricted units, staff recommends a City Loan amount of $500,000, or approximately $8,470 per unit.
The City has sufficient Housing funds to support this project, and for which preservation is an allowable use. The proposed basic terms of the City Loan are specified in the Term Sheet in Attachment 2. If the City Council is in agreement with these terms, staff will draft a set of loan documents that incorporates these terms (Loan Documents), including a Loan Agreement, Deed of Trust, and Promissory Note, and return to the City Council within six months for approval.
Amended 2000 S. Delaware Ground Lease and Regulatory Agreement As noted above, the 2000 S. Delaware Ground Lease between the City and Westlake would be reassigned to the entity that purchases the development, and it must be amended to change the affordability restriction from moderate-income to low- income (80% AMI). The Assignment and First Amendment to Ground Lease (Assignment and First Amendment), provided in Attachment 1, achieves both of these immediate objectives. The Assignment and First Amendment would be signed by all three parties (City, Westlake, MidPen).
Based on discussions with MidPen and the City’s experience with the existing 2000 S. Delaware Ground Lease, staff recommends making further amendments to better align with the intended long-term use of the development. In addition to a Ground Lease, MidPen has requested that the City execute a Regulatory Agreement restricting the units to 80% AMI.
A Regulatory Agreement is required to apply for a Property Tax Welfare Exemption for 2000 S. Delaware.
Rather than seeking approval for these documents now, staff proposes to work with MidPen on a more thorough series of amendments and draft Regulatory Agreement and return to City Council at a later date. Staff recommends this phased approach due to the short timeframe before the targeted closing date (end of September) of the 2000 S. Delaware transaction between Westlake and MidPen. If the City Council approves the Assignment and First Amendment, staff will work with MidPen to draft an Amended and Restated Ground Lease and combine it with the draft Loan Documents and Regulatory Agreement in one item for City Council consideration.
Current Tenancies at 2000 S. Delaware
The MidPen proposal to restrict the rents at 2000 S. Delaware to 80% AMI households, rather than moderate-income households, will not result in displacement of any current tenants at 2000 S. Delaware. Upon expiration of their current lease, any tenants who qualify as households at or below 80% will execute a new lease at an affordable rent for 80% AMI households. Tenants whose incomes exceed the 80% AMI level but are below 120% AMI (moderate-income) will remain in their units at a moderate-income rent. When a tenant at any income level vacates a unit, the unit will then be restricted to 80% AMI households moving forward. Based on the annual reports submitted for this building, all tenants are at or below 120% AMI.
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BUDGET IMPACT:
There are sufficient Housing funds to support a City Loan commitment of $500,000 to 2000 S. Delaware. If the City Council chooses to make a City Loan commitment, staff will return to City Council to seek an appropriation of funds from the appropriate Housing fund.
ENVIRONMENTAL DETERMINATION:
This action is not a project subject to CEQA, because it can be seen with certainty that it will not cause a physical change in the environment. (Public Resources Code Section 21065.)
NOTICE PROVIDED
All meeting noticing requirements were met.
STAFF CONTACT
Rachel Horst, Housing and Neighborhood Services Manager [email protected]
(650) 522-7223
ATTACHMENTS
Att 1 – Assignment and First Amendment of Ground Lease
Att 2 – Term Sheet