City Council
Report
City Council Meeting: March 25, 2025
Agenda Item: 4.D
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To: Mayor and City Council
From: Heather Averick, Director, Housing and Human Services Department Subject: Authorize the City Manager to Complete Negotiations for an Amended and Restated Grant Deed and Option to Purchase Property for Ocean Park Villas Recommended Action
Staff recommends that the City Council:
1. Authorize the City Manager to complete negotiations for an amended and restated Grant Deed and Option to Purchase property located at 2019 and 2219 Fifth Street (Ocean Park Villas) based upon a 58-42 split of the surplus cash flow with an upfront payment to the City of $250,000; and
2. Adopt a finding that the action to approve the amended and restated Grant Deed and Option to Purchase is exempt from CEQA pursuant to CEQA Guidelines sections 15301, 15326, and 15061(b)(3).
Executive Summary
The City conveyed the land at 2019 and 2219 Fifth Street to the owner, Ocean Park Villas, L.P. (Owner), in 1982 for development of affordable housing. After conveyance of the land, the owner obtained (i) a 30-year U.S. Department of Housing and Urban Development (HUD) mortgage to construct the housing and (ii) a Project-Based Section 8 rental subsidy in the form of a Housing Assistance Payment (HAP) contract with HUD. The property consists of two 12-unit apartment complexes occupied by lowincome seniors. Per the Grant Deed, the City has the option to purchase the property from the owner for $1,557,000 beginning on May 1, 2025. The owner presented a proposal to maintain its ownership while sharing cash flow with the City. After Council directed staff in closed session to exercise the purchase option, the owner presented an updated proposal. On February 25, 2025, following due diligence by staff on the updated proposal, Council provided direction to authorize the City Manager to execute 2 of 6
an amended and restated Grant Deed and Option to Purchase based upon a 58-42 split of the surplus cash flow, with the split in favor of the City, and with an upfront payment to the City of $250,000.
Background
Ocean Park Villas consists of two noncontiguous, 12-unit multifamily rental buildings in the Ocean Park neighborhood. Under the terms of the Land Sale Agreement (Attachment A) and Grant Deed (Attachment B), the City now has the option to purchase the property back from the owner for $1,557,000 (the amount of the owner’s original HUD mortgage). Under the Third Amendment to Grant Deed (Attachment C), the City has 90 days to exercise its purchase option beginning on May 1, 2025. If the City does not exercise the option, the owner has the right to purchase the property in the amount of the fair market value of the land minus the original purchase price. If the owner does not purchase the property, then the City has a right to reenter and take title to the property (including land and improvements).
Across the two properties, all 24 units are currently occupied. The tenants pay no more than 30% of their income towards rent. The difference between what tenants can afford to pay in rent and the market-rate rent amount is paid for by HUD under the HAP contract between the owner and HUD, which provides significant cash flow to the owner. The HUD contract is in effect until 2043. To date, the owner has received all proceeds from the rental income produced under the HUD contract, and the City has not participated in the cash flow generated by the property. The owner has paid off the HUD mortgage and there are no liens on the property.
Overall, the property is in good condition; however, the property is over 40 years old and will likely require capital repairs during the current term of the HAP contract. Both the owner and the City have commissioned third-party inspections to identify necessary repairs as well as capital improvements needed to extend the long-term life of the buildings. Based on the reports, the City estimates there are approximately $900,000 in repairs needed.
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Initially, the owner proposed extending the purchase option for 20 years with a new profit-sharing arrangement with the City of a 50-50 split of cash flow with the City after operating expenses, reserve deposits, and capital repairs, which would yield a total distribution of approximately $8 million to the City over 20 years, as well as the following:
• A higher share of net cash flow to the owner, and a lower distribution to the City, in earlier years to allow for the owner to receive its preferred return after expenses, reserves, and capital repairs.
• Making repairs identified in the property inspection report the owner commissioned during Years 1-4, to be funded through cash flow from the property. The owner has not included estimates for in-unit repairs identified by the City's third-party inspection.
• A minimum annual distribution to the owner (after all expenses, reserves, and capital repairs) of $293,020 in Year 1, and $430,000 beginning in Year 2 (owner’s Preferred Return). For the first few years, this minimum distribution to the owner would leave very little excess cash for the City.
• A 3.39% property management fee, which is consistent with recent years, allowed by HUD, and considered industry standard.
• A $27,000 asset management fee per year.
The owner’s proposal was considered at the August 27, 2024, closed session and City Council directed City staff to exercise the purchase option on the property. After the closed session direction, the owner provided an updated proposal, which required additional due diligence.
Discussion
Owner’s updated proposal
The owner would like to continue owning and managing the property for an additional 20-year term, and the City would extend its existing purchase option and grant deed by 20 years with a new profit-sharing arrangement benefiting the City. The owner’s updated proposal included two options: one in which the City receives 58% of net cash 4 of 6
flow each year plus an upfront payment of $250,000; and another in which the City would receive 60% of net cash flow with no upfront payment. For both options, the owner removed its preferred return of $430,000 per year and its annual $27,000 asset management fee.
City’s Due Diligence on Owner’s updated proposal
The City’s consultant, HR&A, reviewed the owner’s updated proposal compared to the Council-selected scenario of exercising the purchase option. As part of this analysis (Attachment D), HR&A refined the Council-selected scenario to include (1) a 10% cost increase to capital expenses to account for prevailing wages, (2) added 9 months without cash flow to the Net Present Value (NPV) calculation to account for the timeconsuming transaction that would be required to implement the non-profit selection and HAP contract transfer processes, and (3) added an estimate of $175,000 for associated City staff/consulting costs.
To earn the same NPV as the updated owner proposals, the City would need to receive at least 81% of the net cash flow from any ground lease. However, after due diligence by staff and HR&A via interviews with a selection of affordable housing developers, it was determined it is unlikely any developer/operator would accept such terms.
Additionally, recent actions by the federal administration raise uncertainties about continued funding of the HAP contract subsidy and the ability to transfer the HAP contract to a new operator.
Amending the Grant Deed allows for keeping the status quo for tenants, provides cash flow to the City’s Housing Trust Fund, and alleviates the burden and substantial risk of having City staff negotiate an assignment of the Owner’s HAP contract with HUD. If federal funding for the HAP contract were to be terminated during the HAP contract term, the Owner would face a significant cash flow reduction, but continued maintenance and management of the Property would remain the Owner’s burden. The existing Option to Purchase terms will remain the same should the City desire to exercise its option in 20 years.
On February 25, 2025, Council provided direction in closed session to authorize the City Manager to complete negotiations for an amended and restated Grant Deed and Option 5 of 6
to Purchase Property to run concurrently with the current 20-year HAP contract based upon the Owner’s updated proposal with a 58-42 split of the surplus cash flow with an upfront payment to the City of $250,000.
Next Steps
With City Council approval, the City Manager will negotiate and execute an amended and restated Grant Deed and Option to Purchase Property to run concurrently with the current 20-year HAP contract based upon the Owner’s updated proposal with a 58-42 split of the surplus cash flow with an upfront payment to the City of $250,000.
Past Council Actions
Meeting Date Description
02/25/2025 City Council direction to complete negotiations for an amended and restated Grant Deed and Option to Purchase Property to run concurrently with the current 20-year HAP contract based upon the Owner’s updated proposal with a 58-42 split of the surplus cash flow with an upfront payment to the City of $250,000
08/27/2024 City Council direction to proceed with exercising the Purchase Option Environmental Review
The restated Grant Deed and Option to Purchase Property is exempt from CEQA pursuant to Section 15301 (Existing Facilities), Section 15326 (Acquisition of Housing for Housing Assistance Programs), and Section 15061(b)(3) of the CEQA Guidelines.
Section 15301 exempts (Class 1 Existing Facilities) projects from CEQA, which include the operation, repair, maintenance, permitting, leasing, licensing, or minor alteration of existing public or private structures, facilities, mechanical equipment, or topographical features, involving negligible or no expansion of existing or former use. Section 15326 6 of 6
exempts actions by a redevelopment agency, housing authority, or other public agency to implement an adopted housing assistance plan by acquiring an interest in existing or housing units. Section 15061(b)(3 states that CEQA does not apply “where it can be seen with certainty that there is no possibility that the activity in question may have a significant effect on the environment.” This amended and restated Grant Deed and Option to Purchase Property would allow for the purchase of existing housing units consistent with the City’s Housing Trust Fund Plan. It can be seen with certainty that the agreement would not result in adverse physical impacts on the environment, and as such, is exempt from CEQA under Section 15301, Section 15326, and Section 15061(b)(3).
Financial Impacts & Budget Actions
There is no immediate financial impact or budget action necessary as a result of recommended action. Staff will return to Council if specific budget actions are required in the future. According to HR&A’s analysis, the recommended revenue share would yield annual revenues to the City of approximately $367,933 in the first full year to $629,913 in the 20th year. The amount of actual net cash flow may vary depending on actual capital expenditure costs.
Prepared By: Ayala Scott, Senior Development Analyst
Approved Forwarded to Council
Attachments:
A. Land Sale Agreement - Ocean Park Villas
B. Grant Deed - Ocean Park Villas
C. Third Amendment to Grant Deed
D. Updated Summary of Options for Preservation – February 2025