1 March 2025
Updated Summary of Options for Preservation
Ocean Park Villas
UPDATED OPTIONS
Following the City Council closed session discussion on August 27, 2024, G&K provided two updated options. HR&A modeled these options along with an updated version of the option selected by the City Council.
1. New Option 1: Extension with G&K. City receives 60% of net cash flow each year.
2. New Option 2: Extension with G&K. City receives an upfront payment of $250K and 58% of net cash flow each year.
3. Revised Option 3 (City Council selection): City purchases the two properties, transfers the HAP contract, and negotiates a cash flow split with a to-beselected non-profit operator. (The amended version of Option 3 is discussed on slide #4).
2 3| HR&A Advisors Ocean Park Villas
G&K’s updated cash flow includes in-unit repairs, a decrease in the property tax escalation to 2% from 3%. Below the line, G&K also removed its preferred return of $430K per year and a $27K asset management fee.
UPDATED G&K CASH FLOW SUMMARY
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Net Revenue $1,105,330 $1,139,478 $1,168,002 $1,197,241 $1,227,211 $1,257,932 $1,289,422 Operating
Expenses ($320,094) ($329,824) ($339,624) ($349,718) ($360,114) ($370,822) ($381,850) NOI $785,236 $809,655 $828,378 $847,522 $867,097 $887,110 $907,571 Expected Capital
Expenditures/
Repairs*
($445,794) ($232,908) ($102,648) ($114,425) ($90,241) ($101,096) ($185,937) Net Cash Flow $339,442 $576,747 $725,730 $733,097 $776,856 $786,014 $721,634 Haven Fees ($6,800) ($6,936) ($7,075) ($7,216) ($7,361) ($7,508) ($7,658) Net Cash Flow for
Distribution $332,642 $569,811 $718,655 $725,881 $769,495 $778,506 $713,977 *Estimated from G&K’s and City’s independent Property Conditions Assessments. Includes roofing upgrades, window replacement, landscaping, an upgraded laundry room, and in-unit repairs (electrical, HVAC, plumbing, flooring, appliances, and paint).
UPDATES TO COUNCIL-SELECTED OPTION
Since the City Council closed session meeting on August 27, 2024, HR&A made the following changes to the Council-Selected Option:
1. Added a 10% cost increase to capital expenses to account for prevailing wages.
2. Added 9 months without cash flow to the NPV calculation to account for a more time-consuming transaction than would be required for an extension with G&K.
3. Added an estimate of $175,000 for City staff/consulting costs to implement the non-profit selection and HAP contract transfer processes.
4. Estimated the “Breakeven” cash flow split that a non-profit ground lessee would need to offer the City to match the NPV of the updated G&K offers. 4 *Estimated City cost allowances in Revised Option 3 includes 9 months without cash flow to account for all implementation steps.
MODELING ASSUMPTIONS BY OPTION
5 Description Annual Cash Flow
Percentage to City
Additional Payments to
City City Expenses
Revised Option 3
[Council selection] New Non-Profit Operator 60% - 90% (Requires Negotiation) $0
• $1.6M purchase
• $175K cost* to complete the
purchase, manage the HAP
transfer, and competitively
select a new non-profit operator
ground lessee
• 10% increase in CapEx
(prevailing wages)
New G&K Option
1 G&K Extension 60% $0 • $75K cost* to negotiate
extension of the G&K contract
New G&K Option
2 G&K Extension with
Upfront Payment 58% $250K upfront payment • $75K cost* to negotiate the extension of the G&K contract 6| HR&A Advisors Ocean Park Villas
SUMMARY OF OPTION MODEING RESULTS
Description
Estimated 20-
Year Cash
Flow to City*
Net Present
Value of 20-
Year Cash Flow
Notes
Revised Option
3 [Council
selection]
City purchases both properties for $1.56M and selects a non-profit affordable housing operator to enter into a
ground lease. Compensation to be negotiated with new
operator, with City receiving about 60%-90% of the annual net cash flow.
$8.1M-$13.0M $3.6M-$6.2M
City becomes property owner; conducts
competitive selection process for a new
non-profit operator; transfers the HAP
contract; and enters into a ground lease
to manage legal and operational
responsibilities.
New G&K
Option 1
City and G&K extend the existing option by up to 20**years with a 60% City/40% G&K split of annual net cash flow $10.1M $5.4M Extends status quo, except that City
would now participate in annual cash
flow. No City legal or operational
responsibility.
New G&K
Option 2
City and G&K extend option by up to 20** years with a
58/42 split of annual net cash flow. G&K pays City $250K upfront $10.0M $5.4M
Extends status quo, except that City
would now participate in annual cash
flow and receive a one-time payment. No
City legal or operational responsibilities.
*Any future cash flow to the City must specify that funds go to the Housing Trust Fund rather than the General Fund. **All cash flow figures are estimated for a 20-year period for consistency.
KEY CONCLUSIONS
• Both revised G&K options provide a higher NPV and total net cash flow benefit to the City compared to its original proposal.
• As with the previous G&K proposal, both revised G&K options provide a higher NPV and total cash flow to the City than the minimums under the Council-selected non-profit option. • The revised G&K options compare more favorably to the non-profit option than in the previous analysis because the updated analysis of the non-profit option now reflects City costs and time to manage the property purchase, HAP contract transfer, and non-profit ground lessee selection. • To earn the same NPV as the revised G&K options (including all City transaction costs), the City would need to receive at least 81% of the net cash flow from the non-profit ground lessee (i.e., 19% of the cash flow to the non-profit ground lessee).
• However, a non-profit ground lessee is unlikely to accept such terms based on initial feedback received by City staff and HR&A during interviews with a selection of non-profit developers. • Recent actions by the new Trump Administration raise uncertainties about continued funding of the HAP contract subsidy.
7 Cash Flow Distributions and NPV Calculations
8 First 7 years of 20-year cash flow shown.
Cash Flow for Distribution is lower in Option 3 due to time required to close and prevailing wage requirements.
Cash Flow to Non-Profit set to make City NPV equal the average of the City NPV under the two G&K options.