City Council
Report
City Council Meeting: October 8, 2024
Agenda Item: 11.A
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To: Mayor and City Council
From: Heather Averick, Director, Housing and Human Services Department Subject: Approve Deal Terms and Authorize Development and Disposition Agreement (DDA) and Ground Lease for 1318 4th Street
Recommended Action
Staff recommends that the City Council:
1. Adopt a finding that the actions to approve the Ground Lease and DDA for the Project (as described in the staff recommendation, below) are exempt from CEQA pursuant to CEQA Guideline section 15182 and a finding that the Project has been previously analyzed in the Downtown Community Plan Environmental Impact Report (SCH# 2013091056) and the 6th Cycle Housing Element Environmental Impact Report (SCH# 2020100575).
2. Authorize the City Manager to negotiate and execute a Ground Lease with a ninety-nine (99) year term and a Disposition and Development Agreement (DDA), with EAH Inc for development and operation of affordable and permanent supportive housing on City-owned property located at 1318 4th Street (the “Project”).
3. Authorize the City Manager to award a grant in an amount not to exceed $2,000,000, to be used for pre-development costs for the Project, as negotiated in the DDA.
4. Adopt a finding that the actions to approve the Ground Lease and DDA for the Project (as described in the staff recommendation, below) are exempt from CEQA pursuant to CEQA Guideline section 15182 and a finding that the Project has been previously analyzed in the Downtown Community Plan Environmental Impact Report (SCH# 2013091056) and the 6th Cycle Housing Element Environmental Impact Report (SCH# 2020100575).
5. Authorize the City Manager to negotiate and execute all necessary documents to make a Housing Trust Fund loan to EAH, Inc. in an amount consistent with the Housing Trust Fund Guidelines loan limits.
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Executive Summary
A 122-apartment affordable and permanent supportive housing development (Development) restricted to low-income households is planned for the City-owned site at 1318 4th Street, Santa Monica. This site was identified for affordable housing development in the City’s 6th Cycle Housing Element for 2021-2029. At its April 9, 2024 meeting, the City Council selected the Design Concept that included 122 apartments with ground-level commercial space and two levels of underground parking for tenants and commercial users (Attachment A). Staff was directed to proceed with negotiations of the Ground Lease and Disposition and Development Agreement (DDA).
Background
On April 9, 2019, per staff and the Housing Commission’s recommendation, Council authorized issuance of a Request for Proposals (RFP) for development of affordable housing on the PS3 site and issued the RFP on August 15, 2019.
On October 12, 2021, Council adopted the 6th Cycle Housing Element Update for 2021- 2029 (Housing Element) and authorized its submittal to the California Department of Housing and Community Development (HCD). The adopted Housing Element identified the use of City-owned sites as a key strategy to meet regional housing needs as land acquisition is typically the largest cost in developing affordable housing. The use of Cityowned land alleviates the impact of land cost on the feasibility of affordable housing development and allows the City’s limited Housing Trust Fund (HTF) resources to be used more strategically.
On January 11, 2022, City Council selected EAH Housing Development Team, comprised of EAH Inc as developer, Van Tilburg, Banvard & Soderbergh as the architect, Epsteen & Associates as the retail broker, The Lynch Group Inc as the retail consultant, AMJ Construction Management as the construction manager, California Housing Partnership as its financial consultant, and The People Concern (TPC) as its services provider. In addition, the City Manager was authorized to negotiate and execute an Exclusive Negotiating Agreement (ENA) with EAH for a mixed-use, 3 of 9
affordable housing and PSH development on PS3. The finalized ENA was executed on July 21, 2022.
EAH conducted both formal and informal engagement, as well as virtual and in-person meetings with the community between November 2022 and April 2023 to further understand the needs and desires of Santa Monica residents and business owners. These meetings facilitated communication between the public and the development team where an overview of the proposed development was given.
Attendees provided feedback on various features of the development.
On May 10, 2024, City Council selected a design concept that includes 122 apartments with two levels of underground parking and a commercial tenant space, and instructed staff to proceed with negotiations of the Ground Lease and Development and Disposition Agreement (DDA).
Discussion
Through negotiations with staff, EAH Inc (Developer) has formalized a proposal to the City that includes the following key provisions:
• Building amenities, including unit furniture for the Permanent Supportive Housing (PSH) apartments.
• To the extent that any developer fee is deferred, developer will receive payment of that fee after the City’s receipt of its 50% share of net cash flow (residual receipts) from the residential portion of the Project.
• The City will provide a ground lease term of 99-years. Fair Market Value (FMV) rent by City will be reassessed at the 55-year mark.
• Subject to federal appropriation, the City will provide a Department of Housing and Urban Development (HUD) Community Project Funding (CPF) grant to the Developer in the amount of $2,000,000 for predevelopment expenses. This CPF grant was allocated to the City through congressional allocation specifically for PS3.
• The Santa Monica Housing Authority will provide 50 Project-Based Vouchers (PBVs) for the PSH apartments.
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• The Developer will provide night and weekend security for the first year of operations.
The annual commercial ground rent will be calculated as 6% of the commercial gross building area appraised value as of the closing date and shall be paid from commercial residual receipts. The annual commercial ground rent amount shall increase at Consumer Price Index (CPI) per year, with a floor of 2% and a ceiling of 4%. The City will receive 100% of commercial residual receipts until the annual payment equates to the annual commercial ground rent. Commercial rent that is unpaid in any year shall not accrue. After the City receives the annual ground rent amount, the City and Developer will share the commercial residual receipts at a 50/50 split. The residual receipts calculations will be different for the residential and commercial. There will be separate leases for residential and commercial tenants.
The proposed Development includes 122 new affordable residences, consisting of 44 studios, 16 one-bedrooms, 31 two-bedrooms, and 31 three-bedrooms. 50 of these residences will be set aside for PSH, and the City will provide 50 PBV’s restricted to 30% of area median income (AMI) for the PSH apartments. The development will restrict 100% of the apartments at or below 60% AMI.
To proceed, staff seeks City Council approval of the proposed DDA terms, including authorization for the City Manager to finalize and execute the DDA and Ground Lease.
Such terms are described in further detail below, summarized in Attachment B and include:
i. Ground-lease terms
ii. Required social services
iii. Use of net cash flow for both residential and commercial uses Terms Summary
The Developer desires to enter into a ground lease with the City for 99 years to retain City ownership in exchange for the continued operation of the property as affordable housing.
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To complete construction, the Developer will apply for the following financing sources:
1. Affordable Housing and Sustainable Communities (AHSC)
2. Infill Infrastructure Grant (IIG)
3. 4% Low Income Housing Tax Credits (Tax Credits) that are competitively awarded by the California Tax Credit Allocation Committee (TCAC)
4. Tax-exempt Bonds from the California Debt Limit Allocation Committee (CDLAC)
5. City HTF Loan of $4,271,981, which falls within the City’s HTF Guidelines Upon securing the agreed-upon financing, the Developer would begin construction of the Development. The construction budget, including a contingency allowance, is estimated at approximately $123 million. The final scope of the new construction and construction budget would be subject to prior written approval by the City.
Sources and Uses
Construction Permanent
Tax Exempt
Construction Loan
$63,531,007 Permanent Loan $7,100,000
Taxable Construction
Loan
$22,430,767 Commercial Loan $1,549,000
Costs Deferred Until
Construction
$3,168,268 Affordable Housing
Sustainable
Communities
(AHSC/State)
$30,938,381
Infill Infrastructure Grant
(IIG/State)
$7,500,000 Infill Infrastructure
Grant (IIG/State)
$7,500,000
City of Santa Monica /
Federal Allocation Award
for 1318 4th Street
$2,000,000 City of Santa Monica /
Federal Allocation
Award for 1318
4 th Street
$2,000,000
City Housing Trust Fund
Loan Request
$4,271,981 City Housing Trust
Fund Loan Request
$4,271,981
Deferred Fee $14,428,050 Deferred Fee $14,428,050
Equity $5,504,851 Equity $55,047,512
Total $122,834,924 Total $122,834,924
Next Steps
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With City Council approval, the City Manager will execute a DDA and associated documents to allow the Developer to apply for low-income housing tax credits and other funding sources to fund the Development’s construction.
Developer plans to submit its funding applications in March 2025 for AHSC, July 2025 for IIG, and to TCAC for low-income tax credits in April 2026. Developer anticipates receiving its TCAC allocation in August 2026 and will start construction in Winter 2027, with construction completion and move-ins estimated in 2029.
If a funding gap should occur, City staff can approve HTF loans that comply with the underwriting criteria and loan limits within the City’s HTF Guidelines. Any request outside of these limits will be brought before City Council for approval. Currently, Developer anticipates a funding gap of up to $4,271,981, which falls within the City’s HTF Guidelines.
Past Council Actions
Meeting Date Description
05/10/2024 City Council selection of the design concept and instructed staff to proceed with negotiations of the Ground Lease and Development and Disposition Agreement (DDA)
01/11/2022 City Council selection of development team for the former Parking Structure 3 site (PS3)
10/12/2021 City Council adopted the final 6th Cycle Housing Element Update (2021-2029)
07/13/2021 City Council awards Bid #2610 and RFP #2610 for the Demolition of Parking Structure #3 and development of site for affordable housing 06/25/2021 City Council provided direction to staff on the draft concepts and strategies to include in the 6th Cycle Housing Element Update 04/09/2019 City Council authorized staff to issue RFP for the development of affordable housing on PS3.
Environmental Review
The execution of a DDA and Ground Lease on the 1318 Fourth Street property for the development of affordable housing is exempt from CEQA pursuant to Section 15182 of CEQA. Section 15182 statutorily exempts qualifying residential or a mixed-use projects 7 of 9
from CEQA that are consistent with an adopted specific plan. The DDA and Ground Lease for development of affordable housing meets the criteria described in Section 15182 in that the project would have a floor area ratio of at least 0.75, is located in a transit priority area, is consistent with the Downtown Specific Plan for which an Environmental Impact Report was certified, and is consistent with the general use designation, density, building intensity, and applicable policies specified for the project area in the Southern California Association of Governments’ Sustainable Communities Strategy.
The development of affordable housing on the property has been previously analyzed in the Final EIR for the Downtown Community Plan (DCP EIR) (State Clearinghouse No. 2013091056) which was certified in July 2017. The DCP EIR analyzed a build-out scenario of 3,024 housing units, including PS 3 as an identified site for housing development. Demolition and development of affordable housing would also be exempt from environmental review pursuant to Government Code Section 65457. “Government Code section 65457 provides an exemption from environmental review for a residential development that is consistent with a broader specific plan for which an environmental impact report previously has been certified.” (Concerned Dublin Citizens v. City of Dublin (2013) 214 Cal.App.4th 1301.) The City further finds that no grounds for supplemental or subsequent environmental review have occurred since certification of the DCP EIR.
Furthermore, the development of affordable housing on 1318 Fourth Street was analyzed as part of the 2021-2029 6th Cycle Housing Element Environmental Impact Report (EIR) [SCH No. 2020100575] that was certified by Council on October 12, 2021, with an Addendum to the EIR approved on October 11, 2022. Development of affordable housing on City-owned properties implements a portion of that 6th Cycle Housing Element and is consistent with the Housing Element EIR. Therefore, no further CEQA review is necessary.
Section 21080.40 of the Public Resources Code. Section 21080.40 exempts from CEQA “An action to lease, convey, or encumber land owned by a public agency for an 8 of 9
affordable housing project” or “An action to facilitate the lease, conveyance, or encumbrance of land owned or to be purchased by a public agency for an affordable housing project”. The DDA and Ground Lease is for the development of an affordable housing project that would meet the criteria in Section 21080.40(a)(1) in that 1) all of the residential units within the project, excluding managers’ units, would be dedicated to lower income households, as defined by Section 50079.5 of the Health and Safety Code 2) the project would meet the labor standards set forth in Section 65912.130 and Section 65912.131 of the Government Code 3) the project is located on a legal parcel in an urban city within ½ mile of a major transit stop and 4) the project is fully surrounded by urban uses.
Additionally, the project meets the requirements of Section 21080.40(c), including • the affordable housing project will be subject to a recorded California Tax Credit Allocation Committee regulatory agreement.
• The affordable housing project site can be adequately served by existing utilities or extensions.
• The project site satisfies the requirements specified in subparagraphs (B) to (K), inclusive, of paragraph (6) of subdivision (a) of Section 65913.4 of the Government Code.
• The project site has been subject to a Phase 1 environmental site assessment, which determined that the project would not be subject to hazardous materials impacts.
The development of affordable housing on the property has also been previously analyzed in the Final EIR for the Downtown Community Plan (DCP EIR) (State Clearinghouse No. 2013091056) which was certified in July 2017. The DCP EIR analyzed a build-out scenario of 3,024 housing units, including PS 3 as an identified site for housing development. Demolition and development of affordable housing would also be exempt from environmental review pursuant to Government Code Section 65457. “Government Code section 65457 provides an exemption from environmental review for a residential development that is consistent with a broader specific plan for which an 9 of 9
environmental impact report previously has been certified.” (Concerned Dublin Citizens v. City of Dublin (2013) 214 Cal.App.4th 1301.) The City further finds that no grounds for supplemental or subsequent environmental review have occurred since certification of the DCP EIR.
Furthermore, the development of affordable housing on 1318 Fourth Street was analyzed as part of the 2021-2029 6th Cycle Housing Element Environmental Impact Report (EIR) [SCH No. 2020100575] that was certified by Council on October 12, 2021, with an Addendum to the EIR approved on October 11, 2022. Development of affordable housing on City-owned properties implements a portion of that 6th Cycle Housing Element and is consistent with the Housing Element EIR. Therefore, no further CEQA review is necessary.
Financial Impacts & Budget Actions
There is a potential HTF request of $4,271,981 to cover the current funding gap, which falls within the City’s HTF Guidelines. Staff will return to Council with any required investment of HTFs or other City resources that fall outside of the City’s HTF Guidelines. Future year funding is contingent on Council budget approval.
Prepared By: Agustin Aleman, Senior Development Analyst Approved Forwarded to Council
Attachments:
A. Attachment A: April 9, 2024 Staff Report
B. Attachment B: DDA Term Sheet - 1318 4th St.
C. Attachment C: Oaks Initiative Form - EAH Inc.
D. Attachment D: Levine Act Disclosure Form - EAH Inc
E. PowerPoint Presentation