ACTION:
____________________________
Clerk/Secretary
Department: City Manager Item No: PH2
Prepared by: Eric Bunge, Housing Programs Manager Meeting Date: June 25, 2024 Approved by:
Imelda M. Huerta, Assistant City Manager
John Conley, City Manager Agenda Location: Public Hearing SUBJECT: MIDDLE INCOME HOUSING POLICY
RECOMMENDATION:
1.Open, conduct and close a public hearing to receive public testimony regarding the Middle-Income Housing Policy.
2. Adopt City Council Resolution No. 2024- , approving the adoption of the Middle-Income Housing Policy.
CORRELATION TO CITY COUNCIL GOALS: Homelessness and Housing, Fiscal Responsibility, and A Cleaner Vista, More Beautiful Vista.
PRIOR ACTION: On March 28, 2023, discussed middle-income housing and provided direction to staff to develop guidelines for a middle-income housing program based on the City Council’s discussion (Vote: No Vote).
On September 27, 2022, discussed middle-income housing and provided direction to staff to research and bring back more information (No Vote: Consensus).
STATEMENT ON THE SUBJECT: In September 2022, City Council discussed middle-income housing and directed staff to research the subject matter and return with more information. Staff researched the topic and hired a consultant to conduct an analysis of the Middle-Income Housing Program and identified a recommended review structure for these proposals, included as Exhibit 3.
Staff brought these findings back to City Council in March 2023 for further discussion. In response, the City Council instructed staff to develop a policy that outlines the requirements and regulations for a Middle- Income Housing Program. Subsequently, staff has formulated a draft policy, which is detailed in Exhibit 2 for approval. This policy aims to streamline the evaluation process for joining a Joint Powers Authority (JPA) and establishes baseline criteria for assessing projects proposed for conversion into "Middle-Income" housing. It delineates the operational framework of the program, incorporates language compliant with the minimum standards of Assembly Bill (AB) 787 necessary for fulfilling the city’s Regional Housing Needs Allocation (RHNA), offers guidance to external entities interested in participation, and outlines mechanisms for cost recovery. The following details are included to elaborate on the topics shared above:
AGENDA
REPORT
CITY COUNCIL
COMMUNITY DEVELOPMENT COMMISSION
SUCCESSOR AGENCY
BUENA SANITATION DISTRICT
JOINT POWERS FINANCING AUTHORITY
Opened, conducted and closed the public hearing. Approved above recommendation, adopted City Council Resolution No. 2024-125. Vote: 4-0 (Green absent)
MEETING DATE: June 25, 2024 PAGE 2
SUBJECT: MIDDLE INCOME HOUSING POLICY
Definition of Middle-Income Housing (MIH). Households earning close to the median income of the region are statistically in the middle of the income distribution and researchers have commonly referred to “Middle- Income” Households (MIH) as those with incomes in the 80 to 120 percent of the Area Median Income (AMI), which ranges between $83,650 - $189,300 depending on household size. The 2024 San Diego County Area Median Income is $119,500. Please reference Exhibit 4 for the 2024 San Diego County AMI chart including family size and income range.
Program Overview. The purpose of Middle-Income Housing for developers is to acquire existing market- rate apartment projects and then to subsequently restrict the units to households earning 120 percent of the AMI or less. The structure of the MIH Program includes the following details:
1.No cash assistance is required from the local jurisdiction;
2.Units in the project must be rented at an affordable rate for households earning less than 120 percent AMI, actual restrictions are negotiated between the local agency and the investor;
3. Tax-exempt government bonds, known as Essential Bonds, finance the project. These bonds must be issued through a Joint Powers Authority (JPA) of which the local agency is a member;
4.The Essential Bonds are issued for 30-35 years, and the local agency can require the investor to sell the project back to the local agency after year 15, at an agreed upon minimum sales price, but there are loopholes that cannot guarantee that the investor will sell the project back to the local agency;
5.The use of Essential Bonds entitles 100 percent of the project to be exempt from property taxes (aside from direct assessments); and
6.The MIH Program requires a Program Administrator, which is the Investor, or a party related to the investor, and is entitled to a fee as defined in the agreement with the local agency.
FISCAL IMPACT: There is no direct fiscal impact on the adoption of middle-income housing policy, however, there can be a long-term impact on the City depending on what type of proposal(s) are received.
Any future strategies implemented will return to City Council for approval. Any future proposals under this policy would be subject to the City Council’s review and approval (of a regulatory agreement) to determine project-specific impacts.
EXHIBITS:
1.City Council Resolution No. 2024- , approving the adoption of the Middle-Income Housing Policy
2.Middle-Income Housing Policy
3.Middle-Income Housing Program Analysis KMA
4. 2024 San Diego County AMI Chart
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00029213 7
RESOLUTION NO. 2024-
A RESOLUTION OF THE CITY COUNCIL OF THE CHARTERED CITY OF
VISTA, CALIFORNIA, APPROVING THE ADOPTION OF THE MIDDLE-
INCOME HOUSING POLICY
The City Council of the City of Vista does resolve as follows:
1. Findings. The City Council hereby finds and declares the following:
A. U.S. Department of Housing and Urban Development (HUD) and California’s Department of Housing and Community Development (HCD) define Middle-Income as households that make between 80-120% of the area median income (AMI).
B. Households falling within the 80-120% Area Median Income (AMI) bracket typically do not qualify for many housing programs, as these initiatives primarily target income thresholds ranging from 0-60% AMI. However, in 2019, a new funding model utilizing a joint powers authority (JPA) was established to assist developers in acquiring and preserving units designated for middle-income households through the utilization of bond financing.
C. The first JPA in California was formed in Santa Rosa to acquire housing and make it affordable to middle-income households. Since then, over 40 JPA acquisition deals totaling at least 13,800 units have been approved in California.
D. On September 27, 2022, City Council held a discussion about Middle-Income City Council held a discussion to explore Middle-Income housing as a viable housing option.
Instructed Staff to research the concept and return to Council for further discussion.
E. On March 28, 2023, Staff returned to Council. Staff presented the concept, shared the analysis from a consultant’s study and recommended a review process for these types of proposals. At the conclusion, Council directed staff to draft a policy that outlines the requirements and regulations for a Middle-Income Housing program.
F. Staff developed a policy that aims to streamline the evaluation process for joining a JPA and established baseline criteria for evaluating projects proposed for conversion into "Middle-Income" housing. Staff returned to Council on June 25, 2024 and presented the policy for approval.
2. Action.
A. The City Council approves the adoption of the Middle Income Housing Policy. [Continued on page 2.]
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EXHIBIT 1
RESOLUTION NO. 2024-
CITY COUNCIL OF THE CHARTERED CITY OF VISTA
PAGE 2
00029213 7Exhibit 1 - 2024 Resolution Middle Income Housing Policy.docx
2. Adoption. PASSED AND ADOPTED at a meeting of the City Council of the City of Vista held on June 25, 2024, by the following vote:
AYES:
NOES:
ABSTAIN:
APPROVED AS TO FORM:
WALTER CHUNG, CITY ATTORNEY
By:
APPROVED
Walter C. Chung
20240613160654
JOHN B. FRANKLIN, MAYOR
ATTEST:
KATHY VALDEZ, CITY CLERK
By:
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Vista City Council Policy
XXXX-XX (1)
XXX-XX Middle-Income Housing Policy
PURPOSE
This Policy provides guidance and tools for staff and City Council to standardize review of requests to join a Joint Power Authority (JPA) and sets standard/minimum expectations for analyzing and reviewing projects proposed for conversion to “Middle-Income” housing.
These guidelines reflect the City’s best tools known at this time to mitigate the risks of “middle-income” financing and the associated unknowns, such as, but not limited to, bond performance, market value, sustainable revenues for the property’s operation, rent increases, and tax/bond regulations.
This Policy does not create any right of any type for an applicant to have an application reviewed, considered, or approved by the City.
POLICY
I.Middle-Income Housing Requirements
City Council does hereby set the following limitations and requirements of any proposed Middle-Income Housing and/or JPA partnership.
A.Limitation on Conversions
1.Joint Power Authority. No JPA Agreement shall be entered into without a project application and project level analysis for City Council consideration. Furthermore, all JPAs must concur with all aspects of this City Council policy and all Public Benefit Agreements shall incorporate, at a minimum, the items identified below and in Section III of this policy.
2.Project Approvals. The City shall not approve more units than identified as the moderate need in the current Housing Element Regional Housing Needs Assessment (“RHNA”), regardless of whether the aggregate approved units meet RHNA credit requirements per AB787.
B.Eligible Projects
1.Council Consideration. The City may consider any project meeting the criteria set forth herein. Should Council find that a project does not comply with this Policy and/or the application requirements but provides a unique community benefit and greater balance in rental housing 06/25/2024 PH2 5 of 30
EXHIBIT 2
Vista City Council Policy
XXXX-XX (2)
opportunities, findings to modify or waive the applicable criteria may be made.
2.Priority. Projects that provide additional levels of affordability protections, deeper affordability below 80% AMI, rehabilitate older properties, are new construction, meet RHNA credit standards, or otherwise provide a greater community benefit shall receive priority for consideration.
3.Existing Covenants. Any project with an existing Affordable Housing Regulatory Agreement at time of application, must meet the following criteria:
a)To be considered, any existing affordability restrictions must expire within the life of the bond term of the conversion to “Middle Income” Housing;
b)All existing restrictions must be extended to match the bond terms; and
c)All restrictions must remain at the same or lesser income targets.
C.City Requirements
1.Business License. Property owner or designee (e.g., property or asset management company) shall obtain a City of Vista business license for the property and remain in good standing, such that the property is included in the City’s multi-family inspection program rotation.
2.City Property Tax. No project shall be considered that does not provide the City with payment of an amount equivalent to the otherwise foregone property tax.
a)Host Charges. Any payment made to the City must, at a minimum, cover costs of foregone ad valorem tax to the City. In addition, should the payment of a Host Charge be found to be an ineligible fee, the JPA must provide an alternative community benefit to satisfaction of the City, such as agreement to lower the income targets and said changes shall be incorporated into the attendant Public Benefit Agreement.
b)Other Taxing Entities. At time of policy adoptions, school districts were funded by state fund control and not receiving property tax allotments from the City/County collection. If in the future, any considered project would impact the property tax to a 06/25/2024 PH2 6 of 30
Vista City Council Policy
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school district, consultation on the impacts would need to be addressed prior to project consideration. A similar examination and consideration should be undertaken for all affected taxing entities as well.
3. Staff and Consultant Costs. Applicants shall submit to the City an application for consideration of any project along with an initial fee to establish a deposit account for the purpose of reimbursing the City for City staff time (including City Attorney staff) and any third-party consultants and/or legal counsel during the due diligence stage prior to City Council action. Selection of any third-party consultants shall be at the sole discretion of the City. Third party review may include but is not limited to:
underwriting, bond counsel, tax counsel, municipal advisors , and property inspection services.
4. Ability to Force Sale. The City shall have the ability to force the sale of any project subject to this policy at any point in time after year 15.
5. Transfers. City shall have sole discretion to approve or reject any changes to the:
a) Ownership, including changes that are made in whole or in part. b) Asset Manager/Project Administrator and Property Manager.
Any request to change the Asset Manager/Project Administrator or Property Manager shall be presented to the City for approval and further, the City may request a transfer of operator for any failure to maintain property or comply with terms of the Public Benefit Agreement.
D. Application Process
1. Any interested parties shall contact the Housing and Homelessness Department.
2. Review Time. At a minimum, staff shall be provided with at least 90 days to review any application upon receipt of all required documentation and conduct the proper due diligence.
3. Required Documents. At a minimum, the following shall be submitted with any application:
a) Sponsorship Team – Narrative description of the sponsor, bond underwriter, bond counsel, asset manager, property manager, and 06/25/2024 PH2 7 of 30
Vista City Council Policy
XXXX-XX (4)
other involved/interested parties including recent experience on comparable workforce housing developments.
b) Property Profile - Identify a historical and current profile of the property, including but not limited to:
(1) Narrative of property, including but not limited to acreage, number of units & buildings, amenities, year built, and identity of seller;
(2) Property sales/market history;
(3) Copies of current property tax bills for all project parcels showing the general tax levy, voter-approved indebtedness, and direct assessments;
(4) Prior five (5) years of revenues and expenses, by
customary line items;
(5) Existing debt obligation and capital improvement
reserves; and
(6) Property inspection with identified needed improvements. c) Current Tenancy - Identify the current tenancy and
demographics of residents, as well as information on the property, including but not limited to:
(1) Current Rent Roll (including term of leases);
(2) Property vacancy and turnover rate;
(3) Qualification criteria for new tenants; and
(4) Income/Employment profile of existing tenants.
d) Project Affordability - Proposed project level affordability and terms, including, but not limited to:
(1) Bond Policy for Middle Income, inclusive of formula or schedule for calculating moderate-income rents are each proposed household income level;
(2) Draft Public Benefit Agreement as applicable;
(3) Draft Partnership Agreement between the proposed
bond-issuing authority and the Sponsor as Project
Administrator/Asset Manager as applicable;
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(4) Draft Project Management Agreement between the
Sponsor and the proposed Property Management Company
as applicable;
(5) Bond documents from a recent similar transaction
prepared by the Project’s proposed bond underwriter;
(6) The relevant sections of the Regulatory Agreement
between the City and Sponsor as it related to the Project’s housing development;
(7) Proposed bonds terms, including expected payoff
date(s);
(8) Proposed tenant rents by unit type and AMI level
including the assumed percent of household income to be paid in rent, net of landlord-provide utilities, and projected rent savings compared to market rents by unit type and AMI level going forward; and
(9) Annual rental increase formula and maximums; and
(10) Any available apartment market studies.
e) Proposed Financial Structure - Proposed fee and debt schedule for the project, including but not limited to:
(1) Full Pro Forma (A live financial pro forma in Excel reflecting the construction, financing, projected income and expenses, debt, reserves and annual debt coverage ratios of the Project along with notes on all key assumptions);
(2) Replacement and Operating reserves - provide
amount(s) that is being set aside to ensure that the property has sufficient funds to maintain its existing class A condition, including a long-term capital improvement and operations plan over the 30 years that contemplates
replacement/renovation of major systems and unit level
renovations; and
(3) Projected net sale proceeds to City at end of a 15-year and 30-year period, and basis for estimates; and
(4) Any proposed payment of City property tax and City
monitoring fee during the bond financing period.
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f) Purchase Information – Identify any other taxing entities impacted by this proposal and current value of the property, including but not limited to:
(1) Current appraisal of the property;
(2) Assessment of other tax impacts to city and other
property tax receiving entities; and
(3) Purchase & Sale Agreement and Property Sales Price, including fees.
g) Notification Process – Provide a description or
documentation that outlines the notification process and documentation that would be provided to existing and new qualified moderate-income tenants.
h) Staff may request additional documents in its sole discretion.
II. Project Proposal Review
At a minimum staff shall analyze, prepare, and present the following for City Council consideration:
A. Housing Stock Considerations
1. Balanced Communities Policy. Adopted in 1981, the Balanced Communities Policy seeks to provide a variety of housing options throughout the City and in individual neighborhoods through a mix of for- sale and rental products at various income levels. The following shall be analyzed in considering any individual project:
a) Number of moderate-income units approved through this policy or Balanced Communities during the Housing Element cycle; b) Location of project relative to other market rate rental opportunities;
c) Cumulative impact of workforce housing projects on overall housing stock; and
d) Balance of overall city rental stock by type and neighborhood.
B. Site Considerations
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Vista City Council Policy
XXXX-XX (7)
1. Tenants and Project Specific Demographics. To the greatest extent feasible, the applicant shall provide the following:
a) Historical/Current vacancy and turnover rate;
b) Demographics of existing tenants by occupation/income, including estimate of tenant’s who would be eligible for Workforce Housing;
c) Amenities of specific project; and
d) Current market rate rent roll in comparison to surrounding rentals.
C. Financial Analysis
1. Third Party. A third party shall be retained to analyze the financial projections, bond fees, property tax revenues, and other financial terms and conditions of the proposal.
III. Public Benefit Agreement
At a minimum, a project proposal and Public Benefit Agreement shall include the following items and be reviewed for substantial conformance to the relevant policy by the City Attorney’s Office to provide the City with greater direction in considering such proposal and provide assurances and direction for tenants, staff, and the community in regard to each project. The Public Benefit Agreement shall protect the City’s interest in the proposed JPA and project.
A. Rental Rates
1. Affordability. The affordable housing cost (rent) shall not exceed the rents published annually on the California Tax Credit Allocation Committee website at https://www.treasurer.ca.gov/ctcac/compliance.asp The City may also consider alternative rental/housing cost standards, in its sole discretion. At a minimum, rents will be set at 10% below current market rate. In the event there are other covenants on the property, the most restrictive rent standard shall apply. Unit mix, location and limit to the proposed applicable household income net of landlord provided utility may also be evaluated.
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Vista City Council Policy
XXXX-XX (8)
B. Maintenance Provisions
1. 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 inspections set forth by the Housing Department and/or other City Departments.
C. Tenant Protections
1. Noticing. Each tenant shall be provided with a written notice advising them of the deed restrictions and on-going compliance procedures to maintain their eligibility to live in the income and rent restricted units by category.
2. Affirmative Marketing. Project will maintain a waiting list and follow the affirmative marketing procedures in compliance with HCD’s Affirmative Furthering Fair Housing.
https://www.hcd.ca.gov/community-development/affh/index.shtml
3. Section 8. In accordance with SB 329, property manager or representative shall not discriminate in renting units against voucher holders including those receiving rental assistance from any local, federal, state, or non-profit agency.
D. Deed of Trust and Insurance
1. Deed of Trust. The City may require a Deed of Trust to be recorded.
2. Title Insurance. Should a Deed be required, Developer shall obtain and pay for an American Land Title Association City’s policy satisfactory to City in the amount of One Hundred Thousand Dollars ($100,000.00), ensuring that the Deed of Trust is an encumbrance against the Property, subordinate only to any monetary liens to which the Deed of Trust has been subordinated.
E. Failure to Deliver Host Charge
1. Remedies. The City shall have available to it any and all remedies should it not be provided a host charge, including, but not limited to, 06/25/2024 PH2 12 of 30
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requiring an increase in the number of affordable units (the City shall determine the amount and type of affordable units to be provided).
F. Reporting Requirements
1. Annual Reporting. Each property owner or authorized representative shall submit an annual compliance report showing the name of the tenant, address, unit number, annual household income and rent. A form can be found at the City’s website at:
www.cityofvista.com/departments/housing-homeless-services/affordable- housing
Reporting requirements and associated monitoring fees may be added to the Public Benefit Agreement.
G. Forcing of Sale
1. The City shall have the right to require the sale of the property (“Right of Sale”) beginning year fifteen (15) and continuing until the City waives its right in writing to forgo said sale. The City may require sale of the property to an affordable housing developer of its choosing or to the City. The Right of Sale, including minimum sales price, shall be on terms acceptable to the City. The minimum sale price shall include repayment of suspended property taxes to the City and other affected taxing entities.
2. Tenants. Any purchase contract shall include a notification process, anti-displacement strategies, and relocation assistance for tenants to the satisfaction of the City.
H. City interest in Project/Property to be protected.
1. The City’s interest in the Property/Project shall be protected and may require, at a minimum, terms regarding revenue to debt ratios, encumbrances on property as debt instrument collateral, title insurance, foreclosure provisions, care/maintenance of property requirements, and indemnification, defense, and hold harmless clauses in favor of the City.
City Staff (including the City Attorney’s Office) may add additional terms as they determine necessary.
IV. Revenues to City of Vista
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Vista City Council Policy
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All projects qualifying under this policy and proceeds associated with the project received by the City may be used, as follows:
A. “Host City Charge”. All annual charges shall be issued to the General Fund.
B. Monitoring Fees. All annual fees associated with the monitoring of units shall be used for monitoring purposes.
C. Sale Proceeds. All proceeds collected on sale shall be distributed at the discretion of the City in the following order:
1. Foregone Property Tax. The City at its sole discretion may use funds received to backfill any foregone property tax by taxing entities, including City.
2. Affordable Housing. All the proceeds may be used towards the production and preservation housing within Vista, including but not limited to:
a) Construction of new affordable housing;
b) Conversion of existing housing to affordable uses and/or extension of covenants for preservation;
c) Providing homeownership assistance opportunities, with a priority to current and prior tenants of the project; and/or d) Costs associated with conversion of a rental project into condominiums to provide for-sale products to moderate income qualifying households.
V. Continuous Review of Policy and additional City Manager authority Monitoring of the “Middle Income” Housing policy shall be continuous to ensure compliance with state requirements and financing mechanisms. The City shall closely monitor legislation related to the RHNA, and update the policy as needed to ensure the City is complying and receiving credit towards Housing Element goals to the greatest extent possible. The City Manager or their designee may impose additional requirements for each project as the City Manager or their designee, in their sole discretion, determines it necessary to protect and advance the City’s interests and to implement this policy.
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Vista City Council Policy
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V. Effective Date
This policy shall take effect immediately upon City Council adoption.
The foregoing criteria do not limit the discretion of the Housing and Homelessness Department, or the City Council upon appeal, to impose any other conditions that is deemed necessary or desirable to protect the public health, safety and general welfare.
Middle-Income Housing development must also comply with all applicable requirements of the Vista Development Code that are not in conflict with this policy.
HISTORY
Adopted May 14, 2024, City Council Ordinance No. 2024-
At its March 28th 2023 meeting, the City of Vista Council provided guidance to staff that there is a “missing middle” in rental housing stock for moderate income households. City Council directed staff to prepare this “Middle-Income” housing policy in order to evaluate those types of proposals.
In 2019, a new financing mechanism to provide rental opportunities primarily for moderate income households [those earning between 81-120% of the area median income (“AMI”)] was developed, whereby jurisdictions enter into a Joint Power Authority (“JPA”) Agreement for the issuance of municipal bonds to purchase an apartment complex for conversion into moderate income rental opportunities.
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500 SOUTH GRAND AVENUE, SUITE 1480 LOS ANGELES, CALIFORNIA 90071 PHONE 213.622.8095 2107001v2.VISTA:TRB
WWW.KEYSERMARSTON.COM 19971.055.006
ADVISORS IN:
Real Estate
Affordable Housing
Economic Development
BERKELEY
A. Jerry Keyser
Timothy C. Kelly
Debbie M. Kern
David Doezema
Kevin Feeney
LOS ANGELES
Kathleen H. Head
James A. Rabe
Gregory D. Soo-Hoo
Kevin E. Engstrom
Julie L. Romey
Tim R. Bretz
SAN DIEGO
Paul C. Marra
MEMORANDUM
To: Amanda Lee, Assistant City Manager
City of Vista
From: Tim Bretz
Reena Patel
Date: August 19, 2021
Subject: Overview of Middle Income Housing Program
I.INTRODUCTION
In recent years, a number of financial entities have been submitting proposals to local jurisdictions to use tax-exempt bonds coupled with a property tax-exemption to secure rental housing for households earning up to 120% of the Area Median Income (AMI).
These programs are generally referred to as “Middle Income Housing Programs” (MIH Program). It is important to understand that the MIH Program terms vary from jurisdiction-to-jurisdiction based on negotiations between the parties.
The two primary financial entities (collectively “Investors”) that have been proposing MIH Programs are:
1.The California Statewide Communities Development Authority (CSCDA); and
2.Catalyst Housing Group (Catalyst).
While there are some minor variations between the MIH Programs proposed by the Investors, the general program structures are the same. As such, this memorandum 06/25/2024 PH2 16 of 30
EXHIBIT 3
Amanda Lee, City of Vista August 19, 2021
Overview of Middle Income Housing Program Page 2
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provides an overview of the MIH Program as well as issues for the City of Vista (City) to consider when evaluating specific MIH Program proposals.
II. MIH PROGRAM OVERVIEW
The purpose of the MIH Program is to acquire existing market-rate apartment projects and then to subsequently restrict the units to households earning 120% AMI or less. To accomplish this, the MIH Program relies on the following structure:
1. No cash financial assistance is required to be provided by the participating local jurisdiction.
2. The units in the project must all be rented at an affordable housing cost to households earning less than 120% of AMI. The actual income restrictions to be applied to the project are the subject of negotiations between the Investor and the local jurisdiction.
3. All MIH Program transactions are financed through the use of tax-exempt government bonds. These tax-exempt bonds are referred to as Essential Housing Revenue Bonds (Essential Bonds):
a. The Essential Bonds must be issued through a joint powers authority (JPA) of which the local jurisdiction is a member.
b. The participating local jurisdiction has no liability or financial obligation for the Essential Bonds.
4. The Essential Bonds are typically issued for a 30- to 35-year term, but the local jurisdiction has the right require the Investor to sell the project (or the local jurisdiction can purchase the project) at any point between Years 15 and the end of the bond term:
a. If the local jurisdiction exercises the option, a minimum sales price is agreed upon between the parties. The minimum sales price is the amount necessary to cover the following costs:
i. The outstanding bond amounts;
ii. Any amounts due to the Investor; and
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Amanda Lee, City of Vista August 19, 2021
Overview of Middle Income Housing Program Page 3
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iii. Any transactional fees and miscellaneous costs.
b. The Investor is then required to make best faith efforts to sell the project.
If a sale at or above the minimum sales price cannot be achieved, then the Investor is not required to sell the project.
c. To the extent the project is sold, and the sales proceeds exceed the minimum sales price, the remaining sales proceeds will be provided to the participating local jurisdiction and/or other taxing agencies.
5. The use of Essential Bonds entitles 100% of the units in the project to be exempt from property taxes (aside from direct assessments).
6. The Investor, or a party related to the Investor, acts as the Program Administrator of the MIH Program. In that role, the Program Administrator is entitled to fees that are defined in the agreements between the local jurisdiction and the Investor.
Issuance of Essential Bonds
As noted above, the Essential Bonds are issued through a JPA that has been formed by the Investor. Each local jurisdiction in which an Investor proposes to purchase an apartment project and carry out the MIH Program must become a member agency of that Investor’s JPA.
The Essential Bonds typically have the following terms:
1. They are issued solely through a JPA formed by each individual Investor.
2. The Essential Bonds are typically issued as two tranches:
a. A Series A Bond is used to finance the acquisition costs, capitalized reserves, and other miscellaneous costs; and
b. A Series B Bond is used to compensate the Investor. The Series B Bond acts similarly to preferred equity provided by the Investor; however, no cash investment is actually contributed by the Investor.
3. The Essential Bonds carry a 30- to 35-year term.
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Overview of Middle Income Housing Program Page 4
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4. The local jurisdiction has no liability or financial obligations for the Essential Bonds.
5. The treatment of the project following repayment of the Essential Bonds is negotiated upfront by the parties when the agreements are executed. However, ownership of the property typically reverts to the local jurisdiction once all outstanding debt has been repaid. The property would be conveyed in an “as-is” condition and the City or future owner would be responsible for making any needed capital improvements.
Property Tax-Exemption
The financial structure of the MIH Program relies on the requirement that each apartment project becomes fully exempt from property taxes after acquisition (aside from direct assessments). This property tax-exemption is based on the property being publicly owned, and not based on the property tax welfare exemption accorded to non- profit entities that own and operate low-income apartment units. Thus, 100% of the units in the project will be exempt from property taxes – regardless of the income of each household.
To be considered publicly owned, a local jurisdiction must have the option to purchase the property after 15 years. The following must take place to comply with this requirement:
1. The local jurisdiction must become a member of the JPA.
2. The JPA and the Investor will own the project for the first 15 years.
3. The local jurisdiction and the Investor enter into an option agreement that allows the local jurisdiction to force a sale of the property between Year 15 and Year 35. The local jurisdiction can purchase the property at the minimum sales price described above during the option period.
It is important to note that the Investors typically target Class A market-rate apartment projects for the MIH Program. These types of projects are typically generating significant property tax revenue to the local jurisdiction and the other taxing agencies.
This factor should be considered when evaluating the financial characteristics of the MIH Program.
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III. EXAMPLE PROJECT
The following provides an example structure for a project undertaken with the MIH Program:
1. The local jurisdiction becomes a member of a JPA.
2. The JPA issues sufficient Essential Bonds to carry out the following:
a. Pay for the acquisition price of an existing market-rate apartment project (typically Class A apartments that require minimal or no rehabilitation); and
b. Pay for capitalized interest and debt service reserves, any necessary immediate repairs, and upfront fees for the Investor.
3. No existing tenants are displaced during the process. The MIH program relies on the natural turnover of units to replace market-rate units with income-restricted units.
4. The proposed affordability mix varies from jurisdiction-to-jurisdiction. A common affordability mix follows:
a. One-third of the units are restricted at 80% AMI;
b. One-third of the units are restricted at 100% AMI; and c. One-third of the units are restricted at 120% AMI.
5. The Investor typically proposes to utilize affordable rents that are partly based on the income limits published by the California Tax Credit Allocation Committee (TCAC) for the Low Income Housing Tax Credit program.
6. Annual rent increases are typically capped at around 4% per year.
7. The affordability covenant placed on the restricted units aligns with the repayment term of the Essential Bonds. As such, the affordability covenant terminates when the property is sold and/or the bonds are repaid in full, which is generally 30 to 35 years.
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8. The local jurisdiction may force a sale between Year 15 and the date in which all outstanding debt has been repaid:
a. The sales price must be sufficient to pay off all outstanding debt and proceeds due to any of the owners plus any financing costs. b. Any excess sales proceeds after the repayment of the items listed previously are distributed to the local jurisdiction and potentially to other taxing agencies.
9. If the sale option is not exercised, the treatment of the project at the end of the bond term is an issue to be negotiated upfront between the parties. However, the property typically reverts to the local jurisdiction after all outstanding debt has been repaid.
The following summarizes pertinent points regarding the economics of each transaction:
1. The Investor competes against other market-rate investors to purchase existing apartment projects:
a. The projects are typically Class A properties for which there is substantial competitive demand.
b. The Investor is able to offer a premium purchase price over that of other investors, because the Investor can take into consideration the value created by the property tax-exemption.
2. The Essential Bonds are typically underwritten at a 100%-110% debt service coverage (DSC) ratio. In other words, the debt service payments are equal to approximately 100% of the project’s estimated net operating income (NOI):
a. During the first several years, the debt service is comprised of interest- only debt service payments.
b. The debt service payments escalate as the NOI escalates. c. The use of a 100% DSC ratio and interest only payments in the early years implicitly requires rents to continually increase in order for the project to support principal payments in future years.
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3. The Essential Bond issuance amount exceeds the purchase price of the project by a significant amount. These “additional” bond proceeds are used to fund the following:
a. The creation of large debt service and interest reserve accounts to be used if the NOI is insufficient to cover the required debt service payments;
b. An upfront fee to the Investor, which is typically set at 2% to 5% of the bond issue amount;
c. Immediately required repair costs; and
d. Closing costs and miscellaneous fees.
4. The Investor does not provide any capital or equity to the project.
IV. BENEFITS OF MIH PROGRAM
The follow summarizes potential benefits of participating in the MIH Program:
1. The JPA is the entity that will issue the Essential Bonds. As such, there is no direct financial risk to the local jurisdiction if the Essential Bonds cannot be repaid.
2. The local jurisdiction is able to obtain income-restricted units for at least 15 years. If the local jurisdiction purchases the property during Years 15–35, or the bonds are fully repaid and the property reverts to local jurisdiction ownership, the local jurisdiction can extend the affordability covenants beyond the initial term of the MIH Program.
3. The sale of the property may generate excess sales proceeds that the local jurisdiction can use at its own discretion.
4. The proposed structure targets income levels between 80% AMI to 120% AMI, which are above the typical affordable housing program income targets of 80% AMI and below.
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V. ISSUES FOR CONSIDERATION
The following are issues for the City to consider when evaluating specific MIH Program proposals:
Affordability Issues
The following outlines issues regarding the proposed affordability restrictions:
1. The issuance of Essential Bonds through the JPA is a form of acquisition financing. As such, the MIH Program nominally re-purposes existing rental housing rather than producing new units.
2. The Investor’s affordable rents may not be aligned with the local jurisdiction’s affordability standards. For instance, CSCDA typically calculates affordable rents for their MIH Program based on the assumption that a household spends 35% of their income on housing costs. In contrast, TCAC and most other affordable housing programs calculate affordable rents based on the assumption that households spend 30% of their income on housing costs. This difference causes CSCDA’s affordable rents to be significantly higher than TCAC rents for corresponding income levels. Furthermore, the Investors do not deduct a utility allowance from the Investor’s affordable rents as do other affordable housing programs.
3. In many locations, the property’s current market rents are substantially lower than the Investor’s 100% AMI and/or 120% AMI rent amounts. As such, a large percentage of the occupied units may already be rented to targeted income households and may continue to be rented to these targeted income households in the future.
4. The Investors will set a cap on annual rent increases for households earning 120% AMI and below at no more than 4% per year. However, over-income tenants will not be subject to a cap on annual rent escalations. In addition, it appears that any unit that is vacated will be able to set the rent for the new tenants at the maximum allowable affordable rent – regardless of the 4% cap on annual rent growth.
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5. The affordability restrictions terminate when the Essential Bonds (both Series A and Series B bonds) are fully repaid – typically between 30–35 years – unless a sale is completed earlier. In contrast, most typical affordable housing projects have a 55-year affordability covenant.
6. While the Investors agree to income-qualify tenants on an annual basis, there is no enforcement mechanism for the local jurisdiction to utilize if the Investor does not comply with this requirement.
7. Under current Regional Housing Needs Assessment (RHNA) requirements, the City will not be able to count any of these units towards its RHNA obligation.
Financial Structure Issues
The following outlines a variety of issues regarding the MIH Program’s financial structure:
1. It is important to note that the structure of the MIH Program is based on very aggressive underwriting assumptions:
a. The Essential Bonds are unrated.
b. The Investor does not provide any capital or equity to the project. c. The Essential Bonds typically equate to approximately 105% of the acquisition cost of the project. In contrast, conventional affordable housing projects typically utilize an 80% loan-to-cost (LTC)/loan-to-value (LTV) ratio.
d. The Essential Bonds are underwritten based on a DSC ratio of 110% or less. In addition, the debt service escalates annually. In comparison, conventional affordable housing projects typically utilize level debt service payments that are based on a 115%-120% DSC ratio. e. The MIH Program is structured so that only the bondholders are liable in the event of failure. Neither the Investor nor the JPA are responsible for the repayment of the Essential Bonds. In contrast, most typical real estate transactions involve both a development entity with at least 06/25/2024 PH2 24 of 30
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partial financial responsibility as well as a major lender or financial institution.
2. As noted above, the MIH program caps annual rent increases for affordable households at no more than 4% per year. However, the local jurisdiction’s financial benefits are predicated on a sale of the property that fully repays any outstanding debt. As such, variations in rent growth or operating expenses will have an impact on the potential sales proceeds in Years 15–35.
3. Since the Investor does not provide any capital or equity to the project, there is very limited development risk. However, the Investor collects high fees through the MIH Program, which are not tied to the Investor’s performance or development risk. The fees are summarized as follows:
a. A large upfront project administrator fee;
b. An annual project administrator fee (typically around $200,000 per year) that is escalated at 3% per year; and
c. The Series B Bond acts similar to deferred developer fee for the Investor.
The Series B Bond typically carries a 10% interest rate, and this interest is anticipated to be paid annually from net cash flow. The principal amount of the Series B Bond does not start being repaid until the Series A Bond is repaid in full. However, the Series B Bond must be fully repaid prior to the local jurisdiction taking ownership of the property or receiving any net sales proceeds.
4. The City will not have oversight or monitoring rights with respect to the maintenance, building repairs, and on-going capital upgrades. If the property reverts to the City at the end of the bond term, the property will be conveyed in an “as is” condition, and the City may inherit deferred maintenance liabilities beyond its control.
5. Regardless of the legal and ownership structure outlined above, the local jurisdiction will be the most public-facing entity of the transaction:
a. If property maintenance or other issues arrive, tenants will likely seek assistance from the local jurisdiction.
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b. While the local jurisdiction has no direct responsibility to cure any financial issues with the project, the local jurisdiction may be coerced into providing financial assistance in order to avoid a foreclosure on income-restricted units.
c. To date, it does not appear that there have been any legal challenges involving the MIH Program. However, the City should discuss with their legal counsel the potential risk of any legal liability associated with the MIH Program.
6. If multiple transactions are carried out through the MIH Program, this could have the effect of inflating the local real estate market as sellers may seek higher than market-rate offers that are made possible by a prospective property tax exemption. This concern has been voiced from the real estate investment community.
Loss of Property Tax Revenue
The following summarizes issues related to the loss in property tax revenue:
1. The MIH Program’s structure requires that the property become exempt from property taxes while the Essential Bonds are outstanding. As such, both the City as well as all other taxing entities would receive no property tax revenue from the property during this time.
2. The MIH Program assumes that the loss in property tax revenue to the City will be outweighed by any excess sales proceeds upon sale of the property:
a. This relies on the assumption that real estate values will always increase. b. The local jurisdiction/JPA establishes the property tax exemption and the other taxing entities automatically forfeit their share of the property tax revenue from the project. No approval is required from other taxing entities.
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rents. Thus, the total foregone property tax revenue is greater than the affordability benefit being received.
VI. CITY FINANCIAL ANALYSIS
KMA recommends that the City conduct a thorough evaluation of each MIH proposal – similar to the financial evaluation that would occur for more typical affordable housing projects. This financial evaluation should include the following:
1. Identify the property proposed to be acquired under the MIH Program.
2. Require the investor to provide a pro forma for the project that includes, but not limited to, the following information:
a. The project’s sources and uses including:
i. The acquisition price; and
ii. The bond issuance amount.
b. The bond underwriting terms;
c. The proposed affordability mix; and
d. A 30-year cash flow.
3. The current market rents at both the identified property as well as the surrounding neighborhood.
4. The estimated amount of property tax revenue to be lost during the bond term.
5. A capital needs assessment/property condition report that assesses the property’s maintenance needs over the entire bond term.
6. An appraisal for the property that does not assume a property tax exemption.
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8. An evaluation of the public policy benefits gained by the MIH proposal versus the potential risks/property tax revenue loss to the City.
VII. SURVEY OF OTHER JURISDICTIONS
KMA conducted a limited survey of other jurisdictions that have discussed participating in the MIH Program. The following describes the results of this survey:
Jurisdictions Participating in MIH Program
The following jurisdictions have agreed to participate in the MIH Program:
• Anaheim
• Antioch
• Carson
• Chula Vista
• Dublin
• Encinitas
• Escondido
• Fairfield
• Glendale
• Hayward
• Larkspur
• Livermore
• Long Beach (one pilot project)
• Monrovia
• Pasadena
• Santa Rosa
• Walnut Creek
Jurisdictions Not Likely to Participate in MIH Program
The following jurisdictions will likely not participate in the MIH Program:
• Oakland
• San Francisco
• San Jose
• San Mateo
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VIII. LIMITING CONDITIONS
1. KMA is not advising or recommending any action be taken by the City with respect to any prospective, new or existing municipal financial products or issuance of municipal securities (including with respect to the structure, timing, terms and other similar matters concerning such financial products or issues);
2. KMA is not acting as a Municipal Advisor to the City and does not assume any fiduciary duty hereunder, including, without limitation, a fiduciary duty to the City pursuant to Section 15B of the Exchange Act with respect to the services provided hereunder and any information and material contained in KMA’s work product; and
3. The City shall discuss any such information and material contained in KMA’s work product with any and all internal and/or external advisors and experts, including its own municipal advisors, that it deems appropriate before acting on the information and material.
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Number of Persons in Household:1 2 3 4 5 6 7 8
San Bernardino
County
Area Median Income:
$97,500
Acutely Low 10250 11700 13200 14650 15800 17000 18150 19350 Extremely Low 21550 24600 27700 31200 36580 41960 47340 52720 Very Low Income 35900 41000 46100 51250 55350 59450 63550 67650 Low Income 57400 65600 73800 82000 88600 95150 101650 108250 Median Income 68250 78000 87750 97500 105300 113100 120900 128700 Moderate Income 81900 93600 105300 117000 126350 135700 145100 154450 San Diego County
Area Median
Income:
$119,500
Acutely Low 12550 14350 16150 17950 19400 20800 22250 23700 Extremely Low 31850 36400 40950 45450 49100 52750 56400 60000 Very Low Income 53050 60600 68200 75750 81850 87900 93950 100000 Low Income 84900 97000 109150 121250 130950 140650 150350 160050 Median Income 83650 95600 107550 119500 129050 138600 148200 157750 Moderate Income 100400 114700 129050 143400 154850 166350 177800 189300 San Francisco County
Area Median Income:
$186,600
Acutely Low 19600 22400 25200 28000 30250 32500 34700 36950 Extremely Low 41150 47000 52900 58750 63450 68150 72850 77550 Very Low Income 68550 78350 88150 97900 105750 113600 121400 129250 Low Income 109700 125350 141000 156650 169200 181750 194250 206800 Median Income 130600 149300 167950 186600 201550 216450 231400 246300 Moderate Income 156750 179100 201500 223900 241800 259700 277650 295550 San Joaquin County
Area Median Income:
$103,800
Acutely Low 10900 12450 14000 15550 16800 18050 19300 20550 Extremely Low 20250 23150 26050 31200 36580 41960 47340 52720 Very Low Income 33750 38600 43400 48200 52100 55950 59800 63650 Low Income 54000 61700 69400 77100 83300 89450 95600 101800 Median Income 72650 83050 93400 103800 112100 120400 128700 137000 Moderate Income 87200 99650 112100 124550 134500 144500 154450 164400 San Luis Obispo
County
Area Median Income:
$125,600
Acutely Low 13200 15100 16950 18850 20350 21850 23350 24900 Extremely Low 26750 30600 34400 38200 41300 44350 47400 52720 Very Low Income 44600 50950 57300 63650 68750 73850 78950 84050 Low Income 71350 81550 91700 101900 110100 118250 126350 134500 Median Income 87900 100500 113050 125600 135650 145700 155750 165800 Moderate Income 105500 120550 135650 150700 162750 174800 186850 198900 San Mateo County
Area Median Income:
$186,600
Acutely Low 19600 22400 25200 28000 30250 32500 34700 36950 Extremely Low 41150 47000 52900 58750 63450 68150 72850 77550 Very Low Income 68550 78350 88150 97900 105750 113600 121400 129250 Low Income 109700 125350 141000 156650 169200 181750 194250 206800 Median Income 130600 149300 167950 186600 201550 216450 231400 246300 Moderate Income 156750 179100 201500 223900 241800 259700 277650 295550 Santa Barbara County
Area Median Income:
$119,100
Acutely Low 12500 14300 16050 17850 19300 20700 22150 23550 Extremely Low 34200 39050 43950 48800 52750 56650 60550 64450 Very Low Income 56950 65050 73200 81300 87850 94350 100850 107350 Low Income 91200 104250 117300 130350 140800 151250 161600 172050 Median Income 83350 95300 107200 119100 128650 138150 147700 157200 Moderate Income 100050 114300 128600 142900 154350 165750 177200 188650 06/25/2024 PH2 30 of 30
EXHIBIT 4