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File #: 23-584 MEETING DATE: 7/18/2023
REQUEST FOR CITY COUNCIL ACTION
SUBMITTED TO: Honorable Mayor and City Council Members
SUBMITTED BY: Al Zelinka, City Manager
VIA: Ursula Luna-Reynosa, Director of Community Development
PREPARED BY: Charles Kovac, Housing Manager
Subiect:
Middle-Income Housing Program Update
Statement of Issue:
On July 20, 2021, the City Council adopted Resolution No. 2021-43 and Resolution No. 2021-44,
approving and authorizing the City Manager to enter into Public Benefit Agreements and execute the
Middle-Income Housing Program (the "Program") and associated agreements with California
Municipal Finance Authority (CMFA) and project sponsor, Catalyst, for the acquisition and conversion
of two market-rate apartments (Elan and Breakwater Apartments) for middle-income housing. Since
the City Council approval in July 2021, Catalyst has been actively proceeding with conversion of the
Elan and Breakwater properties to middle-income housing.
On May 16, 2023, Councilmember McKeon brought forward an "H" item related to the Middle-Income
Housing Program and requested a presentation to update the City Council on the status of the
Program. Specifically, Councilmember McKeon requested that the Community Development
Department, CMFA, and Catalyst provide a comprehensive report related to fiscal impacts and
requested answers to other questions (see Attachment 2).
Financial Impact:
Not applicable. As requested by the City Council, financial impact information of the Middle-Income
Housing Program approved on July 20, 2021 is described in this report.
Recommended Action:
Receive and file.
Alternative Action(s):
None.
Analysis:
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A. BACKGROUND
As described in the July 21, 2021 staff report (Attachment 1), middle-income housing is designed for
persons earning between 80 percent and 120 percent of area median income (AMI). This segment is
considered the "missing middle" between lower income (_<80% AMI) affordable housing and market-
rate (>120% AMI) housing since no funding sources exist for this population. CMFA, working with
Catalyst as the project sponsor (on behalf of CMFA as the asset manager), acquired the Properties in
August 2021 through the issuance of tax-exempt "essential government bonds." As the bond issuer,
CMFA oversaw the underwriting of the bonds prior to issuance and actively manages the
performance of the project sponsor Catalyst during the life of the bonds. The operating rent
generated at the Properties will pay the debt service on the tax-exempt bonds that were issued in
August 2021; therefore, the City does not pay the debt service payments on the tax-exempt bonds.
The July 2021 staff report (Attachment 1) referenced a 30 year bond maturity; however, at the time,
the underwriting process was underway but not completed until after City Council approval. Upon
completion of underwriting and based on the market conditions at the time of sale of the bonds, both
projects required a 35 year maturity in the Limited Offering Memorandums; therefore, this staff report
will utilize the 35 year bond maturity date for calculations related to foregone property tax as well as
for real estate valuation purpose.
As a public agency and a joint powers authority (JPA), CFMA is a tax-exempt entity that is not
required to pay property taxes. This property tax abatement, coupled with the tax-exempt financing,
provides a significant advantage in terms of cash flow, which allows CFMA to compete with market-
rate buyers, and enables CFMA to make the units available to low and moderate income households.
The typical split of units is one-third at 80 percent AMI, one-third at 100 percent AMI, and one-third at
120 percent AMI. It is important to note that a non-government entity could acquire a property and
restrict units to 80 percent AMI, and those units would qualify for the "welfare exemption" and would
not have to pay property taxes on any units at 80 percent AMI or less. As described below, by
providing middle-income units, the City will forego current and future property tax revenues with the
ability to sell the Properties in 15-35 years with all net proceeds distributed to the City.
The Elan and Breakwater Apartments ("Properties") consist of 674 total rental units, of which, 647
have been or will be converted from market rate units to middle-income units (ranging from 80% to
120% of area median income). (Note: the July 2021 City Council report indicated 676 total units at
Breakwater and Elan Apartments; however, the planned conversion of existing non-residential space
into two additional units at Breakwater was later determined not to be a viable option). The balance
of 27 units that are located at Elan Apartments are already restricted to moderate income (110% of
area median income) per the City's Inclusionary Zoning Ordinance that was applied at the time of
entitlement.
As indicated in the July 2021 staff report, the acquisition of the Properties resulted in the loss of 2022
property tax and future property tax revenues to the City's General Fund. The July 2021 analysis
was based on an average 14 percent City share of the 1 percent property tax levied on the assessed
value of the properties and did not include the voter approved 1.5 percent supplemental public safety
employee retirement levy. When you add the public safety retirement levy the effective rate is 15.5
percent. Further, the July 2021 analysis was based on pre-acquisition assessed valuation (additional
discussion on this topic is found later in this staff report under response to Question 5). As described
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later in this report, 2022 property taxes for the Properties were estimated for year 1 at $378,069. To
determine the loss of property taxes over a 35-year period (full term of the outstanding bonds), staff
increased the property taxes by two percent annually, which is the maximum increase allotted for
without a sales transfer or improvements to the property that trigger a reassessment. For a 35-year
period, the City would forego an estimated total of $20,926,549 in property tax revenue. Based upon
providing 647 middle-income units, the cost to create these affordable housing units would be
approximately $32,344 per unit ($20,926,549 divided by 647 units). Comparatively, a traditional
affordable housing project, while usually at the lower income level, includes $70,000-90,000 of
subsidy per unit and qualifies for the welfare exemption and are exempt from property taxes. Most of
the funding available to subsidize affordable housing is for lower income housing leaving little or no
options to preserve workforce (i.e. moderate income) housing. The Program provides an ability to
preserve attainable housing costs by preventing a market rate investor from purchasing the property
and increasing the rents and instead restricts the rents preserving this "middle income" housing
stock.
Beyond the public benefit of creating the restricted middle-income units, the Properties also represent
an investment opportunity with potential long term financial benefits for the City in the form of public
equity. Under the recorded Public Benefit Agreement, the City, at its sole discretion, may force a sale
of the Properties between year 15 and year 35, and the City would receive the net sale proceeds.
Since the Properties are financed through the issuance of tax-exempt bonds and there are no equity
partners, all excess sale proceeds after payoff of the bonds go the City. Over a 35-year period, the
Properties could realize $595,611,279 in valuation at the end of year 35 (assuming a conservative
annual appreciation of 1.8%). The City could realize significant value in owning major real estate
assets that could be sold to market-rate buyers, thereby maximizing value to the City. Alternatively,
the assets could be sold to affordable housing developers to be rehabilitated with new, more deeply
restricted affordable housing covenants recorded on the Properties. This decision could be made in
the future depending upon the City's needs and policy priorities.
The residents of these Properties interface with Catalyst, as the project sponsor or Catalyst's
designated property management firm. Annual rent increases are capped at no more than 4 percent,
which is less than the rent limits under AB1482, the adopted State tenant protection legislation. It is
important to note that existing tenants are not displaced regardless of household income, as the
conversion of market rate units to middle-income units occurs over a few years as leases expire and
current tenants move on to other housing opportunities.
B. RESPONSES TO SPECIFIC QUESTIONS REGARDING MIDDLE-INCOME HOUSING
PROGRAM
On May 16, 2023, Councilmember McKeon brought forward a list of questions that he and the City
Council wanted staff to address regarding the status/update of the Middle-Income Housing Program.
1. How many of the 649 housing units are occupied? There are a combined 674 units at
Breakwater and Elan. These properties have a blended occupancy rate of 95 percent. At
Breakwater, 359 of 380 available units (94%) are occupied, with an additional 20 units under
renovation and not available for immediate occupancy. At Elan, 265 of the 274 units (97%) are
occupied. A five percent vacancy rate is typical in multi-family housing. Additional information
regarding occupancy by unit type can be found in Attachment 3. All of the currently vacant
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units (30 total; 21 units at Breakwater and nine units at Elan) are currently being marketed to
only low and moderate income households per the Program restrictions.
2. How many have been remodeled as planned and at what cost? At Breakwater, 35 units
have been fully renovated, with five (5) additional units scheduled to be delivered in July. Each
unit renovation includes new flooring, appliances, cabinets, countertops, paint, and additional
improvements. The average renovation cost per unit is $43,875. At Elan, while the unit
interiors were not in need of significant renovation, all interior hallways have received fresh
paint and new flooring. Over the next several weeks, the exterior of the property will be
painted, the pool will be resurfaced, and the clubhouse will be renovated.
3. How many of the units are leased to persons earning 80%-120% of the Area Median
Income, as required? Breakwater and Elan have achieved a blended program qualification
rate of 57 percent since acquisition. At Breakwater, 232 of 400 units (58%) have been leased
to program-qualifying households. At Elan, 153 of 274 units (56%) have been leased to
program-qualifying households. On average, 16 units per month have converted. As noted by
CFMA and Catalyst, a full transition to program-qualifying households is limited by two primary
factors:
• The Regulatory Agreements recorded against the properties carry explicit non-
displacement clauses.
• COVID-related conditions and tenant protections lowered turnover compared to
industry norms, including protections that allowed all existing residents to transition
to month-to-month leases without the additional fees that multifamily owners
typically charge to incentivize residents to execute new 12-month leases.
As such, while every effort is made to program-qualify households, the collective balance of
units (43%) is rented to residents who are non-program qualifying, which may be due to: being
over-income, affirmatively choosing to not provide information needed to qualify, or continuing
on a month-to-month basis. Additional information on program qualification progress, including
breakouts by AMI level and unit type, can be found in Attachment 3.
4. What are the average monthly rents? Breakwater has an average monthly rent of $2,324 for
program-qualified households, representing a 24 percent discount to current market rents.
Elan has an average monthly rent of $2,307 for program-qualified households, representing a
23 percent discount to current market rents (see Attachment 3 for market rents). Total rental
discounts amount to nearly $3.3 million annually. Average in-place rental discounts are
anticipated to further increase as additional units are leased to program-qualifying households.
Additional information on average monthly rent by property, including breakdown by AMI level,
can be found in Attachment 3.
5. To fund the Middle Income Housing Program, the City has to forgo future property tax
revenues for up to a 30-year period. How much in property tax did the City forego in
2022 and what is the estimated amount for 2023 and over the next 30 years?
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This question will be answered based on a 35 year bond maturity instead of a 30 year bond
maturity, as previously noted in this staff report. Further, the 2021 staff report analyzed the
foregone property tax based on the assessed value pre-acquisition and the property taxes that
the City was collecting at the time. It is uncertain whether these assets would have transferred
without the Program; therefore, the analysis was based on the pre-acquisition assessed value.
With that being said, following the change in ownership, Breakwater's assessed value
increased by nearly $46 million from $139 million to $185 million (33%). Elan's assessed
value increased nearly $9 million from $125 million to $134 million (7%). As mentioned earlier
in this staff report, the 2021 analysis was based on an average 14 percent of the 1% property
tax levied on the assessed value of the properties, and did not include the voter approved 1.5
percent supplemental public safety employee retirement levy. When you add the retirement
levy it's an effective rate of 15.5 percent.
Due to these dynamic variables, providing a static response to this question is difficult. The
following narrative assumes the same methodology used in 2021 (pre-acquisition value with a
2% annual property tax inflation, an average 14% of the property tax levy, and 1.5% public
safety employee retirement levy) except that it includes a 35 year bond maturity date instead
of a 30 year bond maturity date. Below the narrative response is a chart that shows and
compares the foregone property tax utilizing the average 14 percent share of the levy, a
scenario utilizing the average 14 percent levy plus the supplemental retirement levy 1.5
percent (15.5% total), and a scenario utilizing the average 14 percent levy plus the
supplemental retirement levy and the post-acquisition assessed valuation.
Breakwater - It is estimated that the City would have collected $220,413 in property taxes from
this asset in 2022, based on the 2021 pre-acquisition tax valuation and including the public
safety employee retirement levy. Assuming 2 percent annual property tax inflation, it is
estimated that the City will forgo $224,822 in property taxes from this asset in 2023. Over a 35
-year period, which reflects the full term of the outstanding bonds, the City's foregone property
taxes related to this asset are estimated to be $11,019,517, should the property remain JPA
owned. This amount represents approximately 3 percent of the anticipated value of the
property after the bonds are matured in 35 years ($345,417,199), as outlined in Breakwater's
Public Benefit Agreement. If the City sells the property, this is the anticipated amount the City
would receive.
Elan - It is estimated that the City would have collected $198,163 in property taxes from this
asset in 2022, based on the 2021 pre-acquisition tax valuation and including the public safety
employee retirement levy. Assuming 2 percent annual property tax inflation, it is estimated the
City will forgo $202,127 in property taxes from this asset in 2023. Over a 35-year period, which
reflects the full term of the outstanding bonds, the City's foregone property taxes related to this
asset are estimated to be $9,907,032, should the property remain JPA owned. This amount
represents approximately 4 percent of the anticipated value of the property after the bonds are
matured in 35 years ($250,194,074), as outlined in its Elan's Public Benefit Agreement. If the
City sells the property, this is the anticipated amount the City would receive.
Combined, Elan and Breakwater would have generated $20,926,549 in property tax revenue
over a 35-year period. It is important that the above figures are evaluated with the following
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context:
• These properties will only be exempted from property taxes so long as they are
JPA or government owned. There is no certainty that this will be the case for the
next 35 years. The City may elect to trigger its Public Benefit Agreement as soon as
2036, at which time it may elect for the assets to be sold to for-profit owners that pay
full property taxes.
• In addition to the long-term economics generated for the City, the rental
subsidies alone range from 6 to 8.5 times what the City would have collected in
property tax revenues depending on pre or post acquisition assessment values.
• Existing non-profit affordable housing providers within Huntington Beach
(including for-profit owners with minority (1%) non-profit "partners") are also
receiving full property tax exemptions, without providing any long-term economic
benefits to the City.
Comparison of Foregone Property Tax Estimates
2021 RCA July 2023 Analysis: July 2023 Analysis:
2020-21 Pre- 2022-23
Acquisition Tax Post-Acquisition Tax
Valuation with Valuation with
Employee Retirement Employee Retirement
Levy Levy
Breakwater 195,179 195,179 259,000
Elan 175,476 175,476 187,600
Retirement Levy 0 39,713 47,850
TOTAL 370,655 410,368 494,450
6. What are the property management fees paid every year and to whom are they paid?
Breakwater - Over the past twelve months, Greystar was paid $219,000 in property
management fees, amounting to 2 percent of collected revenues.
Elan - Over the past twelve months, Greystar was paid $187,000 in property management
fees, amounting to 2 percent of collected revenues.
7. What are the annual maintenance and repair fees?
Breakwater - Over the past twelve months, the property incurred $289,600 in maintenance
and repair fees, amounting to $724/unit.
Elan - Over the past twelve months, the property incurred $156,000 in maintenance and repair
fees, amounting to $569/unit.
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8. How many of the retail shops on the first level of Elan are leased? At present none of
the retail shops at Elan are leased, as disclosed publicly in the Limited Offering Memorandum
(LOM). This trend predates acquisition, with the remaining tenants terminating their leases
within months of property closing. Retail vacancy challenges spurred by COVID-19 continue
to impact Huntington Beach, where at least 74 retail spaces remain vacant in the sub-market.
In addition to these market challenges, Elan faces site-specific challenges such as parking
and frontage attributes, which also impact leasing.
CFMA and Catalyst are addressing these concerns, including installing attractive window
wraps to improve the street-side look and feel. In addition, they recently hired a new third-
party retail leasing broker with a strong track record of success in Orange County.
Environmental Status:
Not applicable.
Strategic Plan Goal:
Economic Development & Housing
Attachment(s):
1. July 20, 2021 Request for City Council Action Narrative regarding Middle-Income Housing
2. May 16, 2023 H Item Report (McKeon) requesting update on Middle-Income Housing Program
3. Elan and Breakwater Apartments: Program Qualifications Reports
4. PowerPoint Presentation to City Council for July 18, 2023 meeting
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File #: 21-531 MEETING DATE: 7/20/2021
REQUEST FOR CITY COUNCIL ACTION
SUBMITTED TO: Honorable Mayor and City Council Members
SUBMITTED BY: Oliver Chi, City Manager
PREPARED BY: Ursula Luna-Reynosa, Director of Community Development
Subject:
Approve Middle Income Housing Program by adopting Resolution No. 2021-43 and Resolution
No. 2021-44; Authorize the City Manager to enter into Public Benefit Agreements and execute
Middle-Income Housing Program agreements, and determine that these actions are not
subject to the California Environmental Quality Act
Statement of Issue:
City Council approval is requested for the following items related to the Middle Income Housing
Program, in order to enable the acquisition and conversion of two market-rate apartment complexes
into workforce housing within the City of Huntington Beach:
1. Resolutions approving, authorizing, and directing execution of joint exercise of powers
agreements supporting the issuance of bonds for the production, preservation, and protection
of essential middle-income rental housing;
2. Joint Exercise of Powers Agreements;
3. Public Benefit Agreements, which may result in the City receiving surplus revenue from the
future sale of the projects; and
4. Regulatory Agreements and Declaration of Restrictive Covenants.
Financial Impact:
If approved, the Middle Income Housing Program would result in the creation of 649 middle income
housing units at the two current market-rate apartment complexes in question. Based on the terms
of the program, the identified units would be created at an average cost of$23,169 per door, which is
an efficient and cost-effective way of establishing affordable housing units.
Based on current market conditions, the estimated cost of acquiring and rehabilitating 649 units and
income restricting them at "middle income" levels would be between $56,000 and $85,000 per door,
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depending on the level of income targeting. For further comparative purposes, the City's recent
experience with an affordable housing project being developed by Jamboree Housing for permanent
supportive units resulted in an approximate cost of$70,000 per door cost, and the City of Santa
Ana's average subsidy is approximately $90,000 per door for similarly restricted units.
To fund the Middle Income Housing Program, the City would have to forgo future property tax
revenues for up to a 30 year period, with the first year amount estimated at $370,655. Assuming a
2% increase in property values annually, the average annual property tax subsidy over a 30 year
period would be $501,225. However, of note, between Year 15 and Year 30 (the end of the life of the
bonds), the City, at its sole discretion, may force a sale of the middle-income rental housing projects
and the City would receive the sale proceeds. Over a 30-year period, the City could realize
$647,620,251 in proceeds at Year 30, following payoff of debt.
Recommended Action:
A) Adopt Resolution Nos. 2021-43 and 2021-44 approving, authorizing, and directing execution of
joint exercise of powers agreements relating to the CMFA Special Finance Agency VII and VIII
(collectively the "Agency") supporting the Agency's issuance of bonds for the production,
preservation, and protection of essential middle-income rental housing ("Middle-Income Housing
Program"); and,
B) Authorize and direct the City Manager to enter into Public Benefit Agreements, substantially in the
form attached, with the Agency, which may result in the City receiving surplus revenue from the future
sale of the Projects; and,
C) Authorize and direct the City Manager to execute related documents and take any additional
actions that may be required to implement the Middle-Income Housing Program; and,
D) Determine that this action is not subject to the California Environmental Quality Act (CEQA)
pursuant to CEQA Guidelines Sections 15060(c)(2) and 15060(c)(3), because it will not result in a
direct or reasonably foreseeable indirect physical change in the environment, and it is not a "project"
pursuant to Section 15378(b)(5) of the State CEQA Guidelines.
Alternative Action(s):
Do not adopt the resolutions, enter into the Public Benefit Agreements, or execute related documents,
or take any additional actions that may be required to implement the Middle-Income Housing
Program.
Analysis:
A. BACKGROUND
City Council held a work study session on February 16, 2021, to evaluate a middle income workforce
housing program as a means of achieving the public policy objective to create a continuum of
affordable housing. Middle income housing is designed for persons earning 80% and up to 120% of
area median income (AMI). This segment is considered the "missing middle" between lower income
(<80% AMI) affordable housing and market-rate (>120% AMI) housing since no funding sources exist
for this housing population. At their January Strategic Planning Session, the City Council expressed
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the importance of providing middle income workforce housing as a means to transition people out of
lower-income affordable housing. Currently, one-third of the City's affordable housing portfolio, or
660 units, are moderate income units between 110% - 120% AMI. Of the 660 units, half are rental
units and half are for-sale units.
California Community Housing Agency (CaICHA), working with Catalyst as the project sponsor, was
the first Joint Powers Authority (JPA) to acquire a residential apartment project with tax-exempt
"essential government bonds". They have since closed on nine transactions. There are other JPAs
and other project sponsors doing similar transactions. As a public agency, the JPA is a tax-exempt
entity that is not required to pay property taxes. This property tax abatement, coupled with the tax-
exempt financing, provides a significant advantage in terms of cash flow, which allows the JPA to
compete with market-rate buyers, and enables the JPA to make the units available to low and
moderate income households. The typical split of units is one third at 80% AMI, one third at 100%
AMI, and one third at 120% AMI. It is important to note that a non-government entity could acquire a
property and restrict units to 80% AMI, and those units would qualify for the "welfare exemption" and
would not have to pay property taxes on any units at 80% AMI or less.
The project sponsor acts on behalf of the JPA as the asset manager. For all intents and purposes,
the residents of these projects interface with the project sponsor or their designated property
management firm. Annual rent increases would be capped at no more than 4%, which is less than
the rent limits under AB1482, the recently adopted State tenant protection legislation. It is important
to note, existing tenants are not displaced, regardless of household income, as the conversion of
market-rate units to middle income units occurs over a few years as leases expire and current
tenants move on to other housing opportunities.
The JPA issues the tax exempt governmental bonds. As the bond issuer, the JPA will oversee the
underwriting of the bonds prior to issuance and the performance of the project sponsor during the life
of the bonds.
Opportunity to Acquire Two Existing Apartment Complexes
Catalyst has approached the City with an opportunity to acquire two existing apartment complexes in
Huntington Beach and convert them into "workforce housing" units, as market-rate leases come due.
Elan and Breakwater are the two apartment complexes (the "Properties"), where the rents range from
$1,984 - $3,255 per month. Collectively, between the Properties, there are a total of 676 dwelling
units that generate a combined $2,647,536 annually of basic levy property tax revenue. The City's
annual 14% share is $370,655. Based upon the current valuation (2020-21 Secured Property Tax)
and a two percent annual increase in valuation, the City would have reduced property tax revenue of
an estimated $6,409,893 over 15 years, and $15,036,763 over 30 years for the Projects.
Elan is located at 18504 Beach Boulevard, Huntington Beach and is comprised of a total of 274 units
(27 units are restricted at 110% AMI per the City's Inclusionary Zoning Ordinance). This project was
completed in 2015 and generates $1,253,400 annually of basic levy property tax revenue. The City
receives 14% which equates to $175,476 annually. The market-rate units rent in the range of$1,984
- $3,034 with a current overall vacancy rate of 5.11%. This property last sold in July 2016 for
$131,000,000. Catalyst has negotiated a sales price of$136,000,000.
Breakwater is located at 16761 Viewpoint Lane, Huntington Beach and is comprised of a total of 402
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units (all market rate). This project was completed in 1972 and generates $1,394,136 annually of
basic levy property tax revenue. The City's annual 14% share is $195,179. The rents range from
$2,319 - $3,255 with a current vacancy rate of 5.77%. This property last sold in December 2017 for
$134,000,000. Catalyst has negotiated a sales price of$185,000,000. Since the 2017 sale, the
current owner has invested significantly in renovations and capital improvements.
California Municipal Finance Authority
California Municipal Finance Authority (CMFA) is the City's preferred JPA whose track record and fee
structure are appealing. CMFA was created on January 1, 2004 pursuant to a joint exercise of
powers agreement to promote economic, cultural and community development, through the financing
of economic development and charitable activities throughout California. CMFA is the largest issuer
in the State for all conduit bond financing. They have a 16 year track record with zero housing
defaults on over 1,000 transactions of which 600 are affordable housing projects. To date, over 325
municipalities, including the City of Huntington Beach, have become members of CMFA. CMFA is
the only financing authority which has granted over $25M dollars directly to local governments and
501c3 nonprofit organizations during the past sixteen years. CMFA will grant 25% of the issuance
fees to the general fund of the City. Such grant may be used for any lawful purpose of the City.
CMFA will donate 25% of the issuance fees to a charitable organization of the City's choice within the
host municipality for each transaction.
Execution of the Joint Exercise of Powers Agreement
In order for the Agencies to have the authority to serve as the issuer of the bonds for the Properties, it
is necessary for the City of Huntington Beach to become a member of the Agency (CMFA Special
Finance Agency VII and VIII).
The Joint Exercise of Powers Agreement provides that the Agency is a public entity, separate and
apart from each member executing such agreement. The debts, liabilities and obligations of the
Agency do not constitute debts, liabilities or obligations of the members executing such agreement.
The bonds to be issued by the Agency for the Properties will be the sole responsibility of the
borrower, and the City will have no financial, legal, moral obligation, liability or responsibility for
Properties or the repayment of the bonds for the financing of the Properties. All financing documents
with respect to the issuance of bonds will contain clear disclaimers that the bonds are not obligations
of the City or the State of California, but are to be paid for solely from funds provided by the borrower.
There are no costs associated with membership in the Agency and the City will in no way become
exposed to any financial liability by reason of its membership in the Agency. In addition, participation
by the City in the Agency will not impact the City's appropriations limits and will not constitute any
type of indebtedness by the City.
B. ANALYSIS
The Properties require a City subsidy in the form of forgone property taxes for the duration of the
essential governmental bonds over a thirty-year period. Due to the required subsidy, City staff, with
the support of the National Development Council (NDC) who serves as the City's technical advisor,
has independently evaluated the public benefit of the Middle Income Housing Program as it relates to
the Properties as well as preliminary project feasibility analysis.
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Public Benefit
To evaluate the public benefit, staff has reviewed whether the amount of subsidy is appropriate for
the level of affordability in terms of the proposed "cost per door" for each unit. In the City's recent
experience with an affordable housing project being developed by Jamboree Housing, the City
subsidy represented a cost of approximately $70,000 per door for permanent supportive housing (33
units at 30% AMI, 9 units at 50% AMI, and one manager's unit). The City of Santa Ana's average
subsidy is approximately $90,000 per door for similarly restricted units. The city subsidy is leveraged
with other funding sources so the total subsidy per door is much greater than the city subsidy alone.
Some of the units are currently rent restricted at 110% AMI with 55 year covenants. Excluding the
restricted units there are 649 market-rate units within the Properties. The City currently receives
approximately $370,655 annually in property taxes for the Properties. As previously stated, the City
will forego approximately $15,036,763 in property taxes over 30 years ($23,169 per door) to create
649 middle income rent restricted units. These figures assume a 2% annual increase in property
taxes and represent the City's 14% share of the base tax levy. Further, these numbers don't factor in
a net present value calculation and simply assume the City has access to 100% of the foregone
property tax revenue today, which clearly is not the case. If a 3% net present value calculation is
applied, the cost per door is approximately $7,000 per door less.
The above per door subsidy calculations are not a compatible comparison as the per door examples
are for new construction and extremely low and very low income levels. If an affordable housing
developer were to approach the City with a proposal to acquire and rehabilitate 649 units and income
restrict them at "middle income" rents, staff expects that the requested subsidy, assuming that the
City is the sole funding source, would be between $56,000 and $85,000 per door depending on the
level of income targeting. This subsidy is calculated by subtracting an average, blended restricted
rent from the average, blended market rent to determine the revenue gap (due to the artificial
restriction on rents) on the 649 units over 30 years. As an example, if the blended rental rate was
$200 less than the market-rate rent over 30 years, this would amount to a subsidy of$72,000 per
unit. Therefore, this range of$56,000 to $85,000 is significantly higher than the cost per door utilizing
the essential government bonds program. Further, the City would likely be reluctant to utilize
restricted affordable housing funds on moderate income units and would prefer to use such funds on
more deeply restricted units, such as very low and low income units. Staffs conclusion is that this
essential government bond program to provide middle income housing units is a cost effective way to
create such housing units.
While staff is overall supportive of this program should the City Council desire to further middle
income or workforce housing, it should be noted that the foregone property tax revenue is
unrestricted, General Fund revenue and can fund public safety services as well as parks and other
infrastructure needs. It is a policy decision to prioritize the public benefits that can be achieved with
this money. Further, while there is pending legislation, as of today, under State Law, these units
cannot count toward the City's Regional Housing Needs Allocation (RHNA) for the 2021-2029 cycle.
If Assembly Bill 787 were to pass, the bill would authorize the City to include qualifying converted
units in its annual progress report and reducing the City's share of regional housing need for the
income category of the converted units on a unit for unit basis. The bill would apply only to
converted units that meet specified requirements, including that the rent for the unit prior to
conversion was not affordable to very low, low-, or moderate-income households and the initial post
City of Huntington Beach Page 5 of 7 Printed on 8/8/2021
powere2'LegistarTM
File #: 21-531 MEETING DATE: 7/20/2021
conversion rent for the unit is at least 10% less than the average monthly rent charged over the 12
months prior to conversion. Based on the current draft legislation, approximately 232 of the units
would meet the specified requirements.
Public Equity
Beyond the public benefit of creating the restricted middle income units, the Properties also represent
an investment opportunity with long term financial benefits for the City in the form of public equity.
Under a recorded Public Benefit Agreement, the City, at its sole discretion, may force a sale of the
Properties between year 15 and year 30 (the end of the life) of the bonds, and the City would receive
the net sale proceeds. Since the Properties are financed through the issuance of tax-exempt bonds
and there are no equity partners, all excess sale proceeds after payoff of the bonds go the City. Over
a 30-year period the Properties could realize $647,620,251 in valuation at the end of year 30
(assuming an annual appreciation of 1.8%). The City could realize significant value in owning major
real estate assets that could be sold to market-rate buyers, thereby maximizing value to the City. Or
the assets could be sold to affordable housing developers to be rehabilitated with new, more deeply
restricted affordable housing covenants recorded on the Properties. This decision could be made in
the future depending upon the City's needs and policy priorities.
From an investment perspective, if the City were to invest the foregone property taxes in the Local
Agency Investment Fund (LAIF) at 3%, the average annual rate of return over the past 30 years, the
City's investment would grow to $18,163,088 over 30 years. The average rate of appreciation for real
estate in California is approximately 6% annually. If the City were to invest the foregone property
taxes in real estate instead of LAIF, and assume a 6% annual rate of return, the City's investment
would grow to $31,061,511 (a difference of almost $13 million). Investing the foregone property taxes
in real property will create significant public equity that can help secure the financial stability of the
City of Huntington Beach.
Environmental Status:
Pursuant to Sections 15060(c)(2) and 15060(c)(3) of the California Environmental Quality Act
(CEQA) guidelines, CEQA does not apply to this action because it will not result in a direct or
reasonably foreseeable indirect physical change in the environment and it is not a "project" pursuant
to Section 15378(b)(5) of the State CEQA Guidelines.
Strategic Plan Goal:
Strengthen long-term financial and economic sustainability
Attachment(s):
1. Resolution No. 2021-43 for The Elan
2. Resolution No. 2021-44 for The Breakwater Apartments
3. Public Benefit Agreement by and between CMFA Special Finance Agency VII and the City of
Huntington Beach relating to the issuance of Essential Housing Revenue Bonds for The
Breakwater Apartments
4. Public Benefit Agreement by and between CMFA Special Finance Agency VIII and the City of
Huntington Beach relating to the issuance of Essential Housing Revenue Bonds for The Elan
5. Joint Exercise of Powers Agreement relating to the CMFA Special Finance Agency VIII for The
City of Huntington Beach Page 6 of 7 Printed on 8/8/2021
poweree2'LegistarM
File #: 21-531 MEETING DATE: 7/20/2021
Elan
6. Joint Exercise of Powers Agreement relating to the CMFA Special Finance Agency VII for The
Breakwater Apartments
7. Regulatory Agreement and Declaration of Restrictive Covenants by and between CMFA
Special Finance Agency VIII and Wilmington Trust, National Association, as Trustee relating to
The Elan
8. Regulatory Agreement and Declaration of Restrictive Covenants by and between CMFA
Special Finance Agency VII and Wilmington Trust, National Association, as Trustee relating to The
Breakwater Apartments
City of Huntington Beach Page 7 of 7 Printed on 8/8/2021
powereaaq LegistarTM
e
I.
CITY OF HUNTINGTON BEACH
CITY COUNCIL MEETING — COUNCIL MEMBER ITEMS REPORT
TO: CITY COUNCIL
FROM: CASEY MCKEON, COUNCIL MEMBER
DATE: MAY 16, 2023
SUBJECT: FISCAL AND OPERATIONS UPDATE ON THE CITY'S MIDDLE INCOME HOUSING
PROGRAM
On July 20, 2021,the previous City Council voted to become a member of a Joint Power
Authority (the "JPA")with the California Municipal Finance Authority (CMFA),to enter into a
series of Public Benefit Agreements, and to approve the issuance of revenue bonds by the JPA
to facilitate the City's Middle Income Housing Program. The bond proceeds were used to
enable the JPA to acquire and convert two private properties,the Breakwater Apartments and
the Elan Apartments, into public workforce housing, which is managed and operated by project
sponsor, Catalyst. This was a sizable project and quite a substantial commitment by the
City. This City Council should have an opportunity to review what has been done.
The July 2021 City Council action can be found on the City's website.
RECOMMENDED ACTION
Direct the City Manager and the Community Development Department to coordinate with
Catalyst and CMFA to present a comprehensive report at a City Council Meeting in July or
sooner of the Financial Impact section mentioned in the July 2021 City Council Action. The
report should include, but not be limited to,the following important details:
• How many of the 649 housing units are occupied?
• How many have been remodeled as planned and at what cost?
• How many of the units are leased to persons earning 80%-120% of the Area Median
Income, as required?
• What are the average monthly rents?
• To fund the Middle Income Housing Program, the City has to forgo future property tax
revenues for up to a 30 year period. How much in property tax did the City forego in 2022
and what is the estimated amount for 2023 and over the next 30 years?
• What are the property management fees paid every year and to whom are they paid?
• What are the annual maintenance and repair fees?
• How many of the retail shops on the first level of Elan are leased?
STRATEGIC PLAN GOAL: Economic Development& Housing
331
Attachment 3: Program Qualifications Reports
6/30/2023
Elan
Asking Rents
Unit Type Unit Count Market Rent 80%AMI 110%AMI* 120%AMI
Studio 26 $2,345 $1,890 $2,234 $2,250
1BR 130 $2,814 $2,165 $2,554 $2,699
2BR 118 $3,357 $2,440 $2,858 $3,213
Average Rents $3,003 $2,257 $2,655 $2,878
Discount/Market NA -25% -12% -4%
Monthly Discount NA $746 $349 $125
Annual Discount NA $8,953 $4,187 $1,504
Current Rents
Unit Type Occupied Non-Program 80%AMI 110%AMI* 120%AMI
Studio 26 $2,129 $1,858 $1,942 $2,234
1BR 125 $2,383 $2,137 $2,069 $2,346
2BR 114 $2,813 $2,456 $2,268 $2,838
Average Rents $2,551 $2,243 $2,153 $2,505
Discount/Market -15% -25% -28% -17%
Monthly Discount $452 $760 $850 $498
Annual Discount $5,424 $9,124 $10,205 $5,980
Stabilized Requirement NA 110 27 137
Qualified Households NA 85 23 45
Affordability Progress NA 77% 85% 33%
•
*Units subject separate regulatory agreement with the City of Huntington Beach
6/30/2023
Breakwater
Asking Rents
Unit Type Unit Count Market Rent 80%AMI 100%AMI 120%AMI
2BR 360 $3,016 $2,257 $2,315 $2,395
3BR 40 $3,291 $2,600 $2,800 $2,900
Average Rents $3,043 $2,292 $2,364 $2,446
Discount/Market NA -25% -22% -20%
Monthly Discount NA $752 $680 $598
Annual Discount NA $9,022 $6,159 $7,175
Current Rents
Unit Type Occupied Non-Program 80%AMI 100%AMI 120%AMI
2BR 320 $2,304 $2,206 $2,309 $2,411
3BR 39 $2,840 $2,719 $2,860 $2,881
Average Rents $2,363 $2,281 $2,321 $2,450
Discount/Market -22% -25% -24% -19%
Monthly Discount $680 $762 $723 $593
Annual Discount $8,162 $9,146 $8,672 $7,116
Stabilized Requirement NA 134 133 133
Qualified Households NA 136 48 48
Affordability Progress NA 101% 36% 36%
•
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July 18, 2023
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Januar 2021 Strategic Planning Session
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335
Public Benefit Valuation
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Tax Housing Stock
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COST BENEFIT
336
Opportunity to Create Public Equity
Higher Rate of
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Real Property
Asset
Excess Sales
Proceeds to
City
337
Partners
CMFA Catalyst Orrick
(Joint Powers Authority) (Asset Manager) (Bond Counsel)
Ben Barker Jordan Moss Justin Cooper
Financial Advisor Founder Partner
Allison Arnold
Partnerships
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Homeless Permanent Low Income Workforce
Supportive ,-71 6,
Shelter Housing Housing
Housing
< 30% AMI < 60% AMI < 80% AMI > 80% AMI < 120% AMI
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Partnerships
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SUPPLY CRISIS
California represents
>25% of the nation's
total housing shortfall NH
1 ypk1 3 23K 9mE
K
8 K 7D I � ....x: .�.+ '' s, .. 9 K MA
108K
, °
SD NY
23K ' �K 53K MI 234K - - —4K
1,1‘6100..„ . CT
'" NE 1A _. OH 98K N�JK
8K �\,
mo
�5K CO r 120K '27K WOK „ � _ gK 137K
9C78K 127K KS MO KY • _ 10 �A pC 91K
5K 17K 1.. 13K ,„' 13K
- NC
FS,._TN 44K
AZ OK 22K
123K 23KM 3K AR t�- . SC
5K 12K
,..._.. . _.i. MS AL GA
.._... . - LA )
1K 9K 118K '
322K
!....9K 1 ;.
T%
FL
89K
...?Pti 4 HI EMPIRICAL UNDERPRODUCTION,2079 l
8K
3,000 10,000 30,000 100,_'.-.:. __
CATALYST® (C-MFASource:Up For Growth—Housing Underproduction in the US(2022)
INCOME GAP
Rents have outpaced
incomes by 2.5x over
the past 60+ ea Median Monthly Rent
y Growth
Median Household Income
Growth
CATALYST® CCMFA Sources:Urban Institute,Brookings
MASS EXODUS
California has been exporting essential
workers to other states for decades
74% 34% 24
Californians who say Californians currently Consecutive years California
housing affordability is considering moving to another has experienced negative net
a big problem state interstate migration
® CCMFACATALYSTSources:Public Policy Institute of California
"MISSING MIDDLE"
Fully functioning communities require
housing our middle-income workforce
0-60% AMI 60-120% AMI >120% AMI
Capital "A" affordable Governmentally-owned Privately-owned market-rate
housing, serving ELI/VLI Essential Housing, serving housing, serving high-
households, financed with our middle-income income households,
numerous federal, state, and workforce, who is financed with high-cost
local subsidies, grants, and increasingly unable to afford institutional capital with
loans housing within the fiduciary obligations to
(LIHTC, PABs, HCVs) communities they serve maximize rental increases
CATALYST® CY1FA
ESSENTIAL HOUSING
Housing our essential
workforce while creating Governmental
Ownership
significant public benefits
Essential
Housing
Advantaged Property Tax
Financing Exemptions
CATALYST® CMFA
IMMEDIATE IMPACT
Scaling governmental ownership of
middle-income affordable housing
50 14,000 $25B*
Essential Housing Governmentally-owned Public benefit creation for
communities preserved income- and rent-restricted host municipalities
throughout California Essential Housing units throughout California
CATALYST® CM FA *Estimate
CASE STUDY — BREAKWATER
Preserving existing rental communities while avoiding
displacement by traditional "value-add" investors
I„
er "sex„ DEVELOPED 1972
i
q x.., ' r Y h ; l u,A+ , r '' ACQUIRED 2021
-.: ill ,� • z \'�•" .:� �.° 6,`,�. &tip'.'• 4 gyg� ? y .�'
�`"'' ......... ,k u e• -� PRICE $185 million ($462,500/unit)
Y3o'
_____i__________ , :.2 te - ' '-'-'‘kle 2 ' , , - "do,Tiss
''') •- 360 2BRs + 40 3BRs (400 units)
lids _ . �- __ .•_
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�, AFFORDABILITY 60-120% AMI
fi
p,
,: ' INVESTED $23.5 million capital budget ($58,750/unit)
CATALYST® CMFa
CASE STUDY - BREAKWATER
Proving the impact of governmentally-owned Essential
Housing rental communities
24% 9 . 9X36 .3X
Rent Affordability Public Benefit
Discounts Multiple Multiple
Qualified Rents Current Rent Subsidies Future HB Proceeds*
Market Rents Current HB Tax Subsidy Total HB Tax Subsidy
CATALYST® CM FA *Estimate
CASE STUDY - ELAN
Preserving existing rental communities while avoiding
displacement by traditional "value-add" investors
DEVELOPED 2015
ACQUIRED 2021
i yi,i 7.; '. , I PRICE $134 million ($489,000/unit)
IA iLl kit I - :4--- 1
'I • '1�"� 26 studios + 130 1BRs + 118 2BRs (274 units)
g �,I t. �. . ii i 111 ..: x ' '
AFFORDABILITY 60-120%AMI
INVESTED $5 million capital budget ($18,250/unit)
CATALYST® CIFA
CASE STUDY - ELAN
Proving the impact of governmentally-owned Essential
Housing rental communities
23% 26 .7X�
Rent Affordability Public Benefit
Discounts Multiple Multiple
Qualified Rents Current Rent Subsidies Future HB Proceeds*
Market Rents Current HB Tax Subsidy Total HB Tax Subsidy
CATALYST' (MFA *Estimate
QUESTIONS?
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Permanent Workforce
Homeless „. Low Income .
,,,,v Supportive , � �' `
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Housing
< 30% AMI < 60% AMI < 80% AMI >_ 80% AMI < 120% AMI
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What is the Middle Income Housing Program?
Low Cost
of Capital
Property Discounted
Tax �
Abatement Rents
No
Equity
Investor
Public Benefit Valuation
COST: BENEFIT:
Lost Preservation of Workforce
Property 911 "Middle Income"
Tax Housing Stock
Revenue
COST BENEFIT
Opportunityto Create Public Equity
Higher Rate of
Return
Real Property
Asset
Excess Sales
Proceeds to
City
Partners
CMFA Catalyst Orrick
(Joint Powers Authority) (Asset Manager) (Bond Counsel)
Ben Barker Jordan Moss Justin Cooper
Financial Advisor Founder Partner
Allison Arnold
Partnerships
• •. • • •
• ••
• •
MFA
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California
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FirlallCe Authority CATALYST
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Moore, Tania
From: Fikes, Cathy
Sent: Monday, July 17, 2023 3:41 PM
To: Agenda Alerts
Subject: FW: 7 18 2023 Agenda Item #20 Middle Income Housing Update
From: Paula Schaefer<pas92649@gmail.com>
Sent: Monday,July 17, 2023 3:21 PM
To: CITY COUNCIL(INCL. CMO STAFF)<city.council@surfcity-hb.org>
Subject: 7 18 2023 Agenda Item#20 Middle Income Housing Update
Mayor Strickland and Council Members:
I encourage you to have a staff member review and explain this agenda item during the 7 18 2023 meeting. I
urge you to do this to counteract the incorrect information that has been publicized about these properties
recently.
The staff report reflects, accurately, that the City did not purchase Elan and Breakwater as was extensively and
inaccurately reported during the past council seat elections.
The staff reports the progress made in converting market rate apartments to rates that are affordable to those
earning in the 80-120 median income ranges. Although more conversions would be better, progress has been
made quite well.
The staff report also shows that while the City is foregoing property tax revenue, it is providing affordable
housing to middle income residents at a significantly lower cost than if the City purchased buildings or worked
with a developer.
Finally, the City's sole discretion option to purchase the two properties after 2036 shows that it could be a
valuable asset in the future.
Paula Schaefer
SUPPLEMENTAL
COMMUNICATION
Meeting Date: 7/i8/90d3
Agenda Item No.; A) (93 •6 eti)