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CITY COUNCIL AGENDA ITEM NO. 21

Meeting Date: May 27, 2008

Subject/Title: Accept Management Partners Affordable Housing Obligations and Options Assessment Report; and authorize staff to begin pursuing Recommendations 1 through 7, or recommendations formulated by the Council, to promote financial sustainability of the City’s Housing Administration Fund to continue its purpose to manage and oversee the programs and projects authorized by City’s Affordable Housing Ordinance.

Prepared by: Gina Rozenski, Redevelopment and Housing Manager

Submitted by: Casey McCann, Interim Community Development Director

RECOMMENDATION
Hear, discuss and accept presentation by Management Partners on Affordable Housing Obligations and Options Assessment Report; and authorize staff to begin pursuing Recommendations 1 through 7 of this staff report, or recommendations formulated by the Council, to promote financial sustainability of the City’s Housing Administration Fund to continue its purpose to manage and oversee the programs and projects authorized by City’s Affordable Housing Ordinance.

PREVIOUS ACTION
In early 2007, staff identified that the operational costs to manage the City Housing Programs as authorized by the Affordable Housing Ordinance was financially unsustainable. The Housing Division secured the services of Management Partners to review the Housing Division programs and processes, to perform cost analyses of the programs, and to develop a multi-year financial projection.

In April 2007, Management Partners presented its preliminary findings to the Land Use & Development Committee. Management Partners concluded that the fiscal instability of the Housing Division at that time was more serious than what had previously been anticipated. This is due to its dependence on in-lieu fees – a revenue source that decreases as the City approaches its build-out while the administrative expenses continue to increase.

In July 2007, Management Partners’ services were extended to examine options on how to re-organize and support the necessary administrative and operation costs while maintaining compliance with State and local affordable housing mandates.

The City implemented the first of Management Partners’ recommendations by consolidating the City’s Housing Division with the Redevelopment Agency effective January 2008 in an effort to save costs and eliminate overlapping responsibilities.

BACKGROUND
The operational costs necessary to manage the City Housing Programs are derived primarily from developer fees paid to the City in-lieu of constructing affordable housing (known as “in-lieu fees”). Eighty percent (80%) of the in-lieu fees are deposited into a fund for the purpose of creating and preserving affordable housing in Brentwood and to help the City meet its State and regional housing mandates. The remaining 20% is set-aside to support the operational costs necessary to administer the City’s Affordable Housing Ordinance. Both staff and Management Partners recognized that revenues for the City’s Housing Administration Fund (20%) would be negatively impacted when residential development slowed to a traditional pace and when the City reached build-out. Yet the workload to manage the for-sale below-market-rate units (“BMRs”) and City-rental units would continue in perpetuity, and therefore a steady, reliable revenue stream is needed to support administrative costs.

During Management Partners’ analysis, a dramatic downturn in Brentwood and the Bay Area’s real estate economy led to sharp decrease in the collection of developer in-lieu fees, which further drove the need to make immediate, rather than phased, changes in how the City’s Housing Program is operated. As a direct result of the current real estate decline, little or no collection of developer in-lieu fees is now a reality.

Staff anticipates that the City Housing Administration Fund will have a balance of approximately $3,000 on June 30, 2008. With zero in-lieu fee revenues forecasted, the City Housing Administration Fund is projected to sustain a shortfall of $475,000 in 2008/09. The overage/shortfall will vary each year dependent on the collection of developer in-lieu fees which is unknown at this time.

Management Partners make the following recommendations as a master strategy for Council consideration to immediately shore up the City’s Housing Administration Fund while continuing to deliver customer service, to implement the City’s Affordable Housing Ordinance’s purpose to deliver housing that meets the needs of all income-levels of our community, and to comply with State and local housing mandates imposed on the City.

1. Accept staff recommendations to re-allocate a portion of staffing costs from City Housing Administration Fund to the Redevelopment Agency, where legally permissible, to partially address funding deficiencies. Staff proposes decreasing staffing levels originally budgeted for 2008/09 for the City Housing Administration Fund from 2.60 FTEs to 0.70 FTEs, with a reciprocal increase to the Redevelopment Agency.

2. Subsidize an amount sufficient to cover the annual budget shortfalls in the City Housing Administration Fund from the Affordable Housing In Lieu Fund, which currently has a fund balance of approximately $6.8M, during those years when annual collection of developer in-lieu fees are insufficient. The subsidy will take the form of a low-interest loan.

3. Discontinue the City-owned Rental Housing program and sell the current rental units.
a. Do not negotiate the dedication of units to the City-owned rental inventory as an option for developers to meet their Affordable Housing Ordinance obligations (does not require an immediate amendment to the Affordable Housing Ordinance).

b. Begin the financial analysis to determine a nexus-driven in-lieu fee that will induce developers with approved agreements to re-open negotiations for the purpose of eliminating units that are to be dedicated to the City-owned rental inventory but are not yet constructed. Currently, there are 5 approved agreements with 10 yet-to-be-dedicated rental units.

c. Begin the financial and legal analysis to divest City-owned rental inventory and, where possible, divest City-owned duplexes and four-plexes if parcelization is feasible. If parcelization is not feasible, consider divesting duplexes and four-plexes to a non-profit or other mechanism. Acknowledge that should the City-owned rental inventory be sold as BMR units with 45-year deed restrictions, those units will be added to the on-going inventory of for-sale units that need oversight and management in perpetuity.

4. Continue and expand the Down Payment Assistance Programs (DAP & GAP) by transferring an amount from the Affordable Housing In Lieu Fund commensurate with the DAP & GAP program demands during fiscal years when little or no developer in-lieu fees are paid to the DAP & GAP Program. Acknowledge that market-rate units purchased with DAP assistance do not carry a 45-year deed restrictions and therefore are not eligible towards the City’s compliance of State and regional affordable housing counts, but BMR units purchased with GAP assistance carry a 45-year deed restriction and count towards compliance measures.

5. Begin the legal analysis to determine the feasibility of eliminating other options now available to developers to comply with the Affordable Housing Ordinance, such as market-rate conversion, off-site construction, and dedication of vacant land, for the purpose of capturing in-lieu fees for a more reliable stream of revenues available for administrative costs.

6. Revise the Affordable Housing Ordinance to eliminate the option to dedicate rental units, to reflect the elimination of other options in accordance with the legal determinations of #5 above, and to align with the Housing Element update due in July 2009.

7. Continue the Council’s policy to use the Affordable Housing In Lieu Fund to financially participate with for-profit and non-profit affordable housing developers in an effort to leverage other public resources to create multi-family rental projects as a means to meet State and regional housing mandates. The benefits of this policy include:

a. Most efficient manner to produce affordable units.
b. Recognized by State of California Department of Housing & Community Development and Association of Bay Area Government as meeting the City’s affordable housing requirements.
c. Provides long-term financial sustainability and efficiency of administrative and operational responsibilities.

As noted in the Management Partners’ April 2007 presentation to the Land Use & Development Committee, when the City is built-out and the Redevelopment Agency sunsets, on-going management of the City’s Housing Programs will continue to be necessary and therefore other funding sources must be identified to sustain operations. This conclusion doesn’t change in the 2008 Report. Because development fees and redevelopment revenues are not permanent, the City’s Housing Programs will evolve into the responsibility of the General Fund.

The Land Use and Development Committee recommended that Council officially accept and approve the above Recommendations 1 through 7 to promote financial sustainability of the City’s Housing Administration Fund to continue its purpose to manage and oversee the programs and projects authorized by City’s Affordable Housing Ordinance.

Since the initial presentation of the Management Partners Report to the Land Use & Development Committee, staff became aware of the following errors in the report. The conclusion and recommendations of the report remain unchanged.

1. The Affordable Housing In Lieu Fund is referred to as the “Affordable Housing Trust Fund” in the report.
2. The December 31, 2007 fund balance of the Affordable Housing In Lieu Fund is reported on page 47 of the report as $6,239,462. The correct fund balance was $6,884,513.
3. The Housing Rentals Fund is referred to as the City Rentals Fund on page 52 of the report.

This item seeks authority to begin pursuing the recommendations. Formal action on the budget-related recommendations (1, 2 and 4) will return to the Council in the form of a resolution or other appropriate documentation at its June 10, 2008, meeting. Items requiring additional financial and legal analysis (3b, 3c and 6) will be implemented upon future Council action after the Council has an opportunity to review and discuss the items. Items 3a, 4, 5 and 7 constitute policy directions to staff that can be implemented immediately.

FISCAL IMPACT
An amount of $45,000 is identified in the 2008/2009 City Housing Administration Fund Budget for further financial and legal analyses of Recommendations 3b, 3c and 5. Staff hopes to use the City Attorney office and limited outside consultants to complete the assigned tasks.

The fiscal impact of Recommendation 1 will be a savings of $224,530. Should Council approve this recommendation staff will incorporate this change into the proposed changes to the 2008/09 Operating Budget scheduled to be brought to Council on June 10, 2008.

The fiscal impact of Recommendation 2 will be a loan of $264,148 from the Affordable Housing In Lieu Fund to the Housing Administration Fund. This is the amount necessary to allow the Housing Administration Fund to continue operations. The loan amount will vary annually based upon the projected shortfall of the Housing Administration Fund and interest will be accrued at the Local Agency Investment Fund (LAIF) rate. The interest expense for 2008/09 is estimated to be $13,207 while the annual interest expense is dependant upon the outstanding loan balance and the LAIF rate in effect during the year. Should Council approve this recommendation staff will incorporate this change into the proposed changes to the 2008/09 Operating Budget scheduled to be brought to Council on June 10, 2008.

The fiscal impact of Recommendation 4 is estimated to be an expense of approximately $200,000 per fiscal year in the Affordable Housing In Lieu Fund. Should Council approve this recommendation staff will incorporate this change into the proposed changes to the 2008/09 Operating Budget scheduled to be brought to Council on June 10, 2008.

Staff will return to Council on June 10, 2008, with appropriate resolutions or other appropriate documentation to implement Recommendations 1, 2 and 4 above.

Implementation of Recommendations 3a, 6 and 7 have no direct fiscal impact on the operations budget at this time.

Attachment:
Management Partners Affordable Housing Obligations and Options Assessment Report, dated April 2008
 
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