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CC 2012-11-27_08.e. Authority to Modify Affordable Housing AgreementsMEMORANDUM TO: CITY COUNCIL FROM: STEVEN ADAMS, CITY MANAGER iJs SUBJECT: CONSIDERATION OF RESOLUTION EXTENDING THE CITY MANAGER'S AUTHORITY TO MAKE MODIFICATIONS TO AFFORDABLE HOUSING AGREEMENTS DATE: NOVEMBER 27, 2012 RECOMMENDATION: It is recommended the City Council adopt a Resolution extending the terms and conditions under which the City Manager is authorized to amend existing affordable housing agreements on a temporary basis. FINANCIAL IMPACT: Since the City would not receive any funding from affordable housing units if the maximum sales price exceeds the market rate value, there will not be a financial impact to the City from the recommendation. BACKGROUND: The City currently has 36 total owner occupied and 135 rental deed restricted affordable housing units. Most of the owner occupied units have ·been obtained through inclusionary affordable housing requirements. When purchased, an affordable housing agreement is required that sets forth resale provisions based upon either the maximum sales price under the affordability formula or the housing price index formula (indexed value), whichever is higher. The maximum sales price formula has been established by the City Council. Since it has been modified, the formula in place at the time the unit was originally built and sold is applied. Sellers are required to list the units at the appropriate maximum sales price for a minimum of 90 days. If they are unsuccessful, the City has an option to purchase the unit or they may list it as an unrestricted market rate unit. If it is sold as an unrestricted market rate unit, 90% of the difference between the sales price and the maximum affordable sales price must be paid to the City. If the bank forecloses on a unit, the bank may remove the deed restriction and no funds are paid to the City. Item 8.e. - Page 1 CITY COUNCIL CONSIDERATION OF RESOLUTION EXTENDING THE CITY MANAGER'S AUTHORITY TO MAKE MODIFICATIONS TO AFFORDABLE HOUSING AGREEMENTS NOVEMBER 27,2012 PAGE 2 Due to the current economic downturn, a number of owners of affordable housing units are attempting to sell. However, there are few qualified buyers and the housing market has caused the market rate price to be close to, and in several cases less than, the affordable price. As a result, at the September 8, 2009 meeting, the City Council adopted a Resolution authorizing the City Manager to amend affordable housing agreements in order to prevent foreclosures and loss of deed restricted affordable units when it is verified that the seller will experience a financial loss from a sale under the provisions of the Agreement. These measures were proposed on a temporary basis for a two-year period in order to address the current housing market conditions. In August 2010, a new resolution was adopted that modified the amendments the City Manager is authorized to make to include the following: • If a willing buyer is identified, the owner may sell the unit as a deed restricted affordable unit up to the original price the owner paid for the unit. This is only useful for low and very-low income units. The buyer would be restricted to the original maximum sales price conditions, but would also be eligible for the same amendments if a sale became necessary within the next two-year period when these measures are still in place. • If the unit is converted to market rate, the seller may be required to only pay to the City the difference between the sale price and the amount currently owed on the mortgage after all normal realtor fees and closing costs are deducted. • As an alternative to selling a unit, owners may be allowed to rent the unit at market rate for a period of up to 5 years. ANALYSIS OF ISSUES: The original formula adopted by the City for the maximum sales price allowed for affordable units was the County of San Luis Obispo formula. Due to concerns identified with the formula, the City established its own formula, but later switched back to the County formula after they adopted one similar to what was being utilized by the City. Units that were constructed when the original County formula was in effect are regulated by an agreement that sets forth that formula. Therefore, the formula continues to apply to those units when they are resold. As a result of the current economic conditions, the maximum sales price for moderate rate units under that formula actually now exceeds the market value for the home. Some of the owners are trying to sell in order to avoid foreclosure. However, the 90-day requirement to list the unit for the maximum sales price as a deed restricted affordable unit presents a hardship because there is no chance that it will be sold and increases Item 8.e. - Page 2 CITY COUNCIL CONSIDERATION AUTHORITY TO AGREEMENTS NOVEMBER 27, 2012 PAGE3 OF RESOLUTION EXTENDING THE CITY MANAGER'S MAKE MODIFICATIONS TO AFFORDABLE HOUSING payments due to the bank if the owner is already facing potential foreclosure. Owners have requested the City waive the 90-day requirement. Therefore, it is recommended that the Council adopt a new Resolution that also authorizes the City Manager to waive the 90-day requirement if it is verified that the maximum sales price exceeds the market price. The Resolution also extends the authorization of these modifications for a new two-year period since housing market conditions have not improved since the Resolution was originally approved. The proposed Resolution is now recommended to be in effect for a period of three years. ALTERNATIVES: The following alternatives are provided for the Council's consideration: Approve the Resolution. Modify and approve the Resolution. Provide staff other direction. ADVANTAGES Approval of the Resolution will enable staff to continue to reduce foreclosures and eliminate waste of time and effort by City staff, property owners and realtors by requiring owners to list properties under terms that will make them infeasible to sell. DISADVANTAGES If housing prices and/or factors in the formula change, it may become more difficult to verify the maximum sales price exceeds the market value. ENVIRONMENTAL REVIEW: No environmental review is required for this item. PUBLIC NOTIFICATION AND COMMENTS: The agenda was posted in front of City Hall and on the City's website on Wednesday, November 21, 2012. No public comments were received. Item 8.e. - Page 3 RESOLUTION NO. A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF ARROYO GRANDE TEMPORARILY AUTHORIZING THE CITY MANAGER TO AMEND AFFORDABLE HOUSING AGREEMENTS UNDER SPECIFIED CIRCUMSTANCES WHEREAS, the City's lnclusionary Affordable Housing regulations sets forth inclusionary housing requirements for all residential projects over four (4) units to include a percentage of moderate, low and very low income units; and WHEREAS, the City has entered into several affordable housing agreements since certification of the City's Housing Element; and WHEREAS, as a result of the significant downturn in the housing market, the maximum affordable sales price (hereinafter referred to as "Maximum Sales Price") calculation required by many affordable housing agreement now often results in a Maximum Sales Price below the original purchase price and/or above the market rate; and WHEREAS, requiring a Maximum Sales Price below the original purchase price results in an incentive for each seller of an affordable housing unit to simply allow foreclosure as opposed to incurring a shortfall on the sale and the corresponding liability for the balance of any mortgage on a go forward basis; and WHEREAS, requiring an owner to list a deed restricted unit at a Maximum Sales Price above the market rate eliminates the ability of the owner to sell the unit in a reasonable time period and increases the likelihood of foreclosure; and WHEREAS, upon foreclosure, any deed restriction requiring continued affordability of the property recorded subsequent to the trust deed is eliminated; and WHEREAS, foreclosures result in blight and negative economic conditions; and WHEREAS, the City Council, in an attempt to maintain the affordable housing deed restriction on affordable housing units and avoid foreclosures, deems that it is in the best interest of the City to authorize the City Manager to amend any affordable housing agreement under the specific facts and circumstances described herein. NOW THEREFORE BE IT RESOLVED by the City Council of the City of Arroyo Grande as follows: 1. Upon a clear showing that the seller of an affordable housing unit will incur a financial loss if required to sell the affordable housing unit at the Maximum Sales Price, the City Manager shall be vested with the authority to make any or all of the following amendments to such affordable housing agreement: Item 8.e. - Page 4 RESOLUTION NO. PAGE2 a. Upon identifying a willing buyer, the seller may be allowed to sell the restricted property at a Maximum Sales Price up to the seller's original purchase price; b. If, ultimately, the affordable housing unit is converted to a market rate unit, thereby placing no restrictions on the potential sale price, the seller would be required to pay to the City the difference between the sale price and the balance owed on the mortgage, after deducting customary realtor commissions and closing costs; or c. If the sale of the affordable housing unit is unlikely, the seller may be allowed to rent the unit at a market rate for a period of up to five (5) years. d. If the Maximum Sales Price exceeds the market rate for the unit, the City Manager may waive the requirement to list the unit at the Maximum Sales Price as a deed restricted unit for ninety (90) days. 2. The City Manager shall provide the Council with Annual Reports describing any amendments to affordable housing agreements. 3. The City Manager's right to amend affordable housing agreements, absent further action by the City Council, shall expire three (3) years from the date of adoption of this Resolution. On a motion by Council Member the following roll call vote to wit: AYES: NOES: ABSENT: , seconded by Council Member , and by the foregoing Resolution was passed and adopted this 2ih day of November, 2012. Item 8.e. - Page 5 RESOLUTION NO. PAGE3 TONYFERRARA,MAYOR ATTEST: KELLY WETMORE, CITY CLERK APPROVED AS TO CONTENT: STEVEN ADAMS, CITY MANAGER APPROVED AS TO FORM: TIMOTHY J. CARMEL, CITY ATTORNEY Item 8.e. - Page 6