HomeMy WebLinkAboutItem 2a: Establishing Policies on Resale of Units in Redevelopment Funded First Time Homebuyer Projects and Rental of Units Pl"Fl
STAFF REPORT
Arcadia Redevelopment Agency
DATE: March 1, 2011
TO: Chairman and Members of Agency Board
FROM: Jason Kruckeberg, Assistant City Manager /Development Services
Director
By: Jerry Schwartz, Economic Development Manager,
SUBJECT: REPORT, DISCUSSION AND DIRECTION ON ESTABLISHING
POLICIES REGARDING THE RESALE OF UNITS IN REDEVELOPMENT
AGENCY FUNDED FIRST TIME HOME BUYER PROJECTS AND THE
RENTAL OF UNITS IN THE ALTA STREET CLASSICS DEVELOPMENT
Recommendation: Provide Direction
BACKGROUND
The Alta Street Classics is a redevelopment project with six townhomes that were sold
to first time home buyers. The units were funded with a modest down payment, a
mortgage loan from a conventional lender, and a silent second trust deed from the
Arcadia Redevelopment Agency. The Agency's loan is "silent ", meaning that there are
not regular payments made against this loan. Instead, the Agency is repaid at the time
of sale. Without the Agency's silent second trust deed, these first time home buyers
would not be able to afford their homes. The home buyers took over their units in early
2008.
Since these buyers were provided a unique opportunity, it was expected that they would
remain in their home for several years so that they could build up equity that could then
used to purchase a new home while selling their Alta Street Classics unit to a new
moderate income buyer. In fact, there is an Equity Share Agreement that calls for a
split of equity between the seller and the Agency at the time of sale. This is typical in
first time home buyer programs. The Agency could then use its portion of the equity
share proceeds to increase the silent second trust deed for a new moderate income
buyer, and return any unused funds back to its low /mod housing fund. The scenarios
that were considered when the units were originally sold only provided examples of the
equity sharing after a profitable sale. They did not include scenarios involving selling a
townhome for less than the original purchase price.
One current question is what should be the Agency's policy upon resale of these units if
the sales price is Tess than the original purchase price. This policy would apply to any
first time home buyer units, although the Alta Street project is the only current project of
this type.
An additional issue that relates only to the Alta Street Classics is the ability to rent the
units. The project was built as an owner occupied project, and each buyer understood
that when they purchased their townhome. The Covenants, Conditions, and
Restrictions (CC &Rs) for the project allows for temporary rental in certain situations; the
question for the Agency is what the policy should be regarding the conditions placed on
a temporary rental in this project.
DISCUSSION
Agency staff has heard from several current owners who might be interested in selling
their units. Given what has occurred with the real estate market since the Alta Street
Classics were sold, it is unlikely that there has been an increase in the value of these
properties. In fact, it is probable that the home values have declined. This would leave
a seller without enough proceeds to pay off the first trust deed, the Agency's complete
entire silent second, and still recoup their entire down payment. As the owners did not
expect to lose money on their homes, several have approached the Agency about this
situation. They have asked about the Agency's policy if they lose money on their home
sale.
Staff has contacted other cities to find out if they've been faced with similar situations,
and how it has been handled. Burbank has a first time home buyer program that is
similar to Arcadia's. As a policy, Burbank puts its silent second trust deed behind both
the mortgage loan and the seller's down payment. Burbank is focused on keeping the
unit affordable, and if a unit sells for less than its original purchase price, the Agency
won't have to provide the same level of silent second trust deed to the new buyer.
Both Monrovia and Pasadena have a number of first time home buyer projects but
haven't faced the situation of having a seller with a decline in value.
The goal with the Alta Street Classics project was to help make units available to first
time home buyers and it is the ongoing goal of the Agency to keep these units
affordable at time of sale. In addition, some homes were made available to City
employees so that they could live close to their work with three of the units being sold to
employees. The philosophy of helping people to afford their first homes includes the
concept of limiting their risk/exposure by requiring only a small down payment and
making them responsible for monthly payments only for the first trust deed. There are
three basic options for how to place the Agency's second trust deed:
1) Act like a bank in a standard real estate transaction and put the Agency's second
trust deed ahead of the seller's recovery of their down payment, which would
assure that the Agency receives 100% return on its second with any loss being
the responsibility of the seller, or,
2) Share equally in any Toss, similar to how the equity is shared if the sales price
were to exceed the original purchase price, or,
3) Put the Agency's second trust deed in third position behind the bank and the
seller's down payment, with the Agency absorbing 100% of any loss in value.
This is the Burbank model.
Staff has also been contacted by an owner about renting out their unit on a temporary
basis. The CC &Rs for the project include the ability to rent "for a temporary period not
to exceed twelve (12) months in the event of an emergency or other unforeseen
First Time House Buyer Projects
March 1, 2011
Page 2 of 3
circumstance..." A request to rent must be made in writing and is subject to
"reasonable" conditions placed on the temporary rental by the Agency. The evaluation
of "emergency or unforeseen circumstance" should be made by the Executive Director
of the Agency on a case by case basis. The decision of the Executive Director will be
final. It was not the intent of this project to allow renters for reasons of convenience or
profit. While the project was planned as owner occupied development, the Agency can
consider specific conditions that would apply to a request to rent a unit on a temporary
basis, including;
1) Require that the renter qualify as a moderate income household as determined
by an outside expert acceptable to the Agency and provided to the Agency by the
property owner, and,
2) Require that the owner notify in advance the Agency in writing when the rental
will commence for purposes of income verification of the renter and,
3) Require that the provisions of the CC &Rs regarding property maintenance be
followed by the renter, and if violated, the owner(s) would be responsible, and
4) Require that the owner notify the Agency in writing when the rental has
terminated, and,
5) There can be no extensions of the rental period past twelve months for any
reason. Should this condition be violated, the Agency would exercise available
recourse which could include calling its loan, which would eliminate the "silent"
feature that had benefitted the buyer as an owner /occupant but is not for the
benefit of the owner as landlord.
FISCAL IMPACT
The funding for silent second trust deeds on first time home buyer projects comes from
the Agency's low and moderate income housing fund. It is expected that the initial
investment made in each silent second trust deed will carry forward to future owners
without additional investment from the Agency. However, in a downward real estate
market it is likely the Agency will experience a loss of some portion of its silent second
upon sale of a unit.
RECOMMENDATION
Since the Agency is set up to share in any price growth through the equity share, it is
appropriate to share in any loss in property value in equal proportion to the seller. This
would keep either the seller or the Agency from bearing the entire brunt of a loss in
value. It would also still allow the Agency to provide a silent second trust deed to a new
buyer, thus insuring that the unit would remain affordable to moderate income owners.
Additionally, allow rental of the units per the CC &Rs on a case by case basis and under
the conditions listed above.
Approved:
Donald Penman
Executive Director
Attachment: 1) Section 3 (e) from the Alta Street Classics CC &Rs
First Time House Buyer Projects
March 1, 2011
Page 3 of 3
Attachment 1
(e) The Qualified Home Buyer for itself, its successors and assigns hereby covenants
and agrees that until the end of the Owner Occupancy Covenant Period, the New Home shall not
be leased, subleased, or rented to any third person, except for a temporary period (not to exceed
twelve (12) months) in the event of an emergency or other unforeseen circumstance as may be
expressly approved in writing by the Agency subject to compliance during the temporary rental
period with the reasonable temporary rental occupancy conditions required by the Agency. The
Qualified Home Buyer shall submit a written request to the Agency prior to the commencement
of the temporary occupancy, as practicable, but in any event within not more than sixty (60) days
following the commencement of a temporary rental occupancy of the New Home by a third
party, which notice shall set forth the grounds on which the Qualified Home Buyer believes an
emergency or other unforeseen circumstance has occurred and that a temporary rental occupancy
in necessary.
(f) Restrictions on Transfer of the New Home. QUALIFIED HOME BUYER
UNDERSTANDS THAT THE DETERMINATION OF THE SALES PRICE OF THE NEW
HOME TO A SUCCESSOR -IN- INTEREST CAN BE MADE ONLY AT THE TIME OF THE
PROPOSED TRANSFER TAKING INTO CONSIDERATION INTEREST RATES,
PROPERTY TAXES AND PRICE PERMITTED HEREUNDER MAY NOT INCREASE OR
DECREASE IN THE SAME MANNER AS OTHER SIMILAR REAL PROPERTY WHICH IS
NOT ENCUMBERED BY THE RESTRICTIONS OF THIS COVENANT AGREEMENT.
QUALIFIED HOME BUYER FURTHER ACKNOWLEDGES THAT AT ALL TIMES IN
SETTING THE SALES PRICE OF THE NEW HOME THE PRIMARY OBJECTIVE OF THE
CITY, THE AGENCY AND THE RESTRICITIONS OF THIS COVENANT AGREEMENT IS
TO PROVIDE HOUSING TO ELIGIBLE PERSONS OR FAMILIES AT AFFORDABLE
HOUSING COSTS. THE SALES PRICE WILL ALMOST CERTAINLY BE LESS THAN
OTHER SIMILAR PROPERTIES WHICH HAVE NO COVENANT RESTRICTIONS.
Dated:
Initials of
Qualified Home Buyer
(g) The entirety of the Silent Second Loan and accrued interest may, at the Agency's
option, be immediately due and payable upon the sale, lease, or other transfer of the New Home
prior to the expiration of the full term of the Qualified Residence Period in contravention of
either this Agreement or the affordability covenants. Notwithstanding any other provision herein
to the foregoing, nothing in this Section 3 of this Covenant Agreement shall operate to terminate
the Owner Occupancy Covenant or the maintenance condition, as set forth in Section 4 of this
Covenant Agreement, during the term as defined in Section 10 of this Covenant Agreement.
Section 4. Maintenance Condition of the New Home. The Qualified Home Buyer, for
itself, its successors and assigns, hereby covenants and agrees that:
(a) The exterior areas of the New Home which are subject to public view (e.g.: all
improvements, paving, walkways, landscaping, and ornamentation) shall be maintained in good
repair and a neat, clean and orderly condition, ordinary wear and tear excepted. In the event that
at any time during the term of the term of this Covenant Agreement, as set forth in Section 10 of
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