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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 -8 R VPUB\L WADE\738948.3