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LOAN TO SAN JOAQUIN HOUSING INVESTMENT GROUP, LLC FOR THE REHABILITATION OF THE EL MONTE APARTMENTS, 1225 WEST EL MONTE STREET
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RECOMMENDATION
It is recommended that City Council adopt a resolution:
1. Approving a $1,365,000 Neighborhood Stabilization Program (NSP) loan to San Joaquin Housing Investment Group, LLC (SJHIG) for the purpose of rehabilitating property located at 1225 West El Monte Street;
2. Approving the El Monte Apartments Relocation Plan; and
3. Authorizing the City Manager, or his designee, to execute all documents and take all necessary and appropriate actions to carry out the purpose and intent of the resolution.
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Summary
On May 7, 2013, the City Council approved a $660,725 HOME Investment Partnerships program loan (Attachment A - Resolution 2013-05-07-1204) to Stocktonians Taking Action to Neutralize Drugs (STAND) to acquire the El Monte Apartments, an 11-unit apartment building at 1225 West El Monte Street (Attachment B - Vicinity Map). At the time the acquisition loan was approved it was noted that the property would need to be rehabilitated and that a request for additional funds to cover the cost of the rehabilitation would be brought to Council for consideration at a later date. A comprehensive assessment of the property has now been completed and SJHIG, a limited liability company of which STAND is the managing partner, is requesting an additional $1,365,000 loan to undertake the rehabilitation. The project costs include the payment of prevailing wage rates. It is recommended that the loan be funded with NSP funds which the City received from the U.S. Department of Housing and Urban Development (HUD) specifically to assist with this type of project. These are not General Fund dollars and can only be used on properties that have been in foreclosure and on projects that will result in housing affordable to low income households. Upon completion of the rehabilitation, the project will provide affordable housing for eleven households with incomes at or below 50 percent of the Area Median Income (AMI).
The Council is also being asked to approve a Relocation Plan for the project (Exhibit 2 to Resolution). Federal regulations require that a relocation plan be prepared and adopted by the local legislative body when a project is being proposed that will affect occupied housing units. The Relocation Plan identifies the relocation requirements and benefits, as specified by federal regulations, for the three households that are currently living in the apartment complex who will be temporarily displaced while the rehabilitation takes place.
DISCUSSION
Background
The City has received two allocations of NSP funds, known as NSP1 and NSP3, from HUD to help stabilize neighborhoods that have been affected by foreclosures. The program established by the City for use of the NSP funds includes the following activities:
• Acquisition, rehabilitation, and resale of foreclosed single-family homes; and
• Acquisition, rehabilitation, and rental of foreclosed properties; and
• Down-payment assistance to households purchasing a foreclosed home.
The majority of the NSP funds were used for the acquisition, rehabilitation, and resale of single-family homes which generally benefitted households with incomes between 70 and 120 percent of AMI. However, NSP guidelines require that at least 25 percent of the original grants and 25 percent of the program income generated from the resale of property go to activities that benefit households earning not more than 50 percent of AMI, which in Stockton is $29,950 per year for a family of four. In order to meet this requirement, an Acquisition, Rehabilitation, and Rental activity was included in the plans that were prepared for the use of both the NSP1 and NSP3 funds. These plans were first approved by City Council, then were submitted to and approved by HUD.
STAND has participated in the City’s NSP program to acquire foreclosed single-family residences, rehabilitate them, and resell them to qualified households since 2009. They have also acquired and rehabilitated two apartment complexes using NSP funds from San Joaquin County.
In May 2013, STAND successfully negotiated the purchase of the El Monte Apartments. The property was in foreclosure and therefore eligible for NSP, but to help meet a HOME commitment deadline, the Council approved a $660,725 loan of federal HOME funds to purchase the property and to pay for closing and predevelopment costs associated with the project. The apartment complex, which sits on a .37 acre parcel was constructed in 1979 and consists of eleven units, including four one-bedroom and seven two-bedroom units. (Attachment C - Photos).
When the Council approved the acquisition loan, it was explained that this was a two phase project. Property acquisition was the first phase and rehabilitation of the property would be phase two and that a second request for funds to cover the cost of the rehabilitation would be brought to Council for consideration. The rehabilitation couldn’t be considered at the same time as the acquisition because a thorough assessment of the property was necessary to determine the full scope of the rehabilitation and the time needed to conduct the assessment and obtain bids for the work was not possible during the acquisition process.
The acquisition loan funds were provided to SJHIG, a California limited liability company which, at the time the initial loan was made, was solely owned and managed by STAND. The City recently received and approved a request to allow a transfer of 50 percent of the membership interest in SJHIG to W.T. Hull, Incorporated as a non-managing partner. The 50 percent membership owned by W.T. Hull, Incorporated will be transferred to the shareholders of W.T. Hull and their spouses, resulting in W. T. Hull Senior and his spouse and W.T. Hull Junior and his spouse, each holding a 25 percent non-managing member interest in SJHIG; and therefore, the El Monte Apartments.
Present Situation
Since acquiring the property, SJHIG has conducted a comprehensive assessment of the property’s condition and developed a detailed scope of the repair work that needs to be undertaken. The assessment showed that a significant amount of work needs to be undertaken and that the total cost for the work identified in the assessment is estimated at $981,663. These costs include the payment of prevailing wage.
While there have been updates to the units since they were constructed, no major renovations have been completed. A major rehabilitation of the units is proposed and will include asbestos removal, the conversion of a ground floor unit into an ADA accessible unit; modifications to the electrical and plumbing systems to meet current codes, new HVAC units, replacing the flooring throughout all the units, replacing the kitchen and bathroom cabinets and counters, installing new windows and insulation which will both improve energy efficiency and reduce the noise impact from Pershing Avenue to meet HUD’s requirements, and repainting of the interior of all of the units. Exterior improvements will include a new façade, new fencing, improvements to the landscaping, repaving of the parking lot, and installation of ADA accessible walkways. The project will also include installation of security and fire alarm systems.
STAND is requesting a loan of $1,365,000 to cover all project costs. In addition to the $981,663 for the renovation, the requested loan amount also includes $383,337 to cover other project costs, including $27,000 to temporarily relocate three tenants who are currently living in the complex, a $50,000 deposit into the Maintenance and Operating Reserves, a $179,611 developer fee, $100,305 in contingencies which will only be used if unforeseen work is needed during the rehabilitation project and $26,421 of other costs, such as architectural and engineering fees, building permit fees, and property taxes during the rehabilitation. If the requested loan is approved, the total City loan, including the original acquisition and predevelopment loan, will total $2,025,725.
City of Stockton Acquisition Loan (Resolution 2013-05-07-1204) $ 660,725
City of Stockton Rehabilitation Loan (Proposed) $1,365,000
Total City Loan $2,025,725
The Acquisition and Predevelopment Loan was provided to SJHIG as a zero percent, two-year loan. If the rehabilitation loan is approved, the acquisition and rehabilitation loan will be combined into one loan of $2,025,725. Since the property was in foreclosure when it was purchased by SJHIG, the project is eligible to use NSP funds. It is therefore recommended that the rehabilitation loan be funded with NSP funds and that the loan be provided as a 55-year, zero percent interest loan with annual repayments of 50 percent of residual receipts. Residual receipts is the amount of income remaining after all operating costs are paid. Based on a pro forma provided by SJHIG, residual receipt payments of approximately $11,000 per year can be expected. (Exhibit 1 to Resolution).
Many of the City loans are provided at three percent interest, however other zero percent loans have been approved when it was needed to make a project financially feasible. In this instance, the small number of units and the low rent required by NSP means that very little income is generated by the project. The project will generate only $78,000 per year in gross income. If there were more units, there would be more income generated from rents but not all operating costs would necessarily increase, so the project would have the potential to generate more net income. If the City charges three percent interest, the interest would be over $60,000 per year. The project cannot support that amount of debt.
As noted previously, NSP requires that a minimum of 25% of the original grant plus 25 percent of any program income must be used to benefit households with incomes at or below 50% of AMI. For a project to be counted as meeting this requirement, all of the units within that project must be rented to households below that income limit. Therefore, all eleven units in this complex will be rented to households with incomes at or below 50% of AMI. There will not be an on-site manager because STAND owns the 42-unit apartment complex located at 4215 North Pershing Avenue, which is across the street from the El Monte Apartments. The property manager who resides in that complex will also manage the El Monte Apartment complex.
Because of the extent of the rehabilitation, the three households currently residing in the apartment complex cannot stay in their units during construction. Therefore, as required by the NSP funds, relocation assistance must be provided and a Relocation Plan describing the relocation process must be prepared. SJHIG hired a relocation consultant who prepared a Relocation Plan which has been reviewed by staff and found to meet the federal requirements.
It is anticipated that the tenants will be temporarily relocated into STAND’s complex across the street. If space is not available in this complex, the tenants will receive assistance to obtain comparable units elsewhere. The tenants will have the right to move back into their original units after it is rehabilitated or into one of the other renovated units that may be completed sooner. As required by NSP, the tenants will be provided moving assistance and all costs associated with the moves, including the cost of professional movers and utility hookup fees, will be paid by SJHIG from the City’s loan.
This project is furthering prior revitalization efforts and significant investment that the City and County have previously made in this neighborhood. The City provided a $3.5 million loan to assist in the acquisition and rehabilitation of a 30-unit apartment complex north of this property and a $1.9 million loan for the acquisition and construction of an 82-unit complex located to the northwest. The County used their NSP funds for the acquisition and rehabilitation of the 42-unit property across the street. Together these projects will assist in contributing to improving the neighborhood, which was in need of additional investment and properly managed multi-family properties.
FINANCIAL SUMMARY
No General Funds dollars will be used for this project.
Sufficient funds in the amount of $1,365,000 are available in accounts 063-8526-640 and 064-8526-640 (NSP1 and NSP3 Loan Expenditure Accounts) for this project.
Attachment A - Resolution 2013-05-07-1204
Attachment B - Vicinity Map
Attachment C - Photos