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DE-OBLIGATE HOME ENTITLEMENT FUNDS FROM THE GRAND VIEW VILLAGE PROJECT AND AUTHORIZE LOW TO MODERATE INCOME HOUSING FUNDS TO PAY DOWN THE REAL PROPERTY DEBT
recommended action
RECOMMENDATION
It is recommended that the City Council adopt a resolution:
1. Approving the de-obligation of $334,208 of 2014 HOME Investment Partnerships Program Entitlement funds from the Grand View Village project;
2. Approving release of the $1,021,500 balance of the Low to Moderate Income Housing Funds to pay down the real property debt on the Grand View Village project;
3. Approving a one-year extension of the existing loans to VCOR, LP for the Grand View Village project to June 2020; and,
4. Authorizing the City Manager, or his designee, to take actions that are necessary and appropriate to carry out the purpose and intent of the resolution.
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Summary
Staff recommends de-obligating the 2014 HOME Investment Partnerships Program (HOME) Entitlement funds previously committed to VCOR, LP (a partnership between Visionary Home Builders and Ten Space) for the Grand View Village project in the amount of $334,208 and releasing $1,021,500 of Low to Moderate Income Housing funds so VCOR, LP can pay down the debt on the property.
Due to statutory timeliness requirements related to the use of HOME funds, the U.S. Department of Housing and Urban Development (HUD) informed the City that HOME funds must be de-obligated from the Grand View Village project (the project). VCOR, LP plans to keep the project moving forward, to do so they would like to use the remaining $1,021,500 of Low to Moderate Income Housing Funds (Bond) to pay down the debt on the properties.
Staff recommends $334,208 of HOME Entitlement funds be de-obligated, and releasing $1,021,500 of Bond funds to pay down the debt on the Grand View Village property. Since the City’s existing loans with VCOR, LP will expire on June 9, 2019, staff is also requesting a one-year extension to June 9, 2020 to allow the developer additional time to secure funding necessary to complete the project.
DISCUSSION
Background
Annually, the City of Stockton receives HOME Investment Partnerships (HOME) and Community Development Block Grant (CDBG) allocations from U.S. Department of Housing and Urban Development (HUD). The objectives of the HOME Program are to provide decent, affordable housing to lower-income households, and strengthen the ability of local government and nonprofit organizations to meet local housing needs.
The project includes three Downtown Stockton properties: 241 North San Joaquin Street, 250 North Hunter Street, and 228 and 240 North Hunter Street (Attachment A - Vicinity Map). Grand View Village is a joint development project that includes plans to create new affordable units in Downtown Stockton. This project is particularly important given the rising cost of housing for residents of Stockton and the lack of quality affordable housing. The project proposes to develop 63 residential units; a mixture of studios with 1, 2, and 3 bedrooms. The project also features over 6,000 square feet of space for various community services and 10,150 square feet of ground floor, market-rate retail.
As currently designed, the building is a mixture of new construction and rehabilitation, with a new, five-story structure replacing the former site of Donaldson’s Automotive and the adjacent structure at 250 North Hunter Street. Additionally, the project will rehabilitate the Delta Hotel on the opposite end of the block into second-floor housing and ground floor retail. Parking for tenants will also be provided onsite.
In 2014 and 2015, City Council approved two loans totaling $3,952,547 for the VCOR, LP, to assist with property acquisition, pre-development, and construction of the residential units, including $1,622,547 in HOME Community Housing Development Organization (CHDO) and Entitlement funds, $330,000 in CDBG funds, and $2,000,000 in Series C Redevelopment and Housing Revenue Bond proceeds from the former Redevelopment Agency to the Successor Agency (Attachment B - Resolution 2014-12-16-1211 and Attachment C - Resolution 2015-06-09-1202). Visionary used $330,000 in CDBG funds to acquire property located at 228 and 240 North Hunter Street, Stockton, California. The existing loans are due to expire on June 9, 2019.
VCOR, LP has spent $1,446,047 on the Grand View Village project, including $330,000 in CDBG funds, $137,547 in HOME funds, and $978,500 in Bond proceeds. To date, VCOR, LP has been unable to secure the financing necessary for the development of the Grand View Village project. On August 21, 2018, Council approved reallocation of $849,000 of HOME CHDO funds to the Hunter Street Apartment project (Attachment D - Resolution 2018-08-21-1104). Visionary is the only HUD approved CHDO developer that could have received these funds and this funding helped fill a shortfall in the Hunter Street Apartment project due to higher construction costs.
Present Situation
The purpose of this Staff Report is to obtain approval to de-obligate ($334,208.80) and repurpose funds ($1,021,500) previously committed to the Grand View Village Project.
The project was first proposed in 2015 and has since been redesigned and value engineered to account for rising construction costs and to create the most competitive project possible. While competitive funding has yet to be obtained, VCOR, LP remains committed to the project. To date, a total of $3.4 million has been spent on the project. From the $3.4 million spent, $1.4 million was from City of Stockton’s CDBG, HOME and Bond funds, and the difference of $2 million was of the applicant’s own funding. The applicant’s funds have been utilized for various predevelopment activities (e.g., architectural, engineering, city fees, etc.) and holding costs (e.g., maintenance and repairs).
Due to statutory timeliness requirements related to the use of HOME funds, on August 21, 2018, the City requested approval to move $849,000 of 2011, 2012, 2013, 2014, and 2016 HOME CHDO funds from the Grand View Village project to the Hunter Street Apartment project. The property is in a prime section of Downtown that is ripe for revitalization. If the project is eventually developed, this could spur private investment in the much-needed Downtown area.
In December 2018, HUD instructed the City to de-obligate $334,208 of 2014 HOME Entitlement funds from the Grand View Village project. During to the partial government shutdown City staff was not able to move the funds from this project. Now that the government has reopened, City staff will work the City’s HUD representative to de-obligate funds. After funds are de-obligated, the City staff plan to include the de-obligated funds ($334,208) in the annual Affordable Housing Notice of Available Funding (NOFA) which will be published towards the end of 2019.
VCOR, LP has attempted to meet the timeliness requirements of the HOME funding allocated to this project by applying for multiple funding opportunities over the past few years. However, due to rising construction prices and changes in pricing for equity investments in the tax credit market there has been significant volatility in the affordable housing market directly impacting the success of this project. In order to preserve HOME funds allocated to the City these funds have been moved to other projects or set aside to be reallocated. The remaining City funds in the project give VCOR, LP the opportunity to compete in the upcoming Affordable Housing and Sustainable Communities application process and package other tax credit options.
The funds remaining in the City loan agreements with VCOR, LP include $2,605,094 of City Bond ($2,000,000), HOME ($275,094) and CDBG ($330,000). Of the City funding, VCOR, LP has spent $1,446,047 on the Grand View Village project, including $330,000 in CDBG funds, $137,547 in HOME funds and $978,500 in Bond proceeds. It should be noted that although VCOR, LP has only spent $137,547 in HOME funds, the loan documents reflect a required repayment of $275,094 to recover a HUD timeliness penalty that will be assessed to the City through a reduction in a future allocation of HOME entitlement funds. VCOR, LP has requested approval to use the remaining Bond funds be used to pay down their existing loans on the property, instead of using the funds for construction-related activities. On November 2, 2018, the properties “as is” market value was assessed at $2,780,000, and the properties loan to value is 94%. The City Bond funds will be used to pay down the debt on the properties located at 228, 240, and 250 North Hunter Street and 241 North San Joaquin Street. Visionary is attempting to reduce their overhead costs by paying down the real property debt to increase their cash flow for development of the project which in turn should help make them more competitive for grant funding. This will position the project to be competitive for additional funding.
VCOR, LP will continue to move the project forward and will apply for Affordable Housing and Sustainable Communities Program funding, and a hybrid of both 4% and competitive 9% tax credits in 2019. Releasing the City Bond funds, it will allow the applicant to continue working towards securing financing for the project. It is important to note that while the project has continued to seek financing, the applicant has endured significant costs and expelled considerable resources to maintain the buildings.
It is recommended that City Council approves the de-obligation of federal HOME Entitlement funds previously committed to the Grand View Village project in the amount of $334,208, and to repurpose $1,021,500 to pay down existing debt on the property. The current City loan amount to VCOR, LP will be amended to reflect the reduction in HOME funding. The loan will remain as a 55-year, 3 percent interest loan with payments of fifty percent of residual receipts. Residual receipts are the amount of revenue remaining after all operating expenses are paid. If the annual residual receipt payments do not pay off the loan, the remaining balance is due at the end of the 55-year term.
As the City’s existing loan with VCOR, LP will expire on June 9, 2019, staff is also requesting a one-year extension to June 9, 2020 to allow the developer additional time to secure funding necessary to complete the project.
FINANCIAL SUMMARY
The City will incur no financial liability by de-obligating $334,208 the HOME Entitlement funds, and repurposing $1,021,500 of Bond funds previously approved by Council to pay down the real property debt.
Attachment A - Vicinity Map
Attachment B - Resolution 2014-12-16-1211
Attachment C - Resolution 2015-06-09-1202
Attachment D - Resolution 2018-08-21-1104