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Home My WebLink About80A - PRE-LOAN COMMITMENT LACY PROJECTREQUEST FOR COUNCIL/ HOUSING AUTHORITY ACTION CITY COUNCIL MEETING DATE: FEBRUARY 5, 2019 TITLE: APPROVE A PRE -LOAN COMMITMENT OF $231,494 OF AFFORDABLE HOUSING FUNDS AND A COMMITMENT FOR A 99 - YEAR GROUND -LEASE TO HABITAT FOR HUMANITY OF ORANGE COUNTY FOR THE DEVELOPMENT OF THE LACY STREET PROJECT {STRATEGIC PLAN NO. 5, 3C} CITY MANAGER EXECUTIVE DIRECTOR RECOMMENDED ACTION CITY COUNCIL CLERK OF COUNCIL USE ONLY: APPROVED ❑ As Recommended ❑ As Amended ❑ Ordinance on 1b' Reading ❑ Ordinance on 2nd Reading ❑ Implementing Resolution ❑ Set Public Hearing For CONTINUED TO FILE NUMBER Authorize the City Manager and the Clerk of the Council to execute a pre -loan commitment letter with Habitat for Humanity of Orange County ("Habitat for Humanity") for $231,494 in Inclusionary Housing Funds for the development of the Lacy Street affordable housing project located at 826 N Lacy Street and 830 N. Lacy Street, subject to non -substantive changes approved by the City Manager and City Attorney. HOUSING AUTHORITY Authorize the Executive Director of the Housing Authority and the Recording Secretary to execute a pre -commitment letter with Habitat for Humanity of Orange County ("Habitat for Humanity") for a 99 -year ground -lease of 826 N Lacy Street and 830 N. Lacy Street (APN: 398- 041-22 / 398-041-18) for the development of the Lacy Street affordable housing project, subject to non -substantive changes approved by the Executive Director of the Housing Authority and Authority General Counsel. COMMUNITY REDEVELOPMENT AND HOUSING COMMISSION RECOMMENDATION At its regular meeting on January 23, 2019, the Community Redevelopment and Housing Commission (CRHC) by a vote of 5:0 (Ramos and Urzua abstained): 1) Recommended that the City Council authorize the City Manager and the Clerk of the Council to execute a pre -loan commitment letter with Habitat for Humanity of Orange County ("Habitat for Humanity") for $231,494 in Inclusionary Housing Funds for the development of the Lacy Street affordable housing project located at 826 N Lacy Street 80A-1 Commitment of Affordable Housing Funds and a Ground -Lease to Habitat for Humanity February 5, 2019 Page 2 and 830 N. Lacy Street, subject to non -substantive changes approved by the City Manager and City Attorney. 2) Recommended that the Housing Authority authorize the Executive Director of the Housing Authority and the Recording Secretary to execute a pre -commitment letter with Habitat for Humanity of Orange County ("Habitat for Humanity") for a 99 -year ground -lease of 826 N Lacy Street and 830 N. Lacy Street (APN: 398-041-22 / 398-041-18) for the development of the Lacy Street affordable housing project, subject to non -substantive changes approved by the Executive Director of the Housing Authority and Authority General Counsel. DISCUSSION On June 19, 2018, the City Council authorized the Community Development Agency (CDA) to release a Fiscal Year (FY) 2019 Request for Proposals (RFP # 18-056) to develop affordable rental and ownership project(s) in the City of Santa Ana with available funds from the HOME Investment Partnerships Program (HOME), Community Development Block Grant Program (CDBG), Project Based Voucher Program (PBV), Inclusionary Housing Fund, and Housing Successor Agency Fund. The RFP also included land assets currently owned by the Housing Authority of the City of Santa Ana. The RFP was drafted in compliance with the City's Affordable Housing Funds Policies and Procedures adopted by City Council on March 20, 2018. On July 2, 2018, CDA issued RFP # 18-056 for Affordable Housing Development. The RFP was published on both the City and Housing Authority's websites; a public notice was published in the OC Register on July 2, 2018; an e-mail was sent out by Orange County's largest affordable housing membership associations including the Kennedy Commission, 2-1-1 Orange County, and Southern California Association of Nonprofit Housing; and an electronic letter was e-mailed to interested developers and nonprofit organizations who had previously requested to be informed of development opportunities on CDA's RFP Process Database. The first annual deadline for the City's RFP # 18-056 for Affordable Housing Development closed on Wednesday, August 15, 2018 at 5:00 p.m. The City received thirteen (13) proposals prior to the deadline. The affordable housing developers that submitted a proposal are: Affordable Housing Developer Cesar Chavez Foundation Chelsea Investment Corporation Community Development Partners — 2 Proposals Community HousingWorks Habitat for Humanity of Orange County HomeAid Orange Count Jamboree Housing — 2 Proposals National Community Renaissance & Mercy House Living Centers Orange Housing Development Corporation & C&C Development, LLC Related California LINC Housing Corporation 80A-2 Commitment of Affordable Housing Funds and a Ground -Lease to Habitat for Humanity February 5, 2019 Page 3 After the deadline, staff conducted a minimum threshold review of each proposal to ensure the proposal complied with all of the minimum requirements in the RFP. Following the minimum threshold review, staff formed a Review Panel that consisted of the Executive Director of the City's Public Works Agency with his designee, the Executive Director of the Planning and Building Agency with his designee, the Executive Director of the Community Development Agency, and the Housing Division Manager. The Veterans Affairs Medical Center of Long Beach, the County of Orange, Keyser Marston Associates, and MDG Associates served as advisors to the Review Panel. In compliance with the City's Affordable Housing Funds Policies and Procedures, the Review Panel used the proposal Scoring and Selection Criteria from the RFP to conduct their review and analysis of each proposal. In addition to the Scoring and Selection Criteria from the RFP, the Review Panel also reviewed the proposed project design for appropriateness for the proposed target group, compatibility with surrounding uses, cost effectiveness of construction, and appropriateness of the design and construction for low maintenance and long term durability. On October 30, 2018, the Review Panel met and interviewed all of the developers who submitted a proposal. LINC Housing requested to be removed from consideration prior to their scheduled interview and therefore their proposal was removed from consideration. On November 14, 2018, the Review Panel met a second time to discuss and deliberate upon the scoring and selection of the proposals. Following this deliberative selection process, the Review Panel agreed upon the final scores below based on an average of the Individual Reviewer Scores: • I . Commitment of Affordable Housing Funds and a Ground -Lease to Habitat for Humanity February 5, 2019 Page 4 Housing Authority Land Asset Requested / HUD-VASH Vouchers l Non -Housing Authority Land Asset Developer Name Project Name FINAL SCORE (Average of Individual Reviewer Scores) 1126& 1146 E. Washington Avenue Orange Housing Development Corpomfion and C&C Development, LLC 1126.1146 E. Washington She 92 Related California The Crossroads at Washington 91 Jamboree Housing REVO Apartments 87 Cesar Chavez Foundation Santa Ana Place 84 Community Housing Works Tmnsformar 80 Community Development Partners Washington Plaza, GRFLD, Lacy Walk 77 Chelsea hvesi nent Corporation Cielo 76 826 N. Lacy/830 N. Lacy Habitat for Humanity of Orange County Lacy StreetProject 82 Community Development Partners Washington Plaza, GRFLD, Lacy Walk 77 801, 809 & 809 1/2 E. Santa Ana Blvd. HomeAld Orange County Frances Xavier Residence 90 Community Development Partners Washington Plaza, GRFLD, LacyWalk 77 HUD-VASH Vouchers (As the PnmarySouroe of Financing) Jamboree Housing Budget hn Site 86 Community Development Partners Westview House 81 Non -Housing Authodty Land Asset National Community Renaissance and Mercy House Living Centers Santa Ana United Methodist Church Site 93 Based on the scores above and the relative scoring of proposals competing for the same land asset(s) or source of affordable housing funds (e.g. HUD-VASH PBVs), the Review Panel recommends the following award for this project: Developer: Project Name: Developer Request: Habitat for Humanity of Orange County Lacy Street Project $231,494.00 e I . Commitment of Affordable Housing Funds and a Ground -Lease to Habitat for Humanity February 5, 2019 Page 5 Award Recommendation: • Inclusionary Housing Fund: $231,494.00 • Lease Agreement for 826 and 830 N Lacy St. o Appraised Value as of October 25, 2018: $578,000 The commitment letter with Habitat for Humanity for $231,494 in Inclusionary Housing Funds and a 99 -year ground -lease of 826 N Lacy Street and 830 N. Lacy Street (APN: 398-041-22 / 398- 041-18) for the development of the Lacy Street affordable housing project provides the official award from the Housing Authority (Exhibit 1). In compliance the City's Affordable Housing Funds Policies and Procedures, the City's real estate advisor, Keyser Marston Associates (KMA), has confirmed the underwriting for the Project, the financial gap, and other programmatic requirements related to the funding sources. KMA has reviewed the developer's estimates and projections of rents, expenses, reserves and development costs in accordance with industry - standard underwriting guidelines and recommends the full amount of the award based on their underwriting and subsidy layering analysis (Exhibit 2) along with other policy recommendations. It is important to note that this award above was amended after the initial recommendation by the Review Panel. Following the initial award recommendation by the Review Panel for only a 99 - year ground lease, Habitat for Humanity met with staff and communicated that the economic feasibility of the project had changed since the submission of their proposal on August 15, 2018 under RFP # 18-056 due to changes requested by the French Park Neighborhood Association to the design of the project. Specifically, Habitat for Humanity had submitted a proposal before the deadline for the RFP on August 15, 2018 based on a design that they had not reviewed with the French Park Neighborhood Association. After the deadline, Habitat for Humanity met with the French Park Neighborhood Association, as required in the RFP, [The RFP. stated, 'This vacant site will need to comply with the design guidelines of the French Park Historic District and will require review by the French Park Design Committee."] Following their meeting, the French Park Neighborhood Association requested revisions to the design and construction of their project, which increased the cost of construction for Habitat for Humanity to develop the project. As a result, the financial gap for the construction of the project actually increased for more than $231,494 than initially requested and Habitat for Humanity had preliminarily accepted an award (the 99 -year Ground Lease) for a project that they no longer had the financial capacity to develop. In order to support this project to move forward and comply with the French Park Neighborhood Association, staff reviewed the affordable housing funds available in RFP # 18-056. [As stated in the RFP, "Available affordable housing funds and land assets being made available in this RFP are subject to change."] On January 14, 2019, the City received a disbursement of in -lieu fees from the Heritage Phase III project for over $3.8 million. With these new Inclusionary Housing Funds received by the City, staff was able to amend the original award recommended by the Review Panel for Habitat for Humanity to meet their full original request. Habitat for Humanity plans to address their remaining financial gap through resource development activities in the form of a grant for the project. Commitment of Affordable Housing Funds and a Ground -Lease to Habitat for Humanity February 5, 2019 Page 6 Project Description Habitat for Humanity of Orange County is a nonprofit organization specializing in the construction of affordable homes for purchase by qualifying families. Since 1988, the Orange County affiliate has completed and sold 219 new homes in its service area. Thirty of those homes have been built in the City of Santa Ana. The project location is at the SW corner of Lacy and Vance Streets and is comprised of two single-family lots within the "Historic French Park" community. The Housing Authority will be providing a 99 -year ground lease on the land. Construction will consist of two (2) single-family detached homes. In multiple meetings and discussions with the Historic French Park Committee, the local residents made clear their strong desire that Habitat for Humanity design and construct homes that reflect the architectural elements and finishes that are present in the French Park community. In addition, there is an expectation that Habitat for Humanity will create two distinct floor plans for this project whose sizes are proportionate to the approximately 7,500 sq. ft. lots on which they will be built. With these requirements in mind, Habitat proposes the following: • A single -story "Craftsman -style" home. This residence will be a three bedroom, two and a half bath of approximately 1,500 sq. ft. • A second home that will be influenced by the 'Victorian -Style" of architecture. This will be a two-story residence with four bedrooms and three bathrooms and will be approximately 1,700 sq. ft. It is important to note that the architectural designs proposed for the Project are more in line with custom home developments as opposed to Habitat for Humanity's original mission to provide "simple, decent and affordable" housing. The proposed architectural designs result in significantly higher construction costs than the projects typically constructed by Habitat for Humanity. These homes will be made available to qualifying moderate income families (up to 120% of Area Median Income) as set forth in California Health and Safety Code. Construction will comply with all City of Santa Ana building standards, as well as the Historic French Park community. In RFP # 18-056, staff informed all applicants this vacant site will need to comply with the design guidelines of the French Park Historic District and will require review by the French Park Design Committee. The Historic French Park Association Architectural Review Committee provided a letter of support to Habitat for Humanity for the development of their project (Exhibit 3). The construction of all required improvements associated with the development will be the responsibility of Habitat for Humanity. Materials will include composite roofing material, wood, or simulated wood siding, concrete -paving surfaces, and professionally designed landscape. The two homes will be constructed concurrently, with an anticipated building cycle of 10 months from the issuance of building permits. For the development of this project by Habitat for Humanity of Orange County, the Review Panel is recommending an award of $231,494 in Inclusionary Housing Funds and a 99 -year ground - lease of 826 N Lacy Street and 830 N. Lacy Street (APN: 398-041-22 / 398-041-18) following a competitive selection process through RFP # 18-056 in compliance with the City's Affordable 80A-6 Commitment of Affordable Housing Funds and a Ground -Lease to Habitat for Humanity February 5, 2019 Page 7 Housing Funds Policies and Procedures. After Habitat for Humanity secures all of their remaining financing for the development of the project, staff will return to City Council and the Housing Authority with a Loan Agreement and a 99 -year ground -lease agreement. STRATEGIC PLAN ALIGNMENT Approval of this item supports the City's efforts to meet Goal # 5 - Community Health, Livability, Engagement & Sustainability, Objective #3 (Facilitate diverse housing opportunities and support efforts to preserve and improve the livability of Santa Ana neighborhoods), and Strategy C (Provide that Santa Ana residents, employees, artists and veterans receive priority for affordable housing created under the City's Housing Opportunity Ordinance or with City funding to the extent allowed under state law). FISCAL IMPACT Upon approval of the loan agreement, funds in the amount of $231,494 within the Inclusionary Housing Fund will be made available for distribution (Loans and Grants account no. 41718820- 69152). Any payment associated with the lease agreement will be addressed at the time the agreement is presented to the Housing Authority Board for approval. Steven A. Mendoza Executive Director APPROVED AS TO FUNDS AND ACCOUNTS: Alc � Kathryn Downs, CPA F po Executive Director Community Development Agency Finance and Management Services Agency Exhibits: 1. Pre -Commitment Letter for Habitat for Humanity of Orange County 2. Underwriting and Subsidy Layering Analysis by Keyser Marston Associates 3. Letter of Support from Historic French Park Association 80A-7 MAYOR Miguel A. Pulido MAYOR PRO TEM Juan Villages COUNCILMEMBERS Cecilia Iglesias David Penaloza Roman Reyna Vicente Sarmiento Jose Solorio February 5, 2019 CITY OF SANTA ANA SANTA ANA HOUSING AUTHORITY 20 Civic Center Plaza • P.O. Box 22030 Santa Ana, California 92702 (714) 667-2200 wwW.santa-ana.ora Troy Hendrickson Vice President of Construction Habitat for Humanity of Orange County 2200 S. Ritchey Street Santa Ana, CA 92705 Re: Lacy Street Project 826 and 830 North Lacy, Santa Ana, CA 92701 Pre -Commitment Letter for Lease Agreement 1ZWTitLI111111CGTiL.Tit.7N,A EXHIBIT 1 CITY MANAGER Raul Godinez II CITY ATTORNEY Sonia R. Carvalho CLERK OF THE COUNCIL Maria D. Huizar Habitat for Humanity of Orange County ("Developer') requested financial assistance in connection with the proposed development of a two (2) unit affordable housing project to be located at 826 and 830 North Lacy Street, Santa Ana, CA 92701 (APN: 398-041-22 and 398-041-18) ("Project"). The City of Santa Ana ("City') and Housing Authority of the City of Santa Ana ("Housing Authority') have reviewed the Developer's request for assistance, and at the joint City Council / Housing Authority meeting on February 5, 2019, the City Council and Housing Authority Board authorized and approved issuance of this pre -commitment letter evidencing the preliminary award of ("Agency Assistance"): A loan in the maximum amount of $231,494 in inclusionary housing in -lieu fee payments made pursuant to the City's Housing Opportunity Ordinance (Article XVIII.I of Chapter41 of the Santa Ana Municipal Code) (the "Inclusionary Housing Fund") held by the City of Santa Ana for the Project ("City Loan'); and, - A 99 -year ground lease for the property located at 826 and 830 North Lacy Street, Santa Ana, CA 92701 (APN: 398-041-22 and 398-041-18, with a combined appraised value of $578,000.00 as of October 25, 2018); to be used for development of affordable housing at 826 and 830 North Lacy Street, Santa Ana, CA 92701 ("Ground Lease"). SANTA ANA CITY COUNCIL Miguel A. Pulldo Juan Villages Vicante Sarrnienuo David Penalora Jose Solorio Roman Reyna Cecilia Iglesias Mayor Mayor Pro Tem, Ward 5 Ward 7 Word 2 Ward 3 Ward 4 Ward 5 nmulidoiMsanta-ann.om Ivilleaasnsanta-ana.cravsartnientaratsanta-one ora nal z an - n . IsolorloCAsenta-ona.orn rrevnarcdisanta-ana.orn c1nIesias0santa-zna.ora EXHIBIT 1 Paoe 12 This letter shall evidence the Agency's pre -commitment of the Agency Assistance to the Developer for the Project subject to the conditions described below. City Loan: The amount of the proposed City Loan has been determined based upon the Cityis review of the Developer's request for the receipt of the Agency Assistance and the development proforma and projected cash flows for the Project submitted by the Developer to the City ("Proforma"). The City Manager and Housing Authority Executive Director has authority to approve revised development proformas and projected cash flows for the Project; provided, however, that the City Assistance is not increased or extended. The City Loan shall include the following terms: • $231,494 maximum principal amount, or as much thereof as is disbursed for hard and soft costs in constructing the Project, provided from the City of Santa Ana Inclusionary Housing Fund. • 3% simple interest per annum. • Repayment from 50% of Residual Receipts (pro -rata with payments due in connection with other financing provided by other public agencies) (after payment of operating expenses, debt service, any deferred developer fee, and partnership fees to be described in the Agreement) with the remaining 50% to be disbursed to the Developer. • Remaining principal and accrued interest due upon the 55th anniversary of the issuance of Certificate of Occupancy and/orfinal building permits or earlier upon sale, refinancing or default. On that date, the City agrees to review the performance of the property and consider in good faith any reasonable request by Developer to modify the terms or extend the term of the City Promissory Notes. Additionally, the City will receive a pro rata share of 50% of the net proceeds received from any sale or refinancing of the Project, after payment of outstanding debt and payment in full of any deferred developerfee and establishment of any reserves and transaction costs. • Cost savings from the Project, if any, will be applied first to pay down the City Loan. Ground Lease: The Project will be located at 826 and 830 North Lacy Street, Santa Ana, CA 92701 (APN: 398-041-22 and 398-041-18) ("Property"). The Housing Authority currently owns the Property. Accordingly, the Housing Authority Board authorized the lease of the Property to the Developer for the Project. After Developer secures all of its remaining financing for the development of the Project, staff will return to the Housing Authority for consideration of a 99 -year Ground Lease Agreement. Foorlymul EXHIBIT 1 Paqe 13 General Provisions: The Agency's obligation to provide the Agency Assistance to the Project is subject to each of the following conditions: • Developer must provide proof that it has secured all of its remaining financing for the development of the Project before staff will return to the City Council / Housing Authority for consideration of the Loan Agreement and Ground Lease Agreement. • All provided funding and project requirements shall conform to the City's adopted Affordable Housing Funds Policies and Procedures, unless alternative requirements are expressly provided in the executed Loan Agreement and/or Ground Lease Agreement, or any other documents related to the development of the Project. • Approval of all required entitlements and discretionary actions, to allow the construction of a 2 -unit affordable housing project to be located at 826 and 830 North Lacy Street, Santa Ana, CA 92701. • The City's obligation to provide the Loan is and shall remain subject to all covenants, conditions, and restrictions set forth in the Loan Agreement, and in particular City's analysis of the available funding sources and development and operating costs of the Project and the overall economic feasibility of the Project. • Review and approval of the documents evidencing the City Loan by the City Council, as applicable. • Review and approval of the documents evidencing the Ground Lease by the Housing Authority as applicable. • Compliance with California Health and Safety Code and applicable regulations set forth in Section 34176. Developer, at its sole cost and expense, will be responsible for securing any and all permits and discretionary approvals that may be required for the Project by the City, Housing Authority, or any other federal, state, or local governmental entity having or claiming jurisdiction over the Property or Project. Notably, this pre -commitment letter shall not obligate the City or any department thereof to approve any application or request for or take any other action in connection with any planning approval, permit or other action necessary for the construction, rehabilitation, installation or operation of the Project. This pre -commitment letter for the Project will expire on January 15, 2021. 80A-11 EXHIBIT 1 --– --- -- - —--— -- Page 14 If you have any questions or require any additional information regarding this award letter, please contact Judson Brown, Housing Division Manager, by telephone at (714) 667- 2241 or by e-mail at ibrown(a�santa-ana.org. Sincerely, Steven A. Mendoza Acting City Manager Attest: Norma Mitre Acting Clerk of Council 80A-12 EXHIBIT 2 KEYSER MARSTON ASSOCIATES.. ADVISORS IN PUBLIC/PRIVATE REAL ESTATE DEVELOPMENT ADVISORS IN: Kathleen H. Head Real Estate To: Judson Brown, Housing Division Manager Affordable Housing Kevin E. Engstrom Economic Development Julie L. Romey City of Santa Ana BERKELEY At your request, Keyser Marston Associates, Inc. (KMA) prepared a preliminary financial SAN DIEGO A. Jerry Keyser From: Tim Bretz Timothy C. Kelly parcels that are currently owned by the City of Santa Ana Housing Authority (Authority). Debbie M. Kern sold to moderate income households (Project). David Doezema Date: January 18, 2019 Kevin Feeney LOSANGELES Kathleen H. Head Subject: Lacy Street Project: Preliminary Financial Gap Analysis James A. Rabe Gregory D. Sao -Hoo Kevin E. Engstrom Julie L. Romey Tim R. Bretz At your request, Keyser Marston Associates, Inc. (KMA) prepared a preliminary financial SAN DIEGO gap analysis for the project proposed to be developed at 826 and 830 North Lacy Street Paul C. Marra (Site) by Habitat for Humanity of Orange County (Habitat). The Site consists of two parcels that are currently owned by the City of Santa Ana Housing Authority (Authority). As proposed, Habitat will construct two single family homes on the Site which will be sold to moderate income households (Project). Habitat is requesting the following financial assistance: 1. $231,000 in Inclusionary Housing Funds from the City of Santa Ana (City); and 2. To enter into a 99 -year ground lease with the Authority for the Site at no cost. The purpose of the KMA analysis is to evaluate Habitat's financial assistance request. EXECUTIVE SUMMARY Estimated Financial Gap The results of the KMA financial gap analysis are compared to Habitat's financial proposal in the following table: 500 SOUTH GRAND AVENUE, SUITE 1480 > LOS ANGELES, CAUFORNIA 90071i PHONE 213.622.8095 1901009:SA:TRB W W W.KEYSERMARSTON.COM 19090.017.011 Judson Brown, City of Santa Ana Lacy Street Project: Preliminary Financial Gap Analysis EXHIBIT 2 January 18, 2019 Page 2 KMA Habitat Difference Total Construction Costs $1,189,000 $1,196,000 ($7,000) Total Available Revenue 926,000 870,000 56,000 Financial Gap $263,000 $326,000 ($63,000) As shown in the preceding table, KMA estimates the Project's financial gap at $263,000. Comparatively, Habitat estimates the Project's financial gap at $326,000. This equates to a $63,000 differential. The differential is primarily due to a difference in the KMA and Habitat "Affordable Sales Price" estimates. The City proposes to provide up to $231,000 in Inclusionary Housing Funds to the Project. This amount is lower than both the financial gap identified by KMA and the dollar amount of Habitat's assistance request. As such, it can be concluded that the proposed City assistance package will not provide a windfall profit to Habitat. It is our understanding that subsequent to the completion of KMA's financial analysis, City staff and Habitat discussed the difference between the demonstrated financial gap and the available City assistance funds. It is our understanding that Habitat has committed to fund any portion of the Project's financial gap amount in excess of the City's $231,000 financial assistance commitment. PROJECT DESCRIPTION Background The Site is located in the French Park Historic District (French Park). Any proposed development is subject to the design guidelines imposed on French Park as well as a review by the French Park Design Committee (Design Committee). In Fall 2018, Habitat met with the Design Committee to discuss the proposed Project, and the Design Committee requested revisions to Habitat's original design. Specifically, the Design Committee and residents of French Park requested that Habitat construct homes that incorporate the historic architectural elements and finishes that are currently present in the neighborhood. In response, Habitat proposes the following: 1901009:SA:TRB 19090.017.011 Judson Brown, City of Santa Ana EXHIBIT 2 January 18, 2019 Lacy Street Project: Preliminary Financial Gap Analysis Page 3 1. A single -story "Craftsman -style" home, which will include three bedrooms and two and a one-half bathroom; and 2. A two-story "Victorian -style" home, which will include four bedrooms and three bathrooms. It is important to note that the architectural designs proposed for the Project are more in line with custom home developments as opposed to Habitat's original mission to provide "simple, decent and affordable" housing. The proposed architectural designs result in significantly higher construction costs than the projects typically constructed by Habitat. Scope of Development The proposed scope of development can be described as follows: 1. The Site area totals 0.34 acres, or approximately 16,200 square feet of land area. 2. The two -unit Project represents a density of 5 units per acre. 3. The Project's unit mix is as follows: a. One (1) three-bedroom house estimated at 1,500 square feet of gross building area (GBA); and b. One (1) four-bedroom house estimated at 1,700 square feet of GBA. 4. The Project's total GBA is estimated at 3,200 square feet. 5. Both units will be restricted to moderate income households per the definitions set forth in California Health and Safety Code (H&SC). FINANCIAL GAP ANALYSIS KMA prepared a pro forma analysis to estimate the Project's financial gap. The analysis is located at the end of this memorandum, and is organized as follows: 1901009:SA:TRB 19090.017.011 Judson Brown, City of Santa Ana Lacy Street Project: Preliminary Financial Gap Analysis Table 1: Estimated Construction Costs Table 2: Estimated Available Revenue Table 3: Financial Gap Calculation Estimated Construction Costs (Table 1) EXHIBIT 2 January 18, 2019 Page 4 KMA reviewed Habitat's January 2, 2019 pro forma and then independently prepared a pro forma analysis of the Project. The resulting construction costs are estimated as follows: Direct Costs The direct costs assume that the Project will not be subject to State of California and/or Federal Davis Bacon prevailing wage requirements. As noted previously, the design elements proposed for the Project are more in line with custom home developments. As such, it is difficult to estimate the appropriate direct costs without more detailed plans and drawings. Thus, for the purposes of this preliminary financial gap analysis, KMA utilized the direct cost estimates provided by Habitat. The direct costs can be summarized as follows: 1. The on-site improvement costs are estimated at $8 per square foot of land area, or $124,000. 2. The building costs are estimated at $144 per square foot of GBA, or $460,000. This equates to an average of $230,000 per unit. 3. A 4% allowance for general requirements is provided, which equates to $23,000. 4. Per Habitat, the Project's construction (estimated at 12 months) will require the supervision of two Habitat staff members. The supervision costs are estimated at $120,000, or $60,000 per Habitat staff member. 5. KMA included a $36,000 direct cost contingency allowance, which is equal to 5% of other direct costs. KMA estimates the total direct costs at $763,000. This equates to $238 per square foot of GBA or an average of $381,500 per unit. 1901009:SA:TRB 19090.017.011 EXHIBIT 2 Judson Brown, City of Santa Ana January 18, 2019 Lacy Street Project: Preliminary Financial Gap Analysis Page 5 Indirect Costs KMA utilized the following assumptions in estimating the indirect costs: 1. The architecture, engineering and consulting costs are estimated at $153,000, which equates to an average of $76,500 per unit or 20% of direct costs. 2. Habitat estimated the public permits and fees costs at $52,000, or approximately $26,000 per unit. City staff should verify the accuracy of this estimate. 3. The taxes, insurance, legal and accounting costs are estimated at 2% of direct costs. 4. Habitat will select the home buyer of each unit and provide home buyer education and training. Habitat estimates the cost of these services at $12,000 per unit, or $24,000. 5. Habitat set the Developer Fee at $98,000, which is equal to 13% of direct costs. An indirect cost contingency allowance equal to 5% of other indirect costs is provided. KMA estimates the total indirect costs at $359,000. Financing Costs The financing costs for the Project are estimated as follows: 1. The interest costs to be incurred during the construction period are estimated at $20,000. These costs are based on the following assumptions: a. Habitat stated that they will obtain a construction loan from a 3rd party lender for the Project. KMA estimates the construction loan amount at $998,000, which is calculated based on the total construction costs less the In -Kind Contributions, Developer Fee, closing costs, and warranty costs. 1901009:SA:TRB 19090.017.011 80A-17 Judson Brown, City of Santa Ana EXHIBIT 2 January 18, 2019 Lacy Street Project: Preliminary Financial Gap Analysis Page 6 b. Per Habitat, the construction period interest costs are based on an 8% interest rate, a 12 -month construction period, and a 30% average outstanding balance. 2. Per Habitat, the financing fees for the construction loan are estimated at 1.0 point, or $10,000. 3. The closing costs are estimated at 2% of sales revenue, or $17,000. 4. The warranty costs are estimated at $10,000 per unit, or $20,000. KMA estimates the total financing costs at $67,000. Total Construction Costs As shown in Table 1, KMA estimates the total construction costs at $1.19 million, which equates to approximately $594,500 per unit. In comparison, Habitat estimates the total construction costs at $1.20 million. This equates to a less than 1% differential. Project Revenues (Table 2) The Project Revenues are estimated as follows: Affordable Sales Price Calculations Habitat is proposing to sell both units to moderate income households. KMA estimates the Affordable Sales Prices based on the H&SC Section 50052.5 calculation methodology and the following assumptions (Table 5): 1. The household income used in the calculations is based on the 2018 Orange County median incomes distributed by the California Department of Housing and Community Development (HCD). 2. The Project will not include a homeowner's association, and each homeowner will be required to maintain and repair their own properties. However, given the increased maintenance requirements associated with the architectural elements proposed for the houses, Habitat proposes to require the homeowners to establish a monthly maintenance reserve account. This "forced savings" structure would ensure that funds are available to provide maintenance for the 1901009:SA:TRB 19090.017.011 FOODINFOO Judson Brown, City of Santa Ana Lacy Street Project: Preliminary Financial Gap Analysis EXHIBIT 2 January 18, 2019 Page 7 building exterior. Habitat estimates the maintenance reserve deposits at $275 per unit per month. 3. The monthly utilities costs are set at $178 per month for the three-bedroom home and $209 per month for the four-bedroom home based on the 2019 Utility Allowance Schedule published by the Authority. 4. The property tax cost estimate is based on 1.12% of the Affordable Sales Price. 5. The mortgage interest rate is set at 5.0%. The mortgage is assumed to be fully amortizing over 30 -years and provided by a conventional lender. 6. The home buyer down payment is set at 5% of the Affordable Sales Price. Affordable Sales Revenue Based on the assumptions outlined above, KMA estimates the moderate income Affordable Sales Prices as follows: Three -Bedroom Unit $417,900 Four -Bedroom Unit $452,100 The resulting total affordable sales revenue is estimated at $870,000. In comparison, Habitat estimates the Affordable Sales Prices at $407,000 per unit, which totals $814,000 in affordable sales revenue. Habitat did not provide their Affordable Sales Price calculations. Additional Revenue Habitat proposes to utilize In -Kind Contributions to off -set a portion of the construction costs. Habitat estimates the In -Kind Contributions available to the Project at $28,000 per unit, or $56,000. • A • L�' 1901009:9A:TRB 19090.017.011 EXHIBIT 2 Judson Brown, City of Santa Ana January 18, 2019 Lacy Street Project: Preliminary Financial Gap Analysis Page 8 Total Available Revenue The Project's total available revenue is equal to the sum of the Affordable Sales Price revenue and the Project's additional revenue. KMA estimates the total available revenue as follows: Affordable Sales Price Revenue $870,000 Additional Revenue 56,000 Total Available Revenue $926,000 Financial Gap Calculation The financial gap is estimated by deducting the Project's available revenue from the Project's total construction costs. Based on the preceding analysis, KMA estimates the Project's financial gap as follows: Total Construction Costs $1,189,000 (Less) Total Available Funding Sources (926,000) Financial Gap $263,000 Per Unit $131,500 As shown in the preceding table, KMA estimates the Project's financial gap at $263,000. Comparatively, Habitat estimates the Project's financial gap at $326,000. This equates to a $63,000 differential, which is primarily due the difference in Affordable Sales Prices. The City proposes to provide up to $231,000 in Inclusionary Housing Funds to the Project. Since this amount is less than the financial gap identified by KMA and less than Habitat's assistance request. It is therefore KMA's conclusion that the proposed assistance package will not provide a windfall profit to Habitat. SILENT SECOND MORTGAGE REVENUE CALCULATION The next step in the process is to determine how much of the $231,000 in City assistance can be treated a junior lien obligation. As a basic premise it must be assumed 1901009:SA:TRB 19090.017.011 FO EXHIBIT 2 Judson Brown, City of Santa Ana January 18, 2019 Lacy Street Project: Preliminary Financial Gap Analysis Page 9 that the total of the liens accepted by a home buyer cannot exceed the unrestricted market value of the home. Thus, the amount of junior liens that can be supported is equal to the difference between the defined Affordable Sales Price and the estimated market value of the home. KMA assumes that the junior liens will be deferred payment loans which are commonly known as silent second mortgages. These loans typically become due and payable when the home is resold. It is a fundamental assumption of this analysis that the City assistance to the Project will fall second in the lien hierarchy behind the conventional first trust deed mortgage. The calculations used to estimate the supportable silent mortgages are presented in the following sections of this analysis. Market Rate Sales Prices KMA conducted a survey of recent home sales comparables for the French Park market area. Based on this survey and the information provided by Habitat, KMA estimates the market rate sales prices as follows: Three -Bedroom Unit $525,000 Four -Bedroom Unit $595,000 Available Silent Second Mortgage Revenue Based on the estimated market rate sales prices, the available silent second mortgage revenue is estimated at as follows: Three- Four - Bedroom Unit Bedroom Unit Market Rate Sales Price $525,000 $595,000 (Less) Affordable Sales Price (471,900) (452,100) Silent Second Mortgage Amounts $107,100 $142,900 Total Silent Second Mortgage Revenue $250,000 1901009:SA:TRB 19090.017.011 80A-21 EXHIBIT 2 Judson Brown, City of Santa Ana January 18, 2019 Lacy Street Project: Preliminary Financial Gap Analysis Page 10 As can be seen in the previous table, KMA estimates the total supportable silent second mortgage revenue for the two homes at $250,000. Given that this amount is greater than the City's proposed financial assistance amount of $231,000, there is sufficient silent second mortgage revenue to fully secure the City's financial assistance. It should be noted that both KMA and Habitat estimate the Project's total financial gap at more than $231,000. Given that Habitat has committed to fill any financial gap incurred above the City's $231,000 contribution, it is important to understand how that additional assistance can be structured. Based on current projections, the vast majority of any contribution made by Habitat will likely need to be structured as a grant to the Project. It is important to note that this calculation will need to be revisited once sales of the units commence. At that point, the appraised market values of the homes and the defined Affordable Sales Prices will be utilized to determine the silent second mortgage amounts. If there is insufficient silent second mortgage revenue to secure all of the City's financial assistance, a portion of the City's assistance may need to be structured as a grant. POLICY CONSIDERATIONS As a result of Habitat's discussions with French Park residents and the Design Committee, the architectural and design elements proposed to be included in the Project are similar to the standards utilized for custom home developments. Per Habitat, these design requirements will increase the residential building costs by approximately 25%. Furthermore, Habitat states that the additional architectural design and working drawings necessary for the custom home -type product will cost approximately $80,000 more than the architectural design work required for more typical Habitat projects. Based in part on these cost premiums, Habitat estimates the total construction costs at approximately $598,000 per unit or $374 per square foot of GBA (based on the assumption that no land costs are incurred). For comparison purposes, the construction costs for the 12 -unit Francis Xavier Project, which was recently approved by the City/Authority, were estimated at $352,800 per unit or $286 per square foot GBA. This represents an approximately 30% differential based on the per square foot of GBA estimates. It is also important to note that the estimated per unit construction costs, 19010095A:TRB 19090.017.011 80A-22 EXHIBIT 2 Judson Brown, City of Santa Ana January 18, 2019 Lacy Street Project: Preliminary Financial Gap Analysis Page 11 excluding any land costs, are greater than the estimated market rate sales prices of the units. The City and Authority should consider the policy implications for utilizing affordable housing assets for the construction of a custom home -type product which results in substantial cost premiums. As a part of this discussion, the City and Authority may want to discuss selling the Site on the open market and utilizing the sales proceeds to assist affordable projects with more typical construction costs. CONCLUSIONS / ISSUES FOR CONSIDERATION The following summarizes the conclusions of the KMA analysis: 1. Based on the currently available information, it is KMA's conclusion that the Project exhibits a $263,000 financial gap. The City proposes to utilize up to $231,000 in Inclusionary Housing Funds to fill the financial gap. As such, KMA concludes that the City's proposed financial assistance amount is supported by the Project's economics. Given the detailed nature of the architectural elements proposed to be included in the Project, KMA recommends that the City/Authority require Habitat to obtain at least two general contractor bids prior to the start of construction. This requirement will ensure that all of the agreed-upon architectural elements are adequately reflected in Habitat's budget. The KMA analysis will need to be updated if the contractors' estimates differ from the costs assumed in this preliminary analysis. KMA recommends that the City/Authority consider the following policy objectives regarding the Project's use of affordable housing assets: a. Is this a desirable site for affordable housing? b. Is it a policy objective to utilize affordable housing funds to construct affordable housing units with custom home specifications, which result in units that are more expensive than more typical affordable housing units? 1901009:SA:TRB 19090.017.011 Judson Brown, City of Santa Ana Lacy Street Project: Preliminary Financial Gap Analysis 4. EXHIBIT 2 January 18, 2019 Page 12 C. Should the Authority consider selling the Site on an unrestricted basis and then utilize the sales proceeds for other more cost efficient affordable housing projects? The Affordable Sales Prices cannot be finalized until the Project commences sales activities. It is likely that the actual Affordable Sales Prices will vary from the amounts estimated in this analysis. The cash financial assistance provided by the City should be secured by silent second mortgage loans. a. The City s financial assistance should fall second in the lien hierarchy behind the conventional first trust deed mortgage. b. A re-evaluation will be performed once marketing of the units commences. If at that time the gap between the unrestricted market prices and the Affordable Sales Prices is less than projected in this analysis, a portion of the City's assistance may have to be provided as a grant instead of a loan. 1901009:SA:TRB 19090.017.011 TABLE 1 ESTIMATED CONSTRUCTION COSTS 2 FOR -SALE MODERATE INCOME UNITS LACY STREET PROJECT SANTA ANA, CALIFORNIA I. Direct Costs On -Site Improvements Building Costs General Conditions Habitat Supervision Contingency Allowance Total Direct Costs II. Indirect Costs Architecture, Engineering & Consulting Public Permits & Fees Taxes, Insurance, Legal & Accounting Marketing/Buyer Education Developer Fee Contingency Allowance Total Indirect Costs 16,248 Sf Land 3,200 Sf GBA 4% Construction Costs 21% Construction Costs 5% Other Direct Costs EXHIBIT 2 $8 /Sf Land $124,000 $144 /Sf GBA 460,000 23,000 120,000 36,000 2 Units $381,500 /Unit 20% Direct Costs 3 2 Units $26,000 /Unit 2% Direct Costs 4 2 Units $12,000 /Unit 4 13% Direct Costs 5% Other Indirect Costs $153,000 52,000 15,000 24,000 98,000 17,000 $763,000 $359,000 III. Financing Costs Interest During Construction 3 $998,000 Loan 8.0% Interest $20,000 Loan Origination Fee $998,000 Loan 1.0 Point 10,000 Closing Costs 2.00% Sales Revenues 17,000 Warranties 2 Units $10,000 /Unit 20,000 Total Financing Costs $67,000 IV. ITotal Construction Costs 2 Units $594,500 /Unit $1,189,000 3 Based on Habitat estimates. Assumes that prevailing wage requirements will not be imposed on the Project. ' Habitat will provide two staff members to supervise construction. 3 Based on Habitat estimates. City staff should verify the accuracy of this estimate. 4 Based on estimates provided by Habitat. 3 The total loan amount is equal to the total construction costs less the Developer Fee, closing costs, warranties, and In -Kind donations. Per Habitat, the construction loan will have an average outstanding balance of 30%. Prepared by: Keyser Marston Associates, Inc. File name: Habitat Lacy Street_31819; Pf 80A -25 O A —25 TABLE 2 ESTIMATED AVAILABLE REVENUE 2 FOR -SALE MODERATE INCOME UNITS LACY STREET PROJECT SANTA ANA. CALIFORNIA I. Protected Sales Revenue Moderate Income 3-Bdrm Unit Moderate Income 4-Bdrm Unit Total Projected Sales Revenue II. In -Kind Contributions 1 Unit $417,900 /Unit 1 Unit $452,100 /Unit ' 2 Units $25,000 /Unit EXHIBIT 2 $417,900 452,100 $870,000 $56,000 III. I Estimated Available Revenue 2 Units $463,000 /Unit $926,000 See TABLE 5 for the affordable sales price calculations. z Per Habitat. Prepared by: Keyser Marston Associates, Inc. File name: Habitat LacyStreet_11S 19; Pf 80A-26 UA—nC EXHIBIT 2 TABLE 3 ESTIMATED FINANCIAL GAP 2 FOR -SALE MODERATE INCOME UNITS LACY STREET PROJECT SANTA ANA. CALIFORNIA I. Total Construction Costs See TABLE 1 $1,189,000 II. (Less) Estimated Available Revenue See TABLE 2 $926,000 III. JEWmated Financial Gap 2 Units ($131,500) /Unit ($263,000) Prepared by: Keyser Marston Associates, Inc. Filename: Habitat Lacy Street_11819; Pf 80A-27 -27 TABLE 4 SILENT SECOND MORTGAGE REVENUE CALCULATION 2 FOR -SALE MODERATE INCOME UNITS LACY STREET PROJECT SANTA ANA, CALIFORNIA I. Silent Second Mortgage Amounts Three -Bedroom Unit Silent Second Mortgage Estimated Market Rate Sales Price (Less) Moderate Income Affordable Sales Price Three -Bedroom Unit Second Mortgage Amount Four -Bedroom Unit Silent Second Mortgage Estimated Market Rate Sales Price (Less) Moderate Income Affordable Sales Price Four -Bedroom Unit Silent Second Mortgage Amount Total Silent Second Mortgage Amounts II. Estimated Surplus/ (Shortfall) in Silent Second Mortgage Revenue Total Silent Second Mortgage Amounts (Less) Estimated Financial Gap $525,000 (417,900) $107,100 $595,000 (452,100) $142,900 EXHIBIT 2 $250,000 $250,000 (263,000) III. I Estimated Surplus/ (Shortfall) in Silent Second Mortgage Revenue ($13,000) Prepared by: Keyser Marston Associates, Inc. File name: Habitat Lacy Street_31819; Pf 80A-28 OA—nQ TABLE 5 AFFORDABLE SALES PRICE CALCULATIONS MODERATE INCOME SALES PRICES LACY STREET PROJECT SANTA ANA, CALIFORNIA Income Available for Housine Expenses Benchmark Household Size Median Household Income Income as % of Median % Income Allotted to Housing Costs Total Income Available for Housing Expenses II. Ongoing Expenses Maintenance Reserve Deposits Annual Utilities Allowance Property Taxes @ 1.12% of Affordable Sales Price Total Ongoing Expenses III. Income Available for Mortgage Debt Service IV. Affordable Sales Prices Supportable Mortgage @ 5.00% Interest Rate Home Buyer Down Payment @ 5.00% of Affordable Price EXHIBIT 2 Moderate Income Sales Prices ' Three -Bedroom Four -Bedroom 4 5 $92,700 $100,100 110.00% 110.00% 35.00% 35.00% $35,690 $38,539 $3,300 $3,300 z 2,136 2,508 4,680 5,064 $10,116 $10,872 $25,573 $27,667 $397,000 $429,500 20,900 22,600 V. lAffordable Sales Prices $417,900 $452,100 Based on the California Health and Safety Code Section 50052.5 definition. z Based on the utility allowances published by the Santa Ana Housing Authority on January 1, 2019. Prepared by: Keyser Marston Associates, Inc. Filename: Habitat Lacy Street_11819; CC Afford 8 0A-29 FOODIMT1 EXHIBIT 3 To Whom it May Concern; The French Park Architectural Review Committee met three times with Habitat for Humanity to discuss its Interest to develop two city -owned lots located on the southwest comer of Lacy and Vance, in the Historic French Park neighborhood. At the first meeting, Habitat for Humanity representative Mr. Troy Hendrickson, presented a proposal to construct two single-family homes using plans from other similar developments. To this French Park offered several suggestions, including to increase building square footage, to separate the houses with a side yard fence and employ architectural styles, and those important details, which are characteristic of houses in the neighborhood. At French Park's request a subsequent field meeting was held to walk French Park and portions of the adjoining historic Lacy neighborhood The purpose for this activity was for Mr. Hendrickson to see the range of architectural styles and treatments Habitat for Humanity might consider. Based on the two meetings, and a subsequent third meeting to discuss two preliminary concept drawings, French Park would look forward to working with Habitat for Humanity and to assist it with the project design, if it is selected to purchase and develop the land. Please feel free to email or call me If there are questions regarding this correspondence. Jeff Dickman, Chair Historic French Park Association, Architectural Review Committee 714-240-0883 Cc: Historic French Park Architectural Review Committee 80A-31 80A-32