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HomeMy WebLinkAbout4.16 BMR Rental Policy CITY CLERK File # D~[2][Q]-[RRJ AGENDA STATEMENT CITY COUNCIL MEETING DATE: May 20, 2008 SUBJECT: ATTACHMENT: RECOMMENDATION: ~) ~~ FINANCIAL STATEMENT: PROJECT DESCRIPTION: Background: Proposed Resolution Establishing a Temporary Policy for the Rental of Below Market Rate Ownership Units by Owners Unable to Sell Their Units at the Restricted Resale Price Report Prepared by Jeri Ram, Community Development Director and Sabrina Wolfson, Associate Attorney 1) 2) City Council Staff Report dated May 6, 2008. Resolution Establishing a Temporary Policy for the Rental of Below Market Rate Ownership Units by Owners Unable to Sell Their Units at the Restricted Resale Price. Receive Staff presentation; Deliberate; and Adopt the Resolution Establishing a Temporary Policy for the Rental of Below Market Rate Ownership Units by Owners Unable to Sell Their Units at the Restricted Resale Price. Under the proposed Policy, there would be no financial impact for Staff to administer the policy permitting rental of below market rate for-sale units by owners unable to sell their units at the restricted resale price. Staff would incorporate the administration of the policy into the Housing Division's work plan. Staff anticipates that a small number of rental requests will be submitted. The City's Inclusionary Housing Program requires purchasers of Below Market Rate (BMR) for-sale units to execute a Resale Restriction Agreement and Option to Purchase (Resale Restriction Agreement) that is recorded against the BMR unit. The Resale Restriction Agreement requires the BMR .unit to remain affordable to very-Iow-, low- and moderate-income households (as the individual case may be) for a period of 55 years; requires the owner to live in the unit as his or her primary residence; prohibits the owner from selling the BMR unit for more than the restricted price; and prohibits the owner from renting the BMR unit without the consent of the City. ------------------------------------------------------------------------------------------------------------ COPIES TO: Interested BMR Homeowners Page I of3 K:\HO us lNG\S TFFRPTS\BMRrentalspo Iicy5-20-08. DOC ITEM NO.3-./(P Due to the recent slow down in the housing market, BMR owners desiring to sell their BMR unit are having difficulty finding qualified buyers willing to purchase the units at the restricted resale price because such prices are so close to market prices that qualified buyers would rather purchase Market Rate homes free of resale restrictions rather than BMR units. Some of these owners have requested permission from the City to rent their BMR unit. As a result, Staff presented a report to the City Council at the May 6, 2008 meeting outlining the City's options, which include the following: (I) Take no action. (2) Exercise the City's option to purchase the BMR unit at the restricted price. (3) Retain a Property Manager and permit BMR owners to rent their BMR units to eligible households in the same income category at an affordable rent, provided that the Property Manager retained by the City manages the unit. (4) Adopt a temporary program whereby BMR owners are authorized to rent their BMR units to eligible households in the same income category at an affordable rent pursuant to an agreement with the City. The City Council deliberated and directed Staff to develop a policy permitting BMR owners who are unable to sell their BMR units at the restricted resale price to rent their BMR units to eligible households in the same income category at an affordable rent for a maximum of two years provided that the owner enters into an agreement with the City. City Council also directed Staff to make sure that the Policy would not make permanent rentals of for-sale BMR units and that future tenants would understand the terms of the lease and would have to move within a reasonable period of time. ANALYSIS: Staff developed a proposed Policy based on City Council direction as noted above. The proposed Policy addresses the City Council's concern that a tenant should understand that the unit would not be a permanent rental by requiring disclosures of the program requirements in the lease that would be between the owner and tenant (the City would be a third party beneficiary to the lease). The proposed provisions of the policy are as follows: Proposed Rental Policv 1. Policy. During the Term of this Policy, the owner of a BMR unit who is unable to find a qualified buyer to purchase his or her unit at the Adjusted Resale Price may rent his or her unit provided that the following requirements are satisfied: (a) The BMR unit has been on the Market for at least six (6) months and the owner has made commercially reasonable efforts to sell the BMR unit, as determined by the City. Such efforts shall include, but shall not be limited to, listing the unit with a Real Estate Broker, ensuring the unit is listed in the Multiple Listing Service, and making the unit reasonably available for viewing by Brokers and potential purchasers and their agents; (b) The BMR owner enters into a regulatory agreement with the City; (c) The future tenant is an Eligible Household in the same income category as the BMR unit; (d) The lease contains the provisions set forth in the Lease Agreement Section below; Page 2 of3 (e) The monthly rental payment does not exceed the amount set forth in the Lease Agreement Section below; (f) A copy of the lease is submitted to the City within five (5) days of the date following execution of the agreement by the owner and tenant; and (g) The BMR owner does not live in the BMR unit during the term of the lease. During the two-year period beginning immediately after the Policy's adoption, a BMR owner that satisfies the terms of the Policy could enter into a lease with a tenant. The term of such lease would be a matter between the landlord and tenant. However, the Policy states that all leases must terminate no later than two years after the effective date of the Policy. Thus, a landlord could enter into a lease agreement with a tenant on day one of the Policy, and that unit could remain a rental for a two-year period. Maximum rents will be the City's standard maximum rents for BMR units based on the applicable income category and household size. These maximum rents are published by the City annually on the Housing Division's webpage at www.ci.dublin.ca.us. Household size will be assumed based on the number of bedrooms in the unit as follows: studio, I person; I bedroom, 2 persons; 2 bedroom, 3 persons; 3 bedrooms, 4 persons; 4 bedrooms, 5 persons; and 5 bedrooms, 6 persons. Under existing City policy, maximum rents are reduced if the Tenant pays for utilities. Lease Agreement: The lease agreement would be required to include (I) the term of the lease, (2) the monthly rental payment, (3) a statement that the BMR unit is an affordable unit subject to certain restrictions imposed by the City, (4) a statement that the tenant may be required to submit income documentation to the City upon request, (5) a statement that the lease term will expire no later than 2 years after the effective date of the Policy, and (6) a statement that the City is a third party beneficiary to the lease. The City Manager would enforce the Policy and would have the authority to enter into regulatory agreements with the BMR owners in a form approved by the City Manager and the City Attorney. Should the market conditions not improve after two years, the City Council could direct Staff to extend the program. RECOMMENDATION: Staff recommends that the City Council: 1) Receive Staff presentation; 2) Deliberate; and 3) Adopt the Resolution Establishing a Temporary Policy for the Rental of Below Market Rate Ownership Units by Owners Unable to Sell Their Units at the Restricted Resale Price. Page30f3 CITY CLERK File # D[f]~[Q]-[I][1i] '17 AGENDA STATEMENT CITY COUNCIL MEETING DATE: May 6, 2008 SUBJECT: Consideration of a Temporary Rental Program for Below Market Rate For-Sale Units Report Prepared by John Bakker, City Attorney and Jeri Ram, Community Development Director RECOMMENDATI~~:.tt' I) (\j "v.J' 2) ~ , 3) Receive Staff presentation; Receive public comment; and Direct Staff to bring back a program to permit BMR unit Owners to lease their BMR units as described in the Staff Report. FINANCIAL STATEMENT: No financial impact. PROJECT DESCRIPTION: Background: The City's Inclusionary Housing Program includes both Below Market Rate (BMR) rental and for- sale units. As a mechanism to ensure the affordability of BMR for-sale units, the City requires purchasers of for-sale units to execute a Resale Restriction Agreement and Option to Purchase (Resale Restriction Agreement), which is recorded against the BMR unit. The Resale Restriction Agreement requires the BMR unit to remain affordable to low- and moderate-income households for a period of 55 years and prohibits the BMR Owner from renting the BMR unit without the consent of the City. If a BMR Owner desires to sell his or her BMR unit, he or she must sell the unit to another low- or moderate-income household at a restricted price. The restricted resale price is generally the original price paid by the BMR Owner for the BMR unit, increased by the percentage increase in the median household income for Alameda County between the date of the Resale Restriction Agreement and the date the City receives notification of the Owner's intent to sell. In addition, the Resale Restriction Agreement grants the City an option to purchase the BMR unit at the restricted resale price upon the occurrence of certain events, including receipt of notification of a BMR Owner's intent to sell, receipt of a Notice of Default, and the commencement of foreclosure proceedings. The City may assign the City's option to purchase the BMR unit to another government entity, a non- profit affordable housing provider or to a low- or moderate-income household. --------------------------.------------------------------------------------------------------------------ COPIES TO: Interested BMR Homeowners K :\HOUS rNG\STFFRPTS\BMRrentals5-6-08. DOC Page 1 of 4 - ~l. . I ~.j! d .::./~ .,' o~ 1"h:tt:~~m~it 'lV' Co $ - ~ vA 7 While the City's Inclusionary Housing Program has been extremely successful, the recent slow down of the housing market is negatively impacting BMR Owners. Several BMR Owners financed their .' units with 100% financing and adjustable rate mortgage products. As a result, some BMR Owners are now having difficulty making their mortgage payments due to rising interest rates and turmoil in the mortgage markets. Furthermore, some BMR Owners are trying to sell their BMR units. The Owners, however, are having difficulty finding qualified buyers willing to purchase BMR units at the restricted resale price because such prices are so close to market prices; qualified buyers would rather purchase market-rate homes free of resale restrictions rather than BMR units with 55-year restrictions. Moreover, those qualified buyers interested in purchasing BMR units would be more likely to purchase identical new BMR units from the developers instead of resale BMR units constructed a few years ago. . In January, 2008, the City Council adopted a policy permitting the rental of BMR units on the Basis of Hardship. This policy allowed for limited rentals of BMR units "if the BMR Owner is required to be absent from the unit for an extended period of time due to either a change in the location of his or her employment or health problems of the BMR Owner or an immediate family member of the BMR Owner." However, there are many BMR Owners that are selling for other reasons, such as difficulties with financing or life changes. Staff has had conversations with several of these homeowners and is concerned that if the City does not allow for rentals, at least for a temporary time period, some of these units may go into foreclosure. ANAL YSIS: In the event BMR Owners desiring to sell their BMR units are unable to find qualified buyers to purchase the units at the resale restricted price, the City would have the following options, each of which is discussed below in more detail: (1) Take no action; (2) Exercise City's option to purchase the BMR unit at the restricted price; (3) Retain a Property Manager and permit BMR Owners to rent their BMR units to eligible households in the same income category at an affordable rent, provided that the Property Manager retained by the City manages the unit; or, (4) Adopt a temporary program whereby BMR Owners are authorized to rent their BMR units to eligible households in the same income category at an affordable rent pursuant to a recorded agreement with the City. (1) Take No Action: The City could take no action. If the City chooses this option, there is a possibility that a BMR Owner would default on his or her mortgage and the Lender would then foreclose on the BMR unit. If the Lender forecloses on the unit, the City could potentially lose the BMR unit depending on whether the Resale Restriction Agreement was recorded before or after the foreclosing Lender's Deed of Trust. If the Resale Restriction Agreement was recorded after the Lender's Deed of Trust, the Lender would be permitted to sell the unit at market value, the Resale Restriction Agreement would terminate and the City would lose the BMR unit. On the other hand, if the Resale Restriction Agreement was recorded prior to the Lender's Deed of Trust, the foreclosing Lender would have to sell the BMR unit at no more than the restricted price to an income-eligible household; the BMR unit would remain affordable; and subsequent purchasers would be required to comply with the provisions of the Resale Restriction Agreement for the remaining term of the agreement. While this option Page 2 of 4 .' , 3 would have no financial impact on the City, it is not the preferred option because most of the Resale ~ 7 Restriction Agreements were likely recorded after the foreclosing Lender's Deed of Trust. Therefore, the City would lose the BMR units if a BMR Owner defaults on his or her mortgage. (2) Exercise City's Option to Purchase: The City could exercise the City's option to purchase the BMR unit at the restricted price because under the Resale Restriction Agreement, the City has an option to purchase the BMR unit if the BMR Owner decides to sell. If the City quickly sells the BMR unit at the restricted price, there would be a minimal financial impact of exercising the option. The direct purchase cost might be minimal so long as the amount of debt secured by the BMR Unit does not exceed the restricted price. However, the City would have to pay for "carrying costs," such as Homeowners' Association dues, insurance, and utility services for as long as it held title to the BMR Unit. However, if the City has difficulty selling the BMR unit at the restricted price, which would likely be the case given that there are few qualified buyers willing to buy BMR units at the resale restricted price, the financial impact on the City could be significant. The City would either have to sell the units to eligible households for less than the restricted price or lease the units to eligible households. If the City were to sell the units for less than the restricted price, it would create deeper affordability, but the City would lose the difference between its purchase price and the actual sales price. This option also would require a significant investment of Staff time to implement. There would be City Attorney and Community Development Staff time to work through the purchase of the unit. Then, after the unit was purchased, the City would have to qualify rental applicants, monitor compliance and manage the rental units. There is the potential that if the City purchased several of these units, there might be a negative impact on customer service in other areas if additional Staff were not added to the Housing Division of the Community Development Department. (3) Retain Property Manager and Permit Rental ofBMR Units: The City could retain a Property Manager and permit BMR Owners to rent their BMR units to eligible households in the same income category at an affordable rent, provided that they hire the City's Property Manager to manage the units. The Property Manager would be paid by the City or the BMR Owner. This option would require the City to expend significant funds from the Affordable Housing Fund and dedicate Staff time for putting the program together, contracting with a Property Manager, and, managing the Property Manager contract. In addition, this option would take time to implement and in the interim, some units may go into foreclosure. (4) Permit Rental ofBMR Units Pursuant to Agreement with City: The City could adopt a 2-year program pursuant to which BMR Owners that have been unsuccessful at selling their units at the restricted resale price would be permitted to rent their BMR units to eligible households in the same income category at an affordable rent for the duration of the program. The program would last no more than two years and would require each BMR Owner to enter into an agreement with the City in a form approved by the City Manager and the City Attorney. Under the proposed program, the BMR Owner would be responsible for selecting eligible tenants. This option would have a minimal financial impact on the City and would require minimal Staff time. In addition, this option could be implemented quickly, thereby lessening the possibility of units going into foreclosure. Page 3 of 4 4r;t7 Staff recommends that the City Council adopt a 2-year program to permit BMR Owners to recl their BMR units, provided that the BMR Owner enters into a regulatory agreement (incorporating rental restrictions) with the City on such terms as the City Manager and the City Attorney deem to be in the best interests of the City. If the City Council directs Staff to proceed with the program as described, Staff would return at the next meeting with a program for City Council adoption. RECOMMENDATION: Staff recommends that the City Council: 1) Receive Staff presentation; 2) Receive public comment; and 3) Direct Staff to bring back a program to permit BMR unit Owners to lease their BMR units as described in the Staff Report. Page 4 of 4 RESOLUTION NO. XX - 08 ~~7 RESOLUTION OF THE CITY COUNCIL OF THE CITY OF DUBLIN ************************************ ESTABLISHING A TEMPORARY POLICY FOR THE RENTAL OF BELOW-MARKET RATE OWNERSHIP UNITS BY OWNERS UNABLE TO SELL THEIR UNITS AT THE RESTRICTED RESALE PRICE RECIT ALS WHEREAS, the City of Dublin's ("City") Inclusionary Housing Program requires purchasers of Below Market Rate ("BMR") for-sale units ("Unit") to execute and record a Resale Restriction Agreement with Option to Purchase ("Resale Restriction Agreement"); and WHEREAS, the Resale Restriction Agreement prohibits BMR owners from selling their BMR Units at more than a restricted price; and WHEREAS, due to the recent slow down in the housing market, BMR owners are having difficulty finding qualified buyers willing to purchase their BMR units at the restricted resale price because such prices are so close to market prices that qualified buyers would rather purchase Market Rate homes free of resale restrictions; and WHEREAS, BMR owners who are unable to sell their BMR units would like to rent their BMR units; and WHEREAS, the Resale Restriction Agreement prohibits the rental of the BMR units without the consent of the City; and WHEREAS, although the City does have a policy authorizing rental of BMR units when the owner has a hardship, the City does not currently have a policy regarding the rental of BMR units by BMR owners who are unable to sell their units at the restricted price; and WHEREAS, this Resolution is intended to establish a temporary policy for the rental of BMR units by BMR owners who are unable to sell their units. NOW, THEREFORE, the City Council ofthe City of Dublin does hereby resolve as follows: I. Policy. During the Policy Term, the owner of a BMR unit who is unable to find a qualified buyer to purchase his or her unit at the Adjusted Resale Price may rent his or her unit provided that the following requirements are satisfied: (a) The BMR unit has been on the market for at least six (6) months and the Owner has made commercially reasonable efforts to sell the BMR unit, as determined by the City. Such efforts shall include, but shall not be limited to, listing the unit with a Real Estate Broker, ensuring the unit is listed in the Multiple Listing Service, and making the unit reasonably available for viewing by Brokers and potential purchasers and their agents; (b) The BMR owner enters into a regulatory agreement with the City; K:\HOUSING\S TFFRPTS\BM RrentalpolicyReso5-20-08.DOC Attachment 2 , P i~:? ()~f 1 (c) The future Tenant is an Eligible Household in the same income category as the BMR unit; (d) The lease contains the provisions set forth in Section 4 below; (e) The monthly rental payment does not exceed the amount set forth in Section 3 below; (f) A copy of the lease is submitted to the City within five (5) days following execution ofthe agreement by the Owner and Tenant; (g) The BMR owner does not live in the BMR unit during the term of the lease; and (h) The lease shall terminate no later than the Authorized Lease Termination Date. 2. Definitions. The following definitions shall apply to this Policy: (a) "Authorized Lease Termination Date" means two (2) years from the effective date of this Resolution. (b) "Policy Term" means two (2) years from the effective date of this Resolution. (c) Capitalized terms not defined herein shall have the meaning ascribed to such terms in the Resale Restriction Agreement. 3. Rent. The monthly rental payment for the BMR unit shall not exceed the maximum rent for the applicable income category and household size published by the City annually, on the Housing Division's webpage at www.ci.dublin.ca.us. If the Tenant pays utilities or Homeowners' Association dues, maximum rent must be decreased pursuant to the City's utility allowance schedule. Household size will be assumed based on the number of bedrooms in the unit as follows: studio, I person; I bedroom, 2 persons; 2 bedroom, 3 persons; 3 bedrooms, 4 persons; 4 bedrooms, 5 persons; and 5 bedrooms, 6 persons. 4. Lease. The lease agreement shall clearly state (I) the term of the lease, (2) the monthly rental payment, (3) that the BMR unit is an affordable unit subject to certain restrictions imposed by the City, (4) that the Tenant may be required to submit income documentation to the City upon request, (5) that the lease term will expire no later than the Authorized Lease Termination Date, and (6) that the City is a third party beneficiary to the lease. 5. Authority of City Manager. The City Manager or his or her designee shall have the authority and responsibility for the implementation of this Policy, including the authority to enter into regulatory agreements with the BMR owners in a form approved by the City Manager and the City Attorney. 6. Effect of Violation. Any lease that violates the provisions of this Policy is prohibited, and any owner who violates this Policy shall be deemed to be in default under his or her Resale Restriction Agreement. 7. Severability Clause. The provisions of this Resolution are severable and if any provision, clause, sentence, word or part thereof is held illegal, invalid, unconstitutional, or inapplicable to any person or circumstances, such illegality, invalidity, unconstitutionality, or inapplicability shall not - 2- J.o S ~.7 affect or impair any of the remaining provisions, clauses, sentences, sections, words or parts thereof of this Resolution or their applicability to other persons or circumstances. 8. Effective Date. This Resolution shall take effect immediately. PASSED, APPROVED, AND ADOPTED this 20th day of May, 2008, by the following vote: AYES: NOES: ABSENT: ABSTAIN: Mayor ATTEST: City Clerk 1094445.4 K:\HOUSING\STFFRPTS\BMRrentalpolicyReso5-20-08.DOC - 3-