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Home My WebLink About8.3 For Sale Afford Residence in Foreclos~~~~ Off' nU~~~ /ii ~ 111 L~~ - ~ ~~~ DATE: TO: FROM: STAFF REPORT CITY COUNCIL CITY CLERK File #430-10 February 21, 2012 Honorable Mayor and City Councilmembers ~~ Joni Pattillo, City Manager ° ~' SUBJECT: Non-Exercise of the City's Purchase Option on For-Sale Affordable Residences that are in Foreclosure Prepared by Stephen T. Muzio, Assistant City Attorney EXECUTIVE SUMMARY: The City Council is being asked to authorize the City Manager, in certain circumstances, to not exercise the City's option to purchase residences that were constructed pursuant to the City's Inclusionary Zoning Ordinance. FINANCIAL IMPACT: None. RECOMMENDATION: Staff recommends that the City Council receive the presentation and adopt a Resolution Authorizing the City Manager to Not Exercise the City's Option to Cure a Default On Any Residence Subject to a Resale Restriction Agreement and to Not Exercise the City's Option to Purchase Such Residences In Certain Circumstances. ~~ Submitted By City Attorney DESCRIPTION: ~, Reviewed By Assistant City Manager To further the City's goal of increasing the production of affordable residential units, the City's Inclusionary Zoning Ordinance (Inclusionary Ordinance) requires developers of residential development projects consisting of 20 or more units to construct 12.5% of the units in the project as below market-rate units ("BMR Units"). The BMR Units must be reserved for occupancy by, and at prices affordable to, low- and moderate-income households for 55 years. Purchasers of ownership BMR Units are required to execute a Resale Restriction and Option to Purchase Agreement ("Resale Agreement") with the City, which is recorded against the unit. Page 1 of 3 ITEM NO. 8.3 These agreements are recorded at the County Recorder's office so that they will "run with the land," in the event that the owner later sells or otherwise loses possession of the residence. The Resale Agreements require owners to sell or transfer their property only to other "eligible households" at a restricted price. The Resale Agreements also give the City the right to purchase the units at a fixed price upon certain option events, such as the owner's default on the mortgage. The primary purpose of these Resale Agreements is to ensure that affordable housing units are sold only to eligible purchasers, and that a new Resale Agreement is entered into and recorded on the land. An option event includes receipt by the City of a "Notice of Intent to Transfer" from the owner, any actual or pending transfer of the Property, any actual or pending encumbrance of the property (e.g. mortgages or liens), and situations where a property enters into the foreclosure process due to failure of the owners to pay their mortgage. If the Resale Agreement is recorded before the foreclosing lender's Deed of Trust (in "First Position"), the resale restrictions survive foreclosure. This means that (1) the foreclosing lender would have to sell the BMR Unit at the restricted price to a very low-, low- or moderate-income household at the foreclosure sale; (2) the unit would remain affordable; and (3) subsequent purchasers would be required to comply with the provisions of the Resale Agreement for the remaining term of the Agreement. In contrast, if the Resale Agreement is not recorded before the foreclosing lender's Deed of Trust, the resale restrictions do not survive foreclosure. This means that (1) a foreclosing lender could sell the BMR Unit for an unrestricted price at the foreclosure sale; (2) the unit would no longer be affordable; and (3) subsequent purchasers of the unit would not be required to comply with the provisions of the Resale Restriction Agreement. The City has the following options if a BMR Unit goes into foreclosure proceedings (which typically begin with a lender's recordation of a Notice of Default): 1. No Action -Allow the Unit to Be Sold at Foreclosure Sale: The City could take no action and allow the lender to foreclose on a BMR Unit. If the Resale Restriction was not recorded in First Position, as mentioned above, the City would "lose" an affordable unit because the resale restrictions would terminate upon the foreclosure sale. 2. Pay Amount Required to Cure the Default: The City could pay the lender the amount required to cure the default or provide a BMR owner with financial assistance so that he or she can cure the default. This approach would generally make sense only where it is believed that the owners will be able to make subsequent payments without City assistance. 3. Exercise the Option and take title to the unit: If the City exercises its option, it is required to pay the "Adjusted Resale Price." (The method for determining the Adjusted Resale Price is not identical in every existing Resale Agreement, but it may generally not be less than the "base resale price" of the property). This value, in turn, is generally pegged to the price that the owner paid for the property. In addition, if the adjusted resale price is less than the amount owed on Page 2 of 3 the property, the City would take the property subject to the outstanding amounts owed to various lenders. In the last few years the City Council has been asked whether it wishes to exercise the City's option with respect to properties where the Adjusted Resale Price is higher than either the fair market value of the property, even without the resale restrictions, or the amount owed on the property. In these circumstances, it makes little sense for the City to exercise its option to purchase the unit. For this reason, Staff has prepared a Resolution that would authorize the City Manager to not cure the default on any unit being foreclosed upon, and to not exercise the City's option to purchase the unit, so long as the Adjusted Resale Price exceeds the fair market value of the unit or the amount owed on the property. NOTICING REQUIREMENTS/PUBLIC OUTREACH: None required. ATTACHMENTS: 1. Resolution Authorizing the City Manager to Not Exercise the City's Option to Cure a Default On Any Residence Subject to a Resale Restriction Agreement and to Not Exercise the City's Option to Purchase Such Residences In Certain Circumstances Page 3 of 3 RESOLUTION NO. - 12 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF DUBLIN AUTHORIZING THE CITY MANAGER TO NOT EXERCISE THE CITY'S OPTION TO CURE A DEFAULT ON ANY RESIDENCES SUBJECT TO A RESALE RESTRICTION AGREEMENT AND TO NOT EXERCISE THE CITY'S OPTION TO PURCHASE SUCH RESIDENCES IN CERTAIN CIRCUMSTANCES WHEREAS, the City of Dublin's Inclusionary Zoning Ordinance (Inclusionary Ordinance) requires developers of residential development projects consisting of 20 or more units to construct 12.5% of the units in the project as below market-rate units ("BMR Units"); and WHEREAS, the BMR Units must be reserved for occupancy by, and at prices affordable to, low- and moderate-income households for 55 years; and WHEREAS, purchasers of ownership BMR Units are required to execute a Resale Restriction and Option to Purchase Agreement ("Resale Restriction Agreement") with the City, which is recorded against the unit; and WHERAS, said Resale Restriction Agreements permit the City to make payments to remedy any default of an obligation owed by an owner of such a unit to any third party that made a mortgage loan to said owner; and WHEREAS, said Resale Restriction Agreements also permit the City to exercise an option to purchase such units in the event of certain circumstances; and WHEREAS, in many cases the City's Option Price exceeds either the fair market value of the unit in question or the total amount owed on the unit; and WHEREAS, it is not in the City's interest to pay more for a property than it is worth. NOW, THEREFORE, the City Council of the City of Dublin does RESOLVE as follows: Where the "Affordable Unit Cost" of a BMR Unit, as that term is used in the Resale Restriction Agreement relating to said unit, or the amount owed on said BMR Unit exceeds the market value of said unit, the City Manager is hereby authorized to not exercise the City's option to remedy any default of an owner of a BMR Unit, and is further authorized to not exercise the City's option to purchase any such BMR Unit. PASSED, APPROVED AND ADOPTED this 21st day of February, 2012, by the following vote: AYES: NOES: ABSENT: ABSTAIN: Mayor ATTEST: City Clerk G:\CIP\Generator\Resolution of Award -PrePurchase.doc 178669.1