HomeMy WebLinkAboutItem 8.7 Rental Program BMR
CITY CLERK
File # D[t][!][QJ-[i][D]
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~~:~ 1)
(\,f "VJ' 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.
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COPIES TO:
Interested BMR Homeowners
K: \HO us IN G\S TFFRPTS\B M Rrentals5-6-08. DOC
ITEM NO.
tg.7
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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.
ANALYSIS:
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
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would have no financial impact on the City, it is not the preferred option because most of the Resale
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
Staff recommends that the City Council adopt a 2-year program to permit BMR Owners to rent 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.
RECOMMENDA TION: 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.
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