TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: David Chantarangsu, AICP - Development Services Director
PREPARED BY: Carl Stiehl, City Planner
SUBJECT: Kensington Affordable Apartments Development Impact Fee
Deferral Loan Agreement between the City of Murrieta and Pacific
West Communities
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RECOMMENDATION
recommendation
Adopt Resolution No. 23-4700 entitled: A Resolution of the City Council of the City of Murrieta
to Prepare A Development Impact Fee (DIF) Deferral Loan Agreement in Support of Pacific
West Communities Project to Develop A 126 Unit Multi-Family Affordable Apartments at
Washington Avenue (APN 906-780-004; and
Find that the approval of a DIF Deferral Loan Agreement is consistent with the Categorical
Exemption approved for this project on December 30, 2022, which contemplated the
construction of 126 units.
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PRIOR ACTION/VOTE
None.
CITY COUNCIL GOAL
Plan, program and create infrastructure development.
BACKGROUND
Pacific West Communities, Inc. (Applicant) has approached the City of Murrieta (City) requesting financial assistance to support the development of the Kensington Affordable Apartments Project. The Applicant is seeking a 55-year loan with the City in order to finance the City’s Development Impact Fees (DIF) applicable to the Project. The requested loan amount is approximately $1.77 million. Exhibit A to Resolution No. 23-4700 includes a breakdown of DIF fees required to be paid. Staff notes impact fees from outside agencies are not included in the request.
The Applicant submitted the Project to the City on June 24, 2022, to develop a 126-unit affordable, for-rent, workforce housing development for families that qualify under the “Extremely Low”, “Very-Low” and “Low Income” household limits published by the state. As of June, Riverside County income limits for an Extremely Low Income household (of one to four people) varies between approximately $19,600 and $30,000, for a Very Low Income household varies between $32,650 and $46,600 and for a Low Income household between approximately $52,200 and $74,550 respectively. The Project proposes to allocate ten percent of units at Extremely-Low, ten percent of units at Very-Low with the remaining units at the Low category. Staff notes that it is very difficult for the City to obtain the needed number of units in the Extremely Low and Very-Low housing income categories.
The Project was approved by staff pursuant to Chapter 16.56 of the Murrieta Municipal Code in December 2022. Subsequently, the Applicant submitted a financing application to the state's Tax Credit Allocation Committee (TCAC) and California Debt Limit Allocation Committee (CDLAC) through respective state and federal tax credits and tax-exempt bond financing programs. The Project was not approved for funding in the most recent tax credit and bond financing round as the score needed to receive tax credit financing did not meet the minimum score threshold. This was due in part to the multiple diverse funding sources other projects included, such as the type of loan for DIF fees requested by the Applicant. Projects with diverse funding sources scored higher and were therefore selected for funding.
There are many competitive applications submitted by other affordable housing developers throughout the state in each round of financing which results in a highly competitive tax credit and bond financing market. Therefore, the Applicant was unable to secure tax credit financing in this most recent round. The Applicant plans to submit another application for tax credits and was considering options to receive assistance from the City to achieve a better score on the tax-credit application. Staff notes other cities in the county, including Temecula and Indio, have granted deferred loans to the Applicant for housing projects in their communities to assist the Applicant with obtaining project financing.
The Applicant requests the City consider deferring its DIF fees through a loan to be paid back over a 55-year term. Additional details of the proposed loan are below. Based on the Applicant's experience and insight, the Applicant is confident that with additional City financing through the proposed deferral of City DIF fees, as well as additional financing that is requested from the County of Riverside in an amount that is currently estimated to be upwards of $2.5 Million, the Project will be more financially competitive to receive the necessary tax credit and bond financing. The County may also consider increasing the level of funding to help increase the application scoring as well. The Applicant plans to resubmit funding applications to TCAC and CDLAC for the additional needed funding in the next available round.
As an inducement to the City providing the requested Project financing, the Applicant will consent to forming the City’s first Community Facilities District (CFD) for public safety should the City establish one in the future. The Applicant has advised that the Project can only move forward if the DIF loan agreement is approved, and the Applicant receives all necessary financing for development and construction. If formed, the CFD would establish a $250 per unit annual charge for this Project with no cost escalator.
By way of background, staff has been studying the formation of a public safety CFD in anticipation of the increased population growth expected to occur in the City given the increased residential development activity the City is experiencing. The purpose of a public safety CFD would be to recover costs associated with police and fire services the City would otherwise bear to serve new residential development. If a public safety CFD is formed, new residential development would be required to annex to the CFD, subject to City Council approval and the consent of the property owner. Subsequent actions would be required of the City Council to establish a public safety CFD. The recommended action for this agenda item only addresses the consideration of a loan for the Project’s DIF fees.
The Applicant, Pacific West Communities, Inc. is part of a parent company named The Pacific Companies (TPC). TPC is a nationally recognized privately held for-profit real estate enterprise that develops and operates special-use commercial real estate throughout the western United States with a focus on affordable and market-rate multifamily housing in California, Arizona, Nevada, and Idaho. In 2018, TPC was named the #1 ranked top developer in the nation by Affordable Housing Finance Magazine. Over the last 20 years, TPC has completed more than 160 housing communities and has over 4,000 affordable housing units currently under construction in California.
Project Funding/Loan Terms
The Applicant's financing plan and proforma contemplate a total project cost of $48,425,794, with construction financing being provided as follows: 1) $11,700,000 in competitive 4% taxable and tax-exempt bonds as issued by the CDLC; 2) $28,775,224 in Low-Income Housing Tax Credits (LIHTCs) as issued by the TCAC; 3) $2,855,947 in Deferred Developer Fees (which the Developer defers as a contribution to the Project); 4) $822,500 via a Transportation Uniform Mitigation Fee (TUMF) fee waiver being awarded by WRCOG; and, 5) the $1,769,773 via the proposed deferral of City-DIFs. The Developer is also seeking additional financial assistance from Riverside County in an amount upwards of $2,500,000 through the Permanent Local Housing Allocation (PLHA) Program.
Proposed Loan Terms - As proposed, the DIF deferral would be structured as a 55-year cash residual loan (Loan) that would accrue 3% simple interest yearly and would be paid back over time from cash remaining after operations and other debt service paid (project residual cash) on a yearly basis. As envisioned, the Loan would be formalized through the execution of the required Loan Agreement documents, which would include a Residual Cash Receipts Loan Agreement, Deed of Trust, Promissory Note, and other documents as needed. The Resolution authorizes the City Manager and City Attorney to prepare the necessary Loan documents to effectuate the Loan.
The project proforma (Attachment 2) identifies that starting on the first year of the Loan (year 1 of the Project’s completion), the City would receive an estimated $5,785 as interest/loan payments. This repayment amount is based on the anticipated amount of available project cash flow that remains after the Developer pays for financing expenses and operating costs for the year (residual cash). It is projected that the yearly repayment amount would increase incrementally each year. The yearly payment is estimated to have grown to $13,144 in year 10 and $17,578 in year 15. With current projections, it is estimated that the Developer would have paid back a cumulative amount of approximately $36,792 within the first 5 years of operation, $94,029 within the first 10 years, and $172,959 by year 15.
It may be unclear what future payments will be beyond year 15 because, as is typical of these housing project financing models, after years 10-15, the project ownership and financing structure could change as a result of refinancing or re-syndication of the tax credits. Although this could impact the Project cash flow, influence the amount of monthly payments, and ultimately affect the repayment of the loan in the future, the 55-year affordability covenants will remain in place for the entire term of the 55 years regardless of the ownership ensuring affordability. An additional loan term will require that advertising, application review, and leasing priority be given to current Murrieta residents, with second priority being given to Western Riverside residents, as further detailed in Exhibit A of the Resolution. The priority program will be implemented in a manner that complies with fair housing and any other applicable laws. A residual repayment loan such as this could result in the City receiving no annual payment in some years if the cash flow of the project is negative or zero. In that event, the deferred amount to be paid back would increase annually for those years with a negative or zero cash flow. This is a drawback to this type of proposed loan to the City.
The DIF Deferral Loan is consistent with the City’s Housing Element policies and program actions. Specifically, Policy Action 1-1 Affordable Housing Opportunities and Policy Action 3-3 Development of Housing for Extremely Low and Lower-income housing as the Loan provides support and assistance with funding for affordable housing in the City. Staff recommends that the City Council authorize staff to prepare and execute the necessary loan agreements with the agreement from the Applicant to join the City CFD once the Project is fully funded and able to be developed.
CEQA Determination
The proposed action is consistent with the Categorical Exemption approved for this Project, and posted with the County of Riverside Clerk-Recorder on January 3, 2023 (Attachment 3). Approval of a request to enter into a DIF loan agreement between the City and the Applicant does not alter the Project. The scope of the Project improvements approved in 2022, for which the Categorical Exemption was adopted, are unchanged as a result of the City’s approval of a financing mechanism to facilitate the construction of the Project.
FISCAL IMPACT
The City deferral of City DIF will result in $1,769,773 being paid to the City to cover the DIF cost over 55 years at 3% interest running with the land. Further, the potential formation of a CFD would contribute $31,500 annually toward the City’s public safety costs.
Operating Budgets for payment of interest/principal payments will be established as part of a future budget update, which is contingent on the DIF Deferral Loan Agreement being fully executed. The revenue budget for the CFD will be established when the district is formed.
ATTACHMENTS
1) Resolution No. 23-4700
2) Kensington Project Financial Proforma
3) Notice of Exemption