Item 9-A
Council Meeting: 9/16/97 Santa Monica, CA
To: Mayor and City Council
From: City Staff
Subject: Proposed amendments and waiver of Citywide Housing
Trust Fund guidelines, and adoption of a resolution to
Forego Public Bidding procedures for Construction of a
Public Parking Structure at 1136-1144 Fourth Street.
INTRODUCTION
This report addresses recommended changes to the Citywide Housing
Trust Fund Guidelines as well as recommended Council actions
necessary to accommodate the construction of the Fourth Street
Senior Housing Project.
This report recommends that the City Council take the following
actions: a) authorize staff to amend all four City Housing Trust
Funds to permit the option to administratively waive the City
requirement for a Regulatory Agreement and to eliminate the
Borrower's option to request an extension of the term of the
City's loan in lieu of loan repayment in the case of all projects
funded under the HUD Section 202 and Section 811 Programs; b)
waive the Citywide Housing Trust Funds Guidelines, on a one-time
basis only, to permit as an eligible activity the construction of
the public parking structure to be constructed under the Fourth
Street Senior Citizen Housing Project and to pay the Parking
Authority for the loss of parking meter revenue during
construction; c) adopt a resolution with findings to forego the
bidding procedures for construction of the public parking
structure to be constructed under and as the foundation for the
Fourth Street Senior Citizen Housing Project.
BACKGROUND AND DISCUSSION
What follows is background and discussion on each of the three
recommendations being presented for City Council approval.
Amendment to Trust Fund Guidelines for Section 202 and 811
Projects
Staff recommends that City Council approve an amendment to the
City's four housing Trust Fund Program guidelines to provide
staff with the option to administratively waive certain
requirements of those Guidelines for HUD Section 202 and Section
811 projects, depending upon the individual requirements of the
source of funds. The purpose of such a waiver is to avoid
duplication of HUD requirements and to structure City financing
of Section 202 and Section 811 projects to more closely resemble
conventional lending activities exempt under Article XXXIV of the
State Constitution.
The City has four different funds from which it makes long-term
loans to construct affordable housing: the Citywide Housing Trust
Fund; the Citywide Housing Acquisition and Rehabilitation Trust
Fund Program (CHARP); the Pico Neighborhood Housing Trust Fund;
and the HOME Trust Fund. While each of these trust funds is
governed by a different set of program guidelines, all four
involve many of the same requirements, including a requirement
for a City Regulatory Agreement. The Regulatory Agreement has
been the primary mechanism used to ensure that the housing
remains restricted and affordable to low and moderate income
households. In particular, the Regulatory Agreement sets forth
requirements concerning project rents, marketing and management
procedures, and tenant income and selection.
From time to time, affordable housing projects built in the City
of Santa Monica receive primary funding from another source, such
as the federal government, while receiving secondary funding from
the City. Projects funded under the Section 202 Supportive
Housing for the Elderly Program and Section 811 Supportive
Housing for the Disabled Program are good examples. Since 1993,
Section 202 and Section 811 funding awards totaling approximately
$16.4 million have been made to four projects including 201
affordable housing units in the City. Staff anticipates that
there may be additional Section 202 and Section 811 projects
proposed in the City in the near future.
The HUD Section 202 and 811 programs require federal Regulatory
Agreements of their own. A copy of the standard HUD Regulatory
Agreement for the Section 202 program is provided in Attachment
A. The basic requirements of the HUD Regulatory Agreement are
very similar to the City's standard Regulatory Agreement. For
example, the HUD Regulatory Agreement sets forth requirements
concerning the project's operating budget and procedures;
management procedures; establishment of a reserve fund; annual
financial reporting; bookkeeping; assignment of rents as
security; and, tenant selection criteria. These requirements
closely mirror the basic requirements of the City's standard
Regulatory Agreement.
One of the few basic differences between the HUD Regulatory
Agreement and the City Regulatory Agreement is the term of the
Agreement. While the HUD Regulatory Agreement requires a forty
(40) year term, the term required by the City varies depending
upon which of the four Trust Funds is used to finance the
project. The Pico Neighborhood Trust Fund and CHARP Trust Fund
require terms of 35 years, with the City having the ability to
extend the term by an additional 15 years in exchange for
forgiving the Borrower's loan. The Citywide Housing Trust Fund
and HOME Trust Fund require a term of 50 years, with the City
having the ability to extend the term by an additional 25 years
in exchange for forgiving the Borrower's loan. Thus, the City
terms are generally longer than the term required by HUD.
Apart from the term of the Regulatory Agreement, projects funded
under the Section 202 and Section 811 programs are regulated by
the HUD Regulatory Agreement in much the same way as they would
be regulated by the City's Regulatory Agreement. Waiving the
City's requirement for a Regulatory Agreement on Section 202 and
Section 811 projects will assist the City's efforts to preserve
its remaining Article 34 authority (granted under the City's own
voter-approved initiative, Proposition N).
Article XXXIV requires that low rent housing projects developed,
constructed, or acquired by any state public body be approved by
a majority of the qualified electors of the City. Section
37001.5 (e) of the Health and Safety Code states that Article
XXXIV shall not be interpreted to apply to certain activities of
a public body (i.e., the City) when such body, "Provides
assistance to a low rent housing project and monitors
construction or rehabilitation of such project and compliance
with conditions of such assistance to the extent of:
(1) carrying out routine governmental functions.
(2) Performing conventional activities of a lender.
(3) Imposing constitutionally mandated or statutorily
authorized conditions accepted by a grantee of assistance."
Staff believes that by removing the City requirement for a
Regulatory Agreement for Section 202 and Section 811 projects,
the City would eliminate an aspect of the City's involvement in
affordable housing projects that in some cases may go beyond the
role of a conventional lender. In this way, Section 202 and
Section 811 projects may be able to qualify for an exemption
under Section 37001.5(e).
There is an additional element of the City's Trust Fund
requirements which staff is recommending in order to bring the
City's practices in line with a conventional lender.
Specifically, as indicated, all of the City's Trust Funds
contain a provision which allows the City to accept an extension
of the Regulatory Agreement for a minimum of fifteen or twenty
five years (depending upon the Trust Fund) in lieu of repayment
of the loan. Such an option is not a conventional lending
practice. Rather, it is a practice that is used by the City as
the regulator of affordability on the project to gain a longer
term of affordability. On the HUD Section 202 projects, staff
recommends that the City relinquish its regulatory role to HUD in
this regard.
One Time Only Waiver of Trust Fund Guidelines to Permit and Pay
for Construction of Parking Structure and Pay for Lost Parking
Meter Revenues
On June 15, 1993, the City Council conducted a public hearing on
the sale of air rights above Parking Lot 4 to the Jewish
Federation Council (JFC), authorized the sale of air rights to
JFC, and authorized the City Manager to negotiate and execute a
Option to Purchase Agreement ("Option Agreement") with JFC for
the exclusive right to purchase the air rights and develop the
project. In the Option Agreement between the City and JFC, the
agreed-upon sale price for the air rights was $2.25 million. The
June 15, 1993 City Council staff report made clear that the
revenue from the proceeds from the sale of air rights would be
used to pay for the cost of replacing the existing 165 public
parking spaces in a new parking structure and to pay the Parking
Authority for the loss of parking meter revenue during
construction. Thus, the cost of the parking structure will be
fully offset by the sale of air rights.
Staff estimates that the cost of constructing the parking
structure (including development costs, environmental
mitigations, off-site improvements, project and construction
management services, and any required testing) together with the
cost of paying the Parking Authority for the loss of parking
meter revenue during construction will be approximately $2.25
million.
It is anticipated that construction will begin on the public
parking structure portion of the project in the early spring,
1998, although this is subject to change depending upon the
status of the legal challenge to the project. However, the
proceeds from the sale of air rights will not be available until
the closing of the HUD loan, which will not occur until a few
months after start of construction of the parking structure.
Before HUD can close its loan and disburse payments for
construction of the housing project, a "platform" must be in
place for the housing project. In the case of this project, the
"platform" consists of the parking structure. Therefore, a large
portion of the public parking structure must be built before the
HUD funds are available to construct the housing project.
Construction funds for the structure could be made available by
the City as described below until the time of the HUD closing
when the proceeds from the sale of air rights can be used to
reimburse those expenditures.
Staff recommends that funds be made available temporarily for
that purpose from the Citywide Housing Trust funds. Under all
four trust fund guidelines, use of the program funds is limited
primarily to construction and rehabilitation of affordable
housing and associated predevelopment activities. In order to
use the funds to construct the public parking structure which
will serve as a platform for the Fourth Street Senior Citizen
project, the trust funds requirements must be waived. Staff
recommends that this be done on a one-time basis only. It is
important to note that all funds expended on the public parking
structure will be fully replenished to the housing trust funds
upon the closing of the HUD loan and receipt by the City of the
proceeds from the sale of air rights.
Waiver of Public Bidding Requirements for Public Parking
Structure
Section 2.24.071 of the Municipal Code requires that every
contract involving an expenditure of more than $25,000 for public
works projects, including the construction of public buildings,
be let to the lowest bidder after appropriate notice in a
newspaper of general circulation. Staff believes that the
public parking structure proposed to be built under the Fourth
Street Project falls under the definition of a public works
project and is therefore subject to the requirements of Municipal
Code Section 2.24.071.
For reasons outlined in detail below, staff believes that
applying the City's public bidding requirements to this project
would significantly increase the costs of the project and extend
the schedule, perhaps to the point of losing HUD funding.
Therefore, staff recommends a waiver of the City's bidding
requirements for the project. Under Section 2.24.071(d) of the
Municipal Code, by two-thirds vote the City Council may grant a
waiver from the bidding requirements when it finds that, "The
goods or services can be purchased more economically on the open
market." (Section 2.24.071(d)(1)). This circumstance clearly
applies to this project.
Due to the nature of the HUD regulations governing funding for
the parking structure, the project must necessarily involve two
phases, including the public parking structure as phase I, and
the residential project as phase II. However, only the public
parking structure is subject to the City's bidding requirements
under Municipal Code Section 2.24.071. Funded primarily by HUD,
the housing project is not a public works project. HUD does not
require open public bidding. Therefore, if the City were to
apply its bidding requirements to the public parking structure,
there is a significant risk that two separate contractors
ultimately would be selected to construct each of the two project
phases. The disadvantages of having separate contractors for each
phase have to do with coordination and timing, which in turn
affect costs. Those implications are described in greater
detail below.
Coordination and Costs
On the Fourth Street Project, there will be many interrelated
systems between the parking structure and housing project which
will require careful coordination. If this coordination is not
done properly, it could cost the project time and money. For
example, the conduits and "sleeving" for the plumbing, sewer, and
electrical service to the housing project will come directly up
through the parking structure. Also, a holding tank must be
installed underneath the parking structure in order to contain
storm water runoff generated primarily from the housing project.
A single contractor responsible for both phases will have a
greater stake in understanding the relationship between the
first and second phases and will therefore take measures to
ensure proper coordination. If two separate contractors are
used, and if as a result interrelated buildings systems are not
properly coordinated, this could lead to timing and costs
overruns, as well as overall liability and bonding problems.
During the development of a similar air rights project in the
City of Beverly Hills, the developer used separate contractors
for the two project phases. Mistakes were made in the fittings
between the two project phases, ultimately resulting in $250,000
in remedial repairs.
Another potential coordination problem associated with two
general contractors involves the use of subcontractors. It is
likely that the subcontractors for the first phase will be
different from the subcontractors for the second phase. Once
again, this could adversely affect coordination between the two
phases. On the other hand, if one general contractor is used for
the entire project, the selection of subcontractors for both
phases can be done simultaneously, thereby significantly
increasing coordination between the two phases.
Project Schedule and Timing
The timely development of the proposed project is important for
several reasons. First, the longer it takes to build the parking
structure, the greater the loss of parking meter revenues and
cost of compensating the Parking Authority for this loss of
revenues. Secondly, it is commonly understood that longer
construction periods add to project costs. Thirdly, because this
project has already had a four-year old funding reservation from
HUD, HUD has made it clear that their continued commitment to the
project hinges upon its timely start of construction. As
indicated, the housing portion cannot begin until the parking
structure is substantially complete. Therefore, if construction
does not begin on time, HUD will no longer be required to fund
the project. HUD has indicated that if construction start-up is
delayed, it will pull their financing, thus killing the project.
The selection of subcontractors has timing as well as
coordination implications. The selection process for
subcontractors usually takes several weeks. If two separate
selection processes occur, the time needed for bidding would
double, potentially adding several weeks to the project schedule.
Having separate contractors for each phase would affect the
project schedule in another way. If two separate contractors are
used, for liability reasons it is unlikely that the contractor
for phase I would be willing to allow the contractor for Phase II
to begin work until the work on phase I is complete. With a
single general contractor, start of construction on phase II
could begin prior to completion of phase I, thereby compressing
the project schedule.
Between the extra time needed for two subcontractor selection
processes and the additional time needed to complete phase I
before starting on phase II, it is estimated that the use of
separate general contractors to build each phase of the project
would add an additional six (6) months to the project schedule.
This would significantly add to the costs to the City, both in
terms of project development costs as well as the costs of making
up lost parking meter revenues.
It should be emphasized that waiving the bidding requirements by
no means eliminates competitive bidding for this project.
While the developer would enter into a negotiated general
contract with a single contractor, this contractor would be
required to get a minimum of three competitive bids for each line
item in the development budget.
To summarize, by waiving the City's bidding requirements for the
public parking structure, the developer can select a single
general contractor to develop the entire project, which would in
turn ensure significantly greater coordination between the
project's two phases; significantly reduce the time--and
therefore costs--needed to construct the project; and,
significantly improve coordination between the construction of
the two phases, sparing the project from potentially significant
cost overruns.
Therefore, staff recommends that the City Council adopt the
attached Resolution authorizing the City Manager to forego the
bidding procedures otherwise required by Section 2.24.071 on the
basis that the services necessary to construct the public parking
structure can be purchased more economically on the open
market. FINANCIAL/BUDGETARY IMPACTS
As specified below, existing budget authority will be used to
construct the parking structure:
Account Number Amount
01-720-264-20095-8905-99229 $1,232,029
01-720-264-20095-8905-99710 $1,017,971
TOTAL $2,250,000
These funds will be reimbursed to the City once HUD escrow
closes.
RECOMMENDATIONS
Staff recommends that the City Council:
a) Authorize staff to amend all four City Housing Trust
Funds to permit the option to administratively waive of the
City requirement for a Regulatory Agreement and to eliminate
the Borrower's option to request an extension of the term of
the City's loan in lieu of loan repayment in the case of all
projects funded under the HUD Section 202 and Section 811
Programs;
b) Waive Citywide Housing Trust Funds Guidelines, on a one-
time basis only, to permit as an eligible activity the
construction of the public parking structure to be
constructed under the Fourth Street Senior Citizen Housing
Project and to pay the Parking Authority for the loss of
parking meter revenue during construction;
c) Adopt a resolution with findings to forego public bidding
procedures for construction of the public parking structure
to be constructed under and as the foundation for the Fourth
Street Senior Citizen Housing Project.
Attachment A: HUD Section 202 Capital Advance Program
Regulatory Agreement
Attachment B: Resolution of the City Council Authorizing a
Waiver of Bidding Requirements for Public
Works Projects Pursuant to Municipal Code
Section 2.24.071(d)(1) for Construction of
the Public Parking Structure on Lot 4