Decision on Financial Support for Rockville Housing Enterprises' (RHE) Acquisition of Fireside Park Apartments
Staff recommends that Mayor and Council:
- Receive a briefing on the current options for Fireside.
- Receive an update from staff on additional data provided on the affordable housing inventory.
- Approve a resolution of support for RHE to purchase Fireside Park.
- Discuss and decide on any financial support the City will provide for the purchase of Fireside Park. If Mayor and Council decide to provide assistance, approve resolution for financial support.
UPDATE SINCE MAYOR AND COUNCIL MEETING OF OCTOBER 22, 2012
Outcome of the October 22 Work Session
The Mayor and Council held a work session on October 22, 2012 to discuss the RHE proposal to acquire Fireside Park Apartments and to review a proposal from Priderock that was received via email just prior to that meeting. The work session also included briefings from the County and City staff on the supply and demand for affordable housing in Montgomery County and in Rockville, specifically.
During the October 22 work session, the Mayor and Council requested several items, including:
- Additional information on the affordable housing inventory in the City;
- A property tax comparison of the RHE and Priderock proposals, including answers to questions about forgiving portions of the PILOT; and
- An answer to the question whether the City, in a second lien position, has the right to call the loan if the property is not meeting all debt obligations.
This additional information is included below, along with previously reported information from prior agendas that is still relevant.
Priderock, LLC Withdraws Offer to Purchase Fireside
On October 27, 2012, Priderock, LLC informed the City, via an e-mail from its attorney, that it is withdrawing its offer to purchase Fireside Park Apartments, stating:
"I am writing to inform you that the Priderock Capital Partners is withdrawing from the acquisition process for Fireside Park Apartments." Therefore, the information included below does not contain any additional information on Priderock's proposal since it is no longer an option.
CURRENT OPTIONS FOR FIRESIDE
Mayor and Council currently have three options for the Fireside decision:
- Approve RHE's acquisition of Fireside and provide $2 million of financial assistance.
- Approve RHE's acquisition of Fireside and provide no financial assistance.
- Do not approve RHE's acquisition of Fireside and provide no financial assistance.
EXISTING AFFORDABLE HOUSING STOCK IN THE CITY OF ROCKVILLE - REVISED
Data on the number and location of existing affordable units in Rockville is summarized in Attachment A, with a table of the types of affordable units and the map showing distribution of these units by Planning Area. In addition, the staff has provided more detailed data in a table of the three planning areas closest to Fireside Park. This table (Attachment B), shows apartment complexes in each area and provides a combined figure for scattered site units so as not to violate the privacy of those households.
A second map of the housing inventory that includes approved units which are under construction or not yet built is provided in Attachment C.
Planning Area geographies were used for the housing inventory maps because they have been used historically. Economic and housing data will be tabulated and analyzed by these same geographic areas for the Comprehensive Master Plan.
15% of the City's housing units are affordable
Attachment A provides an analysis of the number and proportion of Rockville's current affordable housing stock. The analysis includes subsidized, income-restricted units, as well as estimates of unsubsidized, market-rate units that are affordable. For purposes of this report, "affordable" is defined as households making 60% of the Area Media Income (AMI) - or those households making up to $45,000 to $70,000 per year depending on household size. This measure is consistent with the City's Moderately Priced Dwelling Unit (MPDU) program household income maximum.
The analysis shows that 15% of Rockville's housing units are currently affordable to these households. This percentage was revised since the October 22 discussion to include 414 Housing Choice Vouchers, which provide a subsidy for a household to rent a unit in the private market, but are not tied to a specific unit. Vouchers do not add units to the overall stock and are not mapped.
Over 40% of the City's current affordable units are vulnerable to price increases
Out of the total 26,054 housing units in Rockville, only 2,320 (or 9%) are legally reserved as affordable. The remaining 1,687 affordable units have no restrictions and are vulnerable to price hikes that could remove them from the City's affordable inventory.
Fireside Park Apartments is part of the market-rate affordable housing stock that is without affordability restrictions and is susceptible to price increases. If purchased by a private buyer, the location, community amenities, and economic potential of the property could cause it to be renovated and marketed in such as way as to render it unaffordable to some of its current residents. This is the reason the County exercised its Right of First Refusal.
The City of Rockville currently has a deficit of at least 175 affordable housing units for working families
A comparison of the 15% total of affordable housing units (subsidized and market rate, including vouchers) to household income provides a rough estimate of the need for affordable units in Rockville. Over 4,100 households in Rockville have an income below $50,000 per year and an additional 3,500 households have an income below $75,000 per year (U.S. Census Bureau). This results in a need for somewhere between 175 to 3,700 additional affordable housing units in addition to the 4,007 the City already has.
The following table summarizes the results of the inventory. It was revised since October 22, 2012 to include 414 Housing Choice Vouchers and with an update to the number of total existing housing units in the City.
A generous set of assumptions were used for this research which may overestimate affordability and underestimate need. The methodology will continue to be refined and more current data obtained as part of the Comprehensive Master Plan revision. An in-depth supply and demand analysis will also be part of the plan preparation to provide estimates of the need for affordable housing by household size and bedroom size.
Number of Units
% of Total Housing Units
|Affordable Income-Restricted Rental Units|
|MPDUs, other subsidized rental housing|
|Affordable Income-Restricted Homeownership Units|
|MPDUs, other subsidized homeownership units|
|Affordable Market-Rate Multifamily Rental Units|
|Units in market-rate rental properties|
|Affordable Market-Rate Homeownership Units|
|Market-rate single-family detached, townhouses, condos|
|Housing Choice Vouchers|
|Rental subsidies used by low and moderate income households to rent existing units in the private market|
|Total Affordable Units|
|Other Housing Units|
|Total Housing Units|
CURRENT CITY OF ROCKVILLE AFFORDABLE HOUSING POLICY
The City's current affordable housing policies are outlined in four sources:
- The City's Housing Goals and Objectives adopted in 1985;
- Chapter 13.5 of the City Code which governs the Moderately Priced Dwelling Unit program (established in 1990 and last revised in 2009);
- The Housing Chapter (Chapter 10) of the City's Comprehensive Master Plan adopted in 2002; and
- Mayor and Council's Strategic Goals and Principles outlined in the FY13 Adopted Budget.
These various policies promote the City's commitment to provide a full range of housing choices for all incomes, ages, and family sizes. Most recently, Mayor and Council stated in their Strategic Goals and Principles: "We will seek a variety of housing types to meet current and future resident needs, including supporting the provision of affordable housing in Rockville." The Strategic Goals and Principles also address Fiscal Responsibility, such as: "We are committed to anticipating changes in the economy, budgeting responsibly and maintaining responsible residential and commercial property tax rates for residents and businesses."
ROCKVILLE HOUSING ENTERPRISES' PROPOSAL TO PURCHASE FIRESIDE PARK APARTMENTS
RHE's plan for the purchase of Fireside remains unchanged from the October 22, 2012 agenda item. RHE outlined some modifications on October 22 that could be made to Fireside operations to further mitigate the City's risk (Attachment D).
Rockville Housing Enterprises seeks to purchase Fireside Park Apartments to preserve the 236-unit rental development as a mixed-income, affordable housing resource in the City of Rockville. The opportunity to support RHE's purchase of Fireside is consistent with the City's current policy of supporting affordable housing.
Affordability Plan - RHE's plan to purchase and acquire Fireside is for 40% of the units (or 94 units) to be rented at levels that are affordable to households at or below 60% of the Area Median Income -- or $64,500 for a family of four -- and for 60% of the units (or 142 units) to be rented at market rates.
Financing - RHE prices the total acquisition of the property, including initial renovation costs, financing fees, closing costs, and miscellaneous costs at $37,750,000. Citibank has provided a letter of commitment to finance 90% of the purchase price. Monthly payments include principal and interest; the loan is not an interest-only loan. The revenue from the monthly rent rolls will be used to pay the monthly mortgage payments.
Citibank mortgage loan at 90% Loan to Value of purchase price
Montgomery County Housing Initiatives Fund (Loan)
City of Rockville Housing Opportunities Fund - Loan
City of Rockville Housing Opportunities Fund - Grant
Rockville Housing Enterprises Cash
Rehabilitation Plan - RHE has a seven-year rehabilitation schedule to address deferred maintenance. In Year 1, RHE will spend $764,975 to replace all the roofs, re-line copper pipes, prune mature trees, and make asphalt repairs. In Years 2 to 6, HVAC units will be replaced in 196 units and additional asphalt, paving, and striping will be completed. RHE's planned investments over seven years total $1.9 million and will be funded from annual deposits to a replacement reserve and from cash flow.
Above and beyond these repairs, RHE will continue interior renovations of units using net cash flow as it is available.
Risk for RHE and Impact on the Organization- The purchase of Fireside is structured in such a way to minimize risk to RHE.
- The loan from Citibank is a non-recourse loan. The loan will be secured by the land and improvements of the property. This type of loan has no direct financial impact to the borrower.
- The Citibank loan is not an interest-only loan. Mortgage payments, including principal and interest, will be paid using cash flow from monthly rents.
- RHE's current programs and assets will be insulated by establishing a Single Purpose Entity (SPE) to be the borrower for Fireside, as is standard industry practice. The purchase of Fireside will be a stand-alone transaction with no adverse impact on the RHE's financial condition.
- RHE will engage a third-party management company to operate Fireside. RHE management staff and Commissioners will be involved in Fireside Park policy issues only in the course of providing supervision and quality control of management company operations.
THE STRUCTURE OF CITY FINANCIAL ASSISTANCE
Nothing has changed about RHE's request or the proposed structure of City assistance since October 22. As previously described, Montgomery County and City staff worked together to revise the proposed terms of the City's participation in the acquisition. These proposed changes were negotiated in order to put forth a structure that could preserve these affordable units while mitigating the risk for the City.
RHE's Request for Assistance
RHE has requested $2 million of financial assistance for the acquisition. Staff have proposed that $500,000 originate from the Housing Opportunities Fund (discussed in the Fiscal Impact section); the remaining $1.5 million would be a loan from the City.
$1.5 Million Loan
The October 22, 2012 agenda item outlined staff's recommendations for the best two options for the source of the $1.5 million loan, which include reducing the capital fund budget or issuing new debt. These recommendations have not changed.
County Offer to Assist with $1.5 Million Loan and Mitigating Risk
The County offers to the City have not changed since October 22, 2012 and include:
- County Loan of $1.5 million to City. Montgomery County has offered to ease the initial fiscal impact on the City by fronting the City's $1.5 million loan to the project and receiving $500,000 annual payments from the City starting in FY2014. This structure allows the City to contribute its fair share of the acquisition, but to have the option of spreading the fiscal impact between three budget years and accommodate the expenditures in the annual budget process. If Mayor and Council accept the County's offer, the City's $1.5 million contribution would still be considered a loan to RHE and would be fully repaid in seven years. Details of the loan between the County and City would need to be worked out and established in a Memorandum Of Understanding.
- Offering the City the Second Lien Position. Montgomery County has agreed to allow the City to take the second lien position. This means that the City loan of $1.5 million will be repaid before the County loan at the end of the seven-year loan term. This significantly mitigates the City's risk.
- Montgomery County Loan Extension Clause. Montgomery County has agreed to include a loan extension clause in its loan to RHE. At the end of the original seven-year loan period, RHE will have the option of extending the loan repayment term with the County if it is unable to fully repay the County loan. This reduces the risk of the RHE's refinance potential for Fireside and provides confidence in the long-term sustainability for the project.
The County has requested that the City show a good faith commitment to the project by waiving 40% of the PILOT payment which equates to a revenue loss of $24,256 per year, compared to $60,641 to waive 100% of the PILOT payment (based on Levy Year 2012). The 40% figure is based upon the minimum proportion of affordable units that RHE will guarantee. Attachment E summarizes staff's analysis of RHE's PILOT waiver request.
RISK TO THE CITY OF LOANING $1.5 MILLION
The County has offered two solutions -- the second lien position for the City and the County loan extension clause -- to significantly mitigate the City's risk of not being fully repaid in seven years.
Holding second position still carries some risk. As the holder of the second deed of trust, the City would not have the ability to single-handedly "call the loan" if the property were not producing adequate cash flow to cover Citibank mortgage payments and the City's loan payments. One solution is developing an agreement with Citibank to outline the process of rectifying such a situation in the unlikely case that it occurs. The agreement would outline Citibank's and the City's good faith obligations to work together to resolve any issues if Fireside does not perform as planned. RHE is circulating this idea to Citibank.
Mayor and Council History
- RHE's potential purchase of Fireside Park Apartments was introduced to Mayor and Council on August 6, 2012. Mayor and Council unanimously approved RHE's effort to obtain the right of first refusal for the property.
- On September 10, 2012, RHE returned to Mayor and Council with a request for City financial assistance and to make a correction to the resolution approved on August 6, 2012.
- At the September 24, 2012 Mayor and Council meeting, RHE presented its plan for the acquisition and operation of Fireside Park.
- On October 8, 2012, Mayor and Council held a public hearing to gather input from citizens on the potential purchase.
- On October 22, 2012, Mayor and Council held a work session to discuss this matter.
Public Notification and Engagement
Mayor and Council held a public hearing on October 8, 2012 to receive feedback from citizens. The public record closed on October 15, 2012 at 5 pm.
$1.5 Million Loan
The October 22, 2012 agenda item outlined staff's recommendations for the best two options for the source of the $1.5 million loan, which include reducing the capital fund budget or issuing new debt. These options and recommendations have not changed and are outlined below. In addition, in order to help finance the City’s $1.5 million contribution, Montgomery County has offered to front the City $1.5 million in FY 2013, with a three-year repayment schedule in equal installments of $500,000 beginning in FY 2014.
Reducing the Capital Budget by $1.5 million
Under this option, the City would reduce the annual pay-go transfer from the General Fund to the Capital Projects Fund. The Mayor and Council have a choice to reduce the transfer all at once in FY 2013, or take advantage of the County’s offer and reduce the transfer by $500,000 per year in FY 2014, FY 2015, and FY 2016. In both cases, the Mayor and Council would need to agree on deferring or eliminating entire capital projects (or portions of capital projects) until the loan is paid back in FY 2020. The Mayor and Council could consider projects that are funded in any year of the CIP, currently funded or planned for the future. If the Mayor and Council take advantage of the County’s offer, there would be additional time to evaluate the entire CIP budget, including the impact of eliminating or reducing projects.
Issuing $1.5 million in New Debt to Support the City’s Capital Projects Fund
Under this option, the City would reduce the annual pay-go transfer from the General Fund to the Capital Projects Fund by $1.5 million in FY 2014, and issue $1.5 million in new debt to fill the gap in the Capital Projects Fund. If the Mayor and Council select this option, staff recommends that the bond issue support the City’s Asphalt Repair and Replacement project (page 57 of the FY 2013 CIP).
If the City issues $1.5 million in new debt in FY 2014 and keeps the General Fund transfer equal to $4.7 million per year, the reserve balances in the Debt Service Fund would be below the reserve policy target. The policy states that the City must maintain a balance equal to the average annual outstanding principal amount. Under this option the balances are projected to be under the target by up to $500,000 between FY 2014 and FY 2018. If the City has a plan in place to show that the Fund will be in compliance starting in FY 2019, then the short-term reduced reserve levels are not a major financial concern. Under this option all debt ratios that are presented in the City’s Debt Management Policy are in compliance with policy targets.
Attachment E is the levy year 2012 tax bill for Fireside Park Apartments, along with a ten-year projection of 40% PILOT exemptions from the City and the County based on RHE's PILOT request. The projections assume that the assessed value will increase by 2% each year and that the tax rates will remain the same as the levy year 2012 rates. Staff knows that these assumptions will change, but wanted to provide the Mayor and Council with an example of what the PILOT exemption could look like over a ten-year period.
Housing Opportunities Fund
The fund balance is $498,114 as of June 30, 2012 and is noted in the City's annual budget in the Special Activities Fund (pg 3-27 of FY 2013 Operating Budget). See Attachment F for a copy of the budget page.
Attach A_Existing Affordable Housing Inventory.pdf
Attach B_Planning Areas 1_3_4 Summary.pdf
Attach C_Affordable Housing Inventory with Pipeline.pdf
Attach D_RHE 10-22-12 Presentation.pdf
Attach F_Housing Opportunities Fund_FY13.pdf
Attachment G - Resolution (RHE Financial Assistance).pdf
Susan Swift, Director of Community Planning and Development Services
Approved on: 10/31/2012
Barbara B. Matthews, City Manager
Approved on: 11/01/2012