ARLINGTON COUNTY, VIRGINIA County Board Agenda Item Meeting of November 18, 2017 DATE: November 9, 2017 SUBJECT: Allocation of up to $13,511,036 in Fiscal Year 2018 Affordable Housing Investment Fund (AHIF) loan funds to AHC, Inc. for construction of a new affordable housing development, Berkeley II, at 2900 South Glebe Road and allocation of AHIF funds for a Tenant Assistance Fund (TAF) for eligible existing residents at 2900 South Glebe Road. C. M. RECOMMENDATIONS: 1. Appropriate $4,706,201 in AHIF loan repayments and developer contributions received in FY 2018 (101.357000.91102) to the FY 2018 AHIF unallocated funds account (101.495130.91102) and $25,933 in HOME loan repayments received in FY 2018 (101.357000.91102) to the FY 2018 HOME unallocated funds account (206.495130.72407). 2. Allocate up to $13,511,036 of FY 2018 Affordable Housing Investment Fund (AHIF) funds (101.495130.91102) to AHC, Inc. ( AHC ) or its designated County-approved ownership affiliate (101.456300.91102), as an AHIF loan to assist with the cost of construction of Berkeley II, a proposed 131-unit affordable housing development to be located at 2900 South Glebe Road. The proposed up to $13,511,036 AHIF loan is subject to the County Board s approval of the final loan terms and conditions as set forth in the AHIF loan documents. 3. Allocate $134,000 of FY 2018 Affordable Housing Investment Fund (AHIF) funds (101.495130.91102) to the AHIF allocated funds account (101.456300.91102) to provide a Tenant Assistance Fund (TAF) for eligible residents at 2900 S. Glebe Road, the future site of Berkeley II. ISSUES: There are no known issues at this time. SUMMARY: In May 2016, the County Board approved a site plan for the redevelopment of the 138-unit Berkeley Apartments into two new buildings containing a total of 256 units. AHC will finance these buildings as two separate tax credit projects, but intends to construct both in one phase. At its February 2017 meeting, the County Board allocated $7,436,471 in AHIF for the County Manager: ##### County Attorney: ***** 39. Staff: Sarah Pizzo, DCPHD, Housing Division
125-unit eastern building (Berkeley I) and AHC was awarded 9% LIHTC credits for the project in June 2017. As anticipated, AHC is requesting County financing to assist with the construction of the 131 new committed affordable units (CAFs) in the western building (Berkeley II). Staff recommends allocating $13,511,036 in FY 2018 AHIF funds to assist in the construction of Berkeley II. In addition, staff recommends allocating up to $134,000 in AHIF for a TAF for eligible residents at 2900 S. Glebe Road, the future site of Berkeley II. Pending approval of this AHIF request, AHC will submit a non-competitive 4% LIHTC application this fall for Berkeley II. AHC expects to begin construction by summer 2018 and complete construction of the two projects by the fall of 2020. BACKGROUND: In 2000, AHC purchased Berkeley Apartments, a 138-unit complex located at 2900 and 2910 S. Glebe Road, adjacent to Four Mile Run. The County loaned AHC $2,080,000 in County HOME and CDBG funds to assist in the acquisition and a moderate rehabilitation and $600,000 in a CDBG Multifamily Revolving Loan Fund loan. In addition, AHC obtained tax-exempt bonds and 4% Low Income Housing Tax Credits to assist in the financing. Built in 1961, the apartment buildings have experienced significant capital needs over the years. Plumbing, mechanical and structural issues have required substantial expenditures by AHC over the years. Following a capital needs assessment, AHC determined that the buildings had outlived their useful lives and that a redevelopment was needed. AHC has wanted to redevelop the property for more than five years but was limited by the fact that the complex was within a 15-year Low Income Housing Tax Credit compliance period. As of December 2016, the compliance period has been satisfied. AHC submitted a site plan in 2013 to redevelop the site with two new buildings, requesting a partial rezoning of the site and bonus density for affordable housing and LEED Silver certification. Following a multi-year site plan process and six Site Plan Review Committee (SPRC) meetings, the County Board approved the site plan on May 17, 2016. In 2016, the County Board approved a loan modification for the County CDBG/HOME loan. The original loan, closed in 2000, had an interest rate of 6%. The County Board modified the interest rate to 2%. In February 2016, AHC submitted an AHIF Letter of Interest to the County requesting FY 2017 funds to assist with the construction of 256 new CAFs in two buildings. In July 2016, AHC submitted a full AHIF application for two loans: one for the 9% tax credit project (Berkeley I) and one for the 4% tax credit project (Berkeley II). The total request for both projects was approximately $24.5 million 1. Due to the size of the combined request and the FY 2017 AHIF pipeline, County staff recommended that the AHIF request be split over two fiscal years 2. In February 2017, the County Board allocated $7,436,471 in AHIF to assist in constructing the 125 CAFs for Berkeley I. In March 2017, AHC applied for a 9% LIHTC allocation to VHDA and was notified of its award in June. 1 The total AHIF request for the two projects was reduced to approximately $21 million in 2017. 2 Since AHC applied for AHIF funds for Berkeley I and II in July 2016, this Berkeley II allocation was exempted from the Fiscal Year 2018 Notice of Funding Availability (NOFA) competition. - 2 -
DISCUSSION: This section discusses the specifics of the Berkeley II request within the context of the total project. Affordable Housing Program: The total affordable housing program will include 256 newly constructed CAFs in the two projects, which will be committed affordable for 70 years. The proposed unit and affordability mix is shown in the table below. Unit Type Berkeley I: 9% LIHTC Project Berkeley II: 4% LIHTC Project Total 40% AMI 50% AMI 60% AMI 80% AMI Total 50% AMI 60% AMI 80% AMI Total Units Percent Studio 1 4 5 2 2 1 5 10 4% 1BR 4 8 8 20 4 11 3 18 38 15% 2BR 1 18 36 17 72 12 77 10 99 171 67% 3BR 2 8 18 28 4 5 9 37 14% Total 3 31 66 25 125 22 95 14 131 256 100% Of the total 256 units, approximately 1% will be affordable up to 40% Area Median Income (AMI), 21% up to 50% AMI, 63% up to 60% AMI, and 15% up to 80% AMI (Rent and Income Limits for Arlington County Affordable Housing Programs). In Berkeley II, approximately 17% will be affordable up to 50% AMI, 72% up to 60% AMI, and 11% up to 80% AMI. This affordability mix will serve a wide range of working Arlington households, ranging from approximately $38,000 for a single household in a 50% AMI unit to $88,000 for a family of four in an 80% unit. Of the total units, 81% will be family-sized and 19% will be studios and one-bedroom units. The two projects will add a total of 306 bedrooms to the CAF inventory. Berkeley I will add 156 net new bedrooms and Berkeley II will add 150 net new. AHC is proposing two (2) permanent supportive housing units and three (3) Type A accessible units within Berkeley II. Both projects combined will have 15 supportive housing units and 16 Type A accessible units. Affordable Housing Master Plan ( AHMP ): Berkeley I and II meet multiple Goals, Objectives and Policies of the adopted Affordable Housing Master Plan, including a net increase of 118 affordable units in the I-395 corridor, an area that currently has a lower share of affordable housing than what is projected in the AHMP 2040 distribution forecast. Berkeley II, for which staff recommends an AHIF allocation in this report, specifically meets the following policy goals: Policy 1.1.1 Berkeley II will add 131 new construction CAFs through the County s Special Exception Site Plan zoning tool and through financial assistance from - 3 -
Policy 1.1.4 Policy 1.1.5 and 3.4.1 Policy 1.1.6 Policy 1.1.8 Policy 1.1.9 and 3.2.2 Policy 2.2.1 Policy 2.3.2 and 2.5.2 Policy 2.5.3 Policy 3.3.1 and 3.3.2 Policy 3.4.2 the AHIF. Berkeley II will add 63 net new CAFs to the inventory of affordable housing in the I-395 corridor, an area projected to have 3,000 affordable units in 2040, but currently has only 564. The 131 CAFs in Berkeley II will be committed affordable for 60 years. Berkeley II will include 22 units affordable to households making 50% or below AMI. Berkeley II will add 108 family-sized units to the CAF inventory, including 99 two-bedroom units and 9 three-bedroom units. Berkeley II will produce 131 CAFs within the transit corridors consistent with the County s adopted land use plans and policies. Berkeley II will include two (2) units with rents made affordable to households earning up to 40% of the AMI through direct rental assistance provided by DHS. Berkeley II will provide two (2) permanent supportive housing units. Berkeley II will add three (3) Type A accessible units, thereby helping to maintain a sufficient supply of CAF units that are accessible for persons with physical disabilities. Berkeley II will be certified EarthCraft Gold which will help to advance the goals of the Community Energy Plan and encourage water conservation. The proposed Loans Terms and Conditions for Berkeley II ensure financial feasibility in the underwriting of the AHIF loan. Tenant Relocation: AHC has held several resident meetings for current tenants to discuss the redevelopment project and tenant relocation during construction. At its May 2016 meeting, the Tenant-Landlord Commission approved the Berkeley Relocation Plan. The site plan, approved by the County Board in May 2016, includes Condition #10 that AHC must adhere to the Berkeley Relocation Plan. Following its successful award of 9% LIHTC this past June, AHC issued 120-day Notices to Vacate in July and August for all tenants living in 2910 S. Glebe (Berkeley I site). AHC anticipates issuing 120-day Notices to Vacate this fall for residents living in 2900 S. Glebe (Berkeley II site). AHC s goal is to find housing for all eligible Berkeley residents at either AHC sister communities in close proximity to The Berkeley or at other nearby rental properties. Any existing Berkeley resident who is in good standing and who meets the income qualifications will be given first priority to apply for an apartment in the new buildings. Final completion of the redevelopment is expected to take two to three years from the time residents are first relocated. - 4 -
Tenant Assistance Fund (TAF): Consistent with the County s TAF Policy, a TAF will be available for all eligible households at the existing Berkeley apartments. Staff recommends an allocation of up to $134,000 in AHIF for the creation of a TAF for eligible households living in 2900 S. Glebe Road, the site of Berkeley II. The County Board approved an AHIF allocation of $93,000 for a TAF in February 2017 for households living at 2910 S. Glebe, the site of the Berkeley I. Consistent with the County s TAF Policy, eligible households are those earning up to 60% AMI who desire to move back after construction and who do not currently receive rental assistance. Households may begin to relocate and utilize the TAF after the 120-day notices are issued. The TAF funds will be held by Arlington County and administered as an AHIF grant of up to $134,000 pursuant to a TAF Reimbursement Agreement between the County and AHC. The TAF Reimbursement Agreement will include the following or substantially similar terms: The funds for the TAF will be held by the County, and disbursed to AHC monthly as reimbursement for documented rent assistance payments. AHC will verify household incomes, determine assistance amounts, issue checks to owners/landlords, and invoice the County monthly with rent assistance amounts per household. Households must have gross verified incomes not exceeding 60% AMI in order to be eligible for the TAF assistance. Households must have been in place in the property when the County first approved its AHIF loan in order to be vested and eligible for the TAF. Households which already participate in a rent assistance program (such as Housing Grants or Section 8 Housing Choice Vouchers) will not be eligible for the TAF. During construction, TAF participant households will pay either the same amount they currently pay, or 35% of gross household income, whichever is higher, toward rent. The TAF will pay the remainder directly to the appropriate landlord. The TAF rent assistance payments for eligible households will continue for the duration of rehabilitation, plus 12 months after each tenant returns to the renovated unit. Development Budget and Financing Package: AHC plans to finance Berkeley I as a 9% tax credit project and Berkeley II as a 4% tax credit project. The total development cost for Berkeley II is $49,640,020, of which 12% is acquisition cost, 64% are construction hard costs, 10% for soft costs, 1% for reserves, 5% for financing costs and reserves, and 8% for developer fee. The acquisition cost for Berkeley II is $5,860,992. This is equal to half of: the total existing debt on the current project and the cost of AHC buying out the limited partner of the existing tax credit project. The County s existing debt will stay in the project together with existing AHC funds. The tax-exempt bonds on the existing project, however, must be paid off. AHC s anticipated financing package for Berkeley II will include a VHDA first mortgage (including tax-exempt bonds, REACH and REACH Plus), tax credit equity and the proposed AHIF loan. - 5 -
Berkeley II (4% Tax Credit Project) Permanent Sources and Uses SOURCES OF FUNDS: USES OF FUNDS: Senior Loan 1 $16,835,680 Acquisition Costs $5,860,992 Tax Credit Equity $11,250,423 Construction Hard Costs $31,963,116 County AHIF Loan $13,511,036 Soft Costs and Reserves $5,672,313 Existing County CDBG & HOME Loans $2,975,640 Financing Costs $2,383,227 AHC Sponsor Loans 2 $3,187,055 Developer Fee $3,760,372 Deferred Developer Fee $1,880,186 Total Sources $49,640,020 Total Uses $49,640,020 1 It is anticipated that VHDA will loan the following funds: $5,835,680 in tax-exempt bond mortgage; $9,000,000 from VHDA s REACH program, and $2,000,000 from VHDA s REACH Plus program. 2 AHC will provide two Sponsor Loans: one for $1,351,105 (equal to 10% of the new AHIF loan) and one for $1,835,951 (an amount equal to 50% of the developer fee for Berkeley I). Existing County Loans: The current principal plus accrued interest of the existing County CDBG/HOME loan is approximately $4.75 million. It is envisioned that the County debt be bifurcated among the two new projects at the time of construction closing with each project carrying approximately $2.375 million of existing County debt. Additionally, this project will assume an existing $600,000 CDBG Multifamily Revolving Loan Fund loan. AHIF Funds Requested: AHC has requested $13,511,036 in AHIF funds for Berkeley II ($103,138 per unit). Adding in the existing $2,975,640 County loan for Berkeley I, the total County debt would be $16,486,676 ($125,852 per unit). The AHIF request for Berkeley II is nearly twice that of the Berkeley I request due to approximately half of the tax credit equity that can be generated by the 4% credits. AHIF loans for new construction, 9% tax credit projects have ranged from approximately $64,000 to $97,000 per CAF unit in the past five years. The past three AHIF loans for 4% new construction tax credit projects have ranged from approximately $82,000 to $162,000. AHC s AHIF request meets the County s underwriting guidelines, two of which are highlighted below: Deferred Developer Fee - One of the County s standard underwriting guidelines is that the developer defer 50% of its developer fee, to be paid out over time from cash flow from the property. AHC proposes to defer 50% of its total fee for Berkeley II. AHC Funds - One of the County s underwriting guidelines is that the developer contribute its own financial resources to the project, with a target of 10% of the AHIF request. AHC has agreed to contribute 10% of the AHIF request for Berkeley II as a sponsor loan in the amount of $1,351,105. AHIF Terms: The proposed $13,511,036 AHIF loan for Berkeley II will have a forty (40) year term at zero (0%) interest. Interest rates on County loans are based on an analysis of the - 6 -
amount of debt a property may be able to support over the life of the loan given affordability levels, projected operating expenses, and debt service from senior loans. Staff recommends 0% interest on the proposed AHIF loan in order to ensure long-term financial feasibility and to slow the rate of debt accumulation. The existing CDBG/HOME loan, however, will continue to bear a 2% interest rate. The blended rate for the County loans for Berkeley II will be 0.4%. The AHIF loan will be secured by a subordinated deed of trust and repayable from a portion of the cash flow of Berkeley II. The proposed loan terms and conditions for the AHIF loan for Berkeley II are detailed in Attachment 1 of this report. Anticipated Timeline and Future County Board Requests: This fall, AHC will be in the building permit review process and will secure financing commitments for the senior mortgages and tax credit equity for both projects. AHC will issue 120-day notices to vacate per its approved Tenant Relocation Plan this fall for tenants living in 2900 S. Glebe (the site of Berkeley II). It is expected that both existing buildings would be vacant by mid-2018 to prepare for closing on financing. Construction financing closing is anticipated to take place in spring 2018. The County Attorney would draft AHIF loan documents for the proposed $13,511,036 AHIF loan for Berkeley II and for the approved $7,436,471 Berkeley I AHIF loan. In addition, the County Attorney would draft the amended and restated loan documents for the existing County CDBG/HOME loans. Prior to the construction closing, County staff would bring forward a request to the County Board for approval of the County loan and subordination documents. Following construction closing, AHC would begin demolition of the two existing apartment buildings and construction of the two new tax credit projects. Construction would be completed no later than the December 2020. Estimated Number of Students Generated by the Development: There are currently 84 Arlington Public Schools (APS) students at the existing Berkeley apartments; APS projects the Berkeley I and II combined to generate 149 students. It is anticipated that a portion of the 65 net new students will be students new to Arlington County. The owner of another new construction CAF project in recent years provided data that less than 20% of the projected school-age children who moved into the development were new to the Arlington County school system. The majority, more than 80% of the student residents, were already enrolled in and attending schools in Arlington County. Arlington Public Schools (APS) projects the following number of students to be generated at the new development. This development project is currently zoned for Oakridge Elementary School, Gunston Middle School, and Wakefield High School. - 7 -
APS Schools Berkeley I (2910 S. Glebe Rd) Number of Students* Berkeley II (2900 S. Glebe Rd) Number of Students* Elementary School (K-5) 40 42 82 Middle School Students (6-8) 13 13 26 High School Students (9-12) 20 21 41 Total* *These numbers are total students to be generated at the new development. However, currently there are 44 elementary school students, 16 middle school students and 24 high school students at the existing Berkeley Apartments. The above estimates are generated by APS using the housing characteristics presented at the time of the AHIF application and using 2016-2017 student generation factors. Should these housing unit characteristics or the student generation factors change, then the student generation estimates would also change. PUBLIC ENGAGEMENT: As described below, AHC has met with the Long Branch Civic Association, the Housing Commission, and the Tenant-Landlord Commission on the Berkeley redevelopment. Civic Association/Community Process: AHC met with the Long Branch Civic Association on January 23, 2014 and April 21, 2016 to share the specifics on its proposed site plan redevelopment. The association provided a letter of support for the redevelopment dated May 8, 2016. Housing Commission: The Housing Commission will consider AHC s Berkeley II request at its November 2017 meeting and will send a letter to the County Board. The Commission previously supported AHC s Berkeley I AHIF request at its February 16, 2017. Tenant-Landlord Commission: The Tenant-Landlord Commission voted in May 2016 to approve the Tenant Relocation Plan for The Berkeley, dated May 11, 2016. FISCAL IMPACT: There is sufficient fund balance to support the $13,645,036 AHIF allocation request for the Berkeley project and associated TAF. In addition, it is anticipated that the inclusion of two permanent supportive housing units at Berkeley II will have a fiscal impact upon the County s Permanent Supportive Housing Program budget. The full year incremental cost increase to the County s Permanent Supportive Housing Program budget is estimated to be approximately $25,728 per year once the Berkeley II is completed and the two permanent supportive housing units are ready for occupancy (anticipated 2020). - 8 -
ATTACHMENT 1: Berkeley II AHIF Loan Terms and Conditions Up to $13,511,036 1. The Applicant shall execute an Affordable Housing Investment Fund Loan Agreement ( AHIF Loan Agreement ) and other related loan instruments, as drafted and finalized by the County Attorney, in a form acceptable to the County Manager and the County Attorney and subject to County Board approval. 2. The Applicant shall include these Berkeley II AHIF Loan Terms and Conditions when requesting proposals from senior lenders and investors. If any terms are negotiated between the Applicant and other parties that are in violation of these Loan Terms and Conditions, the Applicant must submit a request to the County Board to consider revision of these Loan Terms and Conditions as necessary to conform to the negotiated terms between the Applicant and such other parties. 3. Within 30 days of receipt of final third party debt and equity commitments, the Applicant shall submit a final sources and uses table for Berkeley II for approval by the County Manager or his designee. If the $1,000,000 in contingency funds (or a portion thereof) are deemed unnecessary to support the project, staff will seek County Board approval at a later meeting to de-obligate the funds in order to make such funds available for other AHIF projects. The applicant will use its best efforts to contain project costs and to seek additional financing sources such that the contingency funds will be surplus to the project and correspondingly subtracted from the AHIF loan amount for Berkeley II. 4. The AHIF Loan shall be secured by Berkeley II, and shall be repayable from the project s Residual Receipts, as defined in the AHIF Loan Agreement. As set forth in the related promissory note, and subject to an Event of Default (as defined in the AHIF Loan Agreement), the unpaid principal balance of this AHIF Loan shall accrue at 0% interest for the forty-year term as called for in the related promissory note. The term shall be 40 years from construction closing. 5. Beginning in the first operating year of the 131-unit affordable housing complex and each subsequent year during the loan term, the County shall receive a total of fifty (50%) of Berkeley II s Residual Receipts as annual payments towards the County loans: 25% of the Residual Receipts will be applied as an annual payment towards the Berkeley II AHIF Loan and 25% of the Residual Receipts will be applied as an annual payment towards to existing CDBG/HOME loan. If it is determined at any point after ten years of operation that the deferred developer fee is not projected to be repaid by the fifteenth year, the County shall consider a request by the Applicant to amend the portion of Residual Receipts that the County receives. In no event shall the County receive less than 50% of Residual Receipts in years 16-40. Residual Receipts as defined in the County Loan Agreement, shall specifically include, but not be limited to, the amount by which gross revenues exceed annual debt service payments, approved operating expenses, payments to replacement reserve, and priority payment fees of up to $13,100 for AHC Resident Services and up to $13,100 for AHC Asset Management which can be escalated annually at two percent (2%). Any other fees or payments in excess of what is stated here must be paid from the Applicant s portion of Residual Receipts. - 9 -
6. AHC shall provide two sponsor loans to Berkeley II, one of $1,835,105 and one of $1,351,105, which will be funded during the construction period and repaid over time from cash flow of the property. 7. The Applicant must comply with the affordable housing set-aside for the rental units in Berkeley II as follows: twenty-two (22) of the units will be restricted to households earning up to fifty percent (50%) of the AMI, ninety-five (95) units will be restricted to households earning up to sixty percent (60%) of the AMI and the remaining fourteen (14) units will be restricted to households earning up to eighty percent (80%) for 70 years from the date the complex is placed in service with the unit mix as shown in the table located in the Affordable Housing Program section on page 3 of this document. 8. The Applicant agrees that the affordable rents shall be established in accordance with LIHTC rents as published annually by VHDA for the unit size, minus a utility allowance (if applicable) as per the Utility Allowance Schedule annually approved by HUD for the Arlington County, VA Housing Choice Voucher Program or other manner as permitted by applicable federal regulations and approved by the County or, if such LIHTC rents are not published by VHDA, then in accordance with HUD rent limits set for Arlington County. 9. The Applicant shall create a minimum of three (3) fully accessible Type A units for persons with disabilities in the Berkeley II, and will fully cooperate with an affirmative marketing program to market these units to households in need of such accommodation. 10. The Applicant will execute an agreement with the Department of Human Services to provide two (2) supportive housing units with rents affordable to households earning up to 40% of the AMI in the Berkeley II. These may or may not be the same as the fully accessible units. - 10 -
ATTACHMENT 2: Location of The Berkeley Redevelopment 2900 and 2910 S. Glebe Road - 11 -
ATTACHMENT 3: Rendering of The Berkeley Redevelopment - 12 -