Agenda #7
memorandum
to: Mayor and Town Council
from: W. Calvin Horton, Town Manager
subject: Response to Petition from the Pines Community Center, Inc. Requesting Forgiveness of Loan
date: February 27, 2006
PURPOSE
The purpose of this report is to respond to a petition from the Pines Community Center, Inc. asking the Town to forgive the balance of a loan owed to the Town for the acquisition of property located on Park Road in the Pine Knolls neighborhood (please see Attachment 1).
The attached resolution would amend the Town’s Performance Agreement with the Pines Community Center to convert the balance of the Town’s loan into zero-interest, deferred second mortgages to future buyers.
On February 7, 1995, the Town entered into a Performance Agreement with the Pines Community Center to provide a $115,000 loan from the Town’s Housing Loan Trust Fund to acquire approximately nine acres of property located off Park Road (please see Attachment 2). It was the intent that the Pines Community Center would purchase the property to provide homeownership opportunities to 30 Chapel Hill families at or below 60 percent of the area median income by household size. This Agreement expired on February 7, 1996. On July 30, 1996, the Performance Agreement was amended to extend the agreement until February 7, 1997.
The Agreement contemplated that this loan would be paid off in increments as the Center completed homes and transferred them to individual homebuyers, and that the entire loan would be paid back in a maximum of four years. Per the terms of the Agreement, upon sale of one lot (104 Park Road), the Pines Community Center repaid the Town $5,750 (one twentieth of the loan). In addition, as the result of the sale of approximately six acres of the land to First Baptist Church and Manley Estates in 2000, the Pines Community Center repaid an additional $55,000 to the Town. The current balance of the loan is $54,250. This loan is secured by a Deed of Trust on the three acres remaining after six acres were sold to the Church.
A member of the Center’s Board of Directors offers the opinion that because six of the nine acres of property was sold to First Baptist Church and Manley Estates, the Center should not be obligated to repay two-thirds of the loan. The sale of a portion of the Park Road property from the Center to First Baptist Church and Manley Estates allowed the Center to repay $55,000 of the outstanding loan from the Town. At that time, there was no discussion or agreement that the transaction would include First Baptist Church assuming any responsibility for the Center’s loan from the Housing Loan Trust Fund.
On January 9, 2006, a petition was presented to the Council from the Pines Community Center requesting that the Town forgive the balance of the acquisition loan so that the Center could move forward with the development of houses on the Park Road site. The petition also states that the Center intends to partner with EmPOWERment to build 10 housing units on the site, and that they would request financial support from the Town and Orange County for this development.
All of the Town’s affordable housing programs require that houses be sold to first-time homebuyers earning less than 80 percent of the area median income who currently live or work in Orange County. In addition, the guidelines of the local Housing Loan Trust Fund require that the properties must serve households currently living in Chapel Hill. Developers of affordable housing using Town funds are also required to: (1) demonstrate how the project will maintain long-term affordability; and (2) submit income documentation for each initial and subsequent buyer to the Town for approval prior to closing on individual lots. These requirements could be incorporated into an amended Performance Agreement with the Pines Community Center.
In our discussions with the Center, we explained that the Housing Loan Trust Fund guidelines allow funds to be provided as a grant to Land Trust projects that guarantee long-term affordability of a property through a 99-year renewable ground lease. This approach would require the Center to deed the land to the Land Trust. A representative of the Center stated that the organization would not support a Land Trust option if it would mean that the land would be deeded to Orange Community Housing and Land Trust. Therefore, a land trust model is not included in the options discussed below.
We have developed the following options for the Council’s consideration:
Option 1: The Council could choose to convert the Town’s funds into deferred second mortgages to the future buyers of the properties. The amount of the deferred second mortgage would be determined by dividing the loan amount of $54,250 by the total number of single family units. Currently, 10 lots are proposed. Therefore, each second mortgage would be $5,425. If the property was sold, funds could be repaid to the Town at zero percent interest. The Town currently converts funds provided to Habitat for Humanity for development costs into zero percent interest deferred loans to the homebuyers.
The advantage of this option is that the Center would not have to repay the balance of the Town’s loan. Also, if funds were structured as a second mortgage, funds may be repaid to the Town in the future for other affordable housing projects. A disadvantage is that the homeowners would be required to repay the funds when they sold their houses.
Option 2: The Center requests that the Council forgive the balance of this loan. This action would convert the Town’s funds into a grant to the Center. If the Council wishes to forgive this loan, it would be necessary to amend the guidelines of the Housing Loan Trust Fund for this project.
An advantage of forgiving this loan is that the Center would not have to repay the Town’s loan. A disadvantage is that if the loan is forgiven, there would be no guarantee that the future houses would be used for affordable housing purposes. When funds were repaid from the sale of the first house on this property to a qualified buyer, the Town released its lien on this portion of the property and did not require further affordability restrictions. If funds were provided as a grant and the lien on the property was released, the Center could sell the property to whomever it chooses and the Town would not recapture the funds to use for other affordable housing projects.
Option 3: Because the terms of the Performance Agreement have expired, the Council could take the position that the Pines Community Center is in default with the Town’s Performance Agreement and the funds are now due and payable to the Town. If the Council chooses this option, we would formally notify the Center that the Promissory Note and Deed of Trust in the amount of $54,250 was due to the Town. If the loan was not repaid, the Town could request that the Center voluntarily transfer title of the property to the Town. If the Center did not agree, the Town could initiate foreclosure proceedings on the property.
We do not recommend that the Council pursue this option. We believe that the deferred loan option (Option 1) is consistent with the Town’s current affordable housing programs. In addition, the Center has indicated that it wishes to begin the process for development of this property soon.
We recommend that the Council adopt the attached resolution that would allow the balance of the acquisition loan to be converted into zero-interest deferred second mortgage to the future buyers of the homes. This action would be consistent with the Town’s current affordable housing activities. We also recommend that we work with the Center to determine its plans for development of the property and a mechanism to maintain the long-term affordability of the houses prior to executing an amended Performance Agreement.
1. Petition from Pines Community Center, Inc. (p. 5).
2. Performance Agreement with the Pines Community Center (p. 6).