AGENDA #4h
MEMORANDUM
TO: Mayor and Town Council
FROM: W. Calvin Horton, Town Manager
SUBJECT: Proposed Structure of a Revolving Acquisition Fund
DATE: November 12, 2001
The purpose of this memorandum is to review with the Council a proposed structure of a Revolving Acquisition Fund to assist non-profit organizations with the acquisition of properties in the Northside and Pine Knolls neighborhoods, and in situations where the Town has a right of first refusal.
The attached resolution would refer the proposed structure for a Revolving Acquisition Fund to the Housing and Community Development Advisory Board for review on November 27, 2001.
BACKGROUND
The Comprehensive Plan adopted by the Council on May 8, 2000, recommends that the Town establish a “First Option Fund” as a strategy to address the effects on neighborhoods of the conversion of owner-occupied residences to rental properties. According to the Comprehensive Plan, the fund would “encourage owners of affordable homes to provide a local nonprofit or the Town with the first option to buy when they are considering selling their properties. This approach was suggested by the Northside Focus Area Report as a way to keep home prices affordable and prevent further loss of single-family homes through conversion to rental units.”
At a Public Hearing on January 23, 2001, a Council Member requested that the staff bring the Council a report on what the structure of a First Option Fund would be. At that time, the Manager explained that it would be a fund used by a neighborhood development corporation that would allow it to purchase properties that come on the market and to preserve them for residential use in neighborhoods.
In the following discussion, we have referred to the fund as a “Revolving Acquisition Fund” rather than a “First Option Fund”. After discussions with non-profit affordable housing providers, we propose establishing a fund focusing on the acquisition of properties.
A Revolving Acquisition Fund could provide non-profit affordable housing providers a source of funds that could be accessed quickly to purchase properties that might otherwise be sold to non-lower income households or be used for relatively high cost rental housing. This fund could assist with maintaining or creating additional affordable homeownership opportunities in Chapel Hill and prevent the loss of some single-family homes through conversion to rental units in the Northside, Pine Knolls and areas where the Town has a right of first refusal.
We believe that the main goal for the Revolving Acquisition Fund is to preserve owner occupied housing for affordable housing purposes. Some homes purchased with these funds may require renovation and/or second mortgage assistance so that the property is more affordable to a household earning less than 80% of the area median income by household size (Please see Attachment 1 for median income chart). We would continue to use funds from the Town’s Housing Loan Trust Fund and/or the Community Development Neighborhood Revitalization program to provide this subsidy.
Buyers of properties purchased with these funds would agree to use the home as their primary residence and to allow the Town or a designated non-profit agency to place a right of first refusal on the property. A right of first refusal is a legal, recorded document that would require a property owner to notify the Town or a designated non-profit agency prior to placing their home on the market and give the Town or the designated agency the first opportunity to purchase the house for fair market value
After discussions with representatives from EmPOWERment, Inc. and Orange Community Housing and Land Trust, we believe that a revolving fund for acquisition of properties would be more beneficial than a fund solely for obtaining first options. Therefore, we suggest that the Fund be used to acquire properties or to purchase first options on properties.
A first option would provide a non-profit with the right, but not an obligation, to purchase a property for a specific price at a later date. The expiration date of the option would be negotiated between the perspective buyer and the property owner. An option amount would be paid to the property owner and, if the non-profit wanted to purchase the property (exercise the option), this amount would be applied to the purchase price of the property. If the non-profit decided not to purchase the property by the date specified in the option contract, the property owner would keep the option funds. Until the terms of the option contract expire, the property owner would not be able to sell the property to anyone else. Under this scenario, a non-profit could purchase an option from a property owner, locate a buyer, and then sell the property to a qualified buyer within the option contract period.
Because of the strong housing market, we do not believe that there would generally be an incentive for a property owner to enter into an option contract with a non-profit provider. However, there may be some circumstances where a non-profit provider could negotiate a first option, or find it desirable to use this approach. In addition, the use of funds for first options could stretch limited funds to enable more houses to be purchased. Funds used for options would be repaid to the Town when the home was sold to a qualified buyer.
We propose the following components of a Revolving Acquisition Fund:
The Revolving Acquisition Fund could be used by qualified non-profit organizations to purchase existing properties. We believe there are two ways in which the fund would be used:
(1) To exercise the Town’s right of first refusal on existing properties (i.e. Culbreth Park, Tandler). When the Town is notified by owners of their intent to sell, we would contact EmPOWERment or Orange Community Housing and Land Trust to determine if they know of a buyer who may be interested in purchasing the home.
(2) To provide funds to non-profit organizations to purchase properties in the Northside and Pine Knolls neighborhoods and in situations where the Town has a right of first refusal. The funds could be used for acquisition costs, first options, or earnest money (down payment on a purchase contract).
We note that the Town itself would not take ownership of properties. We currently do not have a mechanism for maintaining properties and we do not have the staff resources to locate and qualify buyers, and market the properties for sale. Therefore, we suggest that non-profit organizations take on the responsibility of selling homes and identifying buyers if they intend to use the Revolving Acquisition Fund.
EmPOWERment and Orange Community Housing and Land Trust would qualify potential buyers. We propose that properties be sold to households earning less than 80% of the median by household size (p1lease see Attachment 1 for median income chart).
We propose that the Town provide interest-free loans to qualified non-profit organizations. Funds would be required to be repaid to the Town upon sale of the property to a qualified homebuyer. We recommend that the term for repaying the funds should be 180 days, with extensions approved by the Manager, if necessary.
We would work with the Town Attorney to determine the best mechanisms for securing these loan funds whether through Performance Agreements, deeds of trusts, and/or deed restrictions.
Buyers would also agree to: (1) use the property as their primary residence; and (2) provide a right of first refusal to the Town or a designated non-profit agency.
The Council could require that all properties purchased with this fund be placed in the Land Trust. Please see Attachment 2 for an explanation of the Land Trust model.
Additional Comments
In order for the Revolving Acquisition Fund to be effective, we would rely on Orange Community Housing and Land Trust and EmPOWERment to assist us with identifying and pre-qualifying buyers and maintaining a waiting list of qualified buyers.
Some houses that could be purchased with funds from the Revolving Acquisition Fund may require renovation. In this case, we could use funds from the Housing Loan Trust Fund and/or the Community Development Neighborhood Revitalization Program for this expense. The funds could then be converted into second mortgages or provided as grants to the Land Trust so that the homes are affordable to lower income households.
We believe that this program would help us exercise our right of first refusal on Culbreth Park and Tandler homes. We also believe that it would be effective in neighborhoods such as Northside and Pine Knolls where non-profit organizations have established relationships.
In a letter dated September 24, 2001, Robert Dowling of Orange Community Housing and Land Trust requested that the Town establish a mechanism for Orange Community Housing to access funds to purchase land trust homes that may be in danger of foreclosure (Please see Attachment 3). This would prevent losing a land trust home. The funds would repaid to the Town once the property were resold to a qualified buyer. We believe that the Revolving Acquisition Fund could be used in this manner.
The following funds could be used to establish or contribute on an on-going basis to a Revolving Acquisition Fund:
The Town Council established the Housing Loan Trust Fund in 1973 using local funds to assist low-income families with the purchase of a new home or to renovate an existing home. The Housing Loan Trust Fund has since been used to support a variety of Community Development projects, including deferred second mortgage loans for Tandler and Culbreth Park programs and construction loans to EmPOWERment Inc. and Habitat for Humanity. Please see Attachment 4 for a history of the use of the Housing Loan Trust Fund over the past two years.
The current fund balance of the Housing Loan Trust Fund not appropriated for specific activities in the current year budget is approximately $250,000. We recommend a residual reserve of $100,000 to account for future anticipated recurring expenditures and to provide a safety cushion. Therefore, about $150,000 could be appropriated from the Housing Loan Trust Fund for a Revolving Acquisition Fund. This estimate includes estimated program income during the FY 2001-02 year.
We note that if the Council establishes a Revolving Acquisition Fund using the Housing Loan Trust Fund, funds likely would not be available for any other affordable housing projects typically funded through this source for at least one to two years. Revenue sources (typically program income from Tandler and Culbreth second mortgages, or other loans made by the Council) would eventually replenish the Fund balance and be available for other projects.
In the past year, two private developers have offered to make payments to Orange Community Housing and Land Trust in lieu of creating affordable housing to Orange Community Housing and Land Trust. A total of $48,500 has been contributed to the organization to date. As an alternative, the Council could direct that developer contributions be placed in the Revolving Acquisition Fund.
The Council could choose to appropriate an amount equivalent to some portion of the tax rate for the Revolving Acquisition Fund. In the past, some groups have recommended that one-cent on the tax rate should be appropriated for affordable housing purposes. One-cent on the tax rate would provide approximately $400,000 for a Revolving Acquisition Fund.
The intent of a Revolving Acquisition Fund would be to provide quick access to funds to purchase properties. Because of the time it often takes to ensure compliance with federal regulations, we recommend not using Community Development funds for a Revolving Acquisition Fund. Use of Community Development funds for property acquisition would require following federal regulations such as the acquisition and relocation guidelines, and environmental assessments for each property purchased which could take time to complete. We recommend using a more flexible source of funds for a Revolving Acquisition Fund. However, we note that Community Development funds could be used in conjunction with the Revolving Acquisition Fund to provide second mortgage assistance or for renovation expenses so that houses are affordable to lower income households.
We propose that the Council consider appropriating $150,000 from the Housing Loan Trust Fund for an initial allocation of the Revolving Acquisition Fund. Funds could be used either to purchase properties or for first options. We believe that this amount would be sufficient to purchase a Tandler or Culbreth Park home, or other homes, when placed on the market.
We suggest that the Council authorize the Manager to approve specific requests for use of this Fund in accordance with guidelines to be established by the Council. This approach would enable organizations to have flexibility and offer relative speed in conducting transactions.
MANAGER’S RECOMMENDATION
That the Council adopt the attached resolution referring this report to the Housing and Community Development Advisory Board for review on November 27, 2001.
ATTACHMENTS
1. 2001 Raleigh Durham Chapel Hill Metropolitan Statistical Area Median Income Chart (p. 8).
2. Description of the Land Trust Model (p. 9).
3. September 24, 2001 Letter from Robert Dowling, Orange Community Housing and Land Trust (p. 10).
4. History of the Housing Loan Trust Fund (p. 11).
WHEREAS, the Comprehensive Plan adopted by the Council on May 8, 2000 recommends that the Town establish a “First Option Fund” as a strategy to address the effects on neighborhoods of the conversion of owner-occupied residences to rental properties; and
WHEREAS, the following structure of a Revolving Acquisition Loan Fund is proposed:
The Revolving Acquisition Fund could be used by qualified non-profit organizations to purchase existing properties.
Properties would be sold to households earning less than 80% of the median income by household size.
The Revolving Acquisition Fund would provide interest-free financing to qualified non-profit organizations. Funds would be repaid to the Town upon sale of the property to a qualified homebuyer within 180 days of purchase.
Buyers would agree to: (1) use the property as their primary residence; and (2) provide a right of first refusal to the Town or a designated non-profit agency.
NOW, THEREFORE, BE IT RESOLVED that the Council of the Town of Chapel Hill refers a proposed structure of a Revolving Acquisition Loan Fund to the Housing and Community Development Advisory Board for comment.
This the 12th day of November, 2001.
|
# in Household |
100% of Median |
80% of Median |
70% of Median |
50% of Median |
30% of Median |
|
1 |
$46,300 |
$36,750 |
$32,450 |
$23,150 |
$13,900 |
|
2 |
$52,900 |
$42,000 |
$37,050 |
$26,450 |
$15,850 |
|
3 |
$59,500 |
$47,250 |
$41,650 |
$29,750 |
$17,850 |
|
4 |
$66,100 |
$52,500 |
$46,300 |
$33,050 |
$19,850 |
|
5 |
$71,390 |
$56,700 |
$50,000 |
$35,700 |
$21,400 |
|
6 |
$76,680 |
$60,900 |
$53,676 |
$38,350 |
$23,000 |
|
7 |
$81,960 |
$65,100 |
$57,372 |
$41,000 |
$24,600 |
|
8 |
$87,250 |
$69,300 |
$61,100 |
$43,650 |
$26,200 |
Attachment 2
Orange Community Housing and Land Trust, also known as the Land Trust, is a nonprofit developer of affordable housing. The mission of the Land Trust is to provide rental and homeownership housing to families earning less than the median income for our area. The organization’s focus is on households earning less than 80% of the median income. The Land Trust was formed in July 2001 through the merger of Orange Community Housing Corporation (OCHC) and the Community Land Trust in Orange County. The Land Trust’s operations are largely supported by all of the local governments (though primarily from the Town of Chapel Hill and Orange County).
The Land Trust was created so that affordable housing would remain affordable forever. This is made possible because the homeowner does not purchase the land on which the home is built. The Land Trust continues to own the land and the homeowner executes a 99-year ground lease that allows them use of the land. The ground lease contains a resale formula, which limits the appreciation that can be realized by the homeowner when they sell their home.
In theory, Land Trust homes should appreciate in price but become more affordable over time. This allows homeowners an opportunity to realize some profit (approximately 25% of the market appreciation) while the house remains affordable to successive buyers.
It should be noted that everyone does not embrace the Land Trust model. Some believe it denies low-income families an opportunity to build their wealth. This issue can be particularly sensitive in low-wealth communities such as the Sykes Street neighborhood. Clearly, buyers would prefer to receive a greater percentage of the equity appreciation when they sell their homes. However, the Land Trust model tries to strike a balance between current homeowners, future homeowners and the community-at-large. This is particularly important in neighborhoods that are in danger of gentrification.
In sum, the Land Trust offers an alternative to our standard form of homeownership. By owning the land on which housing is developed, the Land Trust model allows housing to remain affordable over the long term. With developable land and subsidy sources in limited supply, we believe it is important to retain the affordability of our affordable housing stock.
- prepared by Robert Dowling, Orange Community Housing and Land Trust