AGENDA #10
MEMORANDUM
TO: Mayor and Town Council
FROM: W. Calvin Horton, Town Manager
SUBJECT: Recommendations for a Revolving Acquisition Fund
DATE: January 28, 2002
The purpose of this memorandum is to present to the Council recommendations for establishing a Revolving Acquisition Fund to assist non-profit organizations with the acquisition of properties. Properties would be sold to households earning less than 80% of the area median income.
The attached resolution would adopt guidelines for a Revolving Acquisition Fund.
The attached budget amendment would appropriate $150,000 from the Housing Loan Trust Fund to establish an initial budget for the Revolving Acquisition Fund.
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 for the purpose of nurturing owner occupancy.
On November 12, 2001, we provided a report to the Council with a proposed structure of a Revolving Acquisition Fund (please see Attachment 1). At that time, the Council referred a proposed structure of a Revolving Acquisition Fund to the Housing and Community Development Advisory Board for review. The Board reviewed the proposal on November 27, 2001.
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. We also believe that a Revolving Acquisition Fund could prevent the loss of some single-family homes through conversion to rental units in the Northside and Pine Knolls neighborhoods and for properties where the Town has a right of first refusal such as Tandler or Culbreth Park. 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.
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. 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 provide a right of first refusal to the Town or a designated non-profit agency.
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 primarily used to acquire properties.
A secondary use of the Fund could be for first options. 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.
We
recommend that any funds provided for options be structured as a loan from the
Town to the organization. The amount of the option would be deducted from the
sale price and fund would be repaid to the Town upon sale of the property to a
qualified buyer. If the property was not
purchased subsequently by the non-profit, we would require that the agency
repay the Town’s funds. Because of the strong housing market, we do not believe
that the option approach would be used very often.
Recommended Program Guidelines
We propose the following guidelines for a Revolving Acquisition Fund:
The Revolving Acquisition Fund could be used to make loans to qualified non-profit organizations to be used 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 low-income 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.
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.
If a non-profit organization used the Revolving Acquisition Fund to acquire property, the organization would execute a Promissory Note and Deed of Trust to the Town for the amount of funds. In addition, we would enter into a Performance Agreement with the organization for the use of funds. The Performance Agreement would also include the date by which funds must be repaid to the Town. Upon sale of the property to a buyer, the Town’s funds would be repaid and the Promissory Note and Deed of Trust would be cancelled.
Upon sale of the property to a qualified buyer, Buyers would be required to execute documents that would: (1) require that the property be used as the buyers primary residence; and (2) provide a right of first refusal to the Town or a designated non-profit organization.
The Council could require that all properties purchased with this fund be placed in the Land Trust. The attached resolution would require that homes be placed in the Land Trust.
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 identify and pre-qualify buyers and maintain a waiting list of qualified buyers. Both agencies have agreed to work with the Town in this capacity.
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 would then be provided as grants to the Land Trust so that the homes are affordable to lower income households. With the land trust model houses would be permanently affordable in the future. The Council recently approved using this approach on January 14, 2002 for a house located at 503 Sykes Street slated for acquisition and renovation by EmPOWERment, Inc.
We believe that this program would help us exercise the Town’s 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 the organization to access funds to purchase land trust homes that may be in danger of foreclosure. This would prevent losing a land trust home. The funds would be repaid to the Town once the property was resold to a qualified buyer. We believe that the Revolving Acquisition Fund, as recommended, could be used in this manner.
We recommend that the Council authorize the Manager to approve specific requests for use of this Fund in accordance with guidelines established by the Council in the accompanying resolution. This approach would enable organizations to have flexibility and offer relative speed in conducting transactions.
Housing Loan Trust Fund
We recommend that the Council appropriate $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 another home, when placed on the market. We recommend establishing a separate fund to segregate transactions from other activities of the Housing Loan Trust Fund, and to account for the revolving nature of the Acquisition Fund.
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 such as the Town’s local match requirement for the HOME Program, and to provide a cushion for unanticipated expenditures. Therefore, about $150,000 could be appropriated from the Housing Loan Trust Fund for a Revolving Acquisition Fund. These funds would be repaid to the Town in 180 days, and be deposited back into the Revolving Acquisition Fund.
We note that if the Council establishes a Revolving Acquisition Fund using the Housing Loan Trust Fund, additional funds likely would not be available for any other new affordable housing projects typically funded from the Housing Loan Trust Fund 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) could eventually replenish the Housing Loan Trust Fund balance and be available for other projects.
Developer Contributions or Payments-in-Lieu
The Council could consider allocating future Developer Contributions or Payments-in-Lieu of Affordable Housing offered by developers to continue capitalizing the Revolving Acquisition Fund.
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. A total of $48,500 has been contributed to the organization to date. The organization has used these funds for operating expenses and project related expenses. If the Council chose to direct funds to the Revolving Acquisition Fund, funds would not be available to Orange Community Housing and Land Trust for use in this manner.
As opportunities arise, the Council may choose to direct that developer contributions be either placed in the Revolving Acquisition Fund or allocated for other affordable housing activities.
RECOMMENDATIONS
Manager’s Recommendation: That the Council adopt: (1) the attached resolution establishing guidelines for a Revolving Acquisition Fund; and (2) the attached budget amendment to establish a budget for a Revolving Acquisition Fund.
Housing and Community Development Advisory Board’s Recommendation: On November 27, 2001, the Housing and Community Development Advisory Board unanimously voted in favor of the proposed structure for the Revolving Acquisition Fund. However, the Board asks that it have an opportunity to comment on the specifics of the proposed Fund at a later date. The Board requests that additional details on the structure, funding needs and funding sources be forwarded to the Board when they are available. [NOTE: We have forwarded this memorandum to the members of the Housing and Community Development Advisory Board.]
ATTACHMENTS
1. November 12, 2001 Memorandum to the Mayor and Town Council (begin new page 1).
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 Town Council desires to establish a Revolving Acquisition Loan Fund to preserve owner-occupied housing in Chapel Hill for affordable housing purposes;
NOW, THEREFORE, BE IT RESOLVED that the Council of the Town of Chapel Hill adopts the following guidelines for a Revolving Acquisition Loan Fund:
The Revolving Acquisition Fund may be used to make loans to non-profit organizations to be used to purchase existing properties. Funds may be used in the following manner:
(1) To exercise the Town’s right of first refusal on existing properties;
(2) To provide funds to non-profit organizations to purchase properties within the Chapel Hill city limits, especially in the Northside and Pine Knolls neighborhoods and in situations where the Town has a right of first refusal. Funds may be used for acquisition costs, first options, or earnest money. Funds used for first options shall be structured as a loan to the non-profit agency and must be repaid to the Town upon sale of the property to a qualified buyer. If the non-profit agency does not purchase the property, the funds must be repaid to the Town by the non-profit agency.
Properties must be sold to households earning less than 80% of the median income by household size as determined by the U. S. Department of Housing and Urban Development.
Funds shall be used to provide interest-free financing to qualified non-profit organizations. Funds shall be repaid to the Town upon sale of the property to a qualified homebuyer within 180 days of purchase.
Organizations using the Revolving Loan Fund shall execute a Promissory Note and Deed of Trust to the Town for the amount of the loan. Organizations shall also execute a Performance Agreement with the Town for the use of funds. Upon sale of the property to a buyer, the Town’s funds shall be repaid and the Promissory Note and Deed of Trust will be cancelled.
Upon sale of the property to a qualified buyer, Buyers would be required to execute documents that would: (1) require that the property be used as the buyers primary residence; and (2) provide a right of first refusal to the Town or a designated non-profit agency.
Land Trust
The Council requires users of the Revolving Acquisition Fund to place properties purchased with these funds in the Land Trust.
Funding
An initial allocation of $150,000 from the Housing Loan Trust Fund will be used to capitalize the Revolving Acquisition Fund. The Council could choose to direct developer contributions for affordable housing to this Fund.
Program income from the sale of homes acquired shall be returned to the Revolving Acquisition Fund to finance future acquisitions.
BE IT FURTHER RESOLVED that the Council authorizes the Town Manager to approve specific requests for use of this Fund in accordance with Revolving Acquisition Fund guidelines.
This the 28th day of January, 2002.
AN ORDINANCE TO AMEND “THE ORDINANCE CONCERNING APPROPRIATIONS AND THE RAISING OF REVENUE FOR THE FISCAL YEAR BEGINNING JULY 1, 2001 (2002-01-28/O-3)
BE IT ORDAINED by the Council of the Town of Chapel Hill that the Budget Ordinance entitled “An Ordinance Concerning Appropriations and the Raising of Revenue for the Fiscal Year Beginning July 1, 2001” as duly adopted on June 25, 2001, be and the same is hereby amended as follows:
ARTICLE I
Current Revised
APPROPRIATIONS Budget Increase Decrease Budget
HOUSING LOAN
TRUST FUND
Transfer to Revolving
Acquisition Fund 0 150,000 150,000
REVOLVING
ACQUISITION FUND
Reserve for Acquisitions 0 150,000 150,000
HOUSING LOAN
TRUST FUND
Fund Balance 276,069 150,000 426,069
REVOLVING
ACQUISITION FUND
From Housing Loan
Trust Fund 0 150,000 150,000
This the 28 day of January , 2002.