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HomeMy WebLinkAboutFinal_Minutes_SKHHP_ExecutiveBoard_Nov_2023 SKHHP Executive Meeting November 17, 2023 MINUTES I. CALL TO ORDER Chair Nancy Backus called the meeting to order at 1:03 PM. II. ROLL CALL/ESTABLISHMENT OF QUORUM Executive Board members present: Nancy Backus, City of Auburn; Dana Ralph, City of Kent; Colleen Brandt-Schluter, City of Burien; Debra Hartsock (alternate), City of Covington; Traci Buxton, City of Des Moines; Brian Davis, City of Federal Way; Sean Kelly, City of Maple Valley; Eric Zimmerman, City of Normandy Park; Ryan McIrvin, City of Renton; Cynthia Delostrinos Johnson, City of Tukwila; Sunaree Marshall, King County. Others present: Claire Goodwin, SKHHP Executive Manager; Dorsol Plants, SKHHP Program Coordinator; Cathy Sisk, SKHHP Advisory Board; Laural Humphrey, City of Tukwila; Merina Hanson, City of Kent; Matt Torpey, City of Maple Valley; Nicole Nordholm, City of Des Moines; McCaela Daffern, King County; Nicholas Matz, City of Normandy Park; Angie Mathias, City of Renton. III. PUBLIC COMMENT Robin Garcia urged the Executive Board to consider the impact on public schools and public safety when looking at the larger volume of housing with higher needs when reviewing the Housing Capital Fund applications. Robin stated the projects will bring zero funding to schools when school districts are considering funding cuts. It would be better if we had workforce housing for young workers or those attending college. One project located near the 272nd Park and Ride will be located near a planned property involving the Multi-Service Center and a large number of housing units and families. This will be impactful because of tax exemptions. Another project at the Kent/Des Moines station sounds like it might involve special needs which often require extra support in the school that is unfunded due to lower funding for special education coming from the federal government. This would also be impactful because of tax exemptions. While Open Doors for Multicultural Families and Mercy Housing NW projects may have a good reputation, the impact will most definitely be greater due to the schools and public safety when looking at larger housing with greater need. These properties are often on the border of cities and may pull away from services being provided inside the town. I urge you to consider the smaller, less impactful projects. Anna from Federal Way provided the following written comment, “I would like to comment about the projects that are being considered for funding today. I urge all of you to consider the impact on the public schools and public safety when looking at larger volumes of housing with higher need. These projects will bring zero funding to our schools at a time when school districts are looking at funding cuts. It would be better if we had workforce type housing for young workers or those attending college. One of the projects planned for the 272nd park and ride will be located near a planned property involving the Multi-Service Center and a large number of housing units and families. This would be impactful because of the tax exemptions. Another project at the Kent Des Moines Road sounds like it might involve special needs which often requires extra support in the school that comes unfunded to begin with due to lower funding for special education coming from the federal government than what we should be getting. This would also be impactful because of the tax exemptions. While open doors and Mercy House projects might have a good reputation, the impact will most definitely be greater due to the larger numbers. These properties are also on a border between cities and can often draw on services clear at the edge of town that may not be available or might pull away from the need in the local centers of town. This can have a huge impact. I urge you to consider the smaller less impactful projects.” IV. APPROVAL OF OCTOBER 20, 2023 MINUTES Traci Buxton moved to approve the October 20, 2023 minutes as presented, seconded by Dana Ralph. Motion passed (11-0) V. BRIEFING a. FINANCING ACQUISITION AND PRESERVATION OF AFFORDABLE HOUSING Claire Goodwin introduced Andrew Calkins, Director of Policy and Intergovernmental Affairs, Tim Walter, Senior Director of Asset Management and Development, and Robin Walls, Executive Director/CEO of the King County Housing Authority (KCHA). Andrew Calkins began by summarizing the September Executive Board meeting presentation by KCHA, which focused on KCHA’s strategy to grow affordability over time through preservation. Today’s briefing will focus on financing challenges, how to make larger projects pencil, and what the SKHHP Board should consider as it moves its focus to preservation. Robin Walls spoke about the tradition and history of KCHA having a well-defined preservation and acquisition strategy that sets them apart from other housing authorities. Salish Place in Des Moines was acquired in 2021 and is a hallmark of the KCHA strategy. It is a mid-sized property with 136 units and is a family housing type property with a mix of 39 one-bedroom, 47 two- bedroom, and 50 three-bedroom units. The three-bedroom units enable the site to serve families, which is unique to other developments. Salish Place is also within ¾ of a mile of a future Link light rail station. KCHA is focused on preserving transit-oriented development or properties located near transit. The interest rate environment has enabled KCHA to continue focusing on acquisition in South King County, and they are about to announce closing on a property in Kent. Andrew Calkins grounded the conversation by framing the competitive nature of acquisition, which competes against the private market. Per unit costs of multifamily dwelling units have doubled and potentially tripled in some areas over the last decade. Acquiring and preserving property is roughly half the cost of building new types of multifamily development. Acquisition and preservation continue to be a cost-effective strategy for increasing affordable housing. For both a private purchaser and a housing authority, the single largest source of potential financing is the debt based on what the tenants on site are paying. The critical difference is that a private purchaser and real estate investor will typically bring along their equity and cash and that of other investors. This may mean they do not have the same need for debt service as a housing authority. The state empowers housing authorities to go out and issue tax-exempt bonds on the municipal bond market; the revenue generated from bond sales is usually the single most significant source of funds to make acquisitions work. Housing authorities and other nonprofit organizations do have access to other resources. The most extensive resource is the Low-Income Housing Tax Credit (LIHTC), which can sometimes be used for acquisition and preservation projects that include a substantial rehabilitation component. Unfortunately, this is a highly competitive resource and the demand has exceeded the available funds which makes it very difficult to use for preservation. Local funding sources such as SKHHP’s Housing Capital Fund are examples of other resources that are available for housing authorities to use for acquisition and preservation. Tax-exempt bonds and debt are the primary financing tools used currently by KCHA when acquiring and preserving housing. Tim Walter explained that preservation is critical because it is so difficult to build new housing and keep up with the demand for housing. Rents have been increasing so quickly over the last 15-20 years that loss of affordability has been more significant than the ability to build in a response. KCHA has strived to identify apartments with relatively modest, family-size units in communities anyone would be happy to live in but are still affordable for a working class household. These properties are an asset to the community, with the hope to provide housing and opportunities to redevelop in the future to increase density when needed. When considering preservation, one should consider both the near-term opportunities and the long-term opportunities to grow or increase density on an acquired site. Competing against the private market is challenging. KCHA aims to buy properties before they enter the market. At the very least, KCHA wants to talk with property owners before they might be ready to sell. Housing authorities must be prepared to pay the property's market value because they will be competing against buyers who can and will pay the market value. At the time of acquisition, Salish Place, located in Des Moines, had tenants paying roughly $400 less than what the property owner could have been charging. A private market investor would see an opportunity to acquire the property, do some upkeep, and raise the rent to the current market rate. At the time, an investor looking at Salish Place could assume around $2 million in cash flow. With the acquisition price, this amount would be used to determine the capitalization rate, or “cap rate” (rate of return on a real estate property). On the market, properties are priced based on the cap rate. For Salish Place, the cap rate would have been around 5.4%. The average cap rates in our region for real estate fall between 3.5% to 6% return on investment. KCHA looked at the property, and to maintain rent affordability and to accomplish necessary repairs meant that KCHA would not see the $2 million in cash flow. It would likely be closer to $1.3 million. Preservation projects like Salish Place come with an active revenue stream from current tenants. This cash flow can be used to help finance the acquisition, which is a clear advantage preservation projects have over new development. The goal is to determine how to acquire the property without raising the rent to maintain affordability for the current tenants. When KCHA is considering a property, they must also be mindful of the current interest rate environment and determine at what rate they can borrow money. The higher the cost of the debt, the less KCHA can afford to leverage or borrow with the current revenue stream. Looking at Salish Place with a 35-year loan at 6% interest, KCHA could support debt of around $20 million. At 4% interest, they could support debt of around $26 million. Once KCHA knows what it can finance, the next challenge involves closing the remaining gap in funding. A 35-year loan at 6% interest would create a fund gap of roughly $16 million. A 35-year loan at 4% interest would create a funding gap of around $11 million. While a private investor could cover this gap out of pocket or use equity from another investment, KCHA often borrows additional funds to close the gap. KCHA will utilize previous properties that can support additional debt to support the purchase of the new property. The new property, over time, will be able to take on additional debt in the future and be used to purchase the next acquisition. KCHA strategizes balancing the risk and cost to minimize the potential funding gap. Historically, borrowing money in the short term has been cheaper than in the longer term. KCHA will borrow money on a 35-year amortization loan that must be paid back in ten years, known as a bullet maturity. Because of the shorter payback period, the loan tends to have a lower interest rate of 4% compared to the 6% rate a loan paid off over 35 years. While it is likely that at the ten-year mark, KCHA will have to refinance the loan (which has some exposure), other properties may be able to take on debt at the time of refinancing. KCHA’s goal is always to lock in the lowest interest rate over the longest term possible. KCHA’s portfolio consists of almost 600 apartments of workforce housing and every month, KCHA pays down one month’s worth of debt. Often, these more seasoned properties can take on more debt without raising the rent on tenants. Property values continue to increase, and taking action to preserve now will likely be cheaper than waiting ten years. As a municipal body like a city, KCHA has a municipal credit rating of AA from S&P. This enables them to issue bonds to assist in financing properties. Housing authorities can borrow money on a tax-exempt basis, and there is no limit on the amount of bonds KCHA can access. Additionally, there are local funding options such as Transit Oriented Development bonds and private partnerships like Amazon and Microsoft. These tend to be more the exception than the rule. Riverstone Apartments in Federal Way is next to the incoming Link light rail station. Once the station location had been determined, KCHA immediately contacted the property owner to acquire and preserve the property before the station was built. Initially, the property owner was not willing to speak with KCHA but, over time, became willing to sell. Riverstone Apartments is the largest apartment complex near the incoming station. Between the current revenue stream and the debt KCHA was able to take on, a gap of around $11 million remained to acquire the property. KCHA was able to work with Microsoft to close the gap. Riverstone Apartments was a $70 million acquisition of 308 units of family-size housing across from a future light rail station at a price of half what it would have cost to build a brand-new building. While it is a lot of money, it is a relatively small amount to pay for a property of that size. Andrew Calkins reviewed how the area medium income (AMI) of a population served can impact the debt that can be leveraged to acquire a property. Looking at an example property that has a cost of $250,000 per unit, at 60% AMI, the financing could be around $60,757 a year per unit. But serving 30% AMI, the financing could be around $223,626 a year per unit. This is why KCHA institutes affordability over time, gradually changing the AMI service levels where the community needs the support. Acquisition and preservation of housing are cost-effective strategies for affordable housing from the local to national level. The more we can do today, the better we will be, as property does not get cheaper. Traci Buxton asked if it was possible to bond for 100% of the cost of the property. Andrew Calkins responded that it was not, and roughly 50-65% of the property could be bonded on a good day. Traci Buxton asked if KCHA refinances properties they own or just finance the properties. Tim Walter responded that they have done both; KCHA has structured some of the bond issues so the revenues can be pledged to future acquisitions. Traci Buxton asked if that meant properties are never free or clear or if KCHA pays any properties down. Tim Walter acknowledged that they use their equity to expand. KCHA also has development lines of credit, which can be used to acquire a property quickly. Traci Buxton asked how an organization like SKHHP can help KCHA. Tim Walter responded that SKHHP is more in a funder role and can find ways to help close the financial gap and identify tools that nonprofits can use. Traci Buxton asked if SKHHP could provide housing authorities with a loan or grant. Tim Walter confirmed that SKHHP could provide a grant, and the state has implemented a policy to encourage collaborations between local government and housing authorities. Traci Buxton asked how KCHA would respond to concerns that it might be double dipping between government agencies. Tim Walter responded that KCHA does not have a tax authority or a revenue stream. Housing authorities are like cities and public utilities that have their statute under state law. King County Council approves KCHA’s board, but that is the only connection between KCHA and King County. Traditionally, housing authorities administer federal programs such as the Section 8 Voucher program. Robin Walls added that the private market program discussed today and the federal programs are two distinct business lines. KCHA’s relationship to the County Council is related entirely to the administration of the federal programs. Claire Goodwin added that KCHA is eligible to apply to the Housing Capital Fund as an example of how SKHHP and KCHA could partner on preservation. VI. BOARD BUSINESS a. 2023 SKHHP HOUSING CAPITAL FUND RECOMMENDED ALLOCATIONS Claire Goodwin presented the 2023 Housing Capital Fund recommendation from the SKHHP Advisory Board. The Advisory Board completed their review of six applications to the Housing Capital Fund. The intent of the Executive Board meeting today is to finalize a funding recommendation from the Executive Board to transmit to the SKHHP member city councils for concurrence. Along with a funding recommendation, the Advisory Board was asked to discuss their funding rationale and any special conditions on the grant or loan they wanted to include. The Advisory Board also supported the Executive Manager’s ability to add administrative standards and special conditions for the Executive Board’s consideration. SKHHP funds serve as a green light and signal that a project is wanted in South King County. When reviewing applications, the Advisory Board considered project readiness and alignment with the Executive Board’s adopted funding priorities. SKHHP staff requested that the recommendation be limited to three or four projects based on staff capacity. There was also no requirement that all funds be spent. New information has been received since the October Executive Board meeting. SKHHP received third-party construction reports on all four new projects and shared those findings with the Advisory Board. Key items from the reports were also incorporated in the memorandum attached to the Board’s agenda packet. Based on a request from the Executive Board, per-unit costs based solely on the residential costs of construction have been added to the memorandum. Additionally, the square footage cost was calculated by unit size to show the individual costs of the studios, one-bedroom, two-bedroom, and three-bedroom. After the Advisory Board made their recommendation, Claire Goodwin noticed no line item for contingency funding in the Multi-Service Center Victorian Place II project’s budget. After consulting with industry experts, she learned that a 15% contingency for rehabilitation is standard in our market. Based on this new information and SKHHP’s status as a sole funder, Claire Goodwin recommends including a 15% contingency in the funding recommendation, bringing the total to $777,306 sourced from SHB 1406 funds. The Advisory Board did disclose potential conflicts of interest as part of their review of the applications. One Advisory Board member is employed by one of the project applicants, Multi- Service Center, and she did not participate or vote in the funding recommendation. Two Advisory Board members disclosed the possibility of a conflict. They are employed by separate organizations that discussed opportunities to collaborate with one of the project applicants. These members participated in the deliberations and voted on the recommendations. The disclosure happened before the vote was taken, and the conflicting transactions were unrelated to the matter being considered. The SKHHP Advisory Board’s funding recommendations were presented and Claire Goodwin reviewed each project. (See November 17, 2023 Agenda Packet for the complete Project Summary Memorandum.) Dana Ralph stated that the picture provided by Mercy Housing NW to SKHHP during the application process was from early development. Changes will likely be made, such as the community center potentially being removed. The housing itself is still mostly consistent. Eric Zimmerman asked if Dana Ralph could speak to Kent’s position on the Mercy Housing NW project. Dana Ralph responded that Kent is very supportive of the housing portion, but there is still work to be done on how it is laid out on the site and how it looks related to the station. The current design has the back of the community center facing the new street, designed to access the new light rail station. The city and developer are still working on the multiuse element, but Kent supports the housing partnership with Open Doors for Multicultural Families. Traci Buxton asked if the back of the Mercy Housing NW’s Community Center was on College Way, which is the name of the street on the Des Moines side. Dana Ralph responded that on the Kent side, the street is called S. 236th St., and the latest drawings had retail facing out on the street, but there was a question of how those stores would be able to load and unload products. The commercial piece needs to be refined further with the developer. The idea of Transit Oriented Development is that it provides housing and services but also elements that invite the larger community in. There have been challenges balancing the community space with the housing on site. One solution is that there are further discussions with Sound Transit on the south side of S. 236th St. to see if there is a way to focus more of the community elements on this site. Traci Buxton agreed that when you get off the light rail, you want to feel like you have arrived at a place, but facing the back of buildings feels like a street. Dana Ralph added that Mercy Housing has been responsive to the feedback and the city is optimistic the site will get there. Nancy Backus added that while Mercy Housing has a strong history of housing development, the community center was added as a requirement and is newer to the developer. Dana Ralph said that elements of the community center have been incorporated into the residential space, with retail space occupying the site's south side. Dana Ralph observed that she had hoped to fund the Burien project, which was the only homeownership opportunity. She hopes to see more homeownership opportunities in the future, which can create greater stability for the families in our community. Colleen Brandt-Schluter seconded the hope to fund the Burien project but acknowledged the geographic equity and project readiness issue. She asked if SKHHP staff could provide consultation and technical assistance to projects not funded to help them be better prepared for future investment. Claire Goodwin stated the plan was to share the third-party assessment with ecoTHRIVE (the Burien project). She also acknowledged that ecoTHRIVE did not apply to other funders this year. Brian Davis asked if the applications indicated the total project cost. Claire Goodwin stated that they did, and the information could be found in the November and October agenda packets. Brain Davis added that Federal Way is not opposed to any of the projects if the member jurisdiction supports them. Sunaree Marshall added about the ecoTHRIVE project that SKHHP is relatively new to public funding, and it would be a challenge to be the sole funder of a project. In SKHHP’s early days it makes sense to serve more as a leverage partner. Claire Goodwin agreed with that and clarified that SKHHP is the sole funder of the preservation project, which is different than a new development project. Nancy Backus added that homeownership projects would be considerably easier to fund if the legislature would amend SHB 1406 eligibility to include households earning up to 80% AMI. There have been conversations about planned legislative action for the 2024 Legislative Session. Dana Ralph said she was supportive of the idea. Sunaree Marshall stated that King County supports the LIHI Skyway project in unincorporated King County. Dana Ralph responded to the public comment that in the City of Kent, there is pass-through funding that goes to schools any time there is new construction through impact fees. She agreed that limited funding was provided for law enforcement and is working to make that change in the Legislature this year. Traci Buxton moved to adopt the Advisory Board funding recommendation amended to include a 15% contingency for the MSC Victorian Place II project, seconded by Dana Ralph. (11-0) Project Sponsor Location # of Units Project type Amount requested Recommended Funding – HB 1590 Recommended Funding – SHB 1406 Mercy Housing NW Rental Rental Rental Center Moines Rental Homeownership Center Rental TOTAL $4,970,000 $777,306 b. 2023 THIRD QUARTER PROGRESS REPORT Claire Goodwin reviewed the 2023 third quarter progress report, noting that it was a time of action and shared vision among SKHHP. We saw the cities of Kent and Covington step up and pool their HB 1590 funds, which quadrupled the funding we could provide for affordable housing. SKHHP staff has been busy this quarter. A couple highlights include efforts by Dorsol Plants to recruit for the Advisory Board by engaging with over forty organizations and individuals. Interviews will be conducted in December to bring candidates for consideration to the Executive Board in January 2024. The Housing Capital Fund has taken significant staff time, including pooling the new source of revenue, administration of the capital fund, and developing capital contracts and funding agreements. It was all worth it. The work advancing subregional affordable housing preservation strategies is underway with SoKiHo (or the South King County housing planners). This quarter, SKHHP staff met with Congressman Adam Smith to advocate for South King County housing needs. SKHHP staff also collaborated with ARCH and King County to apply for the HUD PRO Housing Grant. Finally, SKHHP staff coordinated several educational briefings for the Executive Board. The budget has two key differences from the one presented last quarter. This includes higher interest earnings than anticipated due to favorable interest rates and a higher beginning fund balance. The higher beginning fund balance is due to the budgeted number adopted in the 2023 Work Plan back in 2022 was a conservative estimate. Due to high inflation and delays in staff hiring, the initial starting balance is higher. Both are good news for SKHHP. The estimated ending fund balance is $426,827. The HB 1590 funding will show up in the quarter four report, as will the first expenditures for the 2022 Housing Capital Fund projects. Sunaree Marshall asked if SKHHP was tracking a change in the Legislature that put in a new allowance for administrative expenses for SHB 1406 funds and if any of those dollars were available to SKHHP. Claire Goodwin stated that it is not included in the current budget but would be something to consider during future budget discussions. VII. UPDATES/ANNOUNCEMENTS SKHHP Chair and Vice-Chair elections will likely be held at the January 19 meeting. Executive Board members interested in serving or nominating someone for those positions, please email Claire Goodwin by January 2, 2024. The December Executive Board meeting will be canceled. The next Executive Board meeting will be on January 19, 2024, at 1 pm. Claire Goodwin has reached out to check in with each Executive Board member by the end of the year. Executive Board members who still need to meet should connect with her. Hannah Bahnmiller has transitioned to a new role outside of South King County. Her collaboration and support were appreciated and will be missed. Council President Delostrinos Johnson representing Tukwila on the Executive Board will be transitioning from her role at Tukwila and on the SKHHP Executive Board. Dana Ralph expressed gratitude for her time and work on the Board. Nancy Backus also expressed gratitude and wished her great success in the future. VIII. ADJOURN Nancy Backus adjourned the meeting at 3:02 PM. Program Coordinator-SKHHP