Villa VasonaMEETING DATE: 06/18/12
ITEM NO.
COUNCIL AGENDA REPORT
DATE: June 12, 2012
TO: MAYOR AND TOWN COUNCIL
FROM: GREG LARSON, TOWN MANAGER
SUBJECT: PROPERTY LOCATION: 612 (AKA: 626) W. PARR AVENUE. APN 406 -28-
034. PROPERTY OWNER: VILLA VASONA LTD. APPLICANT:
HIGHLAND PROPERTY DEVELOPMENT LLC
ADOPT A RESOLUTION AUTHORIZING THE TOWN MANAGER TO:
A. RESCIND THE AGREEMENT FOR DISPOSITION OF REAL PROPERTY
BETWEEN THE TOWN OF LOS GATOS AND VILLA VASONA LTD.,
DATED SEPTEMBER 28, 1983, AND RESCIND THE FIRST
AMENDMENT TO AGREEMENT FOR DISPOSITION OF REAL
PROPERTY BETWEEN THE TOWN OF LOS GATOS AND VILLA
VASONA LTD., DATED SEPTEMBER 5,1989; AND
B. NEGOTIATE AND EXECUTE A NEW AGREEMENT BETWEEN THE
TOWN OF LOS GATOS AND HIGHLAND PROPERTY DEVELOPMENT
LLC, FOR THE DISPOSITION OF REAL PROPERTY AT 612 (626) W.
PARR AVENUE, LOS GATOS, CA.
RECOMMENDATION
Adopt the attached resolution (Attachment 4) authorizing the Town manager to:
A. Rescind the Agreement for Disposition of Real Property between the Town of Los Gatos and
Villa Vasona Ltd., dated September 28, 1983, and rescind the First Amendment to Agreement for
Disposition of Real Property between the Town of Los Gatos and Villa Vasona Ltd., dated
September 5, 1989; and
B. Negotiate and execute a new Agreement between the Town of Los Gatos and Highland Property
Development LLC, for the disposition of real property at 612 (626) W. Parr Avenue, Los Gatos,
CA.
N
PREPARED BY : � &endie R. Rooney, Director of Community Development
Reviewed by: ) Assistant Town Manager 4Town Attorney Finance
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PAGE 2
MAYOR AND TOWN COUNCIL
SUBJECT: VILLA VASONA
June 12, 2012
BACKGROUND
On September 28, 1983, the Town entered into an Agreement for Disposition of Property with Villa
Vasona Ltd. for the property at 612 aka 626 W. Parr Avenue.
On December 1, 1986, Ordinance 1698 was adopted by the Town Council. Ordinance 1698 allowed
for the construction of 107 Section 8 senior apartments, including ten units for the physically
handicapped.
On September 5, 1989, the Town entered into the First Amendment to the September 28, 1983
Agreement for Disposition of Property with Villa Vasona Ltd. This amendment was necessary
because the property was transferred from Jack W. Sheehan to PMG.
On March 19, 2012, Town Council adopted a resolution finding that Highland Property
Development (Highland) is willing and able to fulfill the obligations of the developer under the
existing agreement or any amendments thereto as required by Ordinance 1698.
Highland is planning on purchasing the property and improvements from PMG and is requesting that
the Town rescind the existing 1983 and 1989 Agreements for Disposition of Property. As a result, a
new agreement will need to be negotiated and executed between the Town and Highland.
DISCUSSION
The Town retained Seifel Consulting, Inc. and Goldfarb and Lipman to review the proposed terms of
a new agreement with Highland.
Over the past three months staff and Seifel have reviewed and discussed three options from
Highland, which are briefly summarized as follows:
1. The first involved buying out the Town's option to repurchase the property and
improvements in 2054 in exchange for a $1.85 million note and removing the requirement to
pay property taxes (previous offer and based on further discussions with staff, Highland
increased the offer as outlined in the following option); and
2. The second is the same as the first option, but with an increase to a $2.4 million note and
removing the requirement to pay property taxes (for both options 1 and 2, the annual
payments on the note would be limited to interest only payments capped by a portion of
operating net proceeds); and
3. The third (Attachment 1) no longer included buying out the Town's option to repurchase the
property and improvements in 2054. This was replaced with a 55 year ground lease structure
that would provide the Town the property and the improvements at the end of the ground
lease term. This option also includes removing the requirement to pay property taxes.
The departure from the buyout provision in the third option is a result of Town staff's determination
that it was appropriate to preserve the Town's long term interest in the property and the provision of
affordable housing.
PAGE 3
MAYOR AND TOWN COUNCIL
SUBJECT: VILLA VASONA
June 12, 2012
All three of the options presented by Highland include the following general components: extending
the affordability term by 13 years from 2054 to 2067, making the units affordable at lower levels of
affordability (see Attachment 1 for details), and renovation of the existing units. In addition, no
existing tenants will be displaced due to the change in ownership.
Seifel Consulting, Inc. conducted a thorough analysis of the three options presented by Highland and
has found that the third option is appropriate given the Town's desire to preserve the Town's long
term interest in the property (Attachment 3).
FISCAL IMPACT
The existing agreement calls for a distribution of limited residual one -time proceeds to the Town
from any transfer of the property. It is estimated that the net General Fund benefit would be over
$700,000, which will be considered at the Council's upcoming Capital Projects Funding and Priority
Study Session.
CONCLUSION
If the Council agrees with Seifel Consulting, Inc. and staff's determination, staff recommends that
the Council adopt the attached resolution which will allow the Town Manager, in conjunction with
Seifel and Goldfarb and Lipman, to finalize and execute a revised agreement with Highland pursuant
to the terms included in Attachment 1. The 1983 and 1989 Agreements for Disposition of Property
will be rescinded subject to execution of the Revised Agreement. Following the conclusion of
drafting the revised agreement with Highland, staff will agendize a modification of the existing
Planned Development to replace the existing covenants with covenants reflecting the terms of the
new agreement for Council consideration and action. No changes are being proposed to the Official
Development Plan.
Attachments
1. Term Sheet, dated June 11, 2012
2. Letter from Highland Property Development LLC, dated March 9, 2012
3. Memo from Seifel Consulting, Inc.
4. Draft Resolution
Distribution
PMG, Attn: Robert Haskell, 22055 Clarendon Street, Suite 200, Woodland Hills, CA 91367
PMG, Attn: Bobbi Rosenquist, 22055 Clarendon Street, Suite 200, Woodland Hills, CA 91367
Highland Property Development LLC, Attn: Paul Patierno, 250 W. Colorado Blvd., Ste. 210,
Arcadia, CA 91007
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Town of Los Gatos Proposed Term Sheet
For Villa Vasona Apartments
Amend Ordinance No, 1698, adopted by the Town Council of Los Gatos on December 1,
1986, to modify covenants. Replace all existing agreements between previous owners of
the Apartments and Town of Los Gatos, with new agreements documenting terms
negotiated between Highland Property Development LLC ( "Highland ") and the Town.
Replaced agreements include the following:
Agreement for Disposition of Property dated September 28, 1983,
First Amendment to Agreement for Disposition of Real Property, dated
September 5, 1989.
Prior to, and as a condition of, amendment of Ordinance No. 1698 and termination of other
existing agreements, current owner shall pay the Town the amount due under those
documents in connection with the sale to Highland.
2. The new documents will include:
Property Disposition Agreement setting forth the terms of the proposed transaction
and committing the Town and Highland to prepare and execute the following
documents:
o Grant Deed of Real Property to Town from current owner (Highland will
concurrently purchase the improvements on the Real Property from the current
owner),
0 55 year Ground Lease from Town to Highland. The Ground Lease will provide
that the real property and improvements will revert to Town (without payment)
upon expiration of the Ground Lease (preserving Town's long term interest in
property site).
o New Regulatory Agreement extending affordability,
The ground lease will include the following terms:
• 55 year term.
• A Town consent right, not to be unreasonably withheld, to recordation of
encumbrances against ground lease relating to lender /tax credit financing obtained by
Highland.
• Town will agree to customary subordination and non - disturbance provisions required
by any lender obtained by Highland; provided, however, in no event will Town
subordinate or encumber its fee interest in the land.
• Highland will comply with prevailing wage and apprenticeship program requirements
with respect to the proposed construction/rehabilitation work if and to the extent
required by law, and Highland (through a financially capable entity reasonably
acceptable to the Town) will indemnify, defend and hold the Town (and related
persons and entities) harmless with respect to any claimed or actual failure to so
comply.
1302 \04 \1 1538833
4. The new Regulatory Agreement will extend affordability on the property, and voluntarily
impose deeper affordability to provide housing for very low and low income seniors. The
property is currently restricted to seniors whose total household income does not exceed
80% of area median income. The new Regulatory Agreement will impose one of two
deeper income restrictions.
If 9% low income housing tax credits are obtained with respect to the Apartments,
affordability levels shall be:
0 10 % at or below 30% of the area median income, with tenant -paid portion of rent
restricted at 30% of 30% of area median income;
0 25% at or below 45% of the area median income, with tenant -paid portion of rent
restricted at 30% of 45% of area median income;
0 40% at or below 50 % of the area median income, with tenant -paid portion of rent
restricted at 30% of 50 % of area median income;
0 25 % at or below 60% of the area median income, with tenant -paid portion of rent
restricted at 30% of 60% of area median income.
• If 4% low income housing tax credits are obtained with respect to the Apartments,
affordability levels shall be:
0 10% at or below 50% of the area median income with tenant -paid portion of rent
restricted at 30% of 50% of area median income;
0 90% at or below 60% of the area median income with tenant -paid portion of rent
restricted at 30% of 60% of area median income.
• Affordability will be extended for 55 years from commencement of the ground lease.
Annual regulatory oversight payment to Town from Highland of $10,000, increasing at
2% per year.
• New deeper affordability will not cause any involuntary displacement, temporary or
otherwise, of any existing resident nor will it cause any increase to any resident's current
monthly rent payment. Temporary displacements due to rehabilitation will comply with
Government Code 7262.5, so as not to trigger permanent relocation benefits.
5. The improvements will be owned and operated, and the real property will be leased, by a
Highland - controlled limited partnership. The affiliate will be the entity borrowing funds
for rehabilitation of the improvements, and seeking a tax credit investor limited partner. As
part of Highland's typical procedure, the affiliate limited partnership will also admit a non-
profit entity as a managing general partner, who will share general partnership duties with
Highland. The non - profit managing general partner will apply to the State Board of
Equalization and the County Assessor for property tax abatement.
1302\04\1 153 883.3
250 W. Colorado Blvd., Suite 210
Arcadia, CA 91007
Telephone, 626 294 -9230
IH Facsimile, 626 294 -9270
www.highlandcompanies.com
June 14, 2012
Mr. Greg Larson
Office of Town Manager
110 E. Main Street
Los Gatos, California 95030
Subject: Villa Vasona Apartments —107 Affordable Senior Units
626 West Parr Avenue, Los Gatos
Dear Mr. Larson:
Thank you for the Town's continued attention to our proposal to preserve and rehabilitate Villa
Vasona Apartments. This apartment complex was constructed in 1983, and includes 107 units
for the use of lower- income senior households. While the property has been well maintained
and managed, it is in need of a substantial renovation of the siding as well as modernizing the
units and community residence space due to its age. Highland Property Development LLC
( "Highland ") has entered into a purchase and sale agreement with Villa Vasona, Ltd. (the
"Seller ") to acquire the existing land and improvements with the intent to revive the asset for
the community for a new 55 year term of affordability to senior citizens.
In March 2012, it was proposed to Town Council that Highland wished to involve a non- profit
entity in the ownership of the property, which would enable an exemption from the payment
of large portion of the real estate taxes. Additionally, Highland expressed its desire to purchase
an option the Town currently has to purchase the property for a de minimus price in 2054, in
exchange for a long -term note and the long -term commitment of affordability to senior
households. However, through ongoing discussions with the Town, it is now proposed that
Highland will amend its purchase contract to provide the acquisition of the existing property
improvements only, and that the Town of Los Gatos will receive the land upon which the
improvements are situated via a grant deed from the Seller. It is further proposed that Highland
(and any successor) will, among other things, enter into a 55 -year ground lease term with the
Town. In addition, Highland will enter into a Regulatory Agreement that will provide for deeper
affordability for a term of 55 years. Highland will pay an annual regulatory oversight fee to the
Town of Los Gatos in the amount of $10,000 that will increase at a rate of 2% annually and will
commence in 2013. Highland will be allowed to venture with a non - profit and apply for
property tax abatement in accordance with State law.
Highland commits to a minimum rehabilitation of $30,000 per unit, which would allow us to
increase current accessibility, cure existing known siding issues through a full replacement, and
modernize each unit with wood cabinets, solid surface countertops and new appliances. The
major systems of the buildings would also be upgraded or replaced. Highland will commit to
continue to offer Housing Assistance Payment project -based rental assistance for the property
ATTACi�'€NT 2
Mr. Greg Larson
Villa Vasona Apartments
Page 2 of 2
to the extent offered by HUD, to meet or exceed Town building and ordinance standards, and
to provide quality rental housing and ongoing programs for the residents.
Upon an award of Federal Low Income Housing Tax Credits by the California Tax Credit
Allocation Committee to the property, Highland will begin a detailed set of question and answer
resident meetings. Our Company has a long history of working with the Seller on a number of
affordable housing preservations, coordinating well with existing management, HUD and the
local residents to answer any questions and concerns. Our proposal will not increase the
resident paid portion of any unit rent and will substantially improve their current living
environment. Highland has experience in renovating thousands of apartment units without
resident displacement, which is a benefit in particular to a senior property.
Should you have any questions or wish to discuss this proposal in more detail, please feel free
to contact me at (626) 294 -9230.
Kind regards,
z/'
J
' »-� w
William E. Rice
CEO and Authorized Member
cc: Paul Patierno (Highland)
Tuan Pham (Nixon Peabody)
Joel Paulson (Town of Los Gatos)
Seifel
CONSULTING IN
Memorandum 221 Main Street
Suite 420
San Francisco CA
94105
415.618.0700
fax 415.618.0707
VIA EMAIL www.seifel.com
June 14, 2012
To: Sandy Baily, Planning Manager, Town of Los Gatos
Joel Paulson, Senior Planner, Town of Los Gatos
From: Libby Seifel and Joshua Zade, Seifel Consulting Inc.
Subject: Highland Properties Acquisition and Rehabilitation of Villa Vasona Apartments
Seifel Consulting Inc. (Seifel) is pleased to deliver this memorandum updating our due
diligence analysis of the proposed acquisition and renovation of Villa Vasona, an affordable
senior housing development, by Highland Property Development (Highland).
This memorandum describes updates to Highland's proposal, which were the result of
discussion and negotiation with Town staff and Seifel over the last several months. In particular,
we focused discussions on the substantive changes Highland proposed to the existing agreement
with the property's current owner, PMG. These issues included exemption from property taxes
under the welfare exemption and long term Town control of the property for the preservation of
affordable senior housing.
In summary, Seifel finds that Highland's revised proposal is sufficient to protect the Town's
most significant interests in the property given the priorities identified by Town staff. The
financing risks identified in Seifel's previous memorandum, related to Highland's ability to
secure competitive 9% tax credits and to continue renewing the property's federal Section 8
rental subsidy, still remain. However, these risks do not adversely impact the Town's interests
under the proposed transaction structure reflected in the latest term sheet. The text below
summarizes the two areas of substantive change from the previous agreement.
Long Term Site Control and Affordability
Town staff identified long term control of the property for the preservation of affordable senior
housing as a key priority. All of Highland's proposals have involved extending the required
period of housing affordability and the targeting of deeper levels of affordability for the
property's senior residents. The Low Income Housing Tax Credit (LIHTC) program requires a
55 -year affordability covenant to be recorded against the property, along with specified income
targets for residents. Highland has also been willing to execute a separate, similar regulatory
agreement with the Town, committing to maintain affordability levels for 55 years, concurrent
with the covenants required by the LIHTC program. This regulatory agreement would provide
for an annual housing compliance monitoring fee of $10,000, escalating at 2 percent amivally.
However, under the current agreement with PMG restricting use of the property, the Town has
the ability to ensure that Villa Vasona continues to provide affordable housing in perpetuity. As
discussed in our March memorandum, the Town currently has an option to repurchase the
property in 2054 under its existing agreement. Highland's initial proposals requested that the
Town consent to waive this option in exchange for a promissory note in the amount of $1.85
million (later increased to $2.4 million) to be repaid out of the property's residual cash flow in
the greater amount of $10,000 or 10 percent of distributable cash flow. Accordingly,
terminating the Town's repurchase option would be contrary to maintaining long term site
control.
Highland has offered a new proposed transaction structure under which the current owner of
Villa Vasona would transfer ownership of the underlying land to the Town, while Highland
would purchase only the improvements for the previously agreed upon price of $15 million. The
Town would then provide a 55 -year ground lease to Highland allowing for their use of the
property. At the termination of the lease, control of the land and ownership of the housing itself
would revert to the town without compensation to Highland and the Town would be able to
determine the most appropriate use for the property at that time. Under the proposed ground
lease, annual rent would be minimal (e.g. $1 per year). By providing a below - market ground
lease the Town would enhance Highland's tax credit scoring and enhance their chances of
securing funding to renovate and improve the property.
Payment of Property Taxes
Under the current agreement with PMG, the property is subject to regular ad valorem property
taxes. Highland's initial proposals involved admitting a non - profit managing general partner
into the Villa Vasona development entity. As a non - profit partnership, the Villa Vasona
development entity would be able to apply for a welfare exemption from property taxation.
Thus, the Town would forego receipt of property taxes that currently result in roughly $10,000
per year. At the time, Highland had not identified or provided qualifications for a specific non-
profit partner,
Subsequently, Highland has identified Mission Housing Development Corporation as the non-
profit managing partner for Villa Vasona. Mission Housing is a well- regarded developer of
affordable housing based in San Francisco. Highland still intends to seek a welfare exemption
and the property would not be subject to taxation under their current proposal. However,
expenses incurred by the Town for affordable housing compliance monitoring and related costs
Seifel Consulting Inc.
would be defrayed by the annual payment of $10,000 under the regulatory agreement Highland
would execute with the Town along with ground lease.
Summary. of Findings
Highland's willingness to acquire and renovate Villa Vasona under a ground lease that allows
the Town to maintain long term control of the site is a significant change from their initial
proposals. The proposed transaction structure benefits both Highland and the Town, due to the
proposed below - market ground lease enhancing the likelihood of highland securing an
allocation of tax credits and the Town gaining title to the land and eventually control of the
housing itself at lease termination. Given that Town staff identified long term site control as the
Town's key priority in this transaction, the current proposal adequately protects the Town's
interest in preserving affordable housing at the Villa Vasona site in perpetuity.
Although the Town would forego a moderate amount of property tax revenue under the
proposed transaction structure, its expenses for monitoring affordable housing compliance and
related costs would be offset by annual payments under the new regulatory agreement that
Highland would execute with the Town restricting levels of housing affordability and
addressing other issues of property development, maintenance and operations.
Failure on Highland's part to secure an allocation of competitive 9% low income housing tax
credits may present financing challenges and would necessitate an alternative financing
structure that could not support the levels of affordability currently proposed. As reflected in the
latest term sheet, an alternative 4% tax credit scenario would not allow any of the apartments to
be restricted to households earning less than 45% of area median income. However, continued
renewal of the property's Section 8 subsidy would allow the property to continue housing very
low and extremely low income senior households. While dependence on these two key
subsidies continues to present some level of financing and feasibility risk, the proposed
transaction structure is responsive to the Town's interests in the site.
Seifel Consulting Inc.
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RESOLUTION 2012 -
RESOLUTION OF THE TOWN COUNCIL
OF THE TOWN OF LOS GATOS
AUTHORIZING THE TOWN MANAGER TO RESCIND THE AGREEMENT FOR
DISPOSITION OF REAL PROPERTY BETWEEN THE TOWN OF LOS GATOS AND
VILLA VASONA LTD., DATED SEPTEMBER 28; 1983; AND RESCIND THE FIRST
AMENDMENT TO AGREEMENT FOR DISPOSITION OF REAL PROPERTY
BETWEEN THE TOWN OF LOS GATOS AND VILLA VASONA LTD., DATED
SEPTEMBER 5,1989; AND NEGOTIATE AND EXECUTE A NEW AGREEMENT
BETWEEN THE TOWN OF LOS GATOS AND HIGHLAND PROPERTY
DEVELOPMENT LLC, FOR THE DISPOSITION OF REAL PROPERTY AT
612 (626) W. PARR AVENUE, LOS GATOS, CA.
WHEREAS, that in 1983 the Town of Los Gatos entered into an Agreement for
Disposition of Property with Villa Vasona Ltd. for the property at 612 aka 626 W. Parr Avenue;
and
WHEREAS, that in 1986 the Town Council adopted Ordinance 1698 to allow the
construction of 107 Section 8 senior apartments, including ten units for the physically
handicapped; and
WHEREAS, that in 1989 the Town of Los Gatos entered into a First Amendment to the
1983 Agreement for Disposition of Property because the property was transferred from Villa
Vasona Ltd. to PMG; and
WHEREAS, PMG intends to sell the property to Highland Property Development LLC;
and
WHEREAS, Highland Property Development LLC wants to rescind the 1983 Agreement
for Disposition of Property and the First Amendment to the 1989 Agreement for Disposition of
Property and negotiate a new Agreement pursuant to the terms, as illustrated in Attachment 1 of
the Town Council Report for the meeting of June 18, 2012; and
ArrA `C - RK 1 Tr 4.
WHEREAS, Seifel Consulting, Inc. conducted a thorough analysis of the terms of a new
agreement, as illustrated in Attachment 1 of the Town Council Report for the meeting of June 18,
2012, and determined that the terms are appropriate given the Town's desire to preserve their long
term interest in the property; and
NOW, THEREFORE, BE IT RESOLVED THAT the terms, as illustrated in
Attachment 1 of the Town Council Report for the „meeting of June 18, 2012, are appropriate given
the Town's desire to preserve their long term interest in the property.
BE IT FURTHER RESOLVED, by the Town Council that the Town Manager is
authorized and directed to negotiate and execute a new agreement, subject to Town review and
approval, with Highland Property Development LLC on behalf of the Town of Los Gatos and
rescind the 1983 and 1989 agreements..
BE IT FURTHER RESOLVED, by the Town Council that following conclusion of
drafting the revised agreement with Highland staff will bring back a modification of the existing
Planned Development (Ordinance 1698) to replace the existing covenants with covenants
reflecting the terms of the new agreement for Council consideration and action.
NOW, THEREFORE, BE IT FURTHER RESOLVED, AND IT IS HEREBY
RESOLVED, by the Town Council that the future modification of the existing Planned
Development (Ordinance 1698) to replace the existing covenants with covenants reflecting the
terms of the new agreement is consistent with the General Plan given the existing Official
Development Plan will not be modified.
PASSED AND ADOPTED at a regular meeting of the Town Council of the Town of Los
Gatos, California, held on the 18th day of June, 2012, by the following vote:
COUNCIL MEMBERS:
AYES:
NAYS:
ABSENT:
ABSTAIN:
SIGNED:
0W4=11
MAYOR OF THE TOWN OF LOS GATOS
LOS GATOS, CALIFORNIA
CLERK ADMINISTRATOR OF THE TOWN OF LOS GATOS
LOS GATOS, CALIFORNIA
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