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HomeMy WebLinkAbout2022-10-18 City Council Work Session PacketAgenda City Council Work Session City of Edina, Minnesota Community Room, City Hall Tuesday, October 18, 2022 5:30 PM I.Call To Order II.Roll Call III.Housing Information Area Policy and Financing Review IV.Adjournment The City of Edina wants all residents to be comfortable being part of the public process. If you need assistance in the way of hearing ampli$cation, an interpreter, large-print documents or something else, please call 952-927-8861 72 hours in advance of the meeting. Date: October 18, 2022 Agenda Item #: III. To:Mayor and City Council Item Type: Advisory Communication From:Stephanie Hawkinson, Affordable Housing Development Manager Item Activity: Subject:Housing Information Area Policy and Financing Review Discussion CITY OF EDINA 4801 West 50th Street Edina, MN 55424 www.edinamn.gov ACTION REQUESTED: Discussion only. INTRODUCTION: In May 2021 the Housing and Redevelopment Authority approved a Housing Improvement Area P olicy as a financing mechanism for common area improvements for condominium associations and townhomes. The City lends the money for the improvements and is repaid with fees added to the property taxes. This is a last resort for financing, after the association has demonstrated that they cannot receive financing from a traditional lender, such as a bank. We will review the policy and the financing options. Since that time an application has been submitted and staff is working with the condominium association. As this is the first application, prior to formally presenting this to the City Council, staff would like to discuss the process and funding sources. ATTACHMENTS: Description Staff Report, May 14, 2021 HIA Policy Staff Presentation May 14, 2021 Chair and Commissioners of the HRA Stephanie Hawkinson, Affordable Housing Development Manager Housing Improvement Area Policy Information / Background: Over the years various Condominium Associations have approached the City seeking a financing mechanism for common area improvements. Although State Statute allows for the creation of Housing Improvement Area (HIA) financing, Edina does not yet have a policy regarding this. Staff is proposing the passage of a policy that is like the HIA policies in St. Louis Park and Bloomington. The purpose of this policy is to establish the City and Housing and Redevelopment Authority’s (HRA) position relating to the use of HIA financing for private townhome and condominium housing improvements. This policy shall be used as a guide in processing and reviewing applications requesting HIA financing. HIA’s are City funded improvements to common areas of owner-occupied condominiums and/or townhomes. The City lends the money for the improvements and is repaid with fees added to the property taxes. This is a last resort for financing, after the Association has demonstrated that they cannot received financing from a traditional lender, such as a bank. The City Council may appoint the HRA to be the implementing entity for this policy. Policy Highlights: 1. Eligible Uses: promote neighborhood stabilization; correct building code violations; increase or prevent the loss of the City’s tax base. 2. Approval Criteria: Last resort for financing; financial guarantees; 70% of owners support; financial plan for on-going maintenance; common area improvements. 3. City Administration Fee: 1% of total project cost or $7,500, whichever is greater plus an escrow deposit of $10,000 to cover out of pocket costs for financial advisor and legal advisors. Please refer to the attached HIA Policy for full description. Even with the passage of this policy, a Condominium or Townhome Association would need to make an application to the City/HRA. The City STAFF REPORT Page 2 Council would need to hold public hearings and pass an ordinance before financing for a particular association application were approved. Alignment with Comprehensive Plan: 1. 2040 Comprehensive Plan  Goal 2.2: Encourage the preservation and maintenance of, and improvements to, existing subsidized and naturally occurring affordable housing (NOAH).  Goal 2.5: Promote the preservation and production of affordable housing through the areas of Edina accessible to transit by addressing financial and zoning barriers (italics added).  Goal 2.10: Recognize that housing is a long-term investment and promote housing policies that offer enduring opportunities for medium and low-income residents to house themselves, emphasizing home ownership.  Goal 3.4: Maintain some of Edina’s lower square footage housing stock to attract new residents and retain existing residents, including providing affordable options. 2. Housing Strategy Task Force Report  Goal 1.D.2: Encourage the preservation, maintenance, and rehabilitation of existing subsidized and naturally occurring affordable rental and ownership housing (NOAH).  Goal 3.B.8: Fully utilize the other options the city has to lower the cost of development and or financing [del]. Alignment with City Pillars: 1. Sustainability The condominium and townhome stock in Edina is aging. Some are currently facing deferred maintenance issues that exceed their accumulated reserves. This may not be due to poor management, but rather reflect aging buildings with failing mechanical systems, building envelopes including windows, siding and roofs that are reaching the end of their functional life. HIA financing can help extend the life and functionality of these buildings. It is more environmentally sustainable to increase energy efficiency and address rehabilitation needs rather than demolishing a building and constructing new. 2. Equity and Inclusion Condominium and townhome ownership are more affordable ownership options in the City. A vast majority of the Come Home 2 Edina mortgages are placed on condominiums that allow low- and moderate-income homeowners to move into the City or transfer from rental to ownership housing. 3. Engagement The HIA policy was reviewed and supported by the Edina Housing Foundation at their March 23, 2021 Board meeting. ☐City Council Approved: 5/27/2021 ☒City-Wide Revised ☐Department City of Edina Policy HOUSING IMPROVEMENT AREA POLICY 1. PURPOSE 1.01 The purpose of this policy is to establish the City of Edina and its Housing and Redevelopment Authority’s (HRA) position relating to the use of Housing Improvement Area (HIA) financing for private townhome and condominium housing improvements. This policy shall be used as a guide in processing and reviewing applications requesting HIA financing. 1.02 The City/HRA shall have the option of amending or waiving sections of this policy when determined necessary or appropriate. 2. AUTHORITY 2.01 The City/HRA has the authority to establish HIAs under 1994 Minnesota Laws, Chapter 587, Article 9, Section 22 through 31, and extended in 2000, M.S. Section 428A.11 to 428A.21. Such authority expires June 30, 2028, unless extended by the legislature. 2.02 Within a HIA, the City/HRA has the authority to: A. Make housing improvements. B. Levy fees and assessments, including interest. C. Issue bonds or use other funds to pay for improvements. 2.03 The City/HRA has the authority to review each HIA request, which includes petition, scope of improvements, association’s finances, long term financial plan, and membership support. 3. ELIGIBLE USES OF HIA FINANCING 3.01 As a matter of adopted policy, the City/HRA will consider using HIA financing to assist private property owners only in those circumstances in which the proposed private project addresses one or more of the following goals: A. To promote neighborhood stabilization and revitalization by the removal of Page | 2 blight and/or the upgrading of the existing housing stock in a neighborhood. B. To correct housing or building code violations as identified by the City Building Official. C. To maintain or obtain FHA mortgage eligibility for a particular condominium or townhome association within the designated HIA. D. To increase or prevent the loss of the tax base of the City to ensure the long-term ability of the City to provide adequate services for its residents. E. To preserve naturally occurring affordable housing. F. To preserve a variety of housing styles and values within the community G. To stabilize or increase the owner-occupancy level within a neighborhood or association. H. To meet other uses of public policy, as adopted by the City from time to time, including promotion of quality urban design, quality architectural design, energy conservation, decreasing the capital and operating costs of local government, etc. 4. HIA APPROVAL CRITERIA 4.01 All HIA financed through the City/HRA shall meet the following minimum approval criteria. However, it should not be presumed that a project meeting these criteria would automatically be approved. Meeting these criteria creates no contractual rights on the part of the City/HRA or any association. A. The project must be in accordance with the Comprehensive Plan and Zoning Ordinances or required changes to the Plan and Ordinances must be under active consideration by the City/HRA at the time of approval. B. The HIA financing shall be provided within applicable state legislative restrictions, debt limit guidelines, and other appropriate financial requirements and policies. C. HIA financial assistance is last resort financing and should not be provided to projects that have the financial feasibility to proceed without the benefit of HIA financing. Evidence that the association has sought other financing for the project should be provided and should include an explanation and verification that an assessment by the association is not feasible along with at least two letters from private lenders or other evidence indicating a lack of financing options. Page | 3 D. The project shall meet one or more of the above adopted HIA Goals of the City/HRA as noted in Section 3.01. E. The association shall designate an administrator who will be the City’s point of contact throughout the improvement project. F. The term of the HIA should be the shortest term possible while still making the annual fee affordable to the association members. The term of any bonds or other debt incurred for the area should mature in 20 years or less, or the improvements useful lifespan, whichever is less. The par amount of any bonds shall not be less than $250,000. The City/HRA may determine to provide other sources of financing in lieu of issuance of bonds. G. Service charges (including, but not limited to, construction/improvement costs, cost of issuance of bonds and other pertinent costs associated with the project) will be imposed on the owners in the same ratio as common elements or other such uniform methods as proposed by the applicant. H. The association in a HIA shall provide adequate financial guarantees to ensure the repayment of the HIA financing and the performance of the administrative requirements of the development agreement. Financial guarantees may include but not limited to the pledge of the association's assets including reserves, operating funds and/or property. I. The proposed project, including the use of HIA financing, shall be supported by at least 70% of the owners within the association. The association should include the results of a membership vote along with the petitions to create the area. J. The association must have adopted a financial plan that provides for the Association to finance maintenance and operation of the common elements within the Association and a long-range plan to conduct and finance capital improvements therein, which does not rely upon the subsequent use of the HIA tool. K. The association must have a replacement reserve study (the “Reserve Study”) conducted by an independent third party with designation as a Community Associations Institute (CAI) certified reserve specialist. The Reserve Study must conform to CAI Reserve Study standards. The components of the proposed improvements must normally come from the Reserve Study. The Reserve Study must include a thirty-year replacement reserve plan (the “Reserve Plan”), and the Reserve Study and Reserve Plan must be submitted with the application and will be reviewed by the City’s Financial Advisor. The association must also have an independent third party prepare a thirty-year reserve plan (the “HIA Reserve Page | 4 Plan”) with the proposed components removed from the Reserve Plan. The independent third party must also prepare a thirty-year financial plan (the “Financial Plan”) the reflects the annual replacement reserve contributions based on the HIA Reserve Plan. The Financial Plan will provide a plan for the association’s operating budget with cost increases over time. The HIA Reserve Plan and the Financial Plan must be submitted with the application and will be review by the City’s Financial Advisor. L. The association shall obtain temporary construction financing from a private lender, and the City/HRA shall provide a take-out commitment to the lender, detailing the terms for the payoff of the construction financing. Upon project approval and issuance of certificate of completion, the City will issue bonds or notes to satisfy the temporary construction loan. M. The homeowner's association must be willing to enter into a development agreement, drafted by the City/HRA, which may include, but not limited to, the following terms: • establishment of a reserve fund • staffing requirements • annual reporting requirements • conditions of disbursement • required dues increases • notification to new owners of levied fees • assessments, including interest and City/HRA fees N. The improvements financed through the HIA should primarily be exterior improvements and other improvements integral to the operation of the project, e.g., boilers. In the case of a homeowner's association, the improvements should be restricted to common areas and must be of a permanent nature. The association must have a third party conduct a facility needs assessment to determine and prioritize the scope of improvements. O. HIA financing should not be provided to those projects that fail to meet good public policy criteria as determined by the City/HRA, including: poor project quality; projects that are not in accord with the Comprehensive Plan, zoning, redevelopment plans, and the City/HRA policies; projects that provide no significant improvement to the neighborhood and/or the City; and projects that do not provide a significant increase in the tax base and/or prevent the loss of tax base. P. The financial structure of the project must receive a favorable review by the City’s Director of Finance, Financial Advisor and legal components will include a review by the City/HRA’s legal counsel. The review will include a review of performance and level of outstanding debt of previous HIAs. Page | 5 Q. If bonds are to be issued, legal components will be reviewed by the City/HRA bond counsel. R. All rental units within the HIA must be licensed according to Edina ordinance. S. The association is to submit an application along with a $500.00 non-refundable application fee, as set from time to time by resolution of the City Council. T. The City/HRA will charge an administrative fee of 1% of the total project amount, or $7,500, whichever is greater. In addition, the Association is responsible for all City/HRA out of pocket expenses with an initial escrow deposit of $10,000. [This amount can be financed with the project costs.] Any unused portion of the escrow shall be refundable to the Association. U. The City Council/HRA reserves the rights to deny funding for specific improvements if they are determined not to be in keeping with the intent of the policy. Housing Improvement Area City Council Work Session Agenda 1.Overview 2.Review HIA Policy 3.HIA Process Checklist 4.City Council Approval Process 5.Funding Sources EdinaMN.gov 2 What is a Housing Improvement Area (HIA)? •A defined area where common area improvements to townhome/condo developments (“Associations”) may be financed with City assistance •Provides loans to Associations unable to obtain private financing •Authority granted by State Statute (M.S. 428A) •Property owners repay the loan through fees imposed on the HIA and collected as part of their property taxes up to 20 years •-Carries same penalties and tax forfeiture process EdinaMN.gov 3 •Windows •Siding •Roofing •Parking lot resurfacing •Common entry doors •HVAC •Elevators Maintenance and capital improvement repairs which are the responsibility of the Association (must be defined by the governing documents) What Types of Improvements are Eligible? EdinaMN.gov 4 •Improvements that are not eligible include items that are the responsibility of individual homeowners What Types of Improvements are not Eligible? EdinaMN.gov 5 •What improvements are needed? •What are the costs of needed improvements? •Have all other means of financing been exhausted? •Will at least 70% of owners included in the proposed area requesting a Housing Improvement Area designation sign a petition? What to consider for an HIA Designation EdinaMN.gov 6 HIA Statutory Requirements •Owners submit petition for public hearing •Public Hearing to approve Ordinance defining HIA •Notice published and mailed to each owner •Prior to adoption, an owner may file objection if property would not benefit (determination to exclude property made within 60 days) •Public disclosure of project expenditures, contracting, financing and third-party long-term ops/maintenance plan •Public Hearing on fee resolution •Residents who object have a process to be heard prior to effective dates of ordinance and resolution EdinaMN.gov 7 HIA Checklist EdinaMN.gov 8 Association submits Application -Demonstration of no other funding options -Reserve plan Petition for Improvement Area Establishment and Fees (70% owners) Public meeting to accept Petition and schedule hearing Public Hearing Notice and adoption of Ordinance -Provide list of Public Area Improvements Mail Ordinance to all Owners included in HIA -Mailing includes information on right to veto ordinance Public Hearing Notice/adoption of HIA Resolution & Ordinance imposing fees Financing Development Agreement between City and Association Delivery of Financing Commitment HIA Financing Funding Sources: EdinaMN.gov 9 Internal Funds Revenue Bonds General Obligation Bonds Taxable General Obligation Bonds City issues its bonds pledging its full faith and credit as additional backing if HIA fee revenue ever proves insufficient for repayment Advantages: HIA property can access City’s ability to obtain low market rates and flexible terms Does not count against statutory debt limit or election requirements Disadvantages: City is pledging to step in and use its own funds to make bond payments in event of tax delinquency or forfeiture Annual HIA Fees must provide 105% debt service coverage to avoid City levy requirement Credit Rating Risk EdinaMN.gov 10 Taxable Revenue Bonds City issues its bonds pledging only the HIA fee revenue toward the bonds’ repayment. Bondholder takes on risk of delinquency / forfeiture. Advantages Potentially offer better terms / interest rates than conventional financing Limits City’s exposure to HIA delinquency / credit risk Disadvantages Higher financing cost and underwriting standards -Debt reserve, revenue coverage requirements, etc. Bonds still carry City name and administrative responsibilities EdinaMN.gov 11 Revenue Bond vs G.O. HIA Fee Impact: 0.35 to 0.50% Higher Interest Rates 10 to 25% Higher revenue coverage ratio 5% Higher bonding amount = 10 to 25% Impact to supporting HIA Fee Internal Funds City advances its funds to provide for the improvements and recovers costs from HIA fees Advantages City sets terms for financing: can offer additional flexibility beyond market Can setup revolving fund to manage exposure and reinvest proceeds Disadvantages Limited resources / funding capacity City funds at risk for delinquencies / forfeiture Long recovery period EdinaMN.gov 12 Potential Sources: •SPARC •TIF Pooled Funds •Aff. Housing Trust Fund •Other (HRA Levy, surplus, etc.) HIA: Protecting City Resources Risk Factor: Owner objection and Veto process HIA process requires careful review and lengthy timeline to accomplish public steps for ordinance and hearings Potential Mitigation Require Association provide higher petition percentage by owners before start (70% in Edina versus 50% as required by Statute); demonstrate commitments. To Veto need 45% of owners. Application fee held in escrow to cover City’s administrative costs EdinaMN.gov 13 HIA: Protecting City Resources Risk Factor: Project Feasibility Bond or Loan proceeds at risk during project construction Potential Mitigation Review Association’s project development, scope and procurement align with City’s policy objectives and requirements Financing agreement: Set terms for disbursement or require Association obtain construction financing w/ City guarantee of private loan takeout after project completion and HIA proceedings Consider other forms of collateral or recourse (if necessary) Consider property owner fee prepayment provisions EdinaMN.gov 14 HIA: Protecting City Resources Risk Factor: HIA Fee delinquency / tax forfeiture HIA fee repayment dependent on capacity of Association property owners Potential Mitigation Measure project cost and annual fee payments compared to property value / income levels Review Association’s financial reports, long-term maintenance and operating plan Financing Agreement: Require Association guarantees, bond reserves If bonding, consider adding prepayment flexibility EdinaMN.gov 15 HIA: Protecting City Resources Risk Factor: HIA Administration HIA requires ongoing administrative oversight during project completion and length of fee repayment Potential Mitigation Review bond and loan administrative requirements (trustee / credit surveillance fees) Consider adding HIA administrative charge within annual fee amount to cover staff time coordinating HIA program and financial administration EdinaMN.gov 16 HIA: Protecting City Resources Risk Factor: City’s AAA (S&P) and Aaa (Moody’s) Credit Ratings HIA General Obligation Bonds will count against credit factors: 1. Debt load (total balance as % of tax base) 2. Leverage (total balance as % of operating revenues) 3. Debt service carrying charge (annual debt payments as % of general expenditures) Potential Mitigation Pursue revenue bonds or internal funds (if able) Set policy limits to amount of bonds outstanding, length of repayment EdinaMN.gov 17 HIA: Protecting City Resources 2022 Credit evaluation forecasted $78 million in potential Fire Station and Sales Tax bonding in the future. No impact to overall AAA and Aaa rating assignments, however: S&P: “Weakening debt burden, with the city’s overall debt profile growing this year, potentially significantly if voters approve the local option sales tax bonds.” Moody’s: “Credit Challenge: elevated leverage and fixed costs” EdinaMN.gov 18 City of Edina Key Debt Credit Ratios Indicator Current Ratio Score Forecasted Ratio Score Debt Load 0.45%Aa / Strong 0.95%Aa / Adequate Leverage 131%A / Adequate 247%A / Weak Carrying Charge 14.6%A / Adequate 22.3%A / Weak Closing Thoughts •Effective tool available to MN cities •Preservation of aging affordable housing stock •Bonding vs. internal funding: •-Do we prioritize the use internal funds to address the needs of Condominium common areas? •-Are General Obligation Bonds an appropriate financing tool? •-Pending requests EdinaMN.gov 19