REPORT TO COUNCIL
SUBJECT
Title
Approve a Purchase and Sale Agreement Between the City of Sunnyvale and MP Land Holdings, LLC (MidPen Housing) for the Purchase of 1171 Sonora Court, Approve a Disposition and Development Agreement to Construct a New Affordable Housing Development; and Adopt a Resolution to Authorize a Ground Lease and a Resolution to Declare the Property Exempt from the Surplus Lands Act; and Find that these Actions are Exempt from the California Environmental Quality Act (CEQA) Pursuant to CEQA Guidelines Sections 15004(b)(2)(A) and 15312
Report
BACKGROUND
On May 2, 2024, the Housing Division issued a Notice of Funding Availability (NOFA) for the construction, rehabilitation, acquisition, and/or predevelopment of affordable housing developments to be funded by the City’s Housing Mitigation Funds (HMF) and Below Market Rate (BMR) In-Lieu Funds. On August 13, 2024, Council approved $29,533,000 in NOFA awards for three projects, including an award of approximately $14 million to MidPen Housing (MidPen) for the construction of a new 172-unit affordable housing development located at 1171 Sonora Court (the “Project”). (RTC No. 24-0863.) This funding award is intended to support two separate components of the Project. The first component is the City’s acquisition of the 1171 Sonora Court property from MidPen for $12.5 million. The second component is a loan of $1,533,000 to support predevelopment costs for the Project.
Prior to the recent $14 million NOFA award, the City previously awarded the Project $500,000 in predevelopment funding during the 2022 NOFA. The $500,000 award consisted of Permanent Local Housing Allocation (PLHA) funds, which are allocated to the City by the State Department of Housing and Community Development. Since the 2022 NOFA award, MidPen has completed predevelopment activities including preparing architectural plans and submitting a formal application for planning entitlements on December 21, 2023. Once planning entitlements are secured, the Project will be positioned to apply for additional funding sources including Low-Income Housing Tax Credit (LIHTC) financing through the Tax Credit Allocation Committee (TCAC).
To ensure that the Project is competitive for LIHTC financing, it is critical for the City to acquire the property and enter into a Disposition and Development Agreement (DDA) by the end of 2024. As of 2024, TCAC considers the Project site to be located in a “High Resource” census tract, which makes it more competitive for LIHTC financing. TCAC updates resource categorizations, annually, based on new demographic data. As recently as 2023, the Project site was categorized as “Moderate Resource” and was therefore less competitive for LIHTC financing. It is uncertain whether the Project site will be categorized as “High Resource” in the future. If the City and MidPen enter into a DDA by the end of 2024, the Project would effectively lock in the “High Resource” classification, making it much more viable and competitive for TCAC.
EXISTING POLICY
2023-2031 Housing Element
Goal H-2: Assist in the provision of affordable housing to meet the diverse needs of Sunnyvale’s lower- and moderate-income households.
Policy H-2.1: Leverage local financial assistance with other sources of funding and identify new funding sources for affordable housing to maximize the number of affordable units and to reach the deepest level of affordability.
Council Policy 1.2.7 Acquisition, Leasing and Disposition of City-Owned Real Property
Section 1: Acquisition of Real Property for Municipal Purposes
Real property shall be acquired for current or future municipal purposes, and/or to benefit the community. The City shall acquire real property in accordance with Sunnyvale Municipal Code Chapter 2.07.
Section 2: Lease of City-Owned Real Property
Real property held for future use may be leased for profit when deemed appropriate and favorable to the City and in accordance with Sunnyvale Municipal Code Chapter 2.07. Property leased to outside entities should be based on the current market rent except when Council finds there is a public purpose for leasing at a lower rate.
A. Revenue from the leasing of City-owned property shall be deposited into the Fund in which the property was purchased, except when a fund no longer exists, it will be at the direction of the Awarding Authority as per Municipal Code 2.07
Council Policy 2.3.3 Strategies for Affordable Housing and the Use of Housing Mitigation Fees
8. Encourage private/non-profit partnerships on City-owned sites available for housing development so that part of the site may be developed for low to moderate income housing.
Sunnyvale Municipal Code, Title 19 Zoning
Chapter 19.75 HOUSING IMPACT FEES
Section 19.75.010 Findings and purpose.
(b) Purpose. This chapter requires the payment of housing impact fees for certain types of development to mitigate the impact of nonresidential and residential development on the need for affordable housing in the city of Sunnyvale and to implement the housing element of the city’s general plan and California Government Code Section 65583(c), which expresses the state housing policy that requires cities to assist in the development of adequate housing to meet the needs of lower-income households. Housing impact fees are placed in the city’s housing mitigation fund and used to support the development of affordable housing within the city.
Sunnyvale Municipal Code, Title 2 Administrative and Personnel
Chapter 2.07 Purchase, Sale or Lease of Real Property
Section 2.07.060 Long-term lease of city property.
(a) The city council may enter into a lease of city property for a term in excess of fifty-five years pursuant to the procedures set forth in this section. This section is enacted pursuant to California Government Code Section 37380 for the purpose of establishing alternate procedures thereto and exempting the city from the provisions of subsections (b)(2), (b)(3) and (b)(4) thereof. Except with respect to leases in excess of fifty-five years, the provisions of this section shall not be deemed in any way to restrict the city's authority to enter into other forms of leases.
ENVIRONMENTAL REVIEW
The actions being considered are exempt from environmental review under CEQA pursuant to CEQA Guidelines Section 15004(b)(2)(A), which allows agencies to enter into land acquisition agreements when the future use of the site is conditioned on CEQA compliance, and Section 15312, which applies to sale of surplus government property (a long term ground lease is equivalent to a sale for purposes of the exemption). The City will complete appropriate environmental review prior to approval of the development project, which was submitted in January 2024 and is currently being processed. It is anticipated that the project will be found to be consistent with the Environmental Impact Report for the Lawrence Station Area Plan (State Clearinghouse No. 2019012022), but that determination cannot be made until an environmental checklist is completed.
DISCUSSION
A draft Purchase and Sale Agreement (PSA) and DDA have been prepared to acquire the 1171 Sonora Court property from MidPen and set forth the development terms of the Project. Both the PSA and DDA are based on similar terms that were used for MidPen’s 1178 Sonora Court affordable housing project (now known as Ira D. Hall Square) which was purchased in 2020 (RTC No. 20-0500). The 1178 Sonora project secured full financing, is currently under construction, and is extremely similar in scope, so it provides a successful model for the 1171 Sonora project.
Purchase and Sale Agreement
MidPen acquired the Project site in June 2021 for $12.5 million. The PSA sets the terms for the City to purchase 1171 Sonora Court from MP Land Holdings, LLC (a MidPen subsidiary) for $12.5 million using loan funds from the Community Housing Fund.
The property at 1171 Sonora Court is a 1.3-acre site located in the Lawrence Station Area Plan in close proximity to MidPen’s 1178 Sonora Court affordable housing project and the Lawrence Caltrain Station. As part of their acquisition, MidPen completed due diligence on the property by obtaining an appraisal report, Phase I environmental assessment, and title report. No concerns were identified.
The property currently contains a light industrial/office building of 19,500 square feet and is leased to Tech-Star Industries. This lease is on a month-to-month basis with a monthly rent amount of $25,000. MidPen has informed Tech-Star about their plan to develop an affordable housing project on the property and Tech-Star has been searching for a new location. The current month-to-month lease will be assigned to the City as part of the PSA and all rental income will be payable to the City and deposited in the Housing Mitigation Fund to support future affordable housing development. The current lease is terminable by either party upon 60 days’ written notice. Once Tech-Star vacates the property, the City will enter into a short-term lease with MidPen and the building will remain vacant until construction commences. MidPen would be responsible for securing the building from tenant vacancy to construction start. Once the Project is fully financed and construction commences, the City will lease the property to MidPen through the long-term Ground Lease, which is included as an exhibit to the DDA.
A 30-day due diligence period will occur after signing the PSA. MidPen has already provided the City with the lease agreement, environmental assessments, and preliminary title reports relevant to the property acquisition. This due diligence period allows the City additional time to review these materials prior to acquisition. Once due diligence has been completed, close of escrow will occur and the City will acquire the property. Per the terms of the PSA, close of escrow must occur no later than 37 days following the execution of the PSA.
Fundamental Terms and Conditions of PSA:
• Purchase price: $12,500,000;
• MidPen to pay for all closing costs associated with the purchase;
• Lease agreement with Tech-Star will be assigned to the City; and
• City and MidPen enter into DDA for the development and long-term Ground Lease for the property.
Disposition and Development Agreement
The DDA sets forth the terms of MidPen’s development of the Project and the form of the predevelopment loan documents and long-term Ground Lease. Per the DDA, the property must be used for a future affordable housing development of at least 170 rental apartments affordable to lower-income households and two unrestricted manager's units.
Project Financing
The DDA has a three-year term in which MidPen must obtain full financing for the Project. The total proposed development cost is anticipated to be approximately $180 million. MidPen has identified LIHTCs as the primary source of financing for the Project. In order to qualify for this source of funding, MidPen must secure land use entitlements and all other necessary gap financing. MidPen submitted a formal Planning application for land use entitlements on December 21, 2023, which is currently under review. MidPen will actively look for and secure other funding options from local, state, and regional sources to fill their funding gap before applying for LIHTC financing no later than 2027.
If efforts to obtain LIHTC financing are not successful in the first submission, MidPen will continue to apply for two additional rounds. If MidPen is not successful in receiving a tax credit allocation after three application rounds, they may pursue another method of financing acceptable to the City. If MidPen does not obtain the necessary financing within three years, the DDA includes the possibility of an additional one-year extension at the discretion of the City Manager. An extension longer than one year must be approved by City Council.
Affordability Restrictions
The 170 affordable units will be rented to lower-income households whose incomes do not exceed 80% of Area Median Income (AMI) as determined by TCAC. MidPen has further agreed to ensure that the average income limit for the Project shall not exceed 50% of AMI. In addition, 20% of affordable units shall be rented to households whose incomes do not exceed 30% of AMI. Pending the availability of funding, MidPen intends for these 30% AMI units to be used as permanent supportive housing for unhoused residents. The affordable units shall be deed restricted for a term of at least 85 years.
Ground Lease
The DDA includes the form of the long-term Ground Lease of the property to MidPen (Exhibit E of the DDA). The Ground Lease will commence at the construction loan closing and continue for 85 years. Pursuant to the terms of the Ground Lease, the Partnership will pay annual rent in the amount of the lesser of (i) $1,250,000 per year or (ii) the City's Pro Rata Share of Net Operating Income (as defined in the Ground Lease). However, the City's Pro Rata Share of Net Operating Income will first be applied to the repayment of the City’s $1,533,000 predevelopment loan.
Predevelopment Loan
The DDA also includes the loan terms for the City’s predevelopment NOFA award of $1,533,000 in HMF funds. These loan terms are set forth in the Subordinate Predevelopment Loan Note (Exhibit F of the DDA) and include financing terms and disbursal requirements. The proposed loan terms include 3% simple annual interest, with residual receipt payments starting at completion of construction, and a term of 55 years. These loan terms are the same as the City’s recent affordable housing projects, including 1178 Sonora Court. The predevelopment loan funds will be disbursed upon the City’s acquisition of the property and the execution of the DDA.
Development Timeframe
MidPen shall apply for LIHTCs no later than the last available round of TCAC applications in 2027. If the TCAC funds are awarded, MidPen will prepare and submit complete construction documents (e.g., building permits) to the City for approval. The construction financing closing will occur no later than six months after the award of LIHTCs. Construction will commence no later than 30 days after the close of construction financing and will be completed within 36 months of commencement.
Surplus Lands Act
A ground lease longer than 15 years is considered a “disposition” of property under the Surplus Lands Act (SLA, Government Code Section 54220 et seq.). The SLA requires local agencies to prioritize the use of surplus land for affordable housing. Because MidPen is leasing the land for the purpose of an affordable housing development, the transaction is exempt from most requirements of the SLA . As such, the Council must make a determination that its surplus lands are exempt from the SLA and the determination must be supported by written findings. (Attachment 4.) The written findings, which is ordinarily done by adopting a resolution, must be provided to the California Department of Housing and Community Development.
FISCAL IMPACT
There is sufficient funding in Fund 2021 - Housing Mitigation for the purchase price of $12,500,000 and the $1,533,000 predevelopment loan. These amounts were approved by Council on August 13, 2024 as part of the City’s FY 2024/25 NOFA awards (RTC No. 24-0863.). MidPen will repay the City’s loan through residual receipts payments.
The City will receive revenue from the lease with Tech-Star in the amount of $25,000 per month until the lease is terminated. All rental income from the current industrial tenant will be deposited in the Housing Mitigation Fund.
PUBLIC CONTACT
Public contact was made by posting the Council meeting agenda on the City's official-notice bulletin board at City Hall, at the Sunnyvale Public Library and in the Department of Public Safety Lobby. In addition, the agenda and this report are available at the NOVA Workforce Services reception desk located on the first floor of City Hall at 456 W. Olive Avenue (during normal business hours), and on the City's website.
ALTERNATIVES
1. Approve a Purchase and Sale Agreement and authorize the City Manager to execute it in substantially the same form as Attachment 1 to the report, between the City of Sunnyvale and MP Land Holdings, LLC, for the purchase of real property located at 1171 Sonora Court for $12,500,000; and find that this action is exempt from the California Environmental Quality Act (CEQA) pursuant to CEQA Guidelines Section 15004(b)(2)(A).
2. Direct staff to negotiate different terms of the Purchase and Sale Agreement with MP Land Holdings, LLC, as determined by Council.
3. Do not approve the Purchase and Sale Agreement between the City of Sunnyvale and MP Land Holdings, LLC.
4. Adopt a Resolution authorizing the Ground Lease (Attachment 3 to the report) and a Resolution declaring the property to be exempt from the Surplus Lands Act (Attachment 4 to the report), Approve a draft Disposition and Development Agreement and associated appendices with MP 1171 Sonora I Associates, L.P. for the establishment of the affordable housing development at 1171 Sonora Court (Attachment 2 to the report), and authorize the City Manager to execute it in substantially the same form as Attachment 2 to the report and in a form approved by the City Attorney; and find that this action is exempt from CEQA pursuant to CEQA Guidelines Section 15312.
5. Do not approve the draft Disposition and Development Agreement and do not adopt the Resolutions authorizing the Ground Lease and declaring the property exempt from the Surplus Lands Act, and provide direction to staff to negotiate different terms, or other action deemed appropriate by the City Council.
6. Other Council direction.
STAFF RECOMMENDATION
Recommendation
Alternatives 1 and 4: 1) Approve a Purchase and Sale Agreement and authorize the City Manager to execute it in substantially the same form as Attachment 1 to the report, between the City of Sunnyvale and MP Land Holdings, LLC, for the purchase of real property located at 1171 Sonora Court for $12,500,000; and find that this action is exempt from the California Environmental Quality Act (CEQA) pursuant to CEQA Guidelines Section 15004(b)(2)(A); and 4) Adopt a Resolution authorizing the Ground Lease (Attachment 3 to the report) and a Resolution declaring the property to be exempt from the Surplus Lands Act (Attachment 4 to the report), Approve the draft Disposition and Development Agreement and associated appendices with MP 1171 Sonora I Associates, L.P. for the establishment of the affordable housing development at 1171 Sonora Court (Attachment 2 to the report), and authorize the City Manager to execute it in substantially the same form as Attachment 2 to the report and in a form approved by the City Attorney; and find that this action is exempt from CEQA pursuant to CEQA Guidelines Section 15312.
JUSTIFICATION FOR RECOMMENDATION
Staff recommends authorization of the City Manager to execute the attached PSA and DDA in order to expand the City’s housing supply with much needed, new affordable housing. On August 13, City Council approved the award of approximately $14 million to support MidPen’s 1171 Sonora Court project. Staff’s recommendation fulfills this award by purchasing the property for $12.5 million and providing $1,533,000 in predevelopment funds for the Project. Furthermore, by acquiring the 1171 Sonora Court property and entering into a DDA with MidPen before January 1, 2025, the City will ensure that the Project site is considered a “High Resource” area, thus increasing the Project’s competitiveness for financing.
Levine Act
LEVINE ACT
The Levine Act (Gov. Code Section 84308) prohibits city officials from participating in certain decisions regarding licenses, permits, and other entitlements for use if the official has received a campaign contribution of more than $250 from a party, participant, or agent of a party or participant in the previous 12 months. The Levine Act is intended to prevent financial influence on decisions that affect specific, identifiable persons or participants. For more information see the Fair Political Practices Commission website: www.fppc.ca.gov/learn/pay-to-play-limits-and-prohibitions.html
A check in the checklist below indicates that the action being considered falls under a Levine Act category or exemption:
SUBJECT TO THE LEVINE ACT
___ Land development entitlements
___ Other permit, license, or entitlement for use
_X_ Contract or franchise
EXEMPT FROM THE LEVINE ACT
___ Competitively bid contract
___ Labor or personal employment contract
___ General policy and legislative actions
Staff
Prepared by: Ryan Dyson, Housing Specialist II
Reviewed by: Jenny Carloni, Housing Officer
Reviewed by: Sherine Nafie, City Property Administrator
Reviewed by: Trudi Ryan, Director, Community Development
Reviewed by: Dennis Jaw, Interim Director of Finance
Reviewed by: Connie Verceles, Deputy City Manager
Approved by: Tim Kirby, City Manager
ATTACHMENTS
1. Draft Purchase and Sale Agreement
2. Draft Disposition and Development Agreement
3. Resolution to Authorize the Ground Lease
4. Resolution to Declare Exempt Surplus Land