REPORT TO HOUSING AND HUMAN SERVICES COMMISSION
SUBJECT
Title
Recommendation to City Council to Award Conditional Funding for $29,533,000 in Housing Mitigation Funds and Below Market Rate In-Lieu Funds for the Acquisition, Pre-development, and/or Development of Three Affordable Housing Developments
Report
BACKGROUND
On May 2, 2024, a Notice of Funding Availability (“NOFA”) was issued by the Housing Division for the construction, rehabilitation, acquisition, and/or predevelopment of affordable housing developments to be funded with the City’s Housing Mitigation Funds (“HMF”) and Below Market Rate (“BMR”) In-Lieu Funds. A total of $20 million in HMF and BMR funds was made available through this NOFA, with a note that additional funding could be considered. The City intends to release a NOFA for Housing Mitigation Funds every two years, with the previous NOFA released in 2022 for $16 million.
Housing Mitigation Funds are the collection of Housing Impact Fees for non-residential development. Housing Impact Fees are intended to mitigate the demand for new affordable housing created by the development of new industrial, office, retail, lodging, and other commercial square footage. BMR In-Lieu Fees are collected as a sub-fund of the Housing Mitigation Fund from the development of new residential units that do not provide the affordable units required by the City’s inclusionary zoning policy. Projects funded using City Housing Mitigation Funds are deed restricted as affordable to lower-income households for a minimum of fifty-five years. All funds are used in accordance with the Mitigation Fee Act.
The NOFA announcement was distributed broadly to residential developers and non-profit housing agencies throughout the entire Bay Area region. The City issued a three-day extension of the deadline, which was announced via email to all developers that had previously received a NOFA announcement. Three applications were received by the extended June 6, 2024 deadline. The applications include funding requests that range from approximately $6 million to $14 million for a total of $34 million in funding requests.
The FY 2024/25 budget appropriates a total of $32.5million for this NOFA.
The City Council is scheduled to consider the item on August 13, 2024.
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.
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.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” with the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(b)(4) in that it constitutes the creation of a conditional funding mechanism and does not obligate the City to ultimately approve the projects. CEQA review of the projects will be conducted by the Planning Division as part of the development review process when there is sufficient information for meaningful environmental analysis.
DISCUSSION
Once all NOFA applications were received, a Review Committee (“Committee”) was established which consisted of three Community Development Department (CDD) staff members (Housing Programs Analyst, Housing Specialist, and Housing Programs Technician). The Committee scored each application based on the structured point system (Attachment 2) outlined in the NOFA and ranked the applications by score. Funding amounts were then recommended based on overall rankings, the amount requested, and the planned timeline for each project. The minimum award is $500,000.
Application Summaries
Proposed Project One - 1171 Sonora Court
The 1171 Sonora Court proposal was submitted by MidPen Housing and consists of a request for $14,033,000. Of this amount, $12.5 million is requested for property acquisition and $1,533,000 is requested for predevelopment expenses. The total development cost for this project is estimated at approximately $184 million.
The proposed project is a transit-oriented, multi-family rental development located within a quarter mile of the Lawrence Caltrain station. The project will include the demolition of the existing light industrial structure and the construction of a seven-story, 172-unit apartment building. The project is located across the street from MidPen’s 176-unit Ira D. Hall Square affordable housing project at 1178 Sonora Court, which is currently under construction. Nearly 20% of the 1171 Sonora project (34 units) will be designated as Permanent Supportive Housing to serve unhoused residents. The project’s income categories by Area Median Income (AMI) and unit sizes are shown in the table below:
Headquartered in Foster City, CA, MidPen is a regional leader in affordable housing. MidPen has developed over 9,900 units of affordable housing and successfully completed 11 projects in Sunnyvale (869 total units) with one additional project currently under construction (Ira D. Hall Square on Sonora). MidPen Property Management Corporation will manage and provide resident services for the project, including case management services for Permanent Supportive Housing. MidPen Property Management currently manages more than 130 properties including approximately 8,900 units in northern California.
If awarded acquisition funds, the City would purchase the 1171 Sonora Court property from MidPen for their original purchase price of $12.5 million. MidPen acquired the site by securing a loan from the Community Housing Fund in June 2021 with the intention of developing this project. City acquisition of the site provides multiple benefits by ensuring that the property is used for affordable housing well into the future and by reducing holding costs for the project. A reduction in holding costs decreases operational expenses and the amount of additional subsidy needed to fund the project.
If awarded predevelopment funds, City funds would be used to cover acquisition and holding expenses along with architecture, engineering, and environmental costs. Predevelopment funding will enable the project to seek approximately $46.7 million in financing from competitive County and State funding programs such as Infrastructure Infill Grant (IIG) and Affordable Housing Sustainable Communities (AHSC) grant. Once additional funds are secured, MidPen intends to apply for Low Income Housing Tax Credits (LIHTC) through the Tax Credit Allocation Committee (TCAC) in 2027. This development schedule would allow the project to commence construction in early 2028.
In 2022, the City awarded this project $500,000 in predevelopment funding using Permanent Local Housing Allocation (PLHA) funds. This funding helped MidPen complete architectural drawings to submit for planning entitlements in January 2024. If this current request is fully awarded, the total combined commitment of HMF funds would be $14,533,000, or approximately $84,500 per unit. MidPen has indicated that they intend to apply for an additional $12 million in City funds during a future NOFA to fill the project’s anticipated construction financing gap.
Proposed Project Two - 295 S. Mathilda Avenue
The 295 S. Mathilda Avenue proposal was submitted by MidPen Housing and consists of a total request for $5,967,000. Of this amount, $1,500,000 is requested for predevelopment expenses and $4,467,000 is requested for new construction costs. The total development cost for this project is estimated at approximately $119 million.
The proposed project is a new multi-family rental development located in the Downtown Specific Plan area on the site of a former bank. The project will include the demolition of the existing bank structure and the construction of a six-story, 126-unit apartment building. At least 25% of the project (32 units) will have a preference for households experiencing homelessness. The project’s income categories and unit sizes are shown in the table below:
The project is located on land that was purchased by the City in September 2023 for $7,325,000. As part of the City’s site acquisition, MidPen entered into an Exclusive Negotiating Agreement with the City to develop the site as an affordable housing project. MidPen has site control through a short-term ground lease with the City.
MidPen submitted a preliminary application to the Planning Division for this project in May 2024. The project is currently in the early stages of the design process and has begun community engagement efforts with neighbors and stakeholders.
If awarded predevelopment funding, MidPen will complete architecture and design work, continue community engagement efforts, and submit a full application for Planning entitlements in summer 2025. MidPen will also use predevelopment funds to apply for approximately $17.5 million in competitive financing programs such as AHSC and the Bay Area Housing Finance Authority’s planned 2024 bond measure. If awarded City funding for new construction, MidPen will use funds to help close the project’s anticipated financing gap. Once this gap has been closed, MidPen intends to apply for tax credits in 2026. This development schedule would allow the project to commence construction in early 2027.
Although the City has supported this project through the $7.3 million property purchase, the City has not awarded 295 S. Mathilda funding through a prior NOFA. Including the cost of property purchase, the cumulative funding request for this project equals $13,292,000 or approximately $105,000 per unit. MidPen has indicated that they intend to apply for an additional $7.5 million in City funds during a future NOFA to fill the project’s anticipated construction financing gap.
Proposed Project Three - 352 E. Java Drive
The 352 E. Java Drive proposal was submitted by the Pacific Companies (TPC) and Miramar Capital and consists of a request of $14 million for new construction costs. The total development cost for this project is estimated at approximately $208 million. The proposed project is a new multi-family rental development located in the Moffett Park Specific Plan area. The project will include the demolition of the existing office structure and the construction of a six-story, 308-unit apartment building. The project’s income categories and unit sizes are shown in the table below:
Miramar submitted a preliminary application to the Planning Division for a market rate version of this project in June 2024. If awarded NOFA funds, Miramar would revise and resubmit the application in collaboration with TPC as a 100% deed-restricted affordable housing project. Miramar/TPC intends to obtain planning entitlements within one year of a potential award per the requirements of the NOFA.
Headquartered in Eagle, Idaho, TPC is one of the largest affordable housing developers in the country with over 230 completed projects totaling 16,000 units of affordable housing. Although TPC has not completed a project in Sunnyvale, they have completed five projects in Santa Clara County with 10 more projects in the development pipeline in cities including San Jose, Santa Clara, and Gilroy. For this project, TPC will partner with Miramar Capital, a developer and asset manager of commercial and market-rate multi-family housing projects with a headquarters in Los Angeles. Although Miramar has not completed a project in Sunnyvale, they currently have four multi-family projects in development in Mountain View and San Jose.
TPC and Miramar will serve as co-general partners for this project. The site is currently owned by a subsidiary of Miramar but will be transferred to Safehold Incorporated, a real estate investment company, upon close of construction financing. Safehold will then ground lease the property to the general partnership for 99 years. Through this ownership structure, Safehold will provide a capital investment of approximately $31 million to the project. TPC has successfully used this ground lease and financing mechanism on five affordable housing projects within the last year.
If awarded funding, TPC/Miramar will use funds to close their anticipated construction financing gap of $14 million. The development budget for this project does not rely on competitive gap financing sources through the State and other entities. Instead, about $58 million of the project’s financing gap will be filled through non-competitive sources such as private tax-exempt bonds and the aforementioned Safehold investment. The project intends to complete community engagement and secure planning entitlements by August 2025. This schedule would allow the project to apply for federal LIHTCs and tax-exempt bond financing in fall 2025. If funding is secured, the project plans to commence construction in summer 2026.
The City has made no prior funding awards for the 352 E. Java project and TPC/Miramar have not indicated that additional City funds would be requested during a future NOFA. If this request is fully awarded, the $14 million award is equal to approximately $45,000 per unit.
Rankings and Funding Recommendations
The Committee met to discuss and rank the three project applications. The projects were ranked in the following order based on the ranking form in Attachment 2:
1. 1171 Sonora Court (MidPen Housing)
With an average score of 84 points out of 100, this project was ranked highest based on the following factors:
• Developer has strong organizational capacity and relevant experience;
• Project would provide permanent housing for households experiencing homelessness;
• Project is located in a High Resource area;
• Acquisition funds would be used by end of 2024; and
• Project would provide high percentage of units at deep affordability levels.
Most critically, the applicant’s $12.5 million request for acquisition funding presents a time-sensitive opportunity to positively impact the project’s competitiveness for LIHTCs. As of 2024, TCAC categorizes the project site as a High Resource area, which makes it more competitive for tax credit financing. TCAC updates resource categorizations annually based on new data. As recently as 2023, the site was categorized as Moderate Resource and it is uncertain whether the site will be categorized as High Resource in the future.
If acquisition funds are awarded during this NOFA, the City would enter into a Disposition and Development Agreement (DDA) with MidPen for the development of the project and the site would be transferred to the City. If the City and MidPen enter into a DDA by the end of 2024, the project would effectively lock in the High Resource category, making it much more viable and competitive for tax credits.
2. 295 S. Mathilda Avenue (MidPen Housing)
With an average score of 79 points out of 100, this project was ranked second highest based on the following factors:
• Developer has strong organizational capacity and relevant experience;
• Project would provide permanent housing for households experiencing homelessness;
• Project is located in a High Resource area; and
• Project would provide high percentage of units at deep affordability levels.
This project meets the City’s funding priorities for deeply affordable housing and homeless-serving units, but received fewer points than 1171 Sonora primarily due to project readiness. Although the project would use predevelopment funds immediately, construction funds would not be disbursed until after the project secures full construction financing. This would not occur until late 2026 at the earliest. This timeline would not satisfy the NOFA requirement to enter into a funding agreement within two years of award. Staff recommends that the project reapply for construction funds during a future NOFA planned for FY 2026/27.
3. 352 E. Java Drive (The Pacific Companies and Miramar Capital)
With an average score of 78.7 points out of 100, this project was ranked third highest based on the following factors:
• Developer has strong organizational capacity and relevant experience;
• Project intends to close on financing in summer 2026;
• Budget and financial management;
• There is a lower percentage of units at deep affordability levels; and
• No units would serve households experiencing homelessness.
This project received fewer points than the others largely because it does not target deep levels of affordability or include any unhoused-serving units. Nevertheless, the project remained competitive because its development budget is less reliant on competitive funding sources, making the project much more financially feasible in the near future. With the City’s award of NOFA funds, the project is well positioned to apply for LIHTCs in fall 2025, secure full funding, and commence construction in summer 2026.
Based on these rankings, the Committee determined funding recommendations. Due to the high quality of each of the proposed projects and the critical timing of several funding requests, the Committee recommended to increase the available funding for this NOFA to $29,533,000. This amount ensures that funding is available to meet an important timeline for the acquisition of 1171 Sonora, while also supporting predevelopment expenses for both 1171 Sonora and 295 S. Mathilda and construction activities for 352 E. Java. In total, these NOFA funds will support the creation of over 600 affordable units for lower-income households and establish a pipeline of affordable housing that can help the City meet its Regional Housing Needs Allocation for the 2023-2031 planning period. The Committee’s final funding recommendations are summarized below and included with additional details and funding alternatives as Attachment 3.
Applicants awarded funding through this NOFA will be given a Conditional Award Letter. For non-predevelopment projects, this award is valid for two years while applicants finalize remaining funding and planning entitlements. For pre-development projects, the City will begin negotiating a funding agreement upon issuance of the Conditional Award. If any successful applicant fails to meet the funding timelines outlined in the NOFA, the conditional funding award will be withdrawn, and the applicant must resubmit during a future NOFA round. Timelines may only be extended by a formal request and subsequent approval by the Community Development Director.
Next Steps
After the Housing and Human Services Commission makes a recommendation to the City Council on July 24, 2023, the City Council will consider the item on August 13, 2024. If Council approves the funding recommendations, Housing Division staff will send official Conditional Commitment Letters to the successful applicants on August 14, 2024. This timeframe will allow applicants to, if needed, meet deadlines for LIHTCs, state funding programs, and other deadlines.
All NOFA funding awards will be disbursed in the form of low-interest, long-term deferred residual receipts loans or fully amortized loans. Loan documents will be drafted and executed following the issuance of a Conditional Commitment Letter.
FISCAL IMPACT
Approving these funding recommendations would conditionally commit $29,533,000 in HMF revenue to these projects. Based on the FY 2024/25 Adopted Budget, this will reduce the HMF reserve balance to $22.6 million and a BMR In Lieu Fund reserve balance of $15 million. The recommended award amount is within the FY 2024/25 Adopted Budget, which allocates a total of $32.5 million for this NOFA and would leave approximately $3 million remaining in the event of unanticipated need or to be included in the next budged NOFA in FY 2026/27. The Housing and Humans Services Commission may recommend the $32.5 million amount as Alternative 2, but this would result in no available HMF for any other special projects or items that may arise until the FY 2026/27 NOFA.
The preliminary fee revenue estimate for the Housing Mitigation Fund shows moderate returns for the coming years as non-residential development shows signs of increasing from recent years The payment of mitigation and impact fees cannot be precisely timed as they are based on specific milestones of each development project. The Housing Fund is expected to continue to have healthy reserves to weather any near-term economic downturn, and sufficient funding for operating expenses after the $29,533,000 is allocated.
The purpose of Housing Mitigation Funds is to support the development of affordable housing projects; therefore, the recommended action is consistent with its purpose and various affordable housing policies and programs of the City’s Housing Element.
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
Recommend that City Council:
1. Award conditional funding commitments for $29,533,000 in Housing Mitigation Funds and Below Market Rate In-lieu Funds for the acquisition, pre-development, and/or development of the projects presented in Attachment 3 to the report.
2. Award conditional funding commitments for $32,500,000 in Housing Mitigation Funds and Below Market Rate In-lieu Funds for the acquisition, pre-development, and/or development of the projects presented in Attachment 3 to the report.
3. Direct staff to return with a Budget Modification with an intention to award conditional funding commitments for $34,000,000 in Housing Mitigation Funds and Below Market Rate In-lieu Funds for the acquisition, pre-development, and/or development of the projects, as requested by the applicants and presented in Attachment 3 to the report.
4. Other action regarding an award of conditional funding commitments in Housing Mitigation Funds and Below Market Rate In-lieu Funds for the acquisition, pre-development, and/or development of the projects presented in Attachment 3 to the report.
5. Do not approve any conditional funding commitments.
Recommendation
RECOMMENDATION
Alternative 1: Recommend that Council award conditional funding commitments for $29,533,000 in Housing Mitigation Funds and Below Market Rate In-lieu Funds for the acquisition, pre-development, and/or development of the projects, as presented in Attachment 3 to the report.
JUSTIFICATION FOR RECOMMENDATION
Alternative 1 is the scoring committee’s recommendation and ensures that funding is available to meet an important timeline for the acquisition of 1171 Sonora, while supporting predevelopment expenses for both 1171 Sonora and 295 S. Mathilda and supporting construction activities for 352 E. Java. The recommended funding amount is an increase to the total funding advertised in the NOFA exercising the option that the City Council could increase the total funding to be awarded. Staff recommends not awarding the full amount in the FY 2024/25 budget ($32.5 million) and reserving approximately $3 million should an urgent situation surface prior to FY 2026/27. If the City Council is interested in conditionally awarding the full amount requested ($34 million), a Budget Modification would be required to appropriate the additional funds.
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 or “Y” 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
_Y_ 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
Reviewed by: Jenny Carloni, Housing Officer
Reviewed by: Dennis Jaw, Interim Director of Finance
Reviewed by: Trudi Ryan, Director of Community Development
Reviewed by: Connie Verceles, Deputy City Manager
Approved by: Tim Kirby, Interim City Manager
ATTACHMENTS
1. Reserved for Report to Council
2. Sample NOFA Scoring Sheet
3. Funding Alternatives