Loading...
NTONCityCouncilMemo121508 December 15, 2008 TO: City Councilors FROM: Joanne Campbell Executive Director RE: SRO Housing in the Community and SRO Financing INTRODUCTION The Community Preservation Committee (CPC) has made two CPA recommendations for SRO projects that would be undertaken by Valley CDC. The first is for 16 North Maple Street ($250,000) and the second is for 96-98 King Street ($225,000). At the request of the CPC, I am sending you this memo with information about the impact of SRO housing on our community, as well as information about SRO Financing. If you have questions about this information, please do not hesitate to contact me at 586-5855 ext. 19. SRO HOUSING IN THE COMMUNITY SRO units continue to be lost in the community. Most recently, both Augie’s in downtown Northampton and the Valley Inn in Florence have closed. There continues to be a great need for SRO housing in Northampton. The tenants that rent SROs in our buildings come from many walks of life. They include folks working in low paying custodial, retail, and food service positions in downtown; landscaping/fencing positions; custodial work at an area hospital; employed by a local college; self employed including cleaning services; disabled and retired veterans; physically disabled people, folks recovering from mental illness and substance abuse who may have limited ability to return to work. SRO FINANCING Although it appears that these types of projects are expensive and I detail below many of those expenses, I include here a comparison of what the cost would be if a private developer, who would not be subject to some of the constraints imposed by state funders. If we assume the private developer could complete the project for 60% of the cost of the project ($2 million) which is $1.2 million, plus a 20% down payment ($240,000), s/he would need to borrow $960,000. Assuming an interest rate of 7% with a 30 year term, the monthly debt service would be $6,387 or $76,643 annually. With income for both the commercial space and 8 SROs, the total income is $56,784. When Valley CDC prepares to undertake a new project, whether a preservation project or the creation of new units, we use our experience with previous projects to determine costs. From the early stages of our projects, we are consistently in contact with CEDAC (Community Economic Development Assistance Corporation), an affordable housing acquisition and predevelopment lender with a local office here in Northampton. Our preliminary numbers are always reviewed with CEDAC to ensure we are in line with other affordable housing projects both in Western Massachusetts and throughout Massachusetts so that we stay competitive when we are ready to submit our proposed project to the state for funding. Valley CDC’s recent track record, which includes our last four projects, demonstrates our success. These four projects were funded during their first submission to the State, evidence of our ability to be competitive state-wide. In fact, Valley CDC had two rental projects funded in December 2006, one of only a handful of non-profit housing developers across the state to be funded for more than one project in one “round”. The cost of developing affordable housing is driven by the multi-tiered funding streams that must be coordinated to make projects financially feasible; unique regulatory requirements of each funding source; strict adherence to environmental and design issues; as well as strict oversight of design and construction issues. The complicated financing package necessary to make affordable housing projects work is primarily comprised of deferred payment loans with a recorded mortgage and long term affordable housing restrictions. Hard Costs :  Construction costs are based on a square footage cost of approximately $190 per square foot based on the current square footage of the buildings. A bid lien and performance bond is required of the contractor completing the construction work. The state requires all projects to meet Energy Star requirements, which increases the cost of the project, but reduces the operating expenses of the building.  Valley CDC and the state funding sources generally expect affordable housing contingency costs development projects to include 10% for rehabilitation jobs and 5% for new construction, of the total construction cost. Soft Costs :  detailed due diligence work Requirements by State funding sources for ensures proper use of tax dollars, but these requirements drive up the cost of projects. State inspecting funding sources require oversight of the construction process by an engineerclerk of the worksAccounting and cost certification costs and a . include costs associated with auditing fees for the first year as well as a state review of costs ensuring at the completion of a project that funds spent during the construction were appropriate and in line with the budget.  surveys State funding sources require prior to and subsequent to project completion. appraisalsReal Before and after are required by the affordable housing lenders. estate taxes are paid by the project during the duration of the project when there might not be any rental income due to relocation of tenants.  Environmental costs include a basic environmental review to ensure the property is free of any oil spills, toxic waste, or previous uses which would be inappropriate for residential use. Further exploration can be necessary if concerns are uncovered. Additionally, lead, asbestos and radon inspections are required and if present, specifications are developed professionally for the abatement of lead, asbestos, and/or radon and then incorporated into the plans and specifications prepared by the project architect.  legal regulatory Affordable housing projects are complicated deals with many requirements . Legal costs are driven up by the need for each of the state funding sources to be represented by legal counsel, which are Boston based firms. Additionally, Valley CDC hires counsel to represent its interest in the closing on all the financing for the project. Title and recording fees represent costs for recording affordable housing restrictions, lender’s and owner’s title insurance, as well as monthly title endorsements required by the state to ensure no new encumbrances on the property prior to releasing monthly requisition payments. A construction loan and permanent loan closing can also increase the legal costs.  Relocation costs would be incurred if it were necessary to relocate existing tenants during the construction process. Valley CDC would be subject to federal Uniform Relocation Act requirements regarding tenants’ rights regarding temporary and/or permanent relocation. Valley CDC incurred costs of approximately $22,000 to relocate four (4) tenants at the School Street project.  Insurance costs include builder’s risk insurance during construction as well as costs of insurance during the duration of the project when there might not be any income due to relocation of tenants (and before construction begins).  Prior to closing on the financing with the state funding sources, Valley CDC borrows money from CEDAC, the state’s affordable housing predevelopment and acquisition predevelopment loan lender. Valley CDC has a with CEDAC now for these projects which accrues interest at 7%. Predevelopment costs that are incurred on behalf of the project include some portion of the soft costs from the early stages of project identification until the closing on the state’s subsidy financing for the project at which time CEDAC is repaid. Valley CDC recently requested acquisition financing from CEDAC for the King Street project. Its Board approved the financing and Valley nd expects to purchase the property by December 22. Acquisition interest will accrue at 7% until the closing on the state’s subsidy financing for the project at which time CEDAC will be repaid.  capitalized reserves State funding sources recommend that (future fund for unforeseen operating deficit) be either 6 months of operating expenses or six months of debt service – whichever is highest. Valley CDC usually projects, and the state soft cost contingency funding sources agree, that a 5% is appropriate. State funding developer’s fee and overhead sources limit to approximately 12% of the total development costs for the project to cover staff and agency costs from the predevelopment stages of project initiation to project completion as well as for the long term oversight of the project during its affordability restriction period. Again, please do not hesitate to contact me if you have questions or need additional information.