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CPA Application 2023 - Community Investment Fund for Homeownership 2.7.23.pdf COMMUNITY PRESERVATION PROJECT APPLICATION COVER SHEET I: Project Information Project Title: Two-Family Lease Purchase Pilot to Kickstart a Homeownership Community Investment Fund Project Summary: This initiative will pilot a three-year lease purchase program to provide a homeownership opportunity to an income qualified household (60-80% AMI). The pilot project will purchase an existing two-family home, select a qualified lease-to-own applicant, coordinate training and support, and accrue the buyer’s purchase down payment through the rental payments. At the end of the project, the home will be sold to the lease-purchaser, and proceeds will be returned to a newly created Community Investment Fund that will repeat the pilot project and support continued affordable homeownership opportunities. Estimated start date: _6/1/2023 Estimated completion date:_6/1/2027 CPA Program Area (check all that apply): � Open Space � Historic Preservation X � Community Housing � Recreation II: Applicant/Developer Information Contact Person and or/primary applicant: Danielle McKahn, Managing Partner, Pioneer Development LLC Property Owner (if applicable): An LLC and a Nonprofit will be formed Organization (if applicable): An Advisory Committee will be formed Mailing Address: 32 Perkins Ave, Northampton, MA 01060 Daytime phone #: (413) 320-7208 Fax #: None E-mail address & Website: danimckahn@gmail.com III: Budget Summary Total budget for project: $595,000 CPA funding request: $100,000 CPA request as percentage of total budget: 16.8% Applicant’s Signature: Date Submitted: 2/7/23 Project Narrative A grant in the amount of $100,000 is sought from the Northampton Community Preservation Fund in order to pilot a housing initiative that supports homeownership for Northampton residents with household incomes at 60-80% of the Area Median Income (AMI). The funds will support the pilot project and help establish a self-sustaining Community Investment Fund that enables ongoing repetition of the pilot project (and other affordable housing initiatives) and continued support of homeownership for years to come. Existing subsidized rental, new construction programs, and deed restricted affordable housing already contribute to a vital need to develop and maintain affordable housing stock. This project focuses on affordable homeownership for residents that are 60-80% of AMI using existing naturally occurring small multi-family affordable housing stock. Residents at 60-80% of AMI also have great difficulty in accumulating the necessary down payment for homeownership and are thus prevented from access to the same economic tools that build multi generational wealth. This project accumulates the necessary down payment through a three-year lease purchase program, and uses this period for homeownership and landlord training as well. This pilot project is designed to enable residents to rent an affordable unit at market rate, and then accrue the down payment to purchase the property over a period of 3 years. Conceptually similar to a lease to own model, hybridized with home ownership models similar to those successfully employed by Habitat for Humanity, residents will invest their time in maintaining the property, familiarizing themselves with operation and maintenance, and receiving training in financial literacy and property management. After 3 years, the resident will have the option to purchase the property, with the down payment provided by a portion of the market rate rent they have already paid. This project will initiate the establishment of a Community Investment Fund that returns 0-2.5% to community loan funds and philanthropic investors, rather than the 8-15% or more normally returned by Real Estate Investment Funds. Simply put, rather than providing investors with a high rate of return, this Community Investment Fund will provide future homeowners with a down payment. In addition to the need to transition residents into homeownership, this fund aims to slow the impacts of gentrification that Northampton is currently experiencing. As market rate rents continue to climb, real estate investors are ‘over improving’ existing houses, and raising the cost of rent accordingly. This upward pressure on the rental market is attracting significant investment at the expense of maintaining existing naturally occurring affordable rental units and homes to those at 60-80% AMI. The properties in this program will not be deed restricted, however, because wealth-building is a significant project goal, and avoiding deed restrictions will encourage sweat equity investment and allow the lease purchaser to benefit from local appreciation if and when the home is later sold. The objective of this program is to intentionally create a structure that enables lower-income residents to buy a home, gain equity, and grow their own wealth. At the same time, the initiative preserves and grows the capital investments in the Fund in order to continue to support future projects and residents. While we are not deed restricting houses to keep them perpetually available to residents at 60-80% AMI, we are preserving the financial investment (proceeds from the grant and loan/investment funds that are given to the project will be returned to the fund to repeat the project again), repeatedly reducing the barriers to access to home ownership and slowing the pace of gentrification and the impact it has on diversity in our community. Project Location Once grant, loan and investment funds to initiate the Community Investment Fund are secured, a two-family property for sale in the appropriate condition and at the appropriate price will be identified. As local developers ourselves, we have significant available resources and expertise to identify and purchase an appropriate property to engage in this pilot project. From an assessment over the past 10 years of two-family properties available for sale in Northampton through MLS, there are approximately 10 properties per year with the right characteristics at the right competitively bid price. We are not concerned about our ability to identify a prospective project, offer a competitive bid and secure ownership of the property. Community Preservation Criteria This project targets the Community Housing program area within the CPA Plan. Low income housing is defined as less than 80% of the AMI and we are targeting residents that are within the range of 60-80% of the AMI. As has been well established, the affordability of housing to those below the AMI promotes social and economic diversity and increasing the fraction of those residents that can remain in housing that is accessible to them through homeownership preserves that investment in our community. Within the Community Housing Program, this project will produce and support: ● Diverse Populations - This project supports residents that represent socioeconomically diverse backgrounds within the 60-80% range of the AMI. ● Harmonious Housing - A focus on two-family housing, rather than new construction, preserves the existing character of our diverse neighborhoods and preserves/utilizes diverse housing stock. By identifying and maintaining small scale multi-family houses, we are ensuring that these projects remain harmonious, in design and scale, as they are situated within the context of the surrounding community. ● Existing Buildings - This project leverages and maintains existing housing stock. In addition, we are maintaining real property and reducing the risk from injury, harm or destruction. Although we will not be seeking historic certification for any purchased properties, we will bring all properties to lead compliance, remove knob and tube wiring, and mitigate other hazards currently tolerated in many local rental and owner-occupied properties. While not required by the Building Code or Public Health Standards and Policies, our development ethic offers a reliable history of ensuring that all properties we work with are improved to reasonable safe standards, including the removal of knob and tube wiring to allow for improvements to the building thermal envelope and bringing properties into lead compliance. We have accounted for these improvements in the project budget. ● Fair Housing - Priority will be given to Northampton residents and employees according to the Fair Housing standards. ● Supportive Services - Existing tools, supported through local nonprofit corporations and organizations, will be utilized to provide financial literacy training, particularly for those in need of support services. Additional services will be provided to support the transition to homeownership, similar to those structured by Habitat for Humanity. ● Enhanced Nonprofit Capacity - This project will leverage and compliment existing local nonprofit resources and potentially lead toward collaborative efforts to expand their financial literacy portfolios. Resources will be leveraged from tenant selection through the transition to homeownership. A list of nonprofit organizations that have advised this project structure is included. While we do not yet have collaborative agreements formally structured, many are receptive and enthusiastic about this model and eager to support this work. We intend to continue to build those relationships and avoid reinventing the wheel. ● Reduction of Vehicle Reliance - In selecting a property, we will identify a property that is within 1.75 miles from downtown Northampton or Florence center, with a specific interest in properties within 1.0 mile. Among the criteria for property selection is access to Northampton’s extensive recreational path network. Because we are not building new construction, we are limited in site selection, but have narrowed that criteria to distance from our downtown or Florence center as a proxy to the reduction of car trips and greater reliance on walking, biking and public transit systems. ● Housing for Households at 80% of the AMI - Residents will be identified with household incomes that are within 60-80% of the AMI ● Affordable Home Ownership for Families - As articulated in the Pioneer Valley Planning Commission’s Housing Needs Assessment and Housing Strategic Plan, this project provides low-income residents with an ability to obtain financing for homeownership and addresses the large upfront cash requirement that has contributed to the housing affordability gap. ● New Possibilities - As an alternative funding model this project establishes a revolving Community Investment Fund that will continue to address economic barriers to low-income homeownership. A Community Affordable Housing Trust may not be the best instrument for supporting home ownership for residents at 60-80% AMI. Rather, a Community Investment (or Impact) Fund can better support continued investment that does not require ongoing government subsidies for each subsequent project. In spirit, however, this fund intends to achieve many of the goals set forth by community members interested in the establishment of a Community Affordable Housing Trust as detailed in the CPA Table of Allowable Spending Purposes. Community Needs This pilot project, and the establishment of a Community Investment Fund is designed to serve existing or future Northampton residents with household incomes at 60-80% of area median income (AMI). This population is currently underserved, and there are few programs that focus on transition to homeownership through direct financial support as opposed to financial literacy and support. Those programs that do provide down payment assistance rely on deed restrictions to preserve the affordable status of the entire house or unit, particularly the portion owned by the low income homeowner. As articulated in the Pioneer Valley Planning Commission’s Housing Needs Assessment and Housing Strategic Plan, this project provides low-income residents with an ability to obtain financing for homeownership and addresses the large upfront cash requirement that has contributed to the housing affordability gap. In order to execute this project, an LLC will be formed to hold the property, and this LLC will be held by a nonprofit so that all funds generated can go toward down payment assistance (losses to taxes would lengthen the lease-purchase period) and the Community Investment Fund for affordable homeownership. We will make efforts to identify an existing nonprofit willing to play this role, at least for the pilot project. If/when necessary, a new nonprofit will be formed. Some members of the Advisory Committee for the Pilot Project and the Community Investment Fund could ultimately end up on the board of a non-profit that is established. The existing or new nonprofit home for the program can continue to repeat the pilot project and other homeownership assistance loans or programs with the revolving funds, and it can hold the Community Investment Fund (community loan funds are typically held by nonprofits). Long-Term Preservation of the Project While we are not deed restricting this affordable housing, and instead focusing on homeownership for low-income residents, the Community Investment Fund serves as a revolving fund that continues to assist low-income renters through the transition to homeownership. This revolving fund provides the long-term preservation of the program to support future low-income residents, as opposed to the long-term preservation of the specific housing project. Community Support for Project At this stage in the project development, we have consulted with numerous local and national organizations and experts to assist us in framing and articulating this project concept. We are continuing to engage with these advisers and plan to develop structured support and collaborative relationships to directly assist in, or continue to advise, this project. Although not to be construed as an endorsement of this application, a list of people we have consulted with to structure this project (many of whom that have expressed a willingness to consider participating in the eventual Advisory Committee for the project), includes, but is not limited to: ● Financial Literacy, Affordable Housing and Local Needs: Valley Community Development Corporation can provide free homeownership pre purchase and post purchase classes to project residents, as well as additional support with financing and homeownership. Also had discussions with Joanne Campbell (former Executive Director of Valley CDC), Megan McDonough (Executive Director of Pioneer Valley Habitat for Humanity), Clare Higgins (Executive Director of Community Action Pioneer Valley), Keith Fairey (President and CEO of Wayfinders), Araceli Rivera (Homeownership and Financial Education Manager of Wayfinders) ● Fund Structures, Financial Risks, and Programs to Support Low Income Homeownership: Suzanne Beck (former Executive Director of the Greater Northampton Chamber of Commerce), Randy Krotowski (Resident, Florence MA), Rebecca Busanky (PV Grows Fund Coordinator), Raymond Lanza-Weil (President, Common Capital), Joe Weisbord (former Director of Homelessness Initiatives, Foreclosure Prevention, and Credit and Housing Access for Fanny Mae), Sky Morse (Investment Director, M&S Development LLC), Jake Ide (Director of Investment & Philanthropy, Vermont Community Loan Fund), John Dunne (Senior Community Housing Officer, The Corporation for Supportive Housing), MJ Adams (Community and Economic Development Director, City of Greenfield) ● Community Resources to Support Residents and Affordable Housing: George Kohout (Chair of the City of Northampton Planning Board), Pat Goggins (formerly of Goggins Real Estate) Metrics for Project Success The near-term metric for success is to transfer property ownership to an income-qualified tenant/buyer and return the initial capital investment to the Community Investment Fund to be used for the acquisition of another property purchase to repeat the project. Lenders and investors will be given an opportunity to renew their term if desired, and any grants and excess funds will be reinvested into the fund and the next project. Longer term, our ability to grow the Community Investment Fund and our ability to deploy this structure in other communities is of keen interest. Maintenance and Upkeep Operation and maintenance of the pilot project property will be managed personally, pro-bono, by members of Pioneer Development (the grant applicants). Over the course of the 3-year project, operation and maintenance will be transitioned to the prospective homeowner and the prospective homeowner will be trained through existing programs and assistance of the Pioneer Development members. As the Community Investment Fund grows, the fund will directly support the cost of property management. For each property in this program, maintenance and upkeep transitions to the new homeowner. It is our hope, down the line, to establish an Emergency Fund that could be used to support homeowners who have used this program should they experience significant financial burdens at a time when a property maintenance need is particularly acute. Project Budget Narrative: The total budget for this project is $595,000 as detailed in attached budget documents. $100,000 in CPA grant funds are requested, to be used towards knob & tube wiring removal, lead remediation, HVAC upgrades and other necessary repairs or improvements (up to $25,000); closing costs at the initial property purchase and then later at the sale to the lease-purchaser ($7,000); legal fees to create the Community Investment Fund for affordable homeownership and make the initial fund offering (up to $25,000); and other required soft costs following the initial property purchase (up to $10,000). In addition, $7,200 of the CPA grant funds will be used for direct rent assistance to the selected lease-purchaser. The remaining CPA funds will be used toward Operating Expenses for the three-year lease purchase period, including property taxes, insurance, utilities, maintenance and repairs ($34,066). To raise the remaining demonstration project funds, we applied for Northampton ARPA Community Recovery Project grant funds, to be used toward property acquisition, and we plan to make a monetary donation of $5,000 to the project in addition to in-kind labor donations for project management, fund administration, as well as the launch of the Community Investment Fund, valued at $90,000 over four years. Note that the $25,000 line item for knob & tube wiring removal, lead remediation, HVAC upgrades and other necessary repairs or improvements is based on extensive personal experience with the deferred maintenance conditions typically encountered in older multi- family homes. The ability to meet this budget will be assessed prior to property purchase based on the repairs and upgrades required for the specific home in question. While most older homes are already code-compliant and operating legally, they often need to be upgraded through removal of older knob & tube electrical wiring in order to be insulated. It is also desirable to make older properties lead compliant, and to remove any asbestos pipe insulation, even though this is not required. Some identified upgrades would need to be completed at the outset (e.g. lead remediation) while others could potentially be completed at a later date based on budgeting constraints. Page 1 of the Budget provides an overview of the project concept and estimated costs. Generally speaking (see “General Uses”), the maximum Purchase Price is $450,000, the maximum Repairs & Improvements budget is $25,000, and $120,000 is allocated to Soft Costs & Reserves. The General Uses budget is followed by a “Sample Pilot Project Budget (Detail Uses)” which provides a more detailed example of how funds might be spent depending on the specific conditions of the property that is purchased. The “Sources Budget” then lists the anticipated sources of the funding for the project. Below these Uses and Sources budgets are several summaries that demonstrate how the two-family lease purchase pilot project works. The “Pilot Project Operating Revenue Summary” shows rental revenues and expenses over three years (a summary of Page 3, a detailed Annual Operating Proforma at Purchase), as well as the additional expense of a low interest rate return to the Community Investment Fund and to individual philanthropic investors. At the end of this summary, you can see that the net 3-year income to be applied toward the lease purchaser’s down payment is $40,526. Below this is the “Pilot Project Sale Revenue Summary”, which demonstrates how a small amount of property appreciation applied over the three-year lease purchase period will produce the remainder of the down payment required (in this example, $24,483 is shown). So, together, the $40,526 in net rental income plus the $24,483 generated at the final sale through property appreciation equals $65,009, which exceeds the 15% down payment required (shown in the “Pilot Project Lease Purchase Completion Summary as $63,672). The difference between the $65,009 and the $63,672 (the final numbers will differ from this, of course) represents extra funds that can be applied toward closing costs, approved repairs or improvements, or returned to the Community Investment Fund to assist future low-income purchasers. Note also that these are example numbers and are not exactly what the final numbers will be; the investment to the Community Investment Fund from the pilot project proceeds could be adjusted down (if money has been provided by grants or 0% interest investors) if additional down payment funds are required, and the property appreciation rate applied for the final sale could be adjusted slightly as well (up to 3% is typically used by Community Land Trusts) if needed as well to produce the required down payment at purchase. (One last note: The $69,000 number on page 5 is not directly related to the budget – Page 5 shows a separate Affordability Analysis demonstrating the maximum affordable purchase price for a household at 80% AMI (and the calculated maximum 15% down payment that would be required, which is $69,000). Finally, Page 2 of the budget shows specifically what items CPA funds will be spent on. Page 3, as noted, provides a detailed Annual Operating Proforma (at Purchase), and Page 4 provides a detailed Annual Operating Proforma for the lease-purchaser after the Sale. Page 5, as discussed, is an Affordability Analysis for a household at 80% AMI. If ARPA funds are not awarded to the project, or if smaller than required grant awards are made, we will pursue additional grant opportunities and fundraising, including individual donations and philanthropic investments. If required, the Community Investment Fund could be established earlier, prior to initiation of the pilot project, and an offering made to raise the gap funds. The sources and uses budget and operating proformas are attached, as well as the affordability analysis. Multi-Year Funding: This project is expected to utilize $100,000 in CPA grant funds for 3 to 4 years. The lease-purchase period for the selected applicant is expected to be 3 years. At sale, proceeds from the sale will be used to permanently seed the newly formed Community Investment Fund for affordable homeownership. Project Timeline: Upon securing the funds required for the pilot project, we will seek to purchase a property and select an applicant by December 2023. The training and lease purchase process will be completed by December 2026. In the even that additional time is required, the projected end date is set at June 2027. Feasibility: This project requires purchase of a small multi-family home that fits the location, purchase price and improvement budget parameters. Approximately 10 such homes are sold on the open market through MLS each year in Northampton, and must be obtained through a competitive bidding process. The project can be piloted once the required funds are raised or pledged. Community Investment Fund for Homeownership: Two‐Family Home Pilot Project Project Budget  Prepared by Pioneer Development LLC Uses* of CPA Grant Funds Summary, up to $100,000 *Exact budget will be based on the property and conditions $25,000 Knob & Tube Removal, Lead Remediation, HVAC Upgrade, Repairs $7,000 Closing Costs at Purchase and Sale $25,000 Legal Fees for Community Investment Fund Offering $10,000 Other Soft Costs $7,200 Direct, Subsidized Rental Assistance Payment of $200/month x 3 Years $34,066 3 Years Operating Expenses (Prop Taxes, Insurance, Utilities, Maintenance, Repairs) $108,266 Total Improvements, Soft Costs, Operating Costs and Direct Assistance Projection Project Budget Page 2