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CR 92-73 Westbrooke Rehabilitation )' t 1" y , 0 (j '" ~ .y c" . March 25, 1992 o P K \ ~ Council Report #92-73 WESTBROOKE REHABILITATION FINANCING ANALYSIS Proposed Action Staff recommends approval of the following motion: Accept Springsted, Inc. report intitled "Westbrooke Rehabilitation Financing Analysis" and authorize staff to beqin to undertake initial steps to implement the Work Plan. With approval of this action the Analysis will be formally adopted and staff will begin implementing the Work Plan as outlined. Overview In August of 1991 the City, in cooperation with the five Westbrooke associations (Patio Home, Meadow Creek, North, Park and West), hired the financial consulting firm of Springsted, Inc. to complete an analysis of the financing options for the rehabilitation of the Westbrooke neighborhood. The study was presented to the City Council and the Westbrooke Associations at the March 10, 1992 Council Work Session. Through the study and subsequent discussions, several recommendations were made which can be followed to stabilize and enhance the Westbrooke neighborhood. The Work Plan takes those recommendations and details the steps that need to be taken. One step will be to meet with the various Westbrooke associations and tour the area. This has been scheduled for the May 12, 1992 Work Session. Other recommendations will require further action by the City Council prior to actual implementation. Supportinq Information o Westbrooke Rehabilitation Financing Analysis o Work Plan for Implementing Recommendations . . Housing Coordinator , . j ~ ~~ SPRINGSTED ~ PUBLIC FINANCE ADVISORS Home Office - 85 East S.eventh Place 222 South Ninth Street . SUite 100 Suite 2825 Saint Paul, MN 55101-2143 Minneapolis, MN 55402-3368 (612) 223-3000 (612) 333-9177 Fax: (612) 223-3002 Fax: (612) 333-2363 16655 West Bluemound Road Suite 290 Brookfield, WI 53005-5935 (414) 782-8222 Fax: (414) 782-2904 6800 College Boulevard Suite 600 Overland Park, KS 66211-1533 (913) 345-8062 Fax: (913) 345-1770 February 14, 1992 Mr. Jim Kerrigan, Director of Planning and Economic Development Ms. Kersten Elverum, Housing Coordinator City of Hopkins 1010 First Street South Hopkins, MN 55433 Re: Westbrooke Rehabilitation Financing Analysis Dear Mr. Kerrigan and Ms. Elverum: The purpose of this letter is to report on the conclusions of the financing analysis Springsted Incorporated has conducted for the City of Hopkins regarding options for rehabilitation of the Westbrooke Condominiums. Our analysis includes a review of five possible tools or sources of financing -- tax increment financing, special purpose revenue bonds, general obligation bonds, special service district, and private lending institutions. We have researched the current financial status of the five homeowners associations that represent the 1 ,296 housing units in Westbrooke, how each tool relates to the issues facing the associations, and the advantages and disadvantages of each funding source. The documentation of our analysis contained in this letter is organized in three main sections -- 1) a brief history of the associations and their current financial status, 2) an evaluation of funding alternatives including a discussion of the advantages and disadvantages of each source, and 3) recommendations on the use of certain financing alternatives, including the process needed to secure the funding source. I. Background and Current Status of the Westbrooke Associations The Westbrooke Condominium and Patio Homes neighborhood consists of two housing types -- the eight-plex apartment condominiums located east of 11 th Avenue South and the patio homes, or townhouse condominiums located west of 11 th Avenue . City of Hopkins, Minnesota February 14, 1992 Page 2 - South. The total complex is divided into. five separate homeowner associations as follows: Association Name Number of Units Apartment Condominiums: Westbrooke West 176 Westbrooke North 88 Westbrooke Park 168 Meadow Creek 536 Subtotal 968 Townhouse Condominiums: Patio Homes 328 Total 1,296 The apartment condominiums were originally constructed as rental units in the early 1970's and converted to condominiums from 1980 to 1983. The units consist of one- and two-bedroom apartments, some including separate garages. Original values were in the $45,000-$60,000 range. Currently values range from as low as $13,000 for a recently foreclosed unit to approximately $38,000. The majority of the Westbrooke apartment condominiums are rental properties. The percentage of owner-occupancy varies by association, ranging from approximately 5% in Westbrooke North to 21 % in Meadow Creek and 25% in Westbrooke West and Westbrooke Park. The Westbrooke Patio Homes were also constructed in the early 1970's, but were developed originally for home ownership. The 328-unit complex includes two- and three-bedroom townhomes with detached or tuck-under garages. Some units were sold on a 99-year land lease from the original developer. Original values, including purchase of the underlying land, were in the $40,000-$50,000 range. Current values appear to range from $50,000-$65,000. The majority of the Patio Homes are still owner- occupied, with owner-occupancy rates currently estimated at approximately 64%. As a whole, the Westbrooke Condominium and Patio Homes complex is suffering from problems of deferred maintenance, inadequate repair and replacement reserves, and declining property values. After 20 years of use, the major infrastructure and common area components are wearing out and must be replaced. These components include roofs, windows, parking lots, siding, hallway and entry area refurbishing, and entry and garage doors. Since some original apartment condominium owners are unable to sell units at a price sufficient to payoff their remaining debt, a large number of units have been converted to rental properties. To a large extent, there is no coordination between individual owners on rental rates or policies, which results in underbidding rents to attract tenants and further declines in values. The absentee owners are reluctant to approve increases in association dues to fund repairs, since the increased dues further reduce their rental cash flow. As part of our analysis, we examined current and historic levels of association dues, current and future budgets for repair and replacement and existing reserve fund balances. Table I, attached, presents the association dues and reserve account information by association. The average dues per unit is based on the total budgeted revenue from dues divided by the number of units. It does not reflect adjustments for actual collections. With the exception of Meadow Creek, historic association dues information prior to 1986 was not available. r City of Hopkins, Minnesota February 14, 1992 Page 3 - Association dues budgeted for 1992 range from a low of $124.50 per unit per month for Westbrooke North to $144.80 per unit per month in Meadow Creek. Westbrooke North does not contain garages, which accounts for a differential in dues of $7 per unit per month. Over the past six years, Westbrooke North has had the lowest average annual increase in association dues at 5.36%, while the Patio Homes have experienced the highest average annual increase at 8.07%. It should be noted that the Patio Homes is the only association whose articles of incorporation and by-laws restrict increases in annual dues to no more than 10% per year without a vote of the membership. In the last four years, the Patio Homes have increased dues at the maximum rate. As shown in the bottom half of the table, reserve account balances varied from $36,780 to $55,000. On a per-unit basis, the variance in reserves by association is much greater. However, the reserve per unit does not reflect the ongoing level of repair and replacement or the adequacy of current association dues to cover needed improvements over the next five to 10 years. With the exception of the Patio Homes, the associations and the property managers have prepared long-term capital improvement budgets. These budgets compare expenditures for repair and replacement with revenues from association dues and reserve fund balances. Of the four apartment condominium associations, Westbrooke North is the only association showing a projected shortfall in their replacement reserve, which may occur in 1993 unless association dues are increased further. An average increase of $10 per unit per month in association fees for Westbrooke North would alleviate the projected shortfall and bring their dues amounts closer in line with the other apartment condominium associations. It is important to point out that the capital improvement budget for Meadow Creek does not include maintaining or rebuilding Westbrooke Way and Old Settler's Trail, which are considered part of the common area for the association. The remaining life of the roads is estimated at two to three years. The City Engineer has estimated the cost of reconstructing these roads at $193,000. The Meadow Creek association clearly does not have the capacity currently to absorb this extraordinary cost. As stated above, the Patio Homes association does not currently have a long-term capital improvement program. The Patio Homes are in a much poorer financial position than any of the other associations. It is currently estimated that $900,000 is necessary in the next several years for common area improvements such as repairing roofs, replacing siding and garage doors, and repairing roads and parking areas. The association intends to spend approximately $100,000 this year on various repairs. A special annual assessment of $2,300 per unit to finance the needed improvements failed to gain membership approval two years ago. This special assessment would have almost tripled the association dues. II. Evaluation of Funding Alternatives Unless repair and replacement reserves are accumulated on an annual basis or the association levies a special dues assessment, a condominium association cannot proceed with major common area expenditures. Restrictions on borrowing for common area repairs and replacement without membership votes are sometimes included in the by-laws or articles of incorporation. A more practical constraint to borrowing by the association is the inability to provide adequate security for the loan. Often the associations' only assets are the value of the caretaker units or maintenance garages. This constraint leads us to a discussion of the following funding alternatives: general . City of Hopkins, Minnesota February 14, 1992 Page 4 - obligation bonds, special purpose revenue bonds, special service district, private lenders, and tax increment financing. . General Obligation Bonds. General obligation (G.O.) bonds may be issued by the City of Hopkins on a tax-exempt basis to finance public infrastructure. This funding alternative is the simplest to implement but contains the restriction of usage for public improvements. The most logical application would be for the reconstruction of Westbrooke Way and Old Settler's Trail, which are currently owned by the Meadow Creek condominium association. To use G.O. bonds, the Association must transfer ownership of the roads to the City. The current City roadway policy calls for the City to assume 30% of the construction costs with the remaining 70% assessed against the Meadow Creek property owners. The assessments could be repaid over a 1 0-15 year term at interest rates from 6- 7%. . Special Purpose Revenue Bond. One possible source for financing the necessary common area improvements is a special purpose revenue bond. This option was initially presented to the City by the staff of the Minnesota Housing Finance Agency (MHFA). The proposed bond structure includes a taxable bond issued by MHFA to be repaid from increases in association fees. Since the bond would be supported only by revenue from the increased association dues, MHFA suggested that a bond reserve equal to 25% of the total bond amount be set aside as additional security. It was anticipated that the interest rate on the bonds would be in excess of 10% (depending on the final structure and bond market at the time of sale) and the bond term would be 10- 12 years. It is our understanding that this concept did not proceed further due to the lack of a source for the 25% security reserve. As part of our analysis of financing options, we have pursued the concept of a special purpose revenue bond further. We contacted the City's bond counsel, Holmes & Graven, to research ways the City of Hopkins may issue the bonds and whether it is possible to issue them on a tax-exempt basis. The response from Barbara Portwood of Holmes & Graven in a memo dated February 6, 1992 is attached to this letter. While the City does have authorization under Minnesota Statutes, Chapter 462C to issue multi-family rehab revenue bonds for the common area improvements, the bonds cannot be issued on a tax-exempt basis due to the residency requirement and federal tax laws. Given that the City has authorization to issue the taxable bonds, the key issue remains the type of security that must be provided to make the bonds marketable. The bond issue would most likely be structured and negotiated through a local underwriting firm. The bond investor must believe that there is a strong likelihood that the bond principal and interest would be paid on a timely basis. In addition to the 25% reserve proposed by MHFA, a second security option may include letters of credit from local banks, covering two or more years of debt service payments. The cost of the annual letter of credit fees would also be paid from increased association dues. The City is currently discussing establishing a consortium of local banks. A banking consortium would be an excellent resource for providing the letter of credit or other sources of security for the bond issue. Since the Westbrooke Condominium and Patio Homes reflect such a large share of Hopkins housing stock and property values, any efforts on the part of the local banking consortium to participate in a possible financing solution may also assist the banks in meeting federal Community Reinvestment Act requirements. City of Hopkins, Minnesota February 14, 1992 Page 5 -' Use of a special purpose revenue bond for common area improvements is an unconventional approach, one that will only be successful through a concerted effort on the part of the condominium association. As stated previously, investors will only purchase the bonds if they believe the condominium association will levy and collect the required dues to amortize the bonds. The association must demonstrate a history of dues collections, a firm management plan, and a commitment to continue ongoing repair and replacement and upkeep of the facilities. . Special Service District. A second method for financing the common area improvements would be through the establishment of a special service district. The special service district is a relatively new concept in Minnesota. In recent years, the state legislature has passed special legislation giving certain cities the authority to create special taxing districts to finance improvements and maintain activities in commercial areas. Initially, the authority and the relative power were uniquely described for each city. In 1988, the legislature codified the powers and procedures for special service districts as Minnesota Statutes, Chapter 428A. Communities that have been granted the authority include Minneapolis, White Bear Lake, Robbinsdale, Hopkins, Mankato and Crookston. Half of these communities, including Hopkins, have not yet established the districts. From a financial perspective, there are two advantages of the special service district as a means of financing various activities. First, the district pays for the cost of the services that it receives. The special service district raises money by imposing a service charge on properties within that district. The charge allows the city to generate money to pay for improvements and their maintenance without levying a tax across the entire community. Second, the money is raised without facing the difficulties of the special assessment process. The drawback of the special service district lies with its creation. To date, this authority has only been conveyed through special legislation. Getting the legislative authority does not completely open the door to the creation of a special service district. The legislature has been very concerned about protecting the rights of the property owners. Consequently, the process for using it is complicated. A city cannot initiate the process to create a district unless it is petitioned to do so. The petition must be signed by property owners representing 25% or more of the net tax capacity and 25% of the land area in the district subject to the service charge. The process to impose the service charge is subject to the same petition requirements. The initial petition only starts the process. Following the receipt of the petition, the City schedules a public hearing. After the hearing, if the city decides to create the district or impose the service charge, then a copy of the summary of the ordinance or resolution taking the action must be mailed to effected property owners within five days of adoption. The resolution or ordinance may not take effect for at least 45 days. During that period, the action may be vetoed if objections are filed by property owners representing 35% or more of the net tax capacity and 35% of the land area in the district subject to the service charge. If a service charge is initially proposed and approved for a multi-year period, then the second and subsequent years are not subject to petition and veto. Once the district is established, the city may issue bonds supported by the special service district charges. Depending on the use of funds, the bonds may be issued on a tax-exempt basis, with a general obligation pledge from the city. City of Hopkins, Minnesota February 14, 1992 Page 6 Assuming a 10-15 year bond term, the interest rate would be approximately 6% to 7%, depending on market conditions at the time of sale. For taxable bonds, the interest rate would range from approximately 8% to 9%. The two primary difficulties in using the special service district as a financing tool for Westbrooke Condominium and Patio Homes are first, the need to amend the initial legislation to include improvements to residential common areas and to allow collection of charges from residential property and'second, an amendment to the existing special legislation specific for the City of Hopkins to include the expenditures for the Westbrooke rehabilitation. . Private Lenders. The role of private lenders in the rehabilitation of the Westbrooke Condominium and Patio Homes complex may be primarily as providers of letters of credit or other security for the special purpose revenue bond mentioned previously. This may be most effectively provided through a consortium of local banks, so that the risk and responsibility for the letters of credit can be shared between the various banks. The City may ultimately wish to explore the option of placing the entire special purpose revenue bond with the banking consortium, rather than negotiating the issue through an underwriting firm. In addition to assisting with the common area improvements, local lenders may. participate in home improvement loans to individual owners or new mortgages on units that may be sold or refinanced. This participation will be in conjunction with the normal lending practices. . Tax Increment Financing. Tax increment financing assumes that by subsidizing certain infrastructure or public costs related to a project, the new tax values generated by the development will be sufficient to pay back the initial assistance. Unfortunately, the renovation of the common area improvements in the Westbrooke complex would primarily result in stabilizing current values rather than increasing future property value. It is therefore unlikely that significant tax increment revenues would be generated by the common area improvements. The second problem with the use of tax increment financing is the restriction on the type of costs that can be financed by tax increment. These costs include public infrastructure such as roads, water and sewer, curb and gutter, parking; demolition of blighted structures; and land writedowns. A less common use is credit enhancement for revenue bonds or interest rate reduction on other debt. The only possible application for Westbrooke may include road improvements if the association agrees to convert the private roads to public roads or credit enhancement for the special purpose revenue bond. Although Westbrooke may not generate actual tax increment, it is possible to use excess tax increment from other districts within the City of Hopkins. The amount of increment available in the districts is limited. The boundaries of the development district established in 1985 must be amended to include the Westbrooke area in order to expend increment within the Westbrooke neighborhood. The City must make the policy decision to use their excess increment for Westbrooke or other eligible projects. A comparison of the advantages and disadvantages of each of these financing tools is summarized on the following page. The process necessary to secure these tools is further described under "Recommendations." ( City of Hopkins, Minnesota February 14, 1992 Page 7 WESTBROOKE ANALYSIS COMPARISON OF FINANCING ALTERNATIVES Special Special G.O. Revenue Service Private Bond Bond District Lender TIF A. Risk/Cost to City risk of negligible risk of NA alternative non-pymt. of non-pymt. of uses of TIF assessments! service dist. City has 30% charges of cost B. Eligible Improvements infra- common common common infra- structure area area area structure! improve- improve- improve- credit ments ments ments enhance- ment . C. Availability of Funds good difficult difficult difficult limited D. Affordability to Association assessments to be to be may reduce may reduce impact determined determined interest interest directly on rate rate owners E. Special Requirements roadway approval of special approval of TIF plan dedication increase legislation increase amendment in dues in dues F. Difficulty to Administer OK complex complex OK NA G. Time Constraints assessment none after none plan process legislation amendment requirements approved process City of Hopkins, Minnesota February 14, 1992 Page 8 . III. Recommendations Our review of the status of the five Westbrooke condominium associations contained in Section I indicated that two associations, Westbrooke Park and Westbrooke West are in good financial condition. Westbrooke North should reexamine the current level of association dues and begin setting aside more for future repairs and replacements. The single most immediate maintenance issue is the repair of the two large parking lots. In addition to Westbrooke North, our recommendations focus on two large problem areas -- the private roads in Meadow Creek and the extraordinary common area repairs needed in the Patio Homes. Our recommendations are as follows: A. Convert Westbrooke Way and Old Settler's Trail to public roads and extend Westbrooke Way to Smetana Road. As mentioned previously, the city engineer has estimated the cost to upgrade Westbrooke Way and Old Settler's Trail at $193,000. It would cost an additional $130,000 to extend Westbrooke Way from Old Settler's Trail to Smetana Road (assuming a 30-foot roadway). The third cost component would be $20,500 for storm sewer installation. Based on current assessment policies, these costs would be allocated as follows: Meadow Creek Association Improvement City Costs Costs Total Westbrooke Way Upgrade $ 57,900 $135,100 $193,000 Extension to Smetana Road 39,000 91,000 130,000 Storm Sewer 20,500 0 20,500 Total Costs $117,400 $226,100 $343,500 Assuming the Meadow Creek Association's share of the costs is assessed back to the unit owners and financed through a 10-year general obligation 6% tax- exempt bond, the average cost per unit would be less than $5 per month. In return for agreeing to take over responsibility for the roads and extending Westbrooke Way to Smetana Road, Douglas Strand ness, property manager for the Meadow Creek Association, has indicated that ''the Association would commit to developing a 'grand entrance' at Westbrooke Way and Smetana Road, which would include brick pillars and wing walls along with high class signage. By doing this, the curb appeal of Meadow Creek would be literally and figuratively enhanced." We believe that these improvements would have a significant positive effect on the entire Westbrooke Condominium and Patio Homes complex. A separate, attractive entrance to the Meadow Creek association would provide a more positive image to the area. Property values in Meadow Creek should improve considerably from these improvements, which may also stabilize values in the other condominium associations. The process necessary to proceed includes action by Meadow Creek ~~ association to deed the existing road and proposed road right-of-ways to the City, further engineering studies by the City on the costs of the improvements, and establishment of the special assessments. t City of Hopkins, Minnesota February 14, 1992 Page 9 . As a final note, it is possible to follow the same procedure outlined above for improvements to the roads in the Patio Homes complex. At this time, we have assumed that these improvements will be done in conjunction with other extensive rehabilitation projects and that the roads would continue to be owned by the association. From a homeowner's perspective, it would be more advantageous to have the improvements repaid through an increase in association dues rather than add special assessments against the property. The association dues may be collected by future owners while special assessments are generally paid by the seller when the property is transferred. B. Assist Westbrooke North with parking lot renovations through a bidding process. Westbrooke North contains two large parking lots needing major repairs. The City can only provide the repairs if the parking lots are truly "public" parking lots, which would be unacceptable to the condominium association. It may be possible, however, to achieve cost savings by bidding the repairs, together with the road improvements to Westbrooke Way. The full cost of the repairs would be paid for by the Westbrooke North association, but possibly at a lower total cost than having the parking lot repairs completed independently. C. Pursue the concept of special purpose revenue bonds to finance the common area improvements in the Patio Homes. In 1990, the Patio Homes association identified approximately $900,000 in rehab costs for new roofs, siding, roads, parking lots and garage door improvements. Currently, the special purpose revenue bond appears to be the only option available to finance these improvements. As discussed previously, the bonds are an unconventional source of financing and would require the assistance of an underwriting firm to negotiate the actual structure and identify investors for this product. It will also require a considerable effort on the part of the association to provide an updated budget and priority list for the improvements, and documentation of the ability to levy and collect the increased dues. The bond structure may also require the assistance of a local banking consortium to provide credit enhancement for the issue. And finally, the City may need to commit future excess tax increments as additional security for the bonds. The steps necessary to implement the special purpose revenue bond option include first retaining an underwriting firm to assist in the bond structure. When a preliminary structure has been developed, the plan must receive approval of the Patio Homes association members. The association must vote to increase dues in an amount sufficient to repay the bonds, which will take two-thirds of the membership at an association meeting which has a quorum (50% of the membership). Finally, the preliminary structures will be dependent on the willingness of the local banking consortium to participate. The last step is to receive their approval or a commitment on the City's part to use tax increment financing, if necessary. It is possible that based on the current management plan and financial status of the Patio Homes association, an underwriter may not be able to successfully structure a marketable revenue bond. The most recent unaudited financial statements reflect a large amount of delinquent association dues. The options at this point would be for the association to increase dues to build up replacement reserves and structure their financial statement and collection history so that in 12 to 18 months a better financial outlook can be presented. , City of Hopkins, Minnesota February 14, 1992 Page 1 0 A final option would be to pursue special legislation for the special service district. As mentioned previously, two legislative actions must be requested, the first amending the overall authorizing statute to include residential area improvements and the second, specific authorization for the City of Hopkins. D. Coordinate Leasing Activities. As mentioned in Section I, the Westbrooke Condominium and Patio Homes complex suffers from declining property values due in part to an increasing number of absentee owners undercutting rental rates to attract tenants and offset their cash flow losses. One solution would be for the associations to make it a policy to encourage absentee owners to contract with professional rental agents to manage their units. The rental agents would provide more consistent and reasonable rental rate policies, better tenant screening, and a more effective, positive approach to marketing the Westbrooke neighborhood. A second method of coordinating the rental activities would be the establishment of a property manager coalition for those rental agents and absentee owners currently involved in the Westbrooke neighborhood. Brooklyn Park has recently established such a coalition with the goal of "cooperation, education, communication." The mission statement for the coalition mentions such goals as improving the image of their community within the city, enriching the relationship with the city, sharing solutions to common problems, enhancing the quality of life for residents and protecting the interest of their investors. The participation of the City of Brooklyn Park in the coalition is to provide staff support in the preparation of the monthly newsletter and coordinating speakers for the monthly meeting. The Brooklyn Park coalition was organized in response to many of the same concerns currently facing the Westbrooke Condominium and Patio Homes neighborhood. The mandatory commitment on the part of the City for establishing or supporting the coalition is quite modest when compared to the magnitude of the investment in housing stock and tax base represented currently in the Westbrooke neighborhood. As a final note, one suggestion made by the Associations to enhance property values within the neighborhood would be to develop a golf course on the sanitary landfill site adjacent to the Patio Homes. There is currently a strong demand for golf facilities within the Metropolitan area. This concept may merit further research and discussion. We look forward to presenting our recommendations to the Hopkins City Council and members of the Westbrooke associations. Please feel free to contact us if you need further clarification on any of our recommendations or information contained in this letter. Sincerely, ~// a ~~~~ ~~~~ ~. ~ ~ ;t:U~ Kathleen A. Aho Rebecca D. Yanisch Senior Vice President Vice President mmr /Minneapolis Office Enclosures .. TABLE 1 WESTBROOKE CONDOMINIUMS HISTORIC ASSOCIATION DUES WEST PARK NORTH PATIO HOMES MEADOW CREEK A VERAGEI % A VERAGEI % AVERAGEJ OAl A VERAGEI % A VERAGEJ % YEAR UNIT CHANGE UNIT CHANGE UNIT CHANGE YEAR UNIT CHANGE UNIT CHANGE 1992 $144.50 2.94% $140.13 4.67OAl $124.50 5.06% 1992 $127.50 9.91% $144.80 12.550 1991 140.38 2.65~ 133.88 3.18% 118.50 0.00% 1991 116.00 9.43% 128.65 10.13% 1990 136.75 6.01 % 129.75 9.03OAl 118.50 2.16% 1990 106.00 9.84% 116.82 7.190 1989 129.00 4.14OA 119.00 4.62OAl 116.00 3.11OAl 1989 96.50 9. 660Al 108.98 0.00% 1988 123.88 3.n% 113.75 0.11 % 112.50 4.17% 1988 88.00 3.53% 108.98 7.9911 1987 119.38 13.42% 113.63 25.38% 108.00 18.68OAl 1987 85.00 6.18% 100.92 10.130 1986 105.25 90.63 91.00 1986 80.05 91.64 5.000 1985 87.28 AVE. ANNUAL CHANGE 1986-92 5.42OAl 7.53% 5. 360Al 8.07OAl 7. 920Al RESERVE ACCOUNT BALANCE - 12/91 $47,272 $49.283 $36,780 $52,000 $55,000 NUMBER OF UNITS 176 168 88 328 536 RESERVE/UNIT $268.59 $293.35 $417.95 $158.54 $102.61 . . l HOLMES & GRAVE:\ ( H\H rEHED BARBARA L. PORTWOOD ~711 Pil"bur~ (enfer. \linneapoli,. \linne,,"a <~~1l2 Attorney at Law I'elephone (612) J.I7.~.l1111 Fac,imile (6121 J.17.~.l J() Direct Dial (612) 337-9213 MEMORANDUM TO: Becky Yanish FROM: Barbara L. Portwood ~ RE: Hopkins Condominium Project Financing DATE: February 6, 1992 FACTS The Westbrook residential condominium development (the "Project") located in the City of Hopkins (the "City") is in need of rehabilitation which the homeowner's association is unable to fund on a current basis. The City is interested in financing the rehabilitation with tax exempt bonds. ISSUE Can tax-exempt bonds be issued to finance a loan to the Westbrook condominium homeowner's association (the "Association") to finance the rehabilitation? DISCUSSION Federal Tax Law Requirements Bonds issued to finance the rehabilitation of the Project would be mortgage revenue bonds for purposes of federal tax law, and in order to be tax-exempt would have to meet the following requirements for qualified mortgage bonds: a. residence requirement, b. first time homebuyer requirement (unless the loan to the Association is characterized either as qualified home improvement loans or qualified rehabilitation loans), c. purchase price requirement, unless the loan to the Association could be characterized as a home improvement, d. income req uiremen ts , e. arbitrage requirements, f. targeted area requirement (ifapplicable) ,and g. the new mortgage requirement (unless the loan is characterized as a qualified rehabilitation loan) . BLP29184 HPllO-l . , 1 The residence requirement could be a problem if any of the owners of condominium units use the units for a,ny purpose other than their principal residence, As indicated above, it is not necessary for federal tax purposes to determine the purchase price of each of the units in the Project if the loans constitute qualified home improvement loans (maximum principal amount of $15,000 per mortgagor). It would of course be necessary to obtain an allocation of issuing authority. Allocation of Issuing Authority Minnesota Statu tes, Chapter 47 4A governs the allocation of authority to issue private activity bonds. I have attached a brief summary of certain relevant provisions of Chapter 474A. For purposes of Chapter 474A, the City would have to apply for an allocation from the housing pool to issue mortgage bonds. The statute requires a purchase price limitation equal to the greater of the MHF A's purchase price limits or 90 percent of the median purchase price in the City, up to a maximum of 80% of the safe harbor limits under Section 143(e) of the Code. The language of the statute on thi.:; pc.int is not h::l'ribly IH'eebe, but tile reference Lv tiiE: "sate harbor limits under Section 143 (e) appears to refer to the number which is 90% of the average area purchase price. Chapter 474A also imposes lower income requirements than federal law. Whether or not the owners of units in the Project meet these requirements is obviously a question of fact which will need to be addressed. Chapter 474A also encourages a City has to provide in its bond program for recycling of payments and prepayments to make additional loans. This is a complicated requirement to meet in larger programs, but may be overwhelming in a small issue such as is proposed here. If the City determines that recycling is not possible, it is required to explain to the State why recycling is not possible, and why the City did not have the bonds issued by MHFA. Once such an explanation is given, the City could presumably issue bonds without a recycling provision. State Law Authorization Although Bonds issued to finance the rehabilitation of the Project constitute mortgage bonds for purposes of Federal tax law and for purposes of obtaining an allocation under state law, for purposes of Minnesota Statues, Chapter 462C, the Project constitutes a "multifamily housing development". Chapter 462C authorizes the City to issue its revenue bonds to finance single family programs and multifamily housing developments, including a program to rehabilitate a multifamily housing dc:vd0pmcn~ ::lS Icng- <1::-. the rehabi1H8tinn ,;ORtS 8<1ue1 the lesser of $1 ~OOO per unit or 20% of the appraised value of the building and site. CONCLUSION Assuming that the state and federal purchase price, income and residence requirements described above can be met, it should be possible to issue tax-exempt bonds to finance the rehabilitation of the Project. T4e loan to the homeowners association would have to be structured in a way that it could be deemed to cons titu te loans to the owners of the indi vid ual units. Such individual loans would have to be either qualified home improvement loans or qualified rehabilitation loans for federal tax purposes. The City would apply for an allocation of authority under Chapter 474A to issue mortgage bonds, and either provide for recycling or explain BLP29184 HP 110-1 2 . ~ ; to the State why doing so is not possible. Assuming that an allocation of authority to issue is awarded under Chapter 474A, the City would have the authority to issue the bonds to fiance the rehabilitation of the Project as a multifamily housing development under Chapter 462C. BLP29184 HPII0-1 3 ~<> .. .- i STATE LAW PROVISIONS 474A.061, Subd. 2a. Housing pool allocation. From April 2 to April 15, MHFA may accept applications for an allocation of single family mortgage revenue bonds (as defined for federal tax purposes) which meet the following requirements: 1. locally identified housing need; program economically viable; 2. in Mpls/St. Paul MSA, adjusted income of buyers cannot exceed greater of agency's income limits 80% of area median income; 3. housing price limits may not exceed: i. greater of agency house price limits or median purchase price for the particular city, up to maximum of 80% of safe harbor limits for existing housing under 143(e) of the Code; housing prices may in fact exceed the 80% referenced above if a subsidy is used to reduce the effective purchase price to the above levels; 4. program must meet the requirements of 474A.048, which has been repealed, but whicliprovided that during the first 10 months of an origination period "a city may make loans financed with pr';)ceeds of mortgage bonds for the purchase of existing housing. . ." and restricts the use of proceeds during that period to finance new housing except under certain circumstances. The same requirement appears for a single family housing program under Minnesota Statutes, Section 462C.071, subd. 2. It does not appear to prohibit the issuance of bonds for the purpose of financing rehabilitation loans or home improvement loans; 5. application deposit of 1%. If a city issues mortgage bonds from an allocation it has received in its own behalf, ii must provide fOl' the l'ecycling uf L'8!Ja}%f:nts and prepay.ncnts of !l!i'i'tgage loan:; in to new loans. If the issuer is not able to provide for recycling, it must notify the commissioner in writing of the reason recycling was not possible and the reason the issuer elected not to have MHFA issue the bonds. Maximum allocation to anyone city is the lesser of $4,000,000 or 20% of the total amount available for allocation for mortgage bonds from the housing pool on April 7, 1992. CHAPTER 462C: BLP29184 HPllO-l 4 '. .. 1 462C.02. Subd. 4 "single family housing" means... a unit or an apartment as described in chapter 515 or 515A. .. owned or to be owned and occupied by one person or family as a principal residence... Single family housing may include the acquisition and rehabilitation of an existing building and site, or the rehabilitation of and discharge of any interest or lien in an existing building and site... ,. re habili ta tion" means the improvement of existing single family housing or an existing multifamily housing development to improve the basic livability of the housing or restore it to a decent, safe and sanitary condition.... Improvements shall not include the construction or improvement of recreational facilities, routine or minor repairs or maintenance, or cosmetic improvements unless coupled with the cure of substantial accumulation of deferred m.?.lntenanco ::r other lermittE-d imprQ";'2r..18:-~t8. "multifamily housing development" . .. means an apartment facility, including an apartment described in chapter 515 or 515A or a cooperative, or a group of townhouses, which include four or more dwelling units, each to be rented or sold to or occupied by a person or family for use as a residence, or a building or buildings which include one or more dwelling units, each to be rented by a person or family for use as a residence. A development may include new construction or the acquisition and rehabilitation of an existing building and site or the rehabilitation of and discharge of any interest or lien in an existing building or site. 462C.05 Multifamily housing development loans may be made for the rehabilitation of an existing building and site and the discharge of any lien or other interest in the building and site. The cost of rehabilitation of an existing building must be estimated to equal at least $1,000 per dwelling unit or 20% of the appraised value of the original building and site, whichever is less, but if rehabilitation is primarily for energy conservation, the loans may be made without regard to cost. . . Each development upon completion shall comply with all applicable code requit'ements. BLP29184 HPllO-l 5 ~ ..... .: JI WESTBROOKE NEIGHBORHOOD REHABILITATION WORK PLAN Recommendations Based on Analysis Convert Westbrooke Way to a public road and extend Westbrooke Way to Smetana Road o Community Development and Public Works staff to meet with Meadow Creek property manager to discuss road project April 1992 and outline requirements of City including petition from property owners. o City receives petition from property owners requesting city to complete feasibility May 1992 study and offering to pay 50% of cost; also acknowledging conditions of assessment. o Feasibility study completed. June 1992 o City and Meadow Creek Association enter into development agreement; Meadow Creek Assoc. dedicates right of way and grants necessary utility and drainage easements. July 1992 o Plans and specifications are drawn; including repaving of North Association's parking areas and the reconstruction of Old Settler's Trail; bids let. July/Aug 1992 o Bids opened; assessment hearing held. Sept 1992 o Contract awarded. Oct 1992 o Begin construction. spring 1993 Assist Westbrooke North with parking lot renovation through a bidding process o Plans and specifications are drawn; bids let. JUly/Aug 1992 o Westbrooke North escrows cost of repaving with City. Sept 1992 o Contract awarded. Oct 1992 pursu the conc pt of Sp cial Purpose Revenue Bonds to financ the common area improvem nts in th Patio Hom s . - i o Staff meets with Bond Counsel/underwriter to discuss parameters of a bond issue May 1992 o Meet with Patio Home and condominium Associations to further discuss the Revenue Bond; outline requirements and answer questions; request letter of intent. June 1992 o Receive letter(s) of intent from those associations interested in participating in a bond issue. July 1992 o Meet with City's bond counsel to refine details of the bond issue; negotiate specifics of issue Aug 1992 o City and association board seek Aug 1992 letter of credit or other loan guarantee. Coordinate Leasing Activities o Encourage associations to require absentee owners to contract with professional May 1992 rental agents to manage units. o City staff work with associations in the establishment of a property manager coalition; provide support as needed. June 1992 Recommendations Based on council work Session City Council to Tour Westbrooke Neighborhood o Tour Westbrooke Condominiums and Patio Homes; meet with owners to discuss concerns. May 1992 Identify the Alternatives for Assisting in Garbage Collection in the Westbrooke Neighborhood o Include the Westbrooke neighborhood as an alternate in bid package if City oct/Sept 1992 decides on private collection. continue to Pursue the Development of a Golf Course on the Landfill Site o Work with the EPA to determine possibility of using the landfill property for recreational purposes. 1992