Staff recommends that the City Council approve and authorize the City Manager or designee to execute the amendment to the Agreement between 899 Charleston, a California Nonprofit Public Benefit Corporation, and the City of Palo Alto Requiring Provision of Below Market Rate Dwellings at 899 Charleston Road, to restructure the repayment option.
In 2007, the Taube-Koret Campus for Jewish Life (TKJCL) developed its campus, which included the 899 Charleston Project, now known as the Moldaw Family Residences (Moldaw), a 193-unit senior care housing for independent and assisted living and dementia care. As part of the Planned Community (PC) rezone, TKJCL agreed to provide 24 Below Market Rate (BMR) units in Moldaw as a public benefit in which the BMR units receive a substantial discount in the entry fee and monthly fees. Since the opening of the facility, Moldaw’s management team has had considerable difficulty attracting residents for the BMR units, primarily due to the fact that the BMR resident, after five years of occupancy, does not receive back any of the entry fee, while a market-rate resident is allowed a refund on a portion of the entry fee (50% or 90% depending on the amount of the entry fee). The amendment to the BMR Agreement provides a second repayment option with a 50% refund of the entry fee. It is anticipated that this adjustment will better facilitate occupancy of BMR units.
In September 2006, the City Council approved the Planned Community (PC) application submitted by the TKCJL for the development of the former Sun Microsystems site. The Oshman Jewish Community Center, T’enna Preschool and Leslie Family Early Childhood & Family Education Department, the Schultz Cultural Arts Hall and the Moldaw Family Residences (Moldaw), formerly known as the 899 Charleston Project, constitute the TKJCL development.
Moldaw offers 193 residential units of independent senior living, assisted senior living and dementia care. Of the 193 units, 170 units are independent living, 12 units are used for assisted living and 11 units for dementia care. The independent living residents of Moldaw pay an initial entry fee and monthly payments. The monthly payments allows access to the numerous services the TKJCL has to offer including the variety of activities offered by the Moldaw facility, the exercise facilities at the JCC, and events at the Arts Hall.
As a public benefit, TKJCL agreed to provide 24 BMR units in the Moldaw development. As outlined by the executed BMR Agreement (Agreement), the BMR program is designed to provide 12 independent living units and 12 assisted living units. All 24 units are one bedroom units and are identified in the Agreement. The intent is that those BMR residents would reside in the independent living units until they were unable to live independently and that their unit would transition into an assisted living unit as part of the “aging in place” model.
Moldaw began operations in 2007. From the inception, it was difficult to attract BMR residents for the units. Despite local and regional marketing efforts by Moldaw to advertise the BMR units, they are having difficulty finding residents for the BMR units. Currently, only 7 of the 24 BMR units are occupied.
A number of factors have contributed to the high BMR vacancy rate:
1. BMR Amortization Rate - In the BMR program, the entry fee is amortized over a 60 month period. Every month, 1/60th of the entry fee is deducted and non-refundable. Therefore after the 60 month term, if the BMR unit is transferred, the BMR resident would not receive any of the entry fees back. If the unit is transferred prior to the end of the 60 month term, a pro-rated amount would be returned to the resident. In contrast, a market rate resident is offered two additional options: one with a 50% or guaranteed return on the entry fee and one with a 90% return on the entry, regardless of length of occupancy. For example, a BMR resident pays an entry fee of $250k and a market rate resident pays an entry fee of $500,000. After five years, the BMR resident would not receive any of their entry fee as a return while the market rate resident would receive a minimum return of $450,000. While there are a number of Moldaw amenities that were attractive to a potential BMR resident, the potential of not recouping any of the entry fee after five years was an overriding consideration.
2. Housing Market Decline – Another factor in the high vacancy rate was the housing marking decline in 2008. This has not only affected the BMR units but the market rate units as well. The vacancy rate of the market rate units is not as high as the BMR units but higher than initially projected. With the market decline, many prospective BMR residents decided to remain in their current living conditions rather than relocating.
3. BMR Asset Requirement - In addition, some senior residents have been interested in the BMR units but were determined to be not eligible. To be eligible for a BMR unit, the household must meet certain income requirements. While the senior household may meet the annual income requirements, the BMR program guidelines also have a maximum asset limit. The program requires that the household assets cannot exceed twice the amount of the unit’s entry fee. Even with the market decline, some residents had gained a substantial amount of equity in their residence that they exceeded the City’s maximum asset limit.
Amendment to the BMR Agreement
Because of the concerns about the vacancy rate of both the BMR and market rate units, Moldaw staff met with PAHC and City staff to discuss possible options to address the issue. From the discussions, both parties agreed that: a) the BMR Amortization Schedule needed to be revised and b) there needed to be some flexibility in managing the BMR units.
a. Amortization Schedule
In discussion with the Palo Alto Housing Corporation (PAHC), administrators to the BMR units, and Moldaw, staff believes the biggest barrier in attracting residents to the BMR units is the 60 month amortization rate. In response, Moldaw has offered to provide a second amortization option that offers a lower discounted entry fee rate, 30% (instead of the current 47% discount) but guarantees a minimum 50% return of the entry fee to the BMR resident when the unit is transferred.
b. BMR Unit Flexibility
In addition not being able to occupy the BMR units, Moldaw was finding that there is a greater demand for market rate one bedroom units than the two and three bedroom units. However, all the market rate one bedroom units are occupied. In order to meet their occupancy requirements with their other lenders, Moldaw approached the City about possibly revising the Agreement to move from “fixed” BMR units to “floating” units.
Therefore, the amendment will revise the following sections of the Agreement:
1. 60 month amortization. The original agreement provided a 47% discount from the market rate fees with the 60 month amortization schedule for the 24 BMR units. The agreement will be amended to offer the BMR resident a choice of one of two plans:
a. A discount of 47% from the initial market rate Entry Fee with a 60 month amortization term. A prorated share of the Entry Fee will be deducted for each month of occupancy. After 60 months of occupancy, the BMR resident does not receive back any of the original Entry Fee; or
b. A discount of 30% from the market rate fee but with a 50% refundable plan. The entry fee would be amortized by 2% over 25 months but the BMR resident is guaranteed a 50% refund on the entry fee.
2. Floating BMR units. To provide greater flexibility to Moldaw, staff proposes to revise the Agreement to have the 24 BMR units be “floating” instead of “fixed”. The Agreement will always require that at least 21 of the BMR units be one bedroom units but no longer shall there specific residences associated with the BMR units. The remaining 3 BMR units will be two bedroom units for the possibility of shared living situations.
All other provisions in the Agreement and Summary shall remain in full force and effect.
The public benefit of the BMR units is preserved through the 30% discount. Although the 30% discount is less than the original 47% discount, with the second amortization option, the BMR resident is guaranteed a 50% refund on the entry fee. Current BMR Entry Fees range from $238,000-$398,000. With the new amortization plan, a BMR resident would receive back a minimum of approximately $119,000-$198,000 as compared to the current plan where the BMR resident does not receive back any of the Entry Fee.
If approved, the amendment will take effect immediately.
There is no Resource Impact with this amendment to the existing BMR Agreement.
The actions recommended in this report implement the City’s Housing Element policies and programs supporting the City’s Below Market Rate program. The amendment will better enhance the effectiveness of the BMR program for this development. The 24 BMR units have already been counted towards the City’s Regional Housing Needs Allocation (RHNA) requirements when the project was entitled. This amendment does not affect the City’s RHNA numbers.
On September 25, 2006, An Environmental Impact Report (EIR) was certified for the TKJCL development. The amendment does not trigger any CEQA review.