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HONORABLE MAYOR AND CITY COUNCIL April 16,2021 Subject:JPA-issued Bonds for Moderate-Income Housing Page 5 HR&A Noted Many Concerns in its Analysis of a CSCDA Long Beach Transaction For the Oceanaire transaction in Long Beach, the City of Long Beach hired HR&A Advisors8 to analyze the transaction and the proposed financing product. HR&A is a well-respected real estate and economic development consulting firm that San José currently has under contract for analysis of the Diridon Station development. (HR&A's February 4, 2021, memo for the City of Long Beach is included as Attachment A.) Note that the HR&A memo is highly cautionary, focusing on HR&A's concerns about the structure that remained even though the following terms were negotiated and changed in the favor of the City of Long Beach: • Deepened affordability for moderate-income apartments • Sped up conversion of units from market-rate to moderate-income • Provided an updated market study • Increased capital maintenance reserves • Reduced some transaction fees • Paid the City an annual monitoring fee • Reimbursed the City's costs for review of the transaction. Staff concurs with HR&A's assessment that there are several key areas of concern that must be weighed carefully when considering this new financing model. These areas are discussed further below. Proponents of the JPA structure argue that there is no risk to the City, little staff work needed by the City, and no subsidization required by the City. While it is true that the City is not directly liable for the debt, it would join a JPA that would issue non-rated bonds subject to Federal securities laws and antifraud provisions and would be associated with any bonds that fail or encounter difficulties. The developer and the JPA also are not liable for repayment of the bonds and the developers provide no equity or capital, despite collecting fees that would seem to suggest otherwise. Moreover, while the projects no longer contribute property taxes,the City would continue to serve them and if the project deteriorated or failed,the residents are City residents. As a result, there are still certain implied responsibilities that the City assumes for these transactions. Additionally, while the City does not award a cash subsidy to help acquire the properties,the ongoing property tax exemption is a significant voluntary tax subsidy by the City, and a significant involuntary contribution by the County, local school districts and other overlapping tax entities, including the State of California through its funding formula backfilling property tax for school districts. The following five concerns highlighted per HR&A's analysis and staff's other recent research continue to stand out as material in staff's recommendations. Of the five, one is a structural issue with no apparent mitigations,three can be only partially mitigated, and one can likely be mitigated. A high-level summary of these issues is as follows: 8 https://www.hraadvisors.com/