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HONORABLE MAYOR AND CITY COUNCIL April 16,2021 Subject:JPA-issued Bonds for Moderate-Income Housing Page 6 • No third party exists to oversee ongoing income compliance,which has no obvious mitigants, decreases the structure's public value, and escalates the structure's audit and reputational risks; • Compensation is not directly tied to parties' performance or risk taken, which could be partially mitigated by capping fees and aligning incentives with property performance; • Transaction fees are high relative to renters' benefits, which could be partially mitigated but not eliminated by cost/benefit forecasting, capping fees,possibly deeper affordability mixes, and defining rents per the State Health and Safety Code; • Foregone revenue of property tax and transfer tax revenues could be significant over time, including reducing revenues specifically for affordable housing and homelessness, which could be limited by controlling the number of transactions under this product;and, • High purchase offers made possible by local tax subsidies may crowd out private investment, alter submarket property prices, and limit the City's ability to acquire the buildings from JPAs later, which could likely be mitigated by requiring appraisals and other prudent underwriting parameters for sizing debt. Following is a more in-depth discussion of these issues. Note that this information builds upon the information presented in previous memos. No third party to oversee onnoinn income compliance—Under this structure, the JPA is responsible for overseeing its acquired property, including its effective management as the property owner. The JPA also receives ongoing fees from the B bonds for this oversight function, as its contracted property management companies do the actual management work. However, staff is concerned that could be a perverse incentive for the JPA as property owner to increase revenue and rents in order to repay its debt in the Series B bonds,rather than adhere to the affordability restrictions that they themselves oversee. City staff do not oversee annual compliance, as it does with its affordable housing portfolio and the City's tax-exempt bond issuances. There are no other funders, or financing participants,that can incent compliance. There is no regulation that clearly requires adherence to income restrictions within a given timeframe. While this flexibility can help to manage a development, it may erode the value of the promised affordability. The City, as only an "Alternate Member"of the JPA, does not have the ability to enforce in the case of non-compliance. There is a requirement in the terms that the JPA and asset manager provide annual reporting to the City. However, staff has not identified a clear enforcement mechanism within the terms should a non-compliance issue arise. On the contrary, City staff could receive reports indicating non- compliance, and therefore have new, potentially negative implications for the City (reputational risk, and potential State audit risk)that would realistically require it to review and issue letters acknowledging noncompliance even though it is powerless to enforce. No obvious mitigants: This concern about inability to enforce compliance is inherent to the structure of the product, has no obvious mitigation, and has the potential for increased reputational and audit risks for the City.