24 - Laserfiche WebLink

HONORABLE MAYOR AND CITY COUNCIL April 16,2021 Subject:JPA-issued Bonds for Moderate-Income Housing Page 9 not subject to pay this tax. During a sample 30-year period, a large residential property may change ownership several times. The resulting forgone transfer tax revenue would reduce the Measure E funds available for deeply affordable deed-restricted affordable housing, housing preservation, and homelessness strategies. Potential partial mitigants—The impacts of foregone property and transfer taxes can be mitigated by the City's hiring a consultant to carefully review each transaction for City Council consideration and requiring the City Council approve each transaction. It can also be limited by capping the number of transactions approved under this structure, and by ensuring that an amount equal to foregone revenues is repaid in higher priority at the time of property disposition if the City declines to purchase a property and it is sold at the end of the 30-year period. This could take the form of a Payment In Lieu of Taxes obligation. The amount offoregone tax revenues can be limited through analysis,terms and conditions, and caps on the number of buildings able to be purchased through this product. High purchase offers may alter the San José real estate market—Staff is concerned about the price impact that these transactions could have on the overall market within San José. Staff has heard from those in the investment community that the JPAs are already pursuing deals in San José with prices offered that may exceed typical market-rate offers and could crowd out other private investment. Overpayment for properties, made possible by the property tax exemption and JPA tax- exempt bond issuance, also would increase the amount of debt on each property/transaction, thereby limiting the City's ability to exercise its purchase option in years 15 to 30. Mitigants: In order to mitigate this risk of high purchase offers impacting the market, the term sheet requires a third-party appraisal to validate purchase prices. Requiring a third- party appraisal may slow a transaction down slightly,but appraisals are a prudent real estate practice that should not be foregone to size a reasonable amount of debt on the property. The terms also include a requirement for studies assessing the physical needs of each property to properly size capital replacement reserves needed over time, which also right sizes the amount of debt that can be serviced annually. The risk that public tax subsidy unintentionally alters the local real estate market can be mitigated, but not eliminated, by requiring prudent underwriting practices. Finally, in addition to these five issues, staff continues to be concerned about the potential focus by the State and/or the IRS on this new type of conduit financing.10 The risk that the City as a JPA member could be pulled into audits or have to spend time addressing reputational attacks appears real, particularly given early reports about the transactions conveying limited public benefits relative to fees. 10 A fuller discussion of this issue is found in staff's December 2,2020,memorandum to the Rules Committee,heard by the City Council on December 15,2020. https://sanjose.legistar.com/View.ashx?M=F&1 D=8954795&GUID=DBE8A2A 7-3985-4E78-B EF2-9BEBA5E2D800