HomeMy WebLinkAbout4/7/2004 - STAFF REPORTS (24) DATE: APRIL 7, 2004
TO: CITY COUNCIL
FROM: DIRECTOR OF COMMUNITY & ECONOMIC DEVELOPMENT
LEASE AMENDMENT APPROVING SALE OF CITY-OWNED PARCELS IN SUNRISE NORTE
TO HOMEOWNERS AND RELEASE OF CITY'S RESALE RESTRICTIONS UPON SALE OF
PARCELS
RECOMMENDATION:
That the City Council approve an Amendment to Lease for the Sunrise Norte homeowners,
allowing owners to purchase the fee interest in their individual lots and releasing the City's
resale restriction from the Covenants, Conditions & Restrictions recorded against the
property.
SUMMARY:
Since October 2003 staff has been negotiating with a group of homeowners on a new
lease and/or a sale of the lots in the Sunrise Norte tract. The City is the landowner and
has been in the role of Lessor in the leases since the original developer of Sunrise Norte,
Fredricks Development Corporation, quitclaimed its interest back to the City in 1991.
There were two reasons to amend the lease: (1)to have enough term on the lease (or own
the lot) for owners to qualify for 30-year mortgage financing; and, (2) the owners desired
to terminate the resale restrictions recorded against each of the properties through the
Covenants, Conditions, and Restrictions ("CC&Rs"), as the Council had done in July, 2003
on neighboring Quail Point, Desert Dorado and Sunrise Palms.
This action approved a lease amendment that creates a right to purchase the lots for the
owners in Sunrise Norte, as well as a process for moving forward on the purchases and
the removal of the CPI-based resale restrictions on the lots sold.
BACKGROUND:
History of the Tract
The City of Palm Springs approved a Lease Agreement (No. 1779) with Fredricks
Development Corporation,a California Corporation, on March 1, 1982 for the development
of 60 acres of land located at the northwest corner of Sunrise Way and San Rafael Drive.
Sunrise Norte is a portion of this land; other parts include the Sunrise Village Mobile Home
Park, Coyote Run Apartments (and its expansion site) and a portion of what will become
the Four Seasons development. As part of the lease, the Parties made a Declaration of
Covenants,Conditions and Restrictions("CC&Rs")and subsequently recorded the CC&Rs
on October 22, 1982. One of the components of the CC&Rs was that the resale price of
the homes to be built would need to be approved by the City of Palm Springs, and would
be restricted so that they would increase by no more than the purchase price plus capital
improvements, rising by no more than CPI. Although through the mid-1990's the CPI
increases exceeded or kept pace with real estate values,this resale restriction has become
a burden to owners and sellers in Sunrise Norte.
On February 8, 1983, the City entered an Agreement Re Enforcement of Lease Number
1779 with the State of California, Department of Housing and Community Development,
to facilitate the State making California Homeownership Assistance Program ("CHAP")
loans to eligible households. This agreement with the state allowed for the CHAP
financing program for a number of the original buyers. Only two of the original CHAP
loans remain in Sunrise Norte from 1984.
The Parties also entered an Amendment to Lease Agreement on February 23, 1983 for
the purpose of assisting Fredricks obtain Federal Housing Administration Insurance for the
loans taken by purchasers which were to be secured by the lots into which the Property
was to be subdivided and improvements. Fredricks then subdivided and sold homes in the
tract, subject to the terms of subleases and CC&Rs executed by Lessee and the buyers.
The lease term was tied to the original master lease term and was set to expire in 2032;
in the past few years the term had become too short for a buyer or an owner refinancing
to obtain 30-year financing.
On December 12, 1991, however, Fredricks executed a "Quitclaim Deed" terminating and
cancelling the Lease Agreement by and between City and itself, as well as its interest in
the CC&Rs. With the execution of the Quitclaim Deed, the City's interest merged with
Fredricks' interest for the purpose of the subleases and the City became the Lessor to the
individual homeowners. Also in 1991, the original Homeowners Association that was
created by the developer was dissolved, and an Assessment District was created by the
City at the residents' request to maintain the common area improvements. The
assessment district remains in existence.
Problems with the Leases
One of the biggest problem was that the original lease with Fredricks was for 50 years.
Since it is now 22 years later, the existing leases had only about 28 years remaining on
the term, with 30-year financing the norm and least expensive option. Mortgage lenders,
as a general rule, require five years more than the mortgage term on the lease when
lending on leased land. In other words, most borrowers purchasing or refinancing in the
tract in the past few years have been unable to obtain 30 year mortgages and have had
to obtain 20-or 25 year mortgages at higher monthly payments. The Council rectified that
problem on November 19, 2003 with a lease amendment creating a new 60-year term
(adding another 32 years);
In addition, many of the residents have requested that the resale restrictions in their
CC&Rs be waived or removed, as the City did in Sunrise Palms, Desert Dorado, and Quail
Point. One key difference is that the lots in Sunrise Norte are leased from the City at
below market rates, creating a subsidy on the part of the City that needs to be, by law,
balanced with a restriction that creates a public good. Current leases are $12.49/month
with no increases, which is considered to be a "below market" or subsidized lease. The
restrictions on the other tracts were placed because they were built under state "density
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bonus" law, which allowed the developer to build up to 25% more units per acre than what
is normally allowed under the zoning code, in return for affordability provisions on at least
20% of the units. There was no City ownership or subsidy of the land on those homes.
The CC&Rs contain a provision that restricts the price at which the property owner can
resell the home to what the original price was plus the cost of capital improvements (such
as a pool), then inflated by the Consumer Price Index. There is also an allowance for
selling costs, etc. (such as broker commissions). The City must make the calculation
according to the formula in the CC&Rs and sign off on the sales price. For most of the
history of Sunrise Norte, the property went up in value at less than the CPI and the
restrictions didn't restrict the sale price below the actual market value. Today, with real
estate prices increasing much more quickly, sellers are much more likely to encounter a
situation where the City won't allow them to sell the home at a "market" price.
Over the past several years, the resale restriction program had been enforced unevenly
because it relies on the real estate recordation/title process during a sale to trigger a
request to the City for a determination of the Maximum Allowable Price. In other words,
because the restrictions themselves were buried in the CC & Rs, sometimes transactions
occurred when the buyer, the seller, the agents, and the title/escrow officer have not read
the restrictions and/or contacted the City for a resale calculation. As a result, there are
owners who have purchased property without being aware of any restriction, and who may
have purchased their homes at a higher than "maximum allowable" price. This inequity is
not a result of the City's lax enforcement of the restrictions but rather, over time, confusion
over the lease (the original lease with the homeowners was with Fredricks Development,
not the City), the restrictions themselves or even the vesting of title in the underlying land.
Options for Amending Lease
The City could choose to waive the resale restrictions in Sunrise Norte by converting the
leases to market rate leases, even if it did nothing else. In June, 2003 the City hired the
appraisal firm of Anderson &Brabant to determine the fair market"fee simple"(ownership)
value of the lots in order to determine a fair market lease or a value at which the City could
sell the homeowners the lots and remove the restrictions. The appraisal was received by
the City in September and the appraised value per lot is $11,350.
The sales price and/or the resultant lease rate has been a matter of concern to many of
the Sunrise Norte residents, who offered their own proposal to the City for a lower price.
The residents were not interested in an amended, fair market lease as a way of removing
the resale restrictions. One of their original proposals was to purchase the lots at a price
of$5,000 with a"transfer fee"of$2,500 that would be paid to the City each time a property
is sold. The residents' price was based on a number of theories but not based on any
appraisal. City staff could only recommend the appraised price but made Council aware
of the residents' lower-cost proposal. The residents group originally proposed:
Sales Price of Lots $5,000
Transfer Fee $2,500 fee due upon sale.
Financing Terms City to Finance for 30 years @3% ($21.08/mo.)
Special Terms Owners on Fixed Incomes get 40 year financing
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($17.90/mo.)
Cost Share City and owners to split title and escrow costs (50150)
Payoff Loan to be paid off at sale or refinance
Deferred Purchase Owner can purchase in the future at$5,000 plus CPI (capped at 5%
per year)
Lease Option Continue at $12.49/mo with increases every five years of 25%
Resale Restrictions City would waive all restrictions
By January, 2004 staff and the residents group had agreed in concept on many of these
provisions, with the notable exception of the price (and lease amounts which were derived
from the price). Staff presented the overall plan to Council at a study session in February,
2004, where the Council directed staff to return with a plan to sell the lots to the
homeowners, with no City financing, and receive relief from the resale restrictions, and
where the non-purchasing owners would remain in the current lease (as amended in
November) with the current resale restrictions.
City Proposal
The price proposed by the City is the appraised price of$11,350, based on the appraised
value in the Anderson & Brabant appraisal. Based on Council direction on March 3, 2004,
the City would offer these for sale at the current price until July 1, 2005, at which point the
City would reappraise the remaining parcels and adjust the price. During the period
between appraisals the price would be adjusted by the consumer price index, with the
base price being readjusted every five years. Owners need to provide their own financing.
For those not purchasing right away or choosing to remain in the lease, the lease was
amended on November 19, 2003 by the City Council to extend the term of each of the
leases to 60 years (there are no other changes to the lease in the November 19
amendment). Several of these lease amendments have already been recorded as
property owners have sold or refinanced their properties over the past few months. When
the new sale/lease program is implemented, the new lease amendment will contain the
same provisions (60 year term) as the November 19 term so that owners could opt to
purchase during the term of the amended lease. Both the Lessees and the City will need
to sign the amendment.
In the case of a purchase, staff feels that most of those who buy will purchase their lots
as part of the purchase of the property or as part of a refinancing of the property,
minimizing or eliminating the incremental escrow and closing costs, which could add up to
a few hundred dollars in the case of a stand-alone purchase of property. In the case of
a stand-alone transaction, the City and the buyer would split the title and escrow costs in
the normal and customary manner according to the usual split among buyer and seller in
Riverside County. There are no escrow costs in recording the lease amendment, only to
the actual exercise of the option to purchase.
The lease amendment allows for deferred purchases, so the owners do not have to buy
the lots immediately. For deferred purchasers, the fair market value amount (which today
is$11,350)would be frozen until July 1, 2005 when the lots shall be reappraised. Annually
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thereafter the price shall be adjusted by changes in the published Consumer Price Index
(CPI) for Urban Wage Earners and Clerical Workers, All Items, for the Riverside/San
Bernardino Metropolitan Statistical Area occurring cumulatively since the date of the
appraisal. The City shall have an appraisal performed by an MAI appraiser to establish
the land value as of the five-year anniversary date, commencing July 1, 2005 and
thereafter as of July 1, 2010, 2015, etc. After each five-year adjustment, the annual CPI
changes shall be determined against the new appraised value.
Only the vested owner of the improvements has a right to purchase the lot. No third party
purchasers or investors can purchase the lots without also being the homeowner. This is
to prevent speculation in the lots and potential problems later with private lot-owners
separate from the owners of the improvements.
Impacts on the Housing Program
In July, staff had proposed recommending the replacement of the restrictions on the three
density bonus tracts described above, rather than rescinding them, because of the
legislative purpose and legal basis for creating them as part of a City Covenant Control
Mechanism/Density Bonus Program designed to trade increased density in the
subdivisions with the requirement that the homes remain affordable.
The legal requirement on a density bonus under State law is only that 20% of the units
remain affordable, but in that case the City created a mechanism that it argued would
ensure the long-term affordability of the homes, as determined by a comparison with their
price, mortgage financing, and area median income. Because the program was built on
the theory that there would be a close relationship between income growth (which
determines "moderate income" levels), consumer price index (which is the basis for
determining Maximum Allowable Price under the restrictions), and real estate values, as
the relationship between these numbers has weakened over the past two decades the
basis for the program design has also weakened.
The City was not in violation of the density bonus law, as described by the City Attorney,
if it granted a density bonus under State law, and then after a lengthy period of time
rescinded the required 20% affordability restriction and left the units unrestricted. In the
end, there was not enough rationale for keeping a relatively weak Housing program in
place, and Council voted to rescind the restrictions on the other subdivisions. The change
does not affect the City's primary reporting on affordable housing compliance, which is
related to Redevelopment Agency projects, but will show up in the City's next Housing
Element, since the current draft includes the Desert Dorado and Quail Point homes as
"moderate income housing" and Sunrise Norte as Low/Mod Housing with a subsidized
lease.
In the case of the Sunrise Norte leases, the City currently is providing a below-market
lease. For owners that choose to remain in the lease the restrictions should remain.
Where those purchasing the lots do at fair market value, it is acceptable and legal for the
City to waive or terminate the resale restrictions (though the other provisions contained in
the CC&Rs should remain). Overtime,these units will gradually disappear from the City's
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inventory of affordable housing, though the revenue from the sales will be dedicated to
constructing new affordable units in the city.
Implementation Plan
The resolution attached contains the main provisions of the proposed lease amendment.
There are three important changes to make in the lease and CC & R process as currently
practiced to improve the efficiency and increase compliance with the resale restrictions
(when appropriate). These changes are:
1. The new amended lease creates the ability of property owners to purchase their
lots which, over time, would decrease the regulatory burden on the part of the City
monitoring the resale restrictions and approving the assignments to the leases.
2. The new amended lease is also the first lease document to appear on title in which
the City and homeowner are directly in a contract together. The previous lease
with the City was with the developer of the project, who then assigned pro rata
shares of the lease interest to homeowners as they purchased properties, and then
ultimately quitclaimed his interest back to the City. The current lease situation is
very confusing and has lead to numerous errors on the part of title companies in
recording the leases.
3. The amended lease will also contain a provision for the City to record a
"Memorandum of Covenant Restrictions"which in simple terms makes buyers and
sellers and their brokers aware of the lease, the covenant restrictions on sale, and
the right of purchase of the leasehold interest. Upon sale of the leasehold interest,
a release of covenant restrictions shall be recorded. This should reduce the
confusion over the terms of the current resale restrictions,which appear late in the
current set of CC & Rs.
The first step is to finalize the lease amendment in the form approved by Council on
November 19, 2003 but which contains the new provisions contained in the attached
resolution, include the ability of the owner to purchase, the establishment of the price
mechanism, and the recordation of the Memorandum of Covenant Restrictions.
Following the final drafting of the agreement, staff will send each owner a copy of the
agreement by certified mail with instructions to complete the lease amendments. Staff will
also provide notary service for owners that wish to come into City Hall to execute the
documents. There is virtually no cost to executing and recording the actual lease
amendments.
Concurrently with the drafting of the lease amendment, staff will engage a title company
to provide "cleanup" services on the title of many of the properties. As staff had reported
to Council previously, there are a number of properties where the owner of the
improvements (the home) is also listed as the owner of the underlying fee interest in the
land, which should be listed as the City. In addition to that problem, there are also
properties where the listed owner of the fee is a third party (usually a prior owner), a
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number where the BIA is listed as the owner(who knows why), a few where the Secretary
of HUD is listed as the owner (probably from a prior foreclosure) and two parcels where
Fredricks was still listed as the Lessee. The title problems break down as follows:
Listed Ownership Number
Self(same as property owner) 9
USA or BIA 8
Third Party (usually prior owner) 4
Secretary of HUD 2
Fredricks as Lessee 2
Total 25
There may be legal issues with correcting the vesting information on the titles prior to
closing on the sales of the parcels, but nobody has ever asserted that they are the rightful
owner of their lot, stopped paying the lease payment based on such a claim, or
demonstrated that the City ever deeded or quitclaimed its interest in any of the lots.
Once the amended leases are recorded, Community & Economic Development staff will
keep copies of the leases in their files for monitoring the resale restrictions. The
department maintains the current files with the history of sales, resale calculations,
consents to assignments, etc. As stated above, monitoring should be somewhat simpler
in the future, as fewer leases will need to monitored as properties sell, and a separate
Memorandum of Covenant Restrictions will be recorded on each title, thereby providing
better notice to buyers and sellers of the terms of the restrictions. Additionally, the lease
amendment itself should help reduce the error rate in recording the land-based
transactions, since it will be evident that the City and Lessee are in a lease.
The Finance Department will continue to collect lease payments and pursue delinquencies.
Finance will also calculate the annual increase in sale price after the July 1, 2005
appraisal, based on CPI.
In the case of buyers wishing to purchase the lots, the price has been determined to be
$11,350 until July 1, 2005. If a buyer is wishing to purchase the lot as part of the
acquisition of the home or part of a refinancing, then the City shall deposit a Grant Deed
into the escrow for the sale or refinance. If, however, the buyer just wished to purchase
the property without another escrow, then both parties will open an escrow with a local
escrow firm to handle the closing. At the close of escrow, a Notice of Release of Resale
Restrictions will also be recorded, thereby releasing the buyer from the ongoing resale
restrictions.
The lots will be reappraised in 2005, and again in 2010, 2015, etc. The price of the lots
will be adjusted annually in the intervening years by the CPI, as described above. At the
same time the appraisal is performed, staff will review the title vesting of the unsold lots
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to check for recording errors,to eliminate the problems encountered now with the improper
vesting of title in the underlying land (owned by the City).
Since the land for Sunrise Norte was purchased with CDBG funds, proceeds from the land
sales will be deposited in the CDBG fund. Given HUD's concern about timely
expenditures, however, it will be unlikely that the fund would be able to prudently "bank"
all of the program income until enough is received to make a large contribution to an
affordable housing project. Staff will develop a way to move the program income through
the CDBG fund but ensure that i is devoted to affordable housing programs.
John S. R ymond
Dir for Comm y & Economic Development
APPR VED—. � � �'✓' � �•r'
City Manager
ATTACHMENTS:
1. Resolution Approving Lease Amendment
2. Map of Sunrise Norte tract
REVIEWED BY DEPT. OF FINANCE
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Final Proposal To City of Palm Sprinas
From Residents of Sunrise Norte
3-15-2004
1. Lots would sell for 5,000:00 with a 2,500.00 transfer fee.
2. Residents will provide their own financing.
3. 'Their will be no escrow or escrow fees or finance charges
or closing costs city would be paid in full and would give
owners a grant deed to their land.
4. For homeowners who remain on lease their will be a 3%
raise in their property each year for the next seven years
at which time the city will do a new appraised at full
market value at a 3% raise for the next seven and so on.
5. All resale restrictions will be waived for homeowners who
purchase their property.
kolavov Q
7 0
RESOLUTION NO.
OF THE CITY COUNCIL OF THE CITY OF PALM
SPRINGS, CALIFORNIA CONCERNING THE SUNRISE
NORTE NEIGHBORHOOD APPROVING CHANGES TO
THE LEASES, AUTHORIZING SALES OF PARCELS TO
THE TENANTS FOR FAIR MARKET VALUE, AND
PROVIDING FOR THE PROPER ADMINISTRATION OF
SUCH PROGRAM.
WHEREAS, the City of Palm Springs approved that certain Lease Agreement No. 1779 with
Fredricks Development Corporation, a California Corporation, dated March 1, 1982 for the
development of 60 acres of land located at the northwest corner of Sunrise Way and San Rafael
Drive, a memorandum of which was recorded on March 22, 1982 as Instrument No. 47803 of the
Official Record of the Riverside County Recorder; and
WHEREAS, the Parties made a Declaration of Covenants, Conditions and Restrictions
("Declaration")and subsequently recorded the Declaration on October 22, 1982 as Instrument No.
182722 of the Official Records of the Riverside County Recorder; and
WHEREAS, on February 8, 1983, the City entered an Agreement Re Enforcement of Lease
Number 1779 with the State of California Department of Housing and Community Development
to facilitate the State making California Homeownership Assistance Program ("CHAP") loans to
eligible households, recorded on February 15, 1983 as Instrument No. 28930 of the Official
Record of the Riverside County Recorder; and
WHEREAS, the parties entered an Amendment to Lease Agreement on February 23, 1983 as
Instrument No. 37067 of the Official Record of the Riverside County Recorder, for the purpose
of assisting the Lessee obtain Federal Housing Administration Insurance for the loans taken by
purchasers which were to be secured by the lots into which the Property was to be subdivided and
improvements constructed thereon; and
WHEREAS Lessee subdivided and sold homes in the Tract as described in the Legal Description
shown as Exhibit"A"to the Resolution, subject to the terms of subleases executed by Lessee and
Sublessee; and
WHEREAS Lessee Executed a Quitclaim Deed on December 12, 1991, recorded on December
27, 1991 as Instrument No. 446363 of the Official Record of the Riverside County Recorder;
terminating and cancelling the Lease Agreement by and between City and Lessee, as well as the
Lessee's interest in the Covenants, Conditions and Restrictions (the "Declaration"); and
WHEREAS, with the execution of the Quitclaim Deed by the Lessee and acceptance by the City,
the City's real property interest merged with the Lessee's interest for the purpose of the subleases
with the individual subleases; and
WHEREAS, on November 19, 2003 the City Council approved a Lease Amendment creating a
new sixty (60) year term for the existing leases, but not changing any other term.
NOW THEREFORE BE IT RESOLVED by the City Council of the City of Palm Springs,
that:
SECTION 1. Recitals. All recitals above are deemed true and correct. The programs
enacted hereunder shall be known as the "Sunrise Norte Homeownership
Program."
SECTION 2. Sale. The City shall offer the existing developed parcels in Sunrise Norte
for sale to the owners of the property improvements, at fair market value,
pursuant to an Agreement in a form acceptable to the City Attorney.
Owners shall provide their own financing for the purchase.
SECTION 3. Sale Price. Until July 1, 2005, the price shall be $11,350.00 based upon
the current appraised fair market value. Annually thereafter the price shall
be adjusted by changes in the published Consumer Price Index (CPI) for
Urban Wage Earners and Clerical Workers,All Items,for the Riverside/San
Bernardino Metropolitan Statistical Area occurring cumulatively since the
date of the appraisal. The Finance Department shall calculate these
increases and the resulting sale price. The City shall have an appraisal
performed by an MAI appraiser to establish the land value as of the five-
year anniversary date, commencing July 1, 2005 and thereafter as of July
1, 2010, 2015, etc. After each five-year adjustment, the annual CPI
changes shall be determined against the new appraised value.
SECTION 4. Transfer costs. The City shall determine if an escrow shall be used for the
land transfer. The City shall pay for all standard costs which would be
borne by seller while buyer will pay those paid by buyer.
SECTION 5. Lease Amendment. The City Council on November 19, 2003 approved
extending the leases in the Sunrise Norte until January 1, 2064. At City's
sole expense, City will prepare such lease amendments. The lease
amendment will include a specific notification concerning the buyout
program and the resale restrictions in the recorded covenants and
conditions.
SECTION 6. Covenant Agreement. City may require recordation of a "Memorandum of
Covenant Restrictions"which in simple terms makes buyers and sellers and
their brokers aware of the lease, the covenant restrictions on sale, and the
right of purchase of the leasehold interest. Upon sale of the leasehold
interest pursuant hereto, a release of covenant restrictions shall be
recorded.
SECTION 7. Lease Otherwise Unaffected. For property owners who choose not to
purchase, except as expressly set forth herein, the terms of the Lease and
Sublease, as amended, shall remain unaffected and unimpaired by reason
of the foregoing amendments, and the Lease and Sublease, as amended,
shall remain in full force and effect and binding on all parties hereto.
SECTION 8. Use of Proceeds. All proceeds from the sale of the parcels shall be
deposited in the City's Community Development Block Grant fund for the
development of new affordable housing units.
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SECTION 9. Administration. The City Manager shall prescribe in writing rules for the
orderly administration of the Program.
SECTION 10. Execution of Documents. The City Manager or his designee is authorized
to execute an amendment to the Lease(s) and any agreements, letters,
documents, deeds, easements to facilitate this transaction in such form as
shall be prescribed by the City Attorney.
ADOPTED this day of 2004.
AYES:
NOES:
ABSENT:
ATTEST: THE CITY OF PALM SPRINGS, CALIFORNIA
By
City Clerk City Manager
REVIEWED &APPROVED AS TO FORM
By:
City Attorney