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Open Letter to City of Miami from East Little Havana CDC - re: cuts
March 6, 2002
Honorable Mayor Manuel A. Diaz and
Honorable City of Miami Commissioners
Re: Item #6 of City of Miami Commission Meeting Agenda for March 7, 2002. (Resolution Adopting a Planning Calendar for the Twenty-Eighth (28th) Year Community Development Block Grant.)
Dear Honorable Mayor and Commissioners:
At the City of Miami Commission meeting of March 7, 2002, the Department of Community Development (DCD), will present for your approval, Item No.6, under the Public Hearing Items of the agenda, entitled "RESOLUTION-(J-02-200) - (ADOPTING A PLANNING CALENDAR FOR THE TWENTY-EIGHTH (28TH) YEAR COMMUNITY DEVELOPMENT BLOCK GRANT)
The need to comply with all Federal regulations with respect to the yearly CDBG process is well understood and respected by East Little Havana CDC (ELHCDC). However, as with the required public advertisement published in our local newspapers announcing this public hearing, the title of this item also fails to represent the adverse impact of certain recommendations being made by the DCD, with respect to the development of affordable homeownership projects in the City of Miami.
It is with great disbelief that we find ourselves with the need to address such insensitive and obviously unanalyzed recommendations being made by a department, which represents the City's participation of 28 years with a program created to improve the economic, social and housing needs of our City's low income residents.
We would first like to address if not ask why; the DCD is allowed to make such recommendations without including in its planning process, the organizations that will be affected most. Including in the planning process, all of the players involved in the creation of affordable housing, will generate educated recommendations which will benefit the City of Miami, the organizations, which provide services, and more importantly the residents of our communities.
Following are ELHCDC's concerns with the recommendations proposed by the DCD and some alternative steps or recommendations that may be taken in order to address some of the issues confronting DCD.
DCD Recommendation: Eliminate the award of HUD funds for housing administration. Administrative costs would be provided through development fees generated through the build out of successful projects.
ELHCDC Comments: This recommendation fails to take into consideration the many important and distinct differences in the development of affordable rental as apposed to affordable homeownership projects.
Developers involved with the development of affordable rental projects do so utilizing either the State of Florida Tax Credit Program or the HUD Section 202 Housing for the Elderly Program. Both of these programs which are exclusive for rental projects, provide said developer with a direct, non-repayable subsidy layer covering 80% and above of the total cost of development. With such a large portion of the total development cost covered by these subsidies, the developer's financing package is virtually complete, with only the need to perhaps seek funding from one public or private source, usually done within the same year as the subsidies are granted. This translates into a shorter pre-development time to get a project under construction. In addition, developers of affordable rental projects do not have to concern themselves with the low real estate market values, typical of distressed neighborhoods. Their only task is to lease the building with low-income renters, usually done in a period of 30 days. With a fully occupied building, generating at or close to market rents, and with virtually the entire building subsidized at below market interest rates, if not differed financing, these developments generate a handsome net income each year, in addition to the development and overhead/administration fees generated during construction of 8 to 15%, as well as the on-going yearly management fees. Clearly, understanding the tremendous profit potential in a short period of time generated by affordable rental projects, developers of rental projects will suffer very little when confronted with the possibility of the City eliminating additional administrative funding. However, the DCD is recommending the continued administrative support for these types of developments.
On the other hand, developers of affordable homeownership projects such as ELHCDC, face a completely different list of challenges and obstacles. The primary obstacle is market values. As we all know, the cost of constructing a building in Coral Gables for example, is the same as constructing the same building in Little Havana. However, the market value (appraised value) of the finished units is grossly lower in Little Havana. That obligates the developer of affordable homeownership units in the Little Havana neighborhood to sell the units for less than it cost to build them and, to seek subsidized grants to cover the shortfall between the cost of the construction and the future sell out value of the units. Typically, this shortfall equates to approximately 30% of the total cost of development. Having said that, we must also take into consideration, the size of the proposed homeownership development. The grant subsidy needs of a 10-unit development are not as demanding as that of an 80-unit development.
Since affordable homeownership projects do not have the luxury of programs such as the State of Florida tax credit or HUD Section 202 programs, a developer of affordable homeownership units must seek its grant financing from the local government sources. This brings us to obstacle number two, the availability of funds. Both the City and the County have limited funds available on a yearly basis and many applicants requesting funds. The county for example does not provide grant financing to projects located within incorporated areas, such as the City of Miami. Although their financial participation is essential to the success of a project, it does not help in covering the shortfall between the cost and sell-out value of a homeownership project. In addition, their annual funding limits of $500,000 per Request for Proposal (RFP) creates the need to apply for funds over a two to three year period in order to arrive at the funding needs of a project. Only the City can provide the "grant" or "forgivable loan" financing needed to a project located within the City of Miami. With the lack of available grant financing, together with the limited sources available, a developer of affordable homeownership projects such as ELHCDC does not include the cost of Development fees and/or Overhead/Administration into the cost of the project. This legitimate cost that equates to approximately 15% to 20% of the total development cost would translate into the need for additional grant financing which would have to be provided by the City. In a project such as the Latin Quarter Specialty Center, currently under construction, the development and overhead administration would have added an additional $1,500,000 to the already $7.8M cost, an additional $1,5M that would have had to come from the City in the form of a grant or forgivable loan.
Factoring in the need to secure subsidized financing for the low income homebuyers, which typically calls for the participation of two, three or four sources, qualifying buyers, preparing them for homeownership, working with various lenders to secure commitments for the families, as well as, the aforementioned time needed to secure all of the construction financing, an affordable homeownership developments can take up to 3 years before construction commences. Clearly, with the time needed to successfully commence with the construction of a project, and the inability to generate a fee to the developer due to the limited funding sources, it is critical for the City of Miami to continue to provide administrative support to a developer of affordable homeownership projects. Even if the City was to provide the additional $1.5M of development and overhead fee as with the Latin Quarter example, how is an agency going to survive during the three-year development period without any financial assistance? Where is an organization going to get the pre-development funds needed to pay for architectural, engineering, housing development staff and other professional services needed to move a project along? Simply, impossible.
ELHCDC Recommendation: Instead of eliminating administrative assistance as recommended, DDC should carefully assess the needs of each project individually. Taking into consideration such factors as: Type of project, in terms of homeownership versus rental, size of project, financing needs of a project, location, and other critical characteristics of each project. Work with the developer in creating a sensible time-line complete with benchmarks and thresholds that identify clearly the on-going progress of the project from pre-development through completion and sell out of the units. During this time, provide administrative assistance, through the Federal CDBG funding, to the developer in line with what a development should generate in development fees and overhead/administration and pro-rated over the agreed development time-line. If the development is not meeting its time lines and the developer cannot satisfactorily justify it, then the City should seize the administrative assistance.
Timely Expenditure of Housing Funds:
DCD Recommendation: Due to funds provided to affordable homeownership projects that have been dormant for a period of time, DCD is confronted with the possible non-compliance of expenditure time-lines, as well as inhibiting the development of affordable housing units which are ready to begin construction by tying up funds committed to projects with additional financing or pre-development needs.
DCD recommends the utilization of a two-tier process that basically commits funding for approved housing projects in principal at the first tier and then funds projects previously approved in principle when they are ready to commence construction. Funding would then be provided to construction ready projects on a first come first served basis from existing, available dollars that had been targeted to housing construction.
DCD furthers recommends that funding will only be provided to developers which have secured the site, all project financing, and appropriate insurance and bonds in place.
ELHCDC Comments: As previously mentioned, affordable homeownership developments need the financial assistance of a wide variety of funding sources, from private to other public sources that take up to three years to assemble, depending on the type and size of a project. When a project is located in the City of Miami, it is reasonable to accept that these other funding sources will look for the City's participation and commitment prior to considering their own. Private and other public sources, not to mention the developers themselves cannot feel comfortable providing financing if there isn't a guarantee that all of the funds needed to complete the project are in line and available to the project. A fund, located in a pool for the taking, is not a commitment to a project and will not allow for a developer of affordable homeownership projects to secure other funding sources.
With respects to the requirements of having secured the site and having all of the financing and construction bonding in place prior to the City's participation in a project: It is hard to imagine that such a condition be placed on a project that first and foremost will be located in the City of Miami and benefit the City's residents and tax base. As previously mentioned, other private and public funding sources will look for the City to take care of its own, prior to joining it. It is ludicrous for the City to expect others to help build it before it helps itself. In addition, the requirement of having a full construction bond in place (which is generated by the General Contractor but paid by the developer) indicates that the project, depending on size has expended close to a million dollars on architectural drawings and has secured a General Contractor, which now creates a legal obligation to the contractor and sub-contractors. If for any reason, the project stalls, or fails to be developed due the lack of available funds in the "pool", the developer faces an array of penalties and/or law suits for breach of contracts.
ELHCDC Recommendation: The staff of DCD needs to better manage its current and future allocations of HOME, SHIP and CDBG program funds. With careful planning, financing commitments can be made to projects by DCD, after the aforementioned development of time-lines have been created, based on the needs of different types of projects. Commitments can be made identifying the type of subsidy, but not the year. When a project is ready to commence. Program funds from the current year can be used for that project. On an on-going basis, DCD can monitor the status of each project's time-lines and the availability of funds and make sound decisions as to which funds to spend on what project, as well as the availability of funds for new funding proposals.
The staff of DCD is further recommending that certain projects be de-funded and have the funds placed in the recommended pool. This recommendation has been made without DCD's staff understanding the literal reasons why these projects have not commenced. In the case of Latin Quarter, they are recommending to take funds from a project that has commenced, has the construction bond, has the General Contractor and all of the other requirements, plus has a legal obligation to its contractor and other lenders. How, can anyone in their right minds, with any level of understanding of a construction project, recommend taking funds from a project under construction that has already been partially funded by the City and is on pace to expend all of the City funds within the next 4 to 5 months. Taking the funds away from the project now, would basically mean the City cutting its own throat by placing a successfully commenced construction in danger of not meeting its financial needs.
If any of these issues are not dealt with in the appropriate way, which is, to bring all of the players involved to a table and develop a policy that will ensure compliance, production and timely expenditure of funds. Utilize the expertise of those in the trenches, to develop educated policies that work and will arrive at the goal of provide safe, decent and affordable homeownership opportunities to our residents. Furthermore, to rebuild and revitalize the neighborhoods by bringing on line new construction units to an area forgotten by the private developers for over 30 years.
We respectfully request that before you approve these recommendations that will in essence destroy the ability of successful not-for-profit affordable homeownership organization such as ELHCDC to continue developing, you please instruct the DCD to go back and work with all of the players to produce a policy that will work for all involved.
Thank you for your attention to this matter.
c. Carlos A. Gimenez, City Manager
-Just got my hands on a copy of the City of Miami's updated Consolidated Plan
Policies document and City CDCs need to know a could of key elements:
1) The staff is recommending the elimination of Housing Administration funds for all developers. The staff is arguing that administrative costs will be generated through development fees.
2) "When developer has secured finacing, control of the proposed project site and appropriaet insurace/bonding coverage and is ready to commence construction, the project would then be funded from existing funds..."
3) ..if policy paper is approved, "administration will schedule a public hearing to formally adopt this policy and transfer funding obligations of previously approved housing projects that have been inactive for at least one year to a housing funding pool..."
CDCs affected by this would be BAME CDC, East Little Havana, Gate House, Jubilee, Little Haiti Housing, and New Century CDC.