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02.22.23 HAB Packet CITY OF BOULDER HOUSING ADVISORY BOARD MEETING AGENDA DATE: February 22, 2023 TIME: 6 PM LOCATION: Hybrid Meeting – HAB Members will meet at the Brenton Building at 1136 Alpine Avenue – Public will access the meeting via a link posted the day of meeting 1. CALL TO ORDER AND ROLL CALL / 6:00 p.m. 2. AGENDA REVIEW 3. APPROVAL OF MINUTES a. January 25, 2022 – See attached 4. PUBLIC PARTICIPATION / 6:05 p.m. a. Open comment 5. MATTERS FROM THE BOARD / 6:10 p.m. a. Middle Income Down Payment Pilot (Input) – memo sent under separate cover on 2/17 o Hollie Hendrickson, HHS b. Polis’ Housing Agenda (Feedback) c. Zoning for Affordable Housing discussion continued (Feedback) 6. MATTERS FROM STAFF / 8:40 p.m. a. HAB applicant interview schedule b. Recent development highlights 7. DEBRIEF MEETING AND CALENDAR CHECK / 8:50 p.m. 8. ADJOURNMENT / 9:00 p.m. Informational Item: Updates and education; no action to be taken Feedback: Discussion of board processes and items of interest; may result in action Input: Discussion and comments to shape staff work on housing issues, projects, and policies; no action taken Decision: Vote on board processes, work plan, agenda items, etc. Recommendation: Vote on the board’s input to city council For more information, please contact the HAB Secretary at 303.441.3097, or via email at bollert@bouldercolorado.gov. Board agendas are available online at: https://bouldercolorado.gov/boards- commissions/housing-advisory-board. Please note agenda item times are approximate. HOUSING ADVISORY BOARD Summary Minutes: 01/25/23 Virtual (Zoom) BOARD MEMBERS PRESENT: Michael Leccese, Chair Danny Teodoru, Vice Chair Terry Palmos Philip Ogren Julianne Ramsey STAFF PRESENT: Jay Sugnet Tiffany Boller Hollie Hendrikson Lisa Houde Karl Guiler 1. CALL TO ORDER AND ROLL CALL / 6:01 p.m. 2. AGENDA REVIEW 3. APPROVAL OF MINUTES a. December 7, 2022 – Ramsey motion to approve minutes, Ogren seconded, 5-0 approved 4. PUBLIC PARTICIPATION / 6:05 p.m. a. Lynn Segal b. Mark Fearer c. Lisa Spalding 5. MATTERS FROM THE BOARD / 6:20 p.m. a. Presentation by Lisa Houde, Senior City Planner - Accessory Dwelling Unit Regulations Update i. Lisa shared the same information that will be presented to City Council the following evening. HAB provided feedback on the various topics related to the update b. Zoning for Affordable Housing (Feedback) i. Karl Guiler shared the current thinking on the project in preparation for a March 23 Council Study Session. Thoughts from HAB on potential changes would be appreciated c. Listening Session Topics i. Board would like to have a Listening session when public can be in person ii. Palmos – would like to have listening session on Boulder using the airport to develop housing or occupancy iii. Continue to discuss possible topics during February meeting 6. MATTERS FROM STAFF / 9:04 p.m. a. Jan. 31 - Inclusionary Housing 101 - Joint meeting with Planning Board b. Continue to discuss Zoning for Affordable Housing 7. DEBRIEF MEETING AND CALENDAR CHECK / 9:10 p.m. a. February 22nd, next HAB meeting 8. ADJOURNMENT / 9:11 p.m. a. Palmos motions to adjourn, Ogren seconds. 5-0 approve APPROVED BY      _________________________________  Board Chair      _________________________________  DATE    NO FOOTERS NO PAGE NUMBERS CITY OF BOULDER HOUSING ADVISORY BOARD AGENDA ITEM MEETING DATE: February 22, 2023 AGENDA TITLE Request for Housing Advisory Board to Appoint a Liaison to the Airport Community Conversation Working Group REQUESTING DEPARTMENT / PRESENTERS Transportation & Mobility Natalie Stiffler, Interim Director John Kinney, Boulder Airport Senior Manager Allison Moore-Farrell, Senior Transportation Planner OBJECTIVE 1. Request for Housing Advisory Board to appoint a liaison to the Airport Community Conversation Working Group PURPOSE The purpose of this memorandum is to share information with the Housing Advisory Board (HAB) about the Airport Community Conversation Working Group and request that the HAB appoint one of its members as a liaison to the group. NO FOOTERS NO PAGE NUMBERS EXECUTIVE SUMMARY The City of Boulder (city) will conduct community conversations through a robust engagement process to develop a range of future scenarios for the future of Boulder Municipal Airport (BDU). This engagement process and resulting scenarios analysis will provide a better understanding of the desired future for BDU. To support the process, the project team will convene a Community Working Group (CWG) to help refine stakeholder feedback, identify potential scenarios for the future of the airport and establish discourse between all impacted stakeholders. The project launched in January 2023 and is expected to deliver a final report by June 30, 2023. The HAB Liaison will serve to provide a link between the working group and HAB for the duration of the project. BACKGROUND The city owns BDU, which is a general aviation airport that offers business, private, recreational, and emergency aviation services to the city and surrounding communities. It has two published runways and supports heavy glider operations. The city has expressed interest in holding in-depth community conversations to better understand the aspirations of directly impacted stakeholders, citywide community members and traditionally underserved communities in the region. Kimley-Horn and a team of subconsultants has been retained to develop and implement a community engagement plan, develop a range of scenarios for the future of the airport and recommend a “preferred scenario.” PROJECT DESCRIPTION The scope of work for this project includes hosting a community engagement process that identifies community goals and desired outcomes, a range of future scenarios and a selection of a “preferred scenario” for the airport site. The city is working to develop a deeper understanding of the desired future for BDU by engaging directly with the greater Boulder community, while being mindful of current obligations and commitments to the Federal Aviation Administration (FAA). PROCESS The Community Working Group (CWG) is one of multiple engagement strategies the project team will employ to collect community input on the future of the airport. Members of the CWG are expected to include (but are not limited to): • Airport users, including business owners, pilots and tenants • Community members who do not use the airport, including residents of nearby neighborhoods • Underserved community members who may be directly impacted by airport operations, including Community Connectors The CWG will meet five times throughout the course of the project to collaborate with consultants and city staff to develop and evaluate potential scenarios for the future of the airport. NO FOOTERS NO PAGE NUMBERS Additional future opportunities for community participation include: • Stakeholder interviews • Public Open House Meetings • Online Questionnaires • Public Hearings at City Council ANALYSIS OF KEY ISSUE(S) The project team believes that participation of a HAB member in CWG sessions and activities will benefit both the working group and the board in the following ways: • The HAB member can offer a city-wide perspective on housing for the group to consider when discussing recommendations specific to the airport. • The presence of a board member offers CWG participants the opportunity to communicate directly with the board via the HAB member. • The HAB liaison can serve as a conduit for the two-way exchange of information, from the CWG to the Board and vice versa. • Installing a working relationship between the CWG and the HAB early on can help facilitate conversations about key housing issues and opportunities as they arise and come before the Board during the planning process. The commitment to the CWG requires the participation of one HAB member at five working group sessions from March through December of 2023. The project is estimated to be completed by January 2024. 1 CITY OF BOULDER CITY COUNCIL AGENDA ITEM Draft: Middle Income Down Payment Assistance (DPA) Pilot Program Memorandum EXECUTIVE SUMMARY The Middle Income Down Payment Assistance (DPA) pilot program, as approved by Boulder City Council in 2019, involves a deal between the city and the homebuyer. This pilot program is truly innovative, aiming to achieve two objectives through a single program: 1. Provide down payment assistance to a middle-income household, AND 2. Acquire a permanent deed restriction on the home purchased by this household. The city will use its borrowing capability to create a pool of funds to assist middle- income home buyers to purchase a home in exchange for making that home permanently affordable through a deed restriction. The deed restriction is a contractual obligation recorded with the deed filed with the county which stipulates a maximum annual appreciation for the property. Because this pilot program is untested, there have been several iterations of the specific terms and conditions to ensure short- and long-term feasibility for the first homebuyer, subsequent homebuyers, and the city. Below are the notable elements of the revised pilot program based on recent discussions with council member Yates and former council member Weaver: • The first home buyer can borrow up to $200,000 from the city for the purchase, but no more than 15% of the purchase price. This loan will be set at 0% interest and is required to be paid back at 15 years or at the time of sale. The city’s Affordable Housing Fund would pay the cost to borrow (modeled at 2.5%, 4.5% and 6.5% interest rates), which are estimated to be between $40,000 and $112,000 over the 15-year period. 2 • The first home buyer is income qualified. All subsequent home buyers are not income qualified, but the deed restriction remains on the property in perpetuity. • The appreciation cap for the deed restricted property would be above the typical cap for homes currently in the city’s Affordable Housing Program but lower than market rate appreciation. The appropriate appreciation rate for houses in this pilot program still needs to be established. Modeling of different appreciation options in presented below. The following memo includes a brief description of how this updated pilot program fits into the spectrum of affordable housing options provided by the city. This memo also describes how the pilot program will work for the first homeowner, subsequent homebuyers, and for the City of Boulder. FISCAL IMPACTS • Fiscal - The initial pilot program developed in 2019 did not contemplate a cost to the city. Changes in the pilot program parameters will now require a subsidy between $40,000 and $112,000 per participating household. Budgetary impacts to the city include interest payments for the down payment assistance loan offered to each participating household. Because interest rates for a line of credit borrowed by the city are variable, the costs of this pilot program are very dependent on current and future lending rates. This analysis assumes up to a $200,000 initial down payment assistance, a 2.5% to 6.5% borrowing rate for the city, and a household payback at 15 years. • Staff time – For this pilot program, administration can be absorbed by current city staff under a normal work plan. In the case this program expands, and is established as a regular city offering, additional staff resources would be required to administer. BACKGROUND City Council prioritized the Middle Income Down Payment Assistance (DPA) pilot program at the January 2018 retreat. This decision was based on work that was done to address the loss of middle-income households in Boulder, as documented in the Middle Income Housing Strategy and adopted by council in fall 2016. In response to this trend, council member Yates and former council member Weaver crafted a white paper describing a potential down payment assistance pilot titled A Shared Equity Model for Middle-Income Affordable Housing Home Ownership in Boulder (see Attachment A). The July 23, 2019, study session memo (Attachment B) provided an overview of the funding options along with several operating parameters for this pilot program. The pilot program was put on hold in 2020 due to the pandemic and the uncertainty it created regarding the housing market. Since that time, the market for homes in Boulder has changed dramatically and some assumptions needed to be revisited. In 2022, work on this 3 pilot program was restarted, albeit in a very different lending, economic, and housing environment. The parameters and terms of the original 2018 pilot program concept were changed to respond to the larger market forces, which currently make the original pilot program terms untenable. Considering this evolution of program parameters, an updated terms sheet was created, which outlines program rules, terms, and conditions (Attachment C). Significant changes include: • Removing income qualification requirements for the second and all subsequent homebuyers. • Extending the repayment period from 10 to 15 years. • Offering a 0% interest loan for the down payment assistance for the first homebuyer. The city will cover the interest payments, which are estimated to be between $40,000 and $112,000 over the 15-year period. The following memo includes a brief description of how this updated pilot program will work for the first homeowner, subsequent homebuyers, and for the City of Boulder. 4 ANALYSIS Single family homes have long been out of reach for most Boulder residents and that gap keeps growing. Between 2010 and 2021, Area Median Income (AMI) grew within the city by 30%, while median sale price of single family homes grew by 134%. In practical terms, this means that a household of three needs to earn about $270,000 a year to afford a single-family home in the city. The earning power for a household earning 100% of the AMI needs to more than double to compete in the city’s single-family housing market. Figure 1. Area Median Income and Income Needed to Purchase Median Priced Single-Family Home (2022) While the city current offers the Permanently Affordable Homeownership Program for households earning around 100% AMI, naturally occurring affordable homeownership opportunities for households earning more than 100% AMI are non-existent. This pilot program aims to address this incongruity by creating additional homeownership opportunities for a broader range of incomes. To better understand the intent and implications of this pilot program, both for the city and homebuyers, the analysis below includes model scenarios in terms of the risk and return for the first homebuyer, subsequent homebuyers, and the city. Before implementation of this pilot program begins, staff is seeking feedback from City Council on the following questions: 1. Should we pursue this pilot program considering these program and housing market changes? 2. The appreciation rate for Middle Income DPA properties is a program parameter that still needs to be established. What is an appropriate rate of appreciation for the homes in the Middle Income DPA? 3. Are there additional parameters, terms, or conditions in this pilot program that should be considered? $112,900 Area Median Income $270,000 Income Needed to Purchase Median Single-Family Home 5 Risks and Rewards: First Homebuyer The income and asset profile of the first homebuyer is restricted by pilot program rules to not exceed 120% of the area median income (AMI). In this scenario, a household of three, earning 120% of the AMI, can reasonably afford a $475,000 home with a 6% mortgage interest rate at a 30-year term. This first buyer would also qualify for 0% interest down payment assistance loan from the city, allowing an additional $200,000 in borrowing power. This DPA increases total purchasing price to $675,000 for a household of three earning 120% AMI. Figure 2. Maximum affordable purchasing price or initial household earning 120% AMI (2022) Middle Income DPA Buyer 120% AMI Initial purchase price $675,000 Down Payment $34,000 Loan (1st Mortgage) $441,000 DPA Loan from city $200,000 Assumptions: 6% interest rate on 1st Mortgage, and 0% interest rate for DPA loan from city. The 15-year mark is an important one for the first buyer, as the 0% interest rate down payment assistance loan from the city is due at that time in its entirety. While the initial household can repay the down payment assistance at any time, it is assumed that most households will refinance their 30-year principal mortgage at 15 years, to be able to pull out these funds from their home equity to repay the down payment assistance from the city.1 This pilot program requires the establishment of an appreciation rate on the deed restricted properties brought into this program. The below table identifies the estimated net equity for a Middle Income DPA property at different appreciation rates. This table also includes the estimated market appreciation at the same starting value. Figure 3. Status of Net Equity for a MIDPA and Market Rate Home, 15 Years After Purchase Market Rate Middle Income DPA Option 1 Option 2 Option 3 Initial purchase price $675,000 $675,000 $675,000 $675,000 Annual appreciation rate 7.5% 3.2% 4.2% 5.2% DPA repayment $0 $200,000 $200,000 $200,000 Net equity after DPA repay and sale/refinance $1,500,000 $564,000 $723,000 $924,000 For the first homeowner, if the appreciation cap is capped anywhere between 3.2% or 5.2%, at 15 years, it is estimated that the initial homeowner will have earned enough 1 City Council in 2019 expressed a desire to limit the term to 10 years so funding could be available to new homebuyers. But discussions with Impact Development Fund raised concerns about a homeowner’s ability to build sufficient equity in 10 years to be able to refinance and pay back the loan. 6 equity in their home to repay the initial down payment assistance loan from the city. The appreciation rate for homes in this pilot program will have greater impacts on the future affordability of the homes in the pilot program, and therefore, the Subsequent Homeowner section below provides a more detailed explanation of these options. As with all economic modeling, there are several factors that could disrupt these estimates and assumptions. For example, the ability for a homeowner in this pilot program to refinance depends on the homeowner’s income status, credit score, interest rates and other debt. Any change in lending conditions (e.g., higher interest rates) or slower than average income growth for the household could jeopardize their ability to qualify for a refinance. If the owner can’t refinance, they could be forced to sell and displaced from their home. 7 Risk and Rewards: Subsequent Homebuyer A defining characteristic of this pilot program is the establishment of a deed restriction on the property: the first homebuyer gets access to a $200,000, 0% interest loan from the city in exchange for a permanent deed restriction on the property. Establishing an appropriate appreciation rate is critical for subsequent homebuyers in this pilot program, as this rate will dictate future affordability of the home. As a reminder, after the first homeowners, this house will be available to any household regardless of income and asset levels. Households earning more than the initial pilot program income and asset threshold will be eligible to purchase these deed restricted homes. At an appreciation rate set more closely to the historical market appreciation rates, the home value at 15 years is out of reach for any future middle-income family, without additional financial assistance. Alternatively, a lower appreciation rate helps to keep the home more affordable in the future relative to the market. Between 2012 and 2022, the average appreciation rate in the city’s Permanently Affordable Homeownership Program was 2.2%. The table below shows the 15- and 30- year home value and (Area Median Income) AMI affordability level at three different appreciation rates options described below are pegged to this average: Figure 4. Area Median Income (AMI) Affordability at Different Appreciation Rates, at 15- and 30-Years. Option 1 (3.2%) Option 2 (4.2%) Option 3 (5.2%) Market Rate (7.5%) 15 Years 146% 164% 185% 271% 30 Years 157% 209% 279% 538% Note: City of Boulder’s Permanently Affordable Home ownership Program, which is based on the annual change in the Area Median Income or the Consumer Price Index (whichever is less) and is restricted to a range of 1.0% - 3.5% per year. Using a 4.2% appreciation rate, after 15 years in the program a home in this program will be affordable to a household earning 164% AMI, in contrast to the 271% AMI of a market rate home. And at 30 years in the program, the deed restricted home would be affordable to a household earning 209% AMI. An important goal of this program is to build a wider range of homeownership options for middle income households wanting to live within Boulder city limits. The chart below offers a 15- and 30-year comparison of Area Median Income (AMI) affordability for homes in the city’s three programs (Permanently Affordable Homeownership Program, Middle Income DPA pilot program, and the House to Homeownership (H2O) DPA Program) compared to market rate homes. Note that the AMI levels for the Middle Income DPA pilot program in the chart below assumes a 4.2% appreciation rate. 8 Figure 4. Comparing Area Median Income (AMI) Affordability in City Programs and Market Rate, at 15- and 30-Years While the AMI levels described above are above the pilot’s initial middle income affordability definition, the permanent deed restriction limiting the home to 4.2% annual appreciation, allows homes in this program to remain below market rate without additional city subsidies to households. A 4.2% appreciation rate also creates a more competitive alternative to the current homeownership program, which may incentivize participation. For these reasons, staff recommends the appreciation rate for this pilot program be pegged at 2% higher than the annual appreciate rate as determined for the Affordable Homeownership Program (average annual increase of 2.2% plus 2% equals 4.2%. At this rate, the pilot program will attract potential homebuyers looking for an alternative to the current offerings, allow enough wealth generation through home equity growth for the first and future household, and create a unique housing product in the city perpetually priced well below similar market products. There are a few important caveats to this appreciation rate. Households earning more than the AMI levels identified above will be eligible to purchase these deed restricted homes. It is assumed that a deed restricted home will not be competitive to market alternatives, and therefore, remain available for middle income households. Lastly, capital improvements to the home may be made at any time by the owner, but only pre-approved and eligible capital improvements will result in a higher selling price. The value of capital improvements would appreciate at the same rate as described above for the home. The capital improvement appreciation would be added to the maximum resale price. 9 Risk and Rewards: City of Boulder The Middle Income Down Payment Assistance (DPA) pilot program would expand on current city efforts to encourage and incentivize homeownership opportunities for low to middle-income households. As noted above, this pilot program aims create additional homeownership opportunities for a broader range of incomes. As designed, the Middle Income DPA pilot program is intended to accomplish two objectives: 1) reduce the up-front cost of homeownership through down payment assistance; and 2) increase the city’s inventory of deed-restricted for-sale housing. The city currently manages two separate programs geared toward similar objectives. • House to Homeownership (H2O). Helps first-time buyers finance market rate homes. The program provides a second loan up to $100,000 for the down payment and requires it be paid off after 15 years (or after the home is transferred) plus a share of the appreciation. The maximum income to qualify is 120% AMI. The H2O program provides similar assistance as the Middle Income DPA pilot; however, the H2O program does not impose a deed restriction, which makes the down payment loan easier to repay at the end of the term (because buyers capture the full market-rate value of the home). The max down payment loan in the H2O is lower ($100,000 vs $200,000) and the repayment term is longer (15 years versus 10 years). • Permanently Affordable Homeownership Program. Homes in this program are sold below market rate and are subject to restrictive deeds or Affordability Covenants, which limit appreciation (similar to the Middle Income DPA program). Homes in this program are almost exclusively built by developers as a requirement for annexation into the city, but also through Boulder’s Inclusionary Housing program or donated through the Housing Legacy program by individuals, corporations, or other organizations. In addition, the City of Boulder has begun adding homes to the program through strategic acquisition and rehab of market-rate properties. In 2022, one middle-income home was purchased and three more will enter the program in 2023. The city currently has 811 deed restricted ownership homes in its inventory with two currently listed for sale. There is a waitlist for these homes with preference given to those who both work in Boulder and have been on the list for one year. The income limit to participating in this program is 120% AMI, but most homes are currently at 100% AMI or lower. Middle income homeownership opportunities in Boulder are not limited to city of Boulder managed programs. Below is a list of other opportunities for middle income households looking to purchase a home in Boulder. • Area Down Payment Assistance Programs. In addition to the city’s H2O down payment assistance, there are several different down payment assistance products available for first time homebuyers in the area. Details of these other programs and products can be found in Attachment D. 10 • Flatirons Habitat for Humanity and Thistle Communities. These community housing partners focus on homeownership opportunities for Boulder residents. The city will continue to provide gap funding to these organizations to provide additional homeownership. • Modular Factory. The city is also pursuing a unique opportunity with Habitat and the Boulder Valley School District to build an affordable housing modular factory to increase production and lower costs through modular construction. The modular factory will focus on homeownership exclusively in the early years of production. The Middle Income DPA pilot program outlined here offers another tool in the city’s homeownership affordability toolbox: all three programs preserve below market rate homes within city limits at different affordability levels. All three program have different cost implications for the city, different restrictions homeowners, and different limitations for future homeowners. The city does bear a cost for each unit preserved within these three programs. For the homes in the Middle Income DPA pilot program, the per unit cost is in line with other affordable units in the city’s ownership portfolio. The below table includes details of the estimated per unit cost of each program. Figure 5. City of Boulder Homeownership Programs, Cost to City and Brief Description City of Boulder Program Cost to City Impacts of Affordability Permanently Affordable Homeownership Program $100,000 (2 Bedroom) $215,000 (3 Bedroom) $252,000 (4 Bedroom) Permanently Affordable Unit for households at/under 120% AMI. Middle Income Down Payment Assistance Program Pilot $40,000 at 2.5% interest $75,000 at 4.5% interest $112,000 at 6.5% interest* 1st Homebuyer: income limited at 120% AMI AND deed restricted to limit appreciation not income. House to Homeownership (H2O) Evergreen funding source. No cost to the city. No deed restriction on the home. *The cost of this program to the city is very dependent on current and future lending rates because interest rates for a line of credit are variable. This range assumes a 2.5-6.5% borrowing rate for the city, and a household payback at 15 years. Naturally occurring affordable homeownership opportunities for middle income households in Boulder are rare in today’s housing market and are expected to become non-existent in future years. The Middle Income DPA pilot program, as described, creates additional homeownership opportunities for a broader range of incomes. It is intended to add another avenue for homeownership among middle income households looking to live within city limits. 11 CONCLUSION Council will need to weigh different policy objectives prior to moving forward with the implementation of this pilot program. • Several details and terms of this pilot program have changed since its original conception. Does City Council wish to continue implementation of the Middle Income DPA pilot program with the updated terms, conditions, and parameters? • An appreciation rate still needs to be selected for homes deed restricted by this program. If set too high, the future home value will be unattainable for middle income households, but resale will be more realistic to a market buyer. If set too low, there are lending implications for the first household, and resale on the open market may be difficult. For this reason, staff recommends that the appreciation rate for this pilot program be pegged at the city’s Permanently Affordable Homeownership Program, plus two (2) percentage points, or 4.2%. Does City Council agree with this recommendation for the pilot program’s appreciation rate? • The home bought into the program will carry a financial cost to the city. The initial pilot program did not contemplate this financial burden. Does City Council approve of pursuing this pilot program with this new assumed cost? NEXT STEPS • Immediate. Based on the direction from Council, staff will continue to analyze the options for the pilot as identified by Council and implement the program as directed. • Short-Term. After one-year of pilot program implementation, staff will evaluate participation levels and other metrics to assess the community’s reaction to the pilot. At this point, changes can be made to pilot program parameters to increase community interest, if needed. • Long-Term. Measuring pilot program progress will be challenging in the short- term. The initial down payment assistance loan offers a 15-year term. Because this is a 0% interest loan for the initial homebuyer, it is possible for the first DPA loan not to be paid back before that 15-year term ends. As a result, the pilot program’s impact on the first homebuyer, imp act on city finances, and the deed restricted home’s marketability may not be assessed until 15-years into the pilot program’s initial implementation. ATTACHMENT(S) A – A Shared Equity Model for Middle-Income Affordable Housing Home Ownership in Boulder B – July 23, 2019, Study Session Memorandum C – Updated Middle Income Down Payment Assistance Pilot Program Term Sheet D – Area Down Payment Assistance Program Summary 12 Attachment A: A Shared Equity Model for Middle-Income Affordable Housing Home Ownership in Boulder A Shared Equity Model for Middle-Income Affordable Housing Home Ownership in Boulder A way to produce permanently affordable housing from existing homes with willing partners By Sam Weaver and Bob Yates The ideas presented here are not all our own, as we have been discussing the concept of this program for a number of years, trying to refine it to a system that is scalable and produces middle-income, permanently affordable housing in Boulder. As we know (and consultants report to us), Boulder is doing OK at building and preserving housing for those with the lowest incomes, 30% to 60% of Area Median Income (AMI). Our goal is 10% of our housing stock affordable at those levels and somewhat above – we are at around 8% currently. However, as we know, we are seeing increasing difficulty for middle-income residents to be able to afford to purchase a home in Bou lder. This is because housing prices have been outpacing income growth for many years, and this is a national problem in many desirable urban areas. Boulder is no exception, and is the most expensive non-resort town in Colorado. The lower end of the middle-income range is being completely priced out of home ownership in Boulder. This short overview is focused on a program to help middle-income Boulder workers or residents to purchase a home. The program involves a deal between the city and the homebuyer(s). The city will use its bonding capability to create a pool of money to assist middle-income home buyers to afford a home, and in exchange that home will be made permanently affordable through a deed restriction. The deed restriction is a contractual obligation recorded with the deed filed with the County which stipulates a maximum annual appreciation for the property. This deal will only be attractive to those who wish to live in Boulder enough that they are willing to forego market-rate appreciation, which over the long run will likely be higher than the deed restriction appreciation cap. We expect this is likely to be the population that would never be able to assemble a down - payment large enough, or make monthly payments high enough, to afford to buy a house or condo in Boulder. The ultimate goal of such a program is to preserve economic diversity in the City of Boulder, and potentially to reduce the in-commuting load. The means that this program uses to reach the goal is to provide funding through market mechanisms in which some existing housing stock is preserved as affordable to middle income earners and below for ownership. This program does not address rental housing. Boulder currently has a smaller-scale program called H2O which promotes home ownership by essentially providing a second mortgage on a home that is paid back at some point, but does not 13 include on-going mortgage payments nor permanent affordability. This program is not popular, serving only a handful of buyers each year. To build our proposed program, we will need to first define who will qualify for the program. Since residents who are making significantly more than the Boulder Area Median Income, by definition, need little assistance (and would probably not want to forego market-rate appreciation), the program will focus on those making less than a threshold of (say) 120% of AMI. The exact amount should be specified through a political and technical discussion. Similarly, we do not want to be assisting with the purchase of luxury housing, so to qualify for consideration in this program, the residence to be purchased will be below the median home price of that category of housing (single-family, attached, townhouse, etc.). Those two guidelines (perhaps with a requirement that the applicant have lived or wor ked in Boulder for some period of time, and perhaps limited to first-time homebuyers), would define the pool of potential applicants. The next consideration is how the mechanics of the home purchase will work. What follows is an illustrative example. The income-and asset-qualified purchaser(s) have located a home they want to buy which is below the median price for that type of housing. But, the buyers’ income is only sufficient to qualify for a bank loan for 67% ($400,000) of the value of the home ($600,000), and they have a down-payment of only 10% of the home value ($60,000). This leaves the buyers with a big gap of 23% of the home value or $140,000. Under the proposed program, the City receives their application, agrees with the bank that they are credit-worthy for their monthly payment, and that the home qualifies. The City then provides the 23% of the home value towards the purchase in cash as part of the transaction, and through contractual agreements, receives a 23% share in the equity ownership of the home. The other part of the contractual agreement with the buyer is that the future sale price of the home can have no more than a (say) 4% per year annual appreciation. This shared equity arrangement continues until the home is sold, at which time the City receives its principal, as well as its share of the 4% annual appreciation. A potential option for the program design is that Boulder be guaranteed its 4% annual rate of return regardless of whether the home actually appreciates at 4% per year or not – this puts all of the risk on a sub-4% appreciating real estate market onto the buyer(s). With the sale, the City financial position is restored, and these funds can be deployed for another home purchase, or to pay off the bond-holders that supplied the funding. The only cost to the City has been the opportunity cost for the funding (which could be financially small), but the great benefit is that another home has become permanently affordable to middle-income buyers. If the bonds are set up correctly such that the annual bond rate is roughly equal to the appreciation cap (in this example 4%), this program to preserve middle-income housing affordability could be run with no significant cost to the City of Boulder. There are a myriad of questions that arise when we describe this program to interested parties. We will address a few: 14 1) Will buyers take advantage of this program? They did not too much in the 1990’s and 2000’s. Personally, we think the answer is ‘yes’. Times have changed a LOT since the 1990’s and 2000’s, when home costs were lower, down payments were lower, and the market appreciation was so high that there would have to be a big incentive not to take any deal that required limiting appreciation. But the proof is in the pudding – our thought is to run a limited pilot to see how popular a larger program would be, and if it is not popular it stops; if it is popular Boulder goes to the bond markets for substantial funding to expand the program. 2) Will banks go along with this program, since there are other parties involved? From discussions we have had with national housing experts, we believe the banks consider this to be an acceptable arrangement. We will be exploring this further, but since the buyers will not have to make monthly payments on what is essentially the City- owned equity, and since both the bank’s and the city’s loans will be secured by mortgages on the property (with the bank in the first position), we expect this arrangement to pass lender muster. As far as loan-to-value, either way it would be calculated (with City ownership of a portion, or without) the standard guidelines would typically be met. So, yes, we think this will work from the bank loan side. 3) What about home improvements? Buyers will not want to keep up these homes if they do not re-coup the value from the improvements. This is a very important point. We can deal with this through establishing the basis (purchase price) which can only appreciate at (say) 4% per year, and keeping track of material non-maintenance improvements (a room addition, a kitchen remodel, etc.) which increase the value of the home. These substantial improvements can be accounted separately from the basis, and the value of those improvements can be allowed to appreciate at market rates, ultimately rewarding the owner at the time of a sale. Since a major portion of the value of the property is in the land value, the homes will still remain substantially affordable even with a (relatively small portion) appreciating at market rates. 4) Once owners are in this program, they will never have any incentive to leave, so the funding will be tied up forever. This is also an important point, but we can test its validity. One approach is to try it and see if the normal life circumstances, career advancement, etc., keep the turnover at around the 7 year average occupancy duration we currently see. If, however, program participants are effectively tying up needed funds for new program houses, a balloon element can be added. This would require a home re-finance (or sale) at, say, 7 or 10 years after the City contribution, after which the City principal and appreciation are returned to go to work on a new purchase. 5) Will the bond markets be interested? 15 Again, we think the answer is ‘yes’. We believe these could be tax-free municipal bonds, effectively increasing their yield over whatever market appreciation rate is allowed for the underlying residential appreciation. We can easily find out as we study and prepare for a pilot program. 6) Have other cities implemented programs like this one? Yes, San Francisco and Los Angeles both have similar programs. The main distinction between this program proposal and the ones in other cities is that permanent affordability is achieved with this proposal, while in the other cities market rate appreciation is allowed. In summary, we have worked on this idea with many partners, including fellow Council Members and City staff Bob Eichem and Kurt Firnhaber. We welcome comments from the community, and hope to find proposal weaknesses or hear about potential program improvements from the Boulder community. 16 Attachment B: July 23, 2019 Study Session Memorandum STUDY SESSION MEMORANDUM TO: Mayor and Members of Council FROM: Jane S. Brautigam, City Manager Kurt Firnhaber, Director for Housing & Human Services (HHS) Cheryl Pattelli, Chief Financial Officer Bob Eichem, Chief Financial Advisor Jay Sugnet, Senior Planner (HHS) DATE: July 23, 2019 SUBJECT: Study Session for July 23, 2019 Middle Income Downpayment Assistance Pilot EXECUTIVE SUMMARY City Council prioritized the Middle Income Downpayment Assistance pilot project at the January 2018 retreat. This decision was based on work that was done to address the loss of middle-income households in Boulder, as documented in the Middle Income Housing Strategy and adopted by council in fall 2016. In response to this trend, council members Weaver and Yates crafted a white paper describing a potential down payment assistance pilot titled A Shared Equity Model for Middle-Income Affordable Housing Home Ownership in Boulder. Staff prepared a memo to expand upon this white paper with additional background research and drafted a clear problem or “why” statement and a purpose statement that was discussed by council on Feb. 19, 2019. After discussions with local lenders and industry experts, it appears that the funding source for the pilot could be the existing H2O funds (approximately $820,000) in combination with either bonds, a private placement with a financial institution, or a line of credit (LOC). All options require a ballot measure and draft language is included in this memo for council consideration. Several policy questions remain for council to consider prior to moving forward with a potential pilot. These include: 1) determining an appropriate appreciation limit for homes in the program with a deed restriction; and 2) determining the maximum income and asset limits of program participants, if any. This memo includes a short summary of the pilot history, the benefits and risks of the various approaches, draft ballot language and next steps. 17 BACKGROUND Feb. 19 Council Study Session The Feb. 19 council memo provided an overview of homeownership challenges in Boulder and the need for down payment assistance for middle-income households to remain in our community. The memo also detailed the objectives and potential mechanisms of a potential pilot with the following why and purpose statements. “Why” Statement Boulder is doing well building and preserving housing for low- and moderate- income households (30-60% of Area Median Income (AMI)). The city currently has 7.5% of its housing stock as permanently affordable and recently increased the goal from 10 to 15%. However, it is increasingly difficul t for middle-income households (up to 120% of AMI) to purchase a home in Boulder. This is a result of housing prices outpacing income growth for many years, leaving many middle- income households priced out of home ownership in Boulder. Purpose Statement Create a program to assist middle-income Boulder workers or residents to purchase a home. The goal is to preserve economic diversity in the city and potentially reduce in - commuting. Pilot History The pilot was first conceived as a method for the city to provide down payment assistance at no or low cost to the city. Several models were explored where local lenders would provide the down payment assistance (i.e., a second mortgage) and the city would guarantee the second mortgage and service the loan (i.e., make interest payments) to reduce a homebuyers monthly housing expenses. There was interest from local lenders to participate in such a program until it was determined that the Colorado constitution prohibits municipalities from guaranteeing loans. FUNDING Based on feedback from the industry experts, council members Weaver and Yates requested that staff focus on three funding options. Below are descriptions. Ballot Question to Ask the Voters to Borrow. If approved by the voters, this allows the city to borrow a certain amount of money to be paid back over time. To comply with the QUESTIONS FOR COUNCIL 1. Which option does council prefer for appreciation cap: cost of borrowing (4%), AMI increase (2.1%) or a different fixed rate? 2. Based on the appreciation cap, should the AMI and income limits be raised or eliminated for future buyers of the deed restricted home? 3. Does council have any concerns with the draft ballot measure language? 18 TABOR requirements voters must approve any debt amounts to be paid back over multiple years, and the estimated total debt service to be paid during the time the borrowed money would be outstanding. The borrowing could be done by using bonds, a private placement with a financial institution (has all of the attributes of a bond but is issued differently), or a line of credit (LOC). All methods can be done using a competitive process. The differences in the method used is that a bond or private placement would require borrowing a lump sum with principal and interest be paid back each year. A LOC could be structured so the amount borrowed is only the amount needed at that time. The annual payments to be made by the city could be interest only on the amount borrowed, with the principal being paid off as a balloon payment at the end of the loan (estimated to be seven to ten years). For purposes of the following example the repayment annually will be interest only on the actual money borrowed. This would significantly reduce the amount of money that would need to be paid out annually until the loan was paid off. Please note: for simplicity and illustrative purposes the amount to be borrowed in the examples is $10.5 million. If council moves forward with a ballot issue the amount to be borrowed is set by council and can be changed. In each example, the borrowed money would be issued as taxable borrowing. Due to federal tax laws, the bonds would be taxable since the benefit accrues to an individual instead of the community. Examples of both types of borrowing follow. LOC Example: Voters approve borrowing $10.5 million. Ten loans of $150,000 are made annually over the first seven years, and the first loans are paid back in the seventh year. In total, $1.5 million of the LOC would be drawn down in each of the first seven years for a total of $10.5 million. Each year could be considered a separate tranche (year 1 would be tranche 1, year 2 would be tranche 2 continuing through the seven tranches. The city would only pay interest on the amount borrowed from the line of credit and would make no principal payments until the loan is paid off at the end of seven years for each tranche. That is, tr anche one would pay off in year seven. Tranche two in year eight, tranche three in year nine, etc. If the interest rate that the city pays is 4%, then the total interest paid per $150,000 loan each full year is $6,000 (maximum of $60,000 if ten loans per year are made). When the house sells or refinances in the seventh year the city would collect the accumulated interest and principal at closing to pay off the remaining interest cost and the principal of the first LOC. Each subsequent year would see the sam e thing happen. As long as appreciation of the home is at least 4% per year the total transaction of the seven years will be equal, and the city and the homeowner would break even. The interest rate on LOCs can sometimes be variable over the time borrowed. This means the interest rate will reset over time to more closely reflect the changes in the economy have on the cost of borrowing money. Based on historical analysis staff has used 4% as the estimated aggregate interest rate over the time the LOCs would be outstanding. If interest rates would rise above this amount the council seated at that time could make changes to the program to reflect the reality at that time. 19 If appreciation is less than 4% the homeowner would need to contribute additional funds at the closing to pay back the loan. If appreciation of the home is greater than 4% the homeowner will be in a positive position. The current H20 funds available (approximately, $820,000) could be used to make the first payments. If ten $150,000 loans are made each year it is estimated that it would be year five of the seven-year program before additional funds from the city would be needed to pay the annual interest costs. Additional funds would also be needed to cover potential loan defaults of program participants as well as covering the cost of administering the program. Bond Example: Voters approve borrowing $10.5 million for a period of 7 years at 4% – the annual estimate to pay back the principal and interest on the bonds would be $1.75 million annually. Voters would have to approve the sale of the bonds. If a new revenue was being requested to make the annual payments voters would also have to approve this. If the annual payments are to be paid out of current revenues (not asking the voters for a new stream of money to pay the principal and interest) the ballot question for the new borrowing would say, without a tax increase may the city borrow $10.5 million dollars. To meet TABOR requirements, the ballot language would also include the estimated total amount of principal and interest that would be paid during the time the debt would be outstanding. If a private placement or line of credit is used as the borrowing method, it is easier and less costly to borrow smaller amounts as funds would be needed for the assistance program. The LOC methodology is the most flexible since interest is only paid on the amount borrowed. It is possible though not known for certain that bidders for the LOC may include a small fee on the funds in the annual LOC that are not used. Based on discussions with staff of other governmental entities that use LOCs this amount is usually small in amount (estimated to be around $5,000 annually on each tranche) if it is included in the response. The issuance costs on a private placement or LOC would be significantly less than using multiple bond issues. The trade off, is the interest rate is sometimes higher. If bonds, or a private placement were the choice of method to use, instead of a LOC staff would run a cost analysis to determine which type of borrowing would be best to use at the time of issue. The recommendations would then be brought to council for approval. The interest rate used in the ballot question is normally set higher in case interest rates would rise from the time a ballot item is approved by voters until the time the final borrowing occurs (eight y ears from the current year). If this is not done, and interest rates rise above the amount in the ballot then the total amount borrowed would have to be reduced until it fits into the total amount the ballot item says will be paid in total principal and interest. This would mean a reduction in the number of loans that could be issued. Based on a historical analysis of taxable issues over the past 20 years staff recommends a rate of 5.0 or 5.25 percent be used if a ballot question goes forward. 20 In all cases, the principal will have to be paid back. The difference is when it needs to be paid back. For bonds or private placements, it is paid back annually. For a LOC the principal is paid back at the end of the loan period (estimated to be seven years). Either way, once the principal is paid off there are not further funds available to lend unless the voters approve another round of borrowing, and a new source of funds is found to finance a future revolving fund. Based on the analysis of the two different methods, the LOC option would be better for a pilot program. If there is no interest from community members in using this program, no money will be borrowed. If there is interest, only the amount needed would be borrowed. By using the interest only with a balloon payment methodology, the amount of money the city would have to front end would be minimized and used more effectively. The program as presented would last for seven years if interest rate projections are met. The last tranche of the money borrowed would pay off in approximately 14 years. BALLOT MEASURE LANGUAGE If council chooses to issue bonds, then a vote is required to address TABOR requirements. The debt amount is blank, but currently a debt of $10 million at 5% interest is being discussed. The following is draft language prepared by the City Attorney’s Office. At council’s direction, the staff will work with the city’s bond counsel to develop the ballot question to authorize such debt. SHALL CITY OF BOULDER DEBT BE INCREASED BY AN AMOUNT NOT TO EXCEED $____________, WITH A MAXIMUM REPAYMENT COST OF NOT TO EXCEED $__________________, WITHOUT RAISING TAXES, TO PROVIDE FOR A HOUSING ASSISTANCE PROGRAM TO MAKE LOANS TO MIDDLE INCOME HOUSEHOLDS TO PURCHASE HOMES SOLD IN BOULDER, SUCH DEBT TO BE SOLD AT SUCH TIME AND IN SUCH MANNER AND CONTAIN SUCH TERMS, NOT INCONSISTENT HEREWITH, AS THE CITY COUNCIL MAY DETERMINE AND TO PAY ALL NECESSARY OR INCIDENTAL COSTS RELATED THERETO BY THE ISSUANCE AND PAYMENT OF NOTES, BONDS, LETTERS OF CREDIT OR OTHER DEBT OBLIGATIONS AS PROVIDED BY THE CITY CHARTER, WHICH OBLIGATIONS SHALL BE PAYABLE FROM THE GENERAL FUND AND ANY OTHER LEGALLY AVAILABLE FUNDS OF THE CITY, ALL WITHOUT IN ANY OTHER WAY AFFECTING THE CITY’S OTHER TAXES, REVENUES OR EXPENDITURES UNDER THE CONSTITUTION AND LAWS OF THIS STATE? FOR THE MEASURE____ AGAINST THE MEASURE____ 21 ANALYSIS On Feb. 19, council provided direction on the mechanics of a potential pilot (e.g., who is eligible, what homes are eligible, credit for home improvements etc.) that resembles the current affordable homeownership program. These mechanics are detailed in Attachment A – Pilot Approach. There are two important considerations for a pilot that are outstanding: 1. Allowed annual appreciation rate of an affordable middle-income home; and 2. Income limitations for the initial borrower and future buyers of the permanently affordable home. Appreciation Option A. AMI Appreciation Methodology One option to cap appreciation of affordable middle-income homes is to tie the rate of increase to increases in the area median income. The average annual increase in AMI over the past 10 years was 2.1%. This is a lower appreciation rate than Option B and the primary benefit is that the home remains more affordable for future middle-income borrowers. But it is less attractive for homebuyers to participate in the program because they will see well below market rate appreciation (the market appreciated approximately 7% annually over the past 10 years). Option B. Cost of Lending Another option is to tie the appreciation rate to the city’s cost of borrowing. For example, bond rates or the interest on a line of credit are likely to fluctuate slightly between 3-5% over a 10-year period, therefore for the purpose of this analysis 4% was chosen.2 This rate of appreciation allows the city to pay for the cost of the bonding and is good for the initial seller (i.e., higher sales price at resale), but makes the home less affordable for future purchasers. Option C. Fixed Rate The final option is to determine a fixed appreciation rate depending on the policy objectives of the pilot. Income Limitations Option X. Limit Program to 120% AMI Related to appreciation is the second consideration of asset and income limits. This option would limit the initial homebuyer and future buyers of the same home to the current middle-income asset and income limitations. The 2019 AMI limits for a household of three earning 120% AMI are $122,760 in annual income and $170,000 in assets. Only households earning less and with assets less than $170,000 would be eligible to participate in the program. These limits would apply to both the initial buyer and all subsequent buyers of the permanently affordable home. The primary advantage of this option is to clearly serve income levels targeted by the city’s middle-income housing strategy. 2 The actual rate to issue debt will be a competitive process based on current market conditions, the strength of the City’s Credit Rating and the market demand for the type of debt. 22 Option Y. Limit Program for First Buyer Only Another option is to remove restrictions for future buyers. This could take the form of allowing increasingly higher AMI levels with each resale, removing the AMI limit entirely for all resales, removing the asset limitation, or some combination. Benefits and Risks to the City There are benefits to the city with a downpayment assistance pilot. The city receives a permanently affordable middle-income home in exchange for providing assistance. The city is repaid with interest by the homebuyer within 7-10 years. Most importantly, it advances city policies to reduce in-commuting and promote a diversity of incomes and households. There are also potential risks to the city with the pilot. Some participants may embrace the assistance now and later regret the decision. While participation is voluntary, staff experience with the city’s affordable homeownership program is that some buyers of affordable homes do not fully anticipate the costs of homeownership, and in particular, Homeowners Associations dues and special assessments. While staff is working to better understand these concerns and bring options for council consideration later this year, it provides an important cautionary tale. The situation of an affordable homeowner having to repay the city for a downpayment assistance loan ($138,000 plus $29,000 in inter est) after 10 years is a potential concern. Finally, in the event of a financial crisis, the city may not have enough reserves to purchase homes to prevent foreclosure and the loss of the affordability covenant. Based on experience with the current affordable homeownership program default rates, staff recommends setting aside a minimum of $1.2 million to cover up to two homes under foreclosure at the same time. Benefits and Risks to the Home Purchaser There are also benefits to the home purchaser with a downpayment assistance pilot. The assistance allows a household to purchase a home in the City of Boulder that otherwise is unattainable. The purchaser will still accumulate wealth in the form of paying down the principal while accumulating the value of appreciation. There are also potential risks to a pilot for the home purchaser. The purchaser is agreeing to limit appreciation of their home while agreeing to pay back the full amount of assistance from the city, with interest. While this may be acceptable to those who wish to live in Boulder, many will choose to receive market rate appreciation in the immediately surrounding communities. The city’s assistance is in the form of a balloon payment at the end of 10 years. Refinancing the home to repay the city will extend the life of the homeowner’s debt obligation by 10 years and based on the $600,000 initial purchase price example, the monthly payment would increase by 20% at the time of refinancing.3 While some homeowners will see their incomes grow over a 10-year period, that is not 3 The example is a $600,000 initial purchase price to a homebuyer earning 120% AMI. At a 5.0% interest rate, the principal and interest payment for the first 10 years is $2,321. After 10 years, a refinance at the same interest rate that includes the outstanding loan balance of the first mortgage and the repayme nt of the second (plus 4% interest) would result in a monthly payment of $2,783. 23 universal. Some households will be challenged to refinance the full amount, particularly if interest rates climb above what has been historically low levels in the past d ecade. Resale of Middle-Income Homes Staff modeled several scenarios to better understand how the downpayment assistance program would function including what happens at the time of resale. The resale of the affordable home is complicated by the fact that additional city subsidy may be required for future owners depending on the allowed rate of appreciation and AMI levels served. The following graph shows one scenario assuming a 4% appreciation rate (the city’s cost to borrow) and the potential impacts on future buyers of a deed restricted home. If the city provides $138,000 in assistance for a $600,000 home to the initial purchaser who earns 120% of the AMI, the second buyer earning 120% of the AMI will need $278,000 in downpayment assistance from the city to purchase the same home. The affordability gap for the first homeowner increases for the second owner, if they both have a similar down payment. The gap is further widened when appreciation rates increase at a higher rate than AMI. In this scenario, the city would not receive a return on the investment to repay the bond. Figure 1. Resale Scenario Using Cost of Lending (4%) The following graph provides a comparison using AMI to determine the appreciation rate (2.1% based on a 10-year average). If the city provides the same $138,000 in assistance for a $600,000 home to the initial purchaser earning 120% AMI, the second buyer earning 120% AMI will need $154,000 in downpayment assistance from the city to purchase the home. $1,200,000 $600,000 $910,000 $462,000 $603,000 $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 2019 2029 Value of home with market appreciation (7%) Value of home with capped appreciation (4%) Maximum home value afforadble to a 120% AMI household $138,000 downpayment assistance needed for first buyer After 10 years, the second buyer of the same house and same AMI will need $278,000 in downpayment assistance 24 Figure 2. Resale Scenario Using AMI Method (2.1%) The affordability gap for the first homeowner remains for the second owner in both scenarios and as a result, the city will not receive a return on the investment to repay the bond or line of credit within the 10-year time period. One option to address this gap is to allow the AMI eligibility level to increase with each resale. For example, if the home is initially purchased by a household earning 100% AMI, then at resale a 120% AMI household would be needed to be able to afford this same home to avoid additional city subsidy. The city could also avoid additional subsidy if the second homebuyer at 120% AMI has a sufficient downpayment to cover the gap. The primary benefit of not restricting the AMI of future buyers is that there would be below market homes available in the community and the city would receive in return creating a financially sustainable model. The downside is that the city would not be able to target households of specific incomes at each resale. The following table shows two scenarios. One allows the AMI levels served to increase over time and the other scenario shows the additional subsidy required to keep the AMI limit serving middle-income households. In option 1, if the appreciation rate is set to the cost of borrowing, the second household to purchase the home will need an income of 160% AMI in 10 years (2029 dollars). In 20 years, the same home will need a buyer with an income of at least 194% AMI (2039 dollars). $1,200,000 $600,000 $758,000 $462,000 $603,000 $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 2019 2029 Value of home with market appreciation (7%) Value of home with capped appreciation (2.1%) Maximum home value afforadble to a 120% AMI household $138,000 downpayment assistance needed for 1st buyer After 10 years, the second buyer of the same house and same AMI will need $154,000 in downpayment assistance 25 Table 1. Comparison of Different AMI Limits and Appreciation Rates Option 1 - No Limit on Future AMI - Appreciation set at City's cost to Borrow (4%) Year 10 Sale to 2nd Buyer Year 20 Sale to 3rd Buyer 1st Buyer 1st Owner Sells 2nd Owner Purchases 2nd Owner Sells 3rd Owner Purchases House Price $600,000 $910,350 $910,350 $1,381,229 $1,381,229 Annual Appreciation (4%) 4% 4% 4% 4% 4% AMI Level 120% 160% AMI 194% AMI Down Payment Assistance Needed $137,643 Interest on Down Payment Assistance $14,985 Owner Down Payment (5%) $30,000 $45,518 $69,061 Option 2 - AMI Method - Aligned with current Homeownership Program (2.1%) Year 10 Sale to 2nd Buyer Year 20 Sale to 3rd Buyer 1st Buyer 1st Owner Sells 2nd Owner Purchases 2nd Owner Sells 3rd Owner Purchases House Price $600,000 $757,064 $757,064 $955,243 $955,243 Annual Appreciation (2%) 2.1% 2.1% 2.1% 2.1% 2.1% AMI Level 120% 120% 120% Down Payment Assistance Needed for 120% AMI $137,643 $154,180 $228,287 Interest on Down Payment Assistance $14,985 Owner Down Payment (5%) $30,000 $37,853 $47,762 In the Option 2, if the home value is capped to match increases in AMI, then each subsequent homeowner will need additional city subsidy. In this example, the first buyer will need $137,643, the second buyer in 10 years will need $154,180 and the third buyer in 20 years will need $228,287 in assistance from the city. 26 CONCLUSION Council will need to weigh different policy objectives prior to moving forward with a pilot. Policy decisions will need to be made regarding the purpose of the program (i.e., restrict home prices, serve middle income households or both). As discussed in th e Analysis section, there are clear benefits and risks to the city and the homebuyer depending on how the pilot is structured: • higher interest rates compared to the recent past are a risk for both the city and the homeowner; • a higher appreciation rate for the affordable home helps keep borrowing costs low for the city and benefits the first homebuyer; • a lower appreciation rate for the affordable home increases the city’s borrowing cost in perpetuity, but keeps the home more affordable for future homebuyers; • AMI limits of 120% help the city to target specific households that will benefit from the program per current middle-income city policy; and • higher or eliminated AMI and/or asset limits will allow the program to be more financially sustainable and create homes that are still more affordable than current market rate homes. NEXT STEPS Based on the direction from council, staff will continue to analyze the options for the pilot and other creative options as identified by council. 27 Attachment C: Updated Middle Income Down Payment Assistance Pilot Program Term Sheet REQUIREMENTS HOUSEHOLD INCOME AND ASSET LIMITS – 2022 (Maximum of 120% AMI) Household Size Income Limit Asset Limit 1 $105,360 $140,000 2 $120,480 $155,000 3 $135,480 $170,000 4 $150,480 $185,000 Note: These limits only apply at the time of purchase. MAXIMUM DOWN PAYMENT LOAN AMOUNT $200,000 or 15% percent of the purchase price, whichever is less MAXIMUM HOME PURCHASE PRICE – 2021 Median Sales Price Single-family Home $1,250,000 Condo, Townhome or other $480,000 FEES $25 application fee $350 origination fee DEBT-TO-INCOME RATIO Debt-to-Income ratio may not exceed 42% in most cases. BUYER’S MINIMUM CASH CONTRIBUTION Buyers are required to contribute at least 5% of the purchase price. Lenders may have requirements beyond this minimum. TERM At 15 years, or ownership transfer, the loan is due in its entirety. The interest on the DPA loan is 0%. WORK • At least one person in the household must work 30 or more hours per week (unless retired or permanently disabled) • At least one person in the household must have a work history of 1 year within the most recent 12 months HOMEBUYER EDUCATION To participate in the program each household must attend a city orientation, and a homebuyer education class approved by the Colorado Housing Finance Authority (CHFA). These classes are also available on-line. • The city orientation is required prior to turning in an application. • The CHFA-approved Homebuyer class is required prior to going under contract on a home. 28 LENDER/MORTGAGE LOAN Applicants must submit as part of their city application packet: • Copy of the mortgage loan application (as prepared by their lender, not handwritten). • Mortgage Preapproval Letter that lists maximum purchase price, loan amount, minimum down payment, estimated PITI, interest rate, and loan type. INSPECTION The city requires an inspection to ensure the home meets basic livability standards. IMPROVEMENTS Capital improvements to the home may be made at any time by the owner, but only pre-approved and eligible capital improvements will result in a higher selling price. The capital improvement appreciation would be added to the maximum resale price. RESALE RESTRICTIONS • Homes may be sold to anyone regardless of income and asset. • Resale price will be based on the original purchase price, plus annual appreciation of TBD, approved capital improvements, and other approved fees. OTHER REQUIREMENTS • Homes must be in the City of Boulder. • Buyers may have owned a home in the past, or still own a home at time of application. However, buyers must sell their home before closing on a Permanently Affordable home. • Property must be owner-occupied as a principal residence (see definitions in Title 9, B.R.C. 1981). • At time of resale, the number of bedrooms may exceed number in buyer’s household by one in most cases. • Buyer must adhere to all covenant restrictions (a copy of the covenant is available upon request) • Short-term rentals on the property are prohibited. CITY OF BOULDER EMPLOYEES 15% of the available funding will be set aside for City of Boulder employees. 29 Attachment D: Area First-time Homebuyer Down Payment Assistance (DPA) Programs Administered by Opportunity Maximum Income Maximum Amount Comments Boulder, City of H2O: House to Homeownership 120% AMI $100K For purchase of home in Boulder city limits. CHFA CHFA Smart Step (Grant) $148,120 3% of 1st Mortgage Income limit regardless of household size. CHFA First Step (2nd Mortgage) $175,560 4% of 1st Mortgage Income for 3- person household. Max loan amt: $647,200. CHFA Home Access (2nd Mortgage) $175,560 up to $25K Maximum income shown is for a 3- person household. Max loan amt: $647,200. CHFA Preferred (2nd Mortgage) $100,320 4% of 1st Mortgage Limit regardless of household size. Max loan amt: $647,200. Elevations Community Land Trust Doors to Opportunity $81,000 $50K Maximum income shown is for a 3- person household. Permanent subsidy into the home. Can be used with other second mortgage programs. Impact Development Fund First Bank DPA 80% AMI Lesser of 5% or $30K 6% interest rate Longmont, City of Boulder County DPA 80% AMI up to $40K Maximum home price: $489,000. Metro DPA Metro DPA $176,700 5% Limit regardless of household size. National Homebuyers Fund NHF DPA "Generous" 5% Do not need to be a first-time homebuyer.