Charlottesville City Council has endorsed an agreement that describes how a $5.5 million loan from the city to the Piedmont Housing Alliance will be used for the first phase of the redevelopment of Friendship Court.
“It has been over four years getting to this point and with a tremendous amount of work from in particular on the part of residents of Friendship Court and in particular the advisory committee at Friendship Court,” said Sunshine Mathon, the executive director of Piedmont Housing.
There are currently 150 rental units at Friendship Court, which was built in 1978 on land cleared through the urban renewal of Garrett Street.
“Resident-led redevelopment efforts propose a four-phase approach to replace all of the existing units and add additional residential units over the next eight to nine years,” said Brenda Kelley, the city’s director of redevelopment.
In 2019, Piedmont Housing was awarded funding from the Virginia Housing Development Authority through the Low Income Housing Tax Credit program to help finance the first phase of the project. The loan from the city helped make that application more attractive. The VDHA is now known as Virginia Housing.
“In total, the overall redevelopment proposes to construct approximately 450 new affordable units and more details to come before City Council in the future,” Kelley added. “This approach allows current residents to move directly into newly constructed units in each phase so that there is only one move associated with the relocation of residents.”
The first phase will be built where playgrounds and the community gardens have been. Mathon said the gardens will be relocated elsewhere within the development.
There will be 106 units, 46 of which will be new replacements for existing subsidized units at Friendship Court. The terms of the deal require the affordability restrictions to be maintained for 99 years.
“The item in front of you tonight provides for a master covenant that spells out the overall master plan requirements and also more specifically provides a separate phase one covenant that identifies the terms and the conditions for allocating the forgivable loan,” Kelley said.
In fiscal year 2019, Council allocated $5.545 million in capital funds to the project to pay for public streets, infrastructure, utilities, and affordable units for households with low to moderate incomes.
“The master affordable housing covenant will be recorded in the public records to provide assurances of affordability for the entire site,” Kelley said. “However, in the event of foreclosure, the affordability restrictions will terminate.”
Piedmont Housing will be required to submit an annual report. When the terms of the LIHTC funding are up, the city will have first right to lease or purchase units that are constructed. They’ll also have that right if the projects are ever foreclosed upon.
Piedmont Housing’s repayment will be deferred for 40 years as a forgivable loan, but if the nonprofit breaches the terms of the agreement, they will be responsible to pay for the full amount plus interest.
Part of the funding structure involves an agreement between Piedmont Housing and the Charlottesville Economic Development Authority.
“To help facilitate the financing of the project, Piedmont Housing has requested that the city consider an agreement that will share the incremental increase in real estate tax revenue generated by the investment,” reads the staff report for Council’s discussion. “With a commitment from the city to contribute the future revenue stream (as a grant), Piedmont Housing will borrow on this with a private lender to create the cash needed to begin the project.”
Mayor Nikuyah Walker was concerned about how this was set up given the number of other projects that will have the city paying to cover the costs if its own taxes, such as with Crescent Halls and South First Street.
“Essentially [Piedmont Housing] is taking out a $3 million loan for the gap funding for this and the request for the [Tax Increment Financing] would mean that the city would then forgive taxes up to the amount of the initial loan plus the interest that would accrue over the 30 year period,” Walker said. “Is there a better option than this arrangement where they’re taking out a loan that we will pay back anyway?”
Councilor Heather Hill said she thought this was a result of increased costs for the project.
“Things change,” Hill said. “There are a lot of moving parts, there are some inflationary costs in terms of the construction and that’s what I remember being like, you know, things were covered. Things are now not coming in like we thought. I remember sitting around a table with staff and another Councilor and that’s kind of where I remember that precipitating and then a lot of brainstorming going on to feel like what are some ways to get through this because we knew the city wasn’t going to be in a position to just outlay that capital outright.”
Walker said her caution is based on not knowing what future financial requests will be for the additional phases.
“I think these are two very important projects,” Walker said. “Of all the projects that I have voted on or not voted on that have been in front of us, and I’m just speaking for myself have looked at it, I think [CRHA redevelopment and Friendship Court] are going to take us to places and help us in ways that none of those other projects could do, and so it’s very important but I don’t think we’re looking at any of these projects in a fiscally sustainable way.”
Mathon said this approach was first discussed with city leadership in the spring of 2019. Phase 1 is being built atop a buried creek called Pollocks Branch.
“The site costs for doing work on Friendship Court continued to go in the wrong direction because of the soil conditions there being far worse than we originally anticipated,” Mathon said. “The proximity to the underground creek just caused site work to increase significantly and so we were trying to search for some additional source to cover that delta.”
Chris Engel, the economic development director, said these discussions occurred with Mike Murphy was interim city manager, before former city manager Tarron Richardson began work in May 2019.
This section of the discussion took place before Engel had a chance to give his staff report.
“What you’re going to hear about next in the performance agreement is a way to use the increment without the borrowing and it’s a mechanism that works and we’ve used it in a couple of cases,” Engel said. “This case is a little different in that it involves not a commercial interest, but commercial and residential, primarily residential but it can be helpful in funding something.”
Mathon said he believed this mechanism was in keeping with common practices. He gave a quick overview of how he believes capital budgeting works.
“The city has prioritized in terms of how it uses dollar on an annual basis out of its general revenue fund to pay for its priorities and it bonds a whole number of different items for infrastructure, schools, to pay for things it can’t afford in the short term,” Mathon said.
In this case, the $5.545 million the city is spending on the project will be paid for through the sale of bonds. All localities are evaluated by ratings agencies to determine their creditworthiness at paying bond holders over time. Charlottesville has a AAA bond rating which affords a lower interest rate. There are limits to how much a locality can borrow without jeopardizing that rating, and so the additional $3 million was above the city’s capacity. Hence the need to find a different way forward.
Walker said she was also concerned about the lack of details about phase 4. Mathon said it may take Piedmont Housing another year to begin to plan because of physical distancing protocols caused by the pandemic.
“In the schematic diagram that is included in the performance agreement, Phase 4 continues to be a bit of a placeholder because we are working in a co-design process with the residents,” he said. “Our focus on the last nine months, and COVID has complicated this of course, and has slowed down the process even further but our focus has been on the one hand preparing them and the community for start of construction and on the second hand we’re deep in the throes of final design of phase 2 so that we can apply for tax credits for LIHTC in March 2021 in a few months.”
Council reached consensus to move the loan to the consent agenda for the November 2 meeting.
Before we go, let’s hear one last time how the tax increment financing would work from Chris Engel.
“Essentially what the performance agreement does is use the tax increment that’s created by the project… PHA pays real estate tax that is assessed on the new project. And we would then transfer, the city would set aside as has been discussed, that amount to the [Charlottesville Economic Development Authority] and the EDA would grant back to PHA in this case 100 percent of the incremental taxes created by the project.”
The agreement has a 40 year term, but ends as soon as the EDA has granted a total of $6 million back to Piedmont Housing.
Walker voted for the agreement but said she still did not support it.
There will be a budget work session on capital financing in November, and interim City Manager John Blair said they could have a more full discussion about potential financing arrangements.
Councilor Michael Payne said he supported the agreement.
“I do think the timing is critical on these projects,” Payne said. “I do think that this has something that has helped made the project actually be able to come together and keep together the tight timelines for LIHTC applications and other funding sources and I do think that this is a real critical way to make sure able to be a a shovel-ready project that is able to happen.”