Item 1: Ordinance on MUPTE Boundary

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took place in the deleted MUPTE area. When the boundary was mostly restored to the previous area in 2004 the tool was used and ten new developments applied for and received approval. If applied to other neighborhoods the tool may not work immediately because the rental rates may not be adequate to offset the construction costs – even with a ten-year tax exemption. Are there demonstrable differences between the developments with MUPTE and without? Response: Multi-family housing construction is primarily influenced by economics. The most significant determining factors are the cost of land, cost of construction, and potential rental income. Recently, two potentially eligible projects were developed in the West University Neighborhood (WUN) which did not apply for MUPTE assistance. A local appraiser believes that neither needed the MUPTE (and therefore couldn’t prove the “but for” requirement) because they were able to purchase the land at a very favorable land value. Since there is almost no bare land in that neighborhood, any redevelopment also includes an additional cost for an improvement (typically an old house) that is likely going to be removed. In the WUN, rents are particularly high for this community and new units are charging $525 per bedroom per month. The result is a project that can be financially viable. The same appraiser believes that two of the most recent MUPTEs were of significantly higher than typical quality and that MUPTE probably resulted in the difference. The third project that we discussed was described as high but not exceptional quality. The MUPTE enabled the project to pencil out economically. Can the evaluation of MUPTE applications be less subjective and more objective? How do staff analyze the applications to determine compliance with the “but for” requirement? Response: A proposal for objective criteria is provided as Attachment E. This criterion offers specific circumstances where the approval criteria are clear and others where points are awarded for increasing degrees of compliance. Because of market differences from one neighborhood to the next, raising the bar through objective criteria may result in limiting the effectiveness of MUPTE as a tool. In neighborhoods with little history of redevelopment and average or depressed rental rates, the MUPTE, even if public benefit criteria are reduced, is not enough of an incentive to encourage new housing. Therefore, if conditions are added, the value of the MUPTE incentive is diminished. The Vertical Housing Zone program is administered by the state and has clear objective criteria which make it easier for applicants to plan their projects. The pro-forma for each MUPTE application is reviewed by City staff. The applicant must demonstrate in their financial presentation why the project could not be built “but for” the exemption. Staff is familiar with the construction costs of new multi-family housing because the City closely monitors the financial details of low-income housing developments. In a similar role, private lenders closely look at a project pro-forma, carefully examine the cash-flow, and determine cost reasonableness and feasibility before approving the project financing. In virtually every approved MUPTE project, the private lender requires documentation of the MUPTE approval as a condition of their approval of project financing. As part of the proposed standards recommended by staff for consideration, another step is suggested – a review by the City’s loan advisory committee. This committee is comprised of lenders who are experienced at analyzing financial statements for business development loans and can apply their expertise to multi- family housing projects. Z:\CMO\2008 Council Agendas\M080721\S0807211.doc