OFFICE OF THE CITY ADMINISTRATIVE OFFICER

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1 REPORT FROM OFFICE OF THE CITY ADMINISTRATIVE OFFICER Date: February 25, GAO File No Council File No Council District: 6, 7,8,9, 15 To: From: Reference: Subject: The Mayor The Council Miguel A Santana, City Administrative Office'; )~ Los Angeles Housing Department Transmittal dated February 9, 2011; Received by the City Administrative Officer on February 1 0, 2011 REQUEST FOR AUTHORITY TO SUBMIT AN APPLICATION TO THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT FOR $9,875,577 IN NEIGHBORHOOD STABILIZATION PROGRAM THREE FUNDING AND OTHER RELATED ACTIONS SUMMARY The Los Angeles Housing Department (LAHD) requests authority to submit an application to the U.S. Department of Housing and Urban Development (HUD) for $9,875,577 in Neighborhood Stabilization Program Three (NSP3) funds issued through the Dodd-Frank Wall Street Reform and Consumer Protection Act. These funds were awarded to the City in September The City previously received $32,860,870 in NSP I funds authorized through the Housing and Economic Recovery Act of 2008 as a formula grant and $100 mi llion in NSP2 funds authorized under the American Recovery and Reinvestment Act of 2009 on a competitive basis. Acceptance of the NSP3 funds increases the total City award of NSP funds to $142,736,447. The NSP grants are administered by HUD as a special allocation of Community Development Block Grant (CDBG) funds which must be used to address the problem of abandoned and foreclosed homes. Therefore, the City's use of its NSP grant will be treated as a Substantial Amendment to the City's (36th Program Year) Action Plan. Therefore, LAHD also requests authority to make a Substantial Amendment to the City (36th Program Year) Action Plan to reflect the addition of the NSP3 funds. For the purpose of implementing ttie NSP3 grant, LAHD has proposed that funds be concentrated within three target areas in Watts (Council District (CD] 15), South Los Angeles (COs 8 and 9) and the San Fernando Valley (COs 6 and 7). The Substantial Amendment is included as Attachment 1 of the LAHD transmittal dated February 9, 2011 (Transmittal) and qualifies as the City's application. The City is requ ired to submit its application by March Failure to meet the deadline will result in the cancellation of the award. The City must expend 50 percent of the NSP3 grant (or $4.9 million) within two years from the date HUD signs the Grant Agreement and 100 percent of their grants within three years of this date. Pursuant to Section 14.7 of the Administrative Code, LAHD is required to return for Council and Mayor approval to accept the NSP3 grant and execute the Grant Agreement. We recommend approval of these requests as proposed. The LAHD also requests authority to make Substantial Amendments to the NSP1 grant to allow the City to add eligible uses in accordance with NSP1 guidelines and NSP2 to reflect minor technical adjustments. These changes are identified in Attachment 2 of the Transmittal. The proposed

2 GAO File No Substantial Amendments (including the NSP3 application) have been posted on the City and LAHD websites for public review and comment since February 8, The LAHD seeks approval of additional requests as follows: Authority to issue $250,000 in Municipal Housing Finance Funds (MHFF) to Restore Neighborhoods LA, Inc. (RNLA), a non-profit property holding company formed for the sole purpose of carrying out the City's NSP Program. The funds would be deposited into an interest bearing account and used to advance payment for NSP-eligible expenses, subject to a requirement that this amount shall be repaid in full at the end of the term of RNLA's contract with the City. This is the second request of this type and increases the total loan to $700,000. Additional information relative to this request is included later in this report. This request also includes a transfer of $9,733 in State Home Disaster Relief Trust Funds to the MHFF part of the Department's effort to "clean up" old fund and account balances in accordance with a recent Controller audit. We recommend approval of this request. Authority to utilize standardized loan documents for the single-family mortgage assistance and the down payment and rehabilitation assistance programs under NSP3 in an effort to reduce the time that would be required to perform loan-by-loan review by the City Attorney and to expedite the loan closing process. The LAHD obtained this authority for other homebuyer assistance loan programs and requests similar authority for NSP3. We recommend approval of this request to allow LAHD staff time to start preparing the documents. However, no loans may be executed until the Grant Agreement is executed. For NSP1, NSP2 and NSP3, LAHD requests blanket authority to shift funds among the per-grant eligible uses as contained in the Substantial Amendments (Attachments 1 and 2 of the Transmittal and in earlier Substantial Amendments), as recommended by HUD, as long as the goals and outcomes of the approved NSP grants are met. This request is intended to help expedite the implementation process and enable the Department to meet expenditure deadlines. We recommend approval of this request. However, we also recommend that LAHD provide informational reports to the Council and Mayor immediately following any such amendments. The LAHD plans to work with the City's Department of Recreation and Parks (DRP) to convert selected vacant lots into pocket parks utilizing NSP1 funds to acquire the properties. Although DRP will be responsible for park development and maintenance, the source of funding for these activities was not identified at the time of this report. Therefore it is recommended that this request be approved as an allowable activity under the City's NSP1 grant, but that additional information be provided by LAHD, with assistance from DRP, relative to the fund source/s that will pay for park development and ongoing maintenance at each identified site. Authority to transfer $64,940 in NSP2, Rent Stabilization Trust Funds and Code Enforcement Trust Funds to cover the salary and related costs associated with City Attorney's Office support to LAHD for legal counsel and review of legal documents related to the NSP Program and the Asset Management Division which enforces the LAHD loans involving debt collection and foreclosures. In addition, this attorney will represent the Occupancy Monitoring Division, involving enforcement of affordability covenants. Other support will also be provided to other LAHD operations including Stimulus-funded programs, the Major Projects Division, the Affordable Housing Trust Fund and Permanent Supportive Housing Programs and the Rent and Code Divisions. The requested amount will pay for $38,837 in salaries and $26,103 in related cost reimbursements to the General Fund.

3 Authority to allocate $25,000 in NSP2 funds to contract with the cable television channel LA. Cityview 35 to create a documentary video on the NSP Program and projects, featuring the purchasing process from point of purchase to final sale and how Green Communities standards are applied in these homes. Authority to enter into the contract may be processed administratively in accordance with the Mayor's Executive Directive Three. For the purpose of the NSP Program, HUD provides an amount of up to 10 percent of an NSP grant and up to 10 percent of program income earned to pay for general administration and planning activities. Therefore, we recommend that LAHD report on all program income collected to date from all NSP grants and include information relative to opportunities to use NSP funds to cover LAHD staff costs, especially for eligible work that is charged to the regular Development Block Grant Fund (CDBG) grant. These recommendations comply with the City's Financial Policies in that sufficient funds are available to pay for the requested authorities included in this report. The Department must report back to the Mayor and Council to request authority to execute the Final NSP3 Grant Agreement with HUD. Proposed NSP3 Budget Eliaible Uses Name Amount Purchase/Rehabilitate Abandoned or Foreclosed Homes $6,888,019 Redevelop Demolished or Vacant Properties as Housing 2,000,000 LAHD and RNLA Administrative Costs (1 0 percent) 987,558 Totals $9,875,577 Under NSP3, LAHD will provide soft-second mortgage loans to eligible homebuyers to purchase homes, acquire and rehabilitate single family homes and multifamily rental properties, and redevelop blighted properties as affordable housing for very low income residents. The LAHD will continue to work with RNLA as a Subrecipient, which will continue to operate the NSP Program with its network of real estate agents, lending institutions, the National Community Stabilization Trust among other partners to acquire eligible properties. At these funding levels, LAHD anticipates that 35 single family homes and 42 multifamily rental units will be created. Approximately $2.5 million (or 25 percent ofthe total NSP3 grant) will assist individuals and families whose incomes are at or below 50 percent ofthe AMI. The NSP3 requirements and site selection are summarized in the Attachment to this report. HUD Recommendations for Revisions versus Substantial Amendments For all three grants, LAHD requests blanket authority from the Mayor and Council to shift funds among eligible uses in the NSP Substantial Amendments (Attachments 1 and 2 of the Transmittal) as long as the goals and outcomes of NSP1, NSP2 and NSP3 are met. The LAHD reports that HUD made a recommendation to grantees in an effort to add flexibility to their action plans by incorporating language into the Substantial Amendments allowing funds to be shifted among eligible uses included in the Substantial Amendment on as as-needed basis due to the unpredictability of the housing market. The LAHD would utilize this authority when estimated costs for activities are significantly different from the actual costs. The LAHD requests this Council and Mayor authority at the beginning of the process (with the submission of the application) rather than returning at a later time during implementation in an effort to respond more quickly to program needs and changes in

4 the housing market. Such approval is also expected to improve the rate at which the Department is able to obligate and expend funds. The LAHD would submit amendment requests directly to HUD to shift funds among the NSP-eligible uses. This blanket authority would not apply to significant changes that deviate from the previously approved Substantial Amendment and would require Mayor and Council approval. We recommend approval of this request, provided that LAHD submits informational status reports to the Mayor and Council relative to program implementation and any amendments (funding shifts) that have occurred immediately following submission of such requests to HUD. This information may also be requested as part of any future NSP Program-related request. Proposed Amendments to NSP1 The NSP1 grant was approved as a Substantial Amendment to the City's 34th Year Action Plan in November 2008 and included the following eligible activities: Purchase/Rehabilitate Abandoned or Foreclosed Homes and Residential Properties and Program Administration. Unlike NSP2 and NSP3, NSP1 funds may also be used for construction of new permanent affordable housing. Therefore, blighted homes can be demolished and the lots used to create pocket parks or other open space uses in low income neighborhoods. The LAH D has discussed this opportunity with DRP. To date, 20 properties were selected as ideal candidates for conversion into community pocket parks or community gardens. These structures are considered too blighted to rehabilitate and were purchased by RNLA for the purpose of constructing new single family homes. However, if approved, eligible properties would be transferred to DRP. The DRP would assume responsibility for developing and maintaining the sites. Funding for the DRP costs would need to be identified and would be subject to funding availability as part of the City's budget process or other DRP grant seeking efforts. This opportunity would require a transfer of $2.4 million from one eligible use category to another. In addition, for the purpose of acquisition, LAHD would need to transfer $285,000 to cover demolition costs. The LAHD also proposes transferring $4 million from Purchase/Rehabilitate Abandoned or Foreclosed Homes to instead finance the construction of permanently affordable rental housing. In an effort to ensure that transfers of these properties do not occur prior to confirmation that sufficient ongoing funds are secured, it is recommended the LAHD, with the assistance of DRP, report back with additional information per site relative to the funds that have been secured, or the status of funding requests, necessary to develop and maintain these sites. This information can be provided when LAHD returns for Council and Mayor approval to execute the NSP3 Grant Agreement. LAHD also requests authority to amend definitions for "affordable rents and long-term affordability," which impacts NSP1 and NSP2. This change aligns the definitions to match the NSP3 Substantial Amendment. Additional information regarding these changes are discussed in pages nine through 10 of the Transmittal. Other changes are identified in Attachments 1 and 2 of the Transmittal. Loan to RNLA The LAHD requests authority to increase the existing $250,000 RNLA Revolving Fund by $450,000, augmenting the total amount to $700,000. The RNLA's only source of operating revenue is NSP grant funds. Originally, LAHD's Agreement with RNLA provided for advances of NSP1 funds for RNLA's administrative and program delivery costs. After its review of NSP1, HUD advised that the advance of NSP1 funds for RNLA's costs was not allowed. The Council and Mayor authorized the use of $250,000 in MHFF to be issued as an interest-free loan which was placed into an interestbearing account to pay operational and administrative costs. In December 2009, the Council and Mayor authorized LAHD to advance as a loan $250,000 in MHFF for eligible NSP operational and administrative expenses (C.F ).

5 The LAHD reports that RNLA's administrative and program delivery costs have increased proportionately with the addition of new NSP grant funds. The RNLA successfully opened an Enterprise Line of Credit (LOG) for $600,000 to manage the growing needs of the organization. However, HUD subsequently determined that the origination fees and interest payments could not be reimbursed from NSP funds. As a result, LAHD requests to increase the MHFF loan fund to $700,000 to pay for NSP1, NSP2, and NSP3 expenditures so as not to incur additional fees and interest costs. The LAHD reports that RNLA will use the Enterprise LOG solely for escrow deposits required to purchase larger multifamily properties. Origination fees and interest for property acquisition are eligible for reimbursement from NSP2. To repay RNLA the origination fees and interest already incurred from the Enterprise LOC, LAHD requests authority to pay an additional $55,000 in MHFF. We recommend approval of this request It should be noted that the loan and all interest accruing to the account must be repaid to LAHD in its entirety upon termination ofthe RNLA contract. Reasons for Delayed Submission Approximately five months passed from the time of the grant award to the release of the TransmittaL LAHD reports that HUD published an NSP3 guidebook, a final version of the NSP3 application/amendment format, and provided additional detailed guidance on how to design an NSP3 program throughout November and December In order to fill out and submit the NSP3 application, HUD requires a design to be in place with specific project/activity descriptions and budgets and detailed target areas small enough for the program to have an impact within the target neighborhoods. Upon receipt of this information in December 2010, LAHD prepared the application and TransmittaL Much work in designing the program, reviewing potential target areas, finalizing language for the application as well as transmittal occurred throughout January The Department also needed to address the submission deadlines of the City and grantors for other grant programs. For instance, staff was also engaged in completing NSP1 and NSP2 quarterly reporting. A final editing, internal review and approval for the NSP3 transmittal occurred in early February RECOMMENDATIONS That the Council: 1. Authorize the General Manager of the Los Angeles Housing Department (LAHD), or designee, to: A. Submit an application (Substantial Amendment) for Federal Assistance SF 424, required certifications and amendments thereto and any other required documents between the U.S. Department of Housing and Urban Development (HUD) and the City of Los Angeles for the eventual receipt and disbursement of a Neighborhood Stabilization Program Three (NSP3) grant in the amount of $9,875,577, in substantial conformance with Attachment 1 of the LAHD Transmittal dated February 9, 2011 (C. F ); and, B. Submit the NSP3 Substantial Amendment to HUD before the deadline of March 1, 2011; 2. Instruct the General Manager, LAHD, or designee, to report back to the Council and Mayor for the following:

6 CAO File No, A. To request authority to execute the NSP3 Grant Agreement with HUD, upon receipt of the documents from HUD, including implementing language, program budget and Controller instructions; R To provide information relative to all program income collected to date from all NSP grants and include information relative to opportunities to use NSP funds to cover LAHD staff costs, especially for eligible work that is charged to the regular Development Block Grant Fund (CDBG) grant; and, C, Relative to NSP1, with the assistance of the Department of Recreation and Parks, to provide additional information relative to what sources of funds have been secured for the development and maintenance of potential new pocket parks and community gardens, That the Council, subject to the approval of the Mayor: 3, Authorize the General Manager, LAHD, or designee, to: A. Utilize standardized loan documents for the single-family mortgage assistance and the down payment and rehabilitation assistance programs, as proposed by the City Attorney, to eliminate loan-by-loan review by City Attorney as to 11 form 11 in order to expedite the loan closing process, subject to the final award of NSP3 funds and execution of the NSP3 Grant Agreement; R Make recommendations to shift funds among the Eligible Uses in the NSP3 Substantial Amendment, in substantial conformance with Attachment 1 of the LAHD Transmittal dated February 9, 2011 (C.F, ), as long as the goals and outcomes of the approved NSP3 Program are met; C. Add to the NSP1 Amendment Eligible UseD, Demolish Blighted Properties, and Eligible Use E, Redevelopment of Vacant and Demolished Properties, and submit the amendment to HUD, transfer from Eligible Use B, Purchase and Rehabilitate Homes, $285,000 to Eligible UseD and $6,415,000, into Eligible Use E, Redevelopment of Vacant and Demolished Properties, in substantial conformance with Attachment 2 of the LAHD Transmittal dated February 9, 2011 (C.F ); D. Make recommendations to shift funds among Eligible Uses in the City's approved NSP1 Amendment and in the City's approved NSP2 Application (C. F ) provided that the goals and outcomes of the approved NSP1 and 2 programs are met. The LAHD must report to the Mayor and Council immediately following any such amendments; E. Increase the current LAHD loan to Restore Neighborhoods LA, Inc (RNLA) from the Municipal Housing Finance Fund (MHFF) by $450,000 to be deposited into an interest bearing account for the sole purpose of paying for expenses incurred by RNLA in implementing the NSP1, NSP2, and NSP3 grants, creating a total loan amount of $700,000. Such funds shall be repaid in full, including interest earned on the account, at the end of the term of RNLA's contract with the City; and, F. Use the MHFF to repay up to $55,000 in origination fees and interest on the line of credit obtained by RNLA to pay NSP expenditures prior to reimbursement by LAHD.

7 Request the Controller to: A Establish new Account No. G112, City Attorney, within Fund No. 52J/43, Neighborhood Stabilization Program 2 (NSP2) Grant; B. Transfer funds within Fund No. 52J/43, NSP2 Grant, as follows: From: Account Title Amount F304 NSP2/ARRA-Admin Reserve LAHD $57,470 To: Account Title Amount G112 City Attorney $19,419 G299 Related Costs 13,051 G245 NSP Professional Svcs. Contr. 25,000 Total $ C. Transfer appropriation within Fund No. 440/43, Rent Stabilization Trust Fund, as follows: From: Account Title Amount G201 Rent Stabilization Reserve $16,235 To: Account Title Amount G112 City Attorney $9,709 G299 Related Costs 6,526 Total $ D. Expend funds not to exceed $16,235 from the above fund and accounts upon proper written demand of the General Manager, or designee, on an as-needed basis, E. Transfer appropriation within Fund No. 41 M/43, Code Enforcement Trust Fund, as follows: Account Title Amount G301 Code Enforcement Reserve $16,235 To: Account Title Amount G112 City Attorney $9,709 G299 Related Costs 6,526 Total $16,235 F. Expend funds not to exceed $16,235 from the above fund and accounts upon proper written demand of the General Manager, or designee, on an as-needed basis. G. Establish new Account No. G818, RNLA NSP2, within Fund No. 815/43, Municipal Housing Finance Funds (MHFF). H. Transfer funds within Fund No. 815/43, MHFF, as follows: From: Account Title Amount W223 Moderate Inc Home Buyer Prog $184, A223 Moderate Inc Home Buyer Prog 265, Total $

8 Account Title Amount G818 RNLA NSP2 $450,000 I. Expend funds in an amount not to exceed $450,000 from the above fund and accounts upon proper written demand of the General Manager, or designee, to pay for the loan to RNLA; J. Transfer remaining cash balance of $9, in Fund No. 40G, State Home Disaster Relief Trust, to Fund No. 815, MHFF, Account No. G005 for future use; K. Increase appropriations for City Attorney Fund No. 100/12, from Fund No. 52J/43, NSP2 Grant, Fund No. 41 M/43, Code Enforcement Trust Fund (CODE), and Fund No. 440/43, Rent Stabilization Trust Fund (RENT), as follows: Account Title Amount 1010 Salaries - General $38,837 L. Transfer cash from Fund No. 52J/43, NSP2 Grant, Fund No. 41 M/43, CODE, and Fund No. 440/43, RENT, to reimburse the City Attorney General Fund No.1 00/12 upon presentation of proper documentation from City Attorney in the amount of $64, Authorize the General Manager, LAHD, or designee, to prepare Controller instructions and make any necessary technical adjustments consistent with the Mayor and Council actions on this matter, subject to the approval of the City Administrative Officer, and request the Controller to implement the instructions. FISCAL IMPACT STATEMENT There is a positive General Fund impact. Approval of these recommendations will authorize LAHD to submit an application to the U.S. Department of Housing and Urban Development for the purpose of accepting $9,875,577 in Neighborhood Stabilization Program Three (NSP3) funds issued through the Dodd-Frank Wall Street Reform and Consumer Protection Act. Other approvals include: a) issuance of a $250,000 loan to Restore Neighborhoods LA, Inc. (RNLA), a non-profit property holding company, utilizing Municipal Housing Finance Funds (MHFF); b) transfer of $64,940 in NSP2, Rent Stabilization Trust Funds and Code Enforcement Trust Funds to cover the salary and related costs associated with City Attorney's Office support to LAHD including a $26, 103 related cost reimbursement to the General Fund; and c) allocation of $25,000 funds to contract with the cable television channel L.A. Cityview 35 to create a documentary video on the NSP Program. MAS:AHS: c Attachment

9 Los Angeles Housing Department (LAHD) Neighborhood Stabilization Program Three (NSP3) Overview Attachment Requirements of the NSP3 Program are very similar to those of the NSP1 program with the same eligible uses, definitions, requirement for defined building standards, regulations and 10 percent cap threshold on program administration. The key differences from the existing NSP programs are discussed in detail in the LAHD transmittal dated February 9, 2011 (Transmittal) and summarized below: Concentration of effort into much smaller areas that can be positively affected with the amount of NSP funds available to provide selected outcomes listed above; Preference for the development of affordable rental housing; To the extent possible, hire employees who reside in the target area vicinity. There is no limitation on the income of residents, only their geographic location; and, All properties must meet Green Communities standards. The following requirements must be met through the NSP3 grant: All funds must serve individuals and families whose income does not exceed 120 percent of area median income (AMI); At least 25 percent of the funds must be used for the purchase and redevelopment of abandoned, foreclosed or vacant homes or residential properties that will be used to house individuals and families whose incomes are less than 50 percent of AMI; and Recipients that receive NSP funds must give priority emphasis to the areas of greatest need within their jurisdictions, including those: a) areas with the greatest percentage of foreclosures; b) areas with the highest percentage of homes financed by subprime mortgage related loans; and c) areas identified as likely to face a significant rise in the rate of home foreclosures. While there is some flexibility in defining the areas, the census tracts chosen in the City must have 'foreclosure need scores' of at least 17 on HUD's 20 point scale. The LAHD proposed allocating NSP3 funds within NSP1 and NSP2 neighborhoods in order to maximize the impact of the NSP3 funds. This will also help meet a 20 percent minimum impact requirement. The three proposed target areas were selected based on data set information provided by HUD and geographic information systems (GIS) analysis that identified neighborhoods of greatest need and where the ability to leverage resources is most likely to aid in meeting the NSP3 outcomes. Pages seven through eight of the Transmittal describes in greater detail the LAHD analysis and other factors used in selecting the target areas. These neighborhoods are also identified in Attachment 1 of the Transmittal. The LAHD estimates that the total number of units required to make a 20 percent impact is 154. This HUD NSP3 Foreclosure Need Score, AMI information and other selection information are summarized in page seven of the Transmittal. Page six of the Transmittal identifies outputs and outcomes for the goals that are summarized below: Attract new residents to target area; Improve property values and stabilize the tax base; Increase homeownership in target areas and leverage opportunities for private lending; Remove blighting influences and vacant structures; and, Increase the housing supply for special needs populations.