OFFICE OF THE MAYOR SAN FRANCISCO September 28, 1973 JOSEPH L. ALIOTO The Honorable John J. Sparkman, Chairman and Urban Affairs Senate Office Building Washington, D. C. 20510 Dear Senator Sparkman: The Senate and House of Representatives are currently receiving various alternative housing proposals associated with new legislation and studies initiated by the executive branch. The City of San Francisco is implementing two locally sponsored housing programs which may be of interest to your Committee during its review of housing alternatives. These programs demonstrate, we think, how cities given adequate resources can establish innovative approaches in meeting local housing needs. I am enclosing for your review (1) an explanation of the City's purchase and financing of the Midtown Park Apartments (modest priced housing for families), and (2) a description of a locally assisted code enforcement program which is replacing the terminated Federally Assisted Code Enforcement (FACE) program. Admittedly, we have not solved the shortage of funds for FACE program administration which the Department of Housing and Urban Development (HUD) also cut off. The first local program is similar to FACE in that it is designed to provide individuals in deteriorating neighborhoods with low interest loans to bring their housing and thus the neighborhood up to code standards. Under the local program the City of San Francisco continues to make public improvements in the target neighborhoods funded through the City's General Fund. In order to provide loans for the private property owner the City borrows funds from a private lending institution at a lower rate of interest. This is possible because interest rates on municipal obligations are tax exempt (26 USC Section 103). The City then loans out the money to the private home owner at a rate just over the rate at which the City borrowed the money. This enables the City to cover the loan administrative costs and to create a bad debt reserve fund. The City then pledges to the bank as security the amounts received in repayment of the loans, the mortgages, and the money in the bad debt fund. Through this method of financing the individual is able to take advantage of low interest loans comparable to those which were available under FACE without having to involve the Federal government and without running the risk of increased burdens for the local taxpayer as the money involved as security is not part of the City's General Fund. An advantage of this program is that in implementing it the City was able to use the talents of the same people who were administering the FACE program. Thus the City was spared expense of the start up costs. As noted above, we are still flying blind on administrative costs (city building inspection payroll), heretofor 100% financial by HUD. The legal issues which were raised when San Francisco adopted a plan of local housing rehabilitation financing are typical of what other cities might be confronted with if they undertook a similar program. The central issue is whether a city has the authority to incur indebtedness or pledge city or county funds as security for the purpose of a private property owner's loan for housing rehabilitation. In San Francisco's case the question was raised in four ways. Article 13 Section 25 of the California Constitution prohibits the state legislature from authorizing any city and county to pledge the funds of the city and county for a private purpose. Whether subsidizing loans for private property rehabilitation is a public purpose can be resolved if the board of supervisors (or city council) as the proper legislative body determines that there is a public purpose involved in the city loaning money to property owners for housing rehabilitation. Such a finding would make Article 13 Section 25 inapplicable. Because it is a legislative determination, the decision would be upheld as long as there is a reasonable basis for the decision. Article 13 Section 40 and San Francisco City Charter Section 6.304 both place limitations on the authority of a city to incur indebtedness. Both these sections are designed to protect the taxpayer from the city placing improvident burdens upon future tax revenues. However, the funds involved are not general funds (those obtained through property, use, sales, or license taxes) and; therefore, this method of financing comes under an exception developed through case law which excludes special funds from such limitations. The reasoning behind this exception is that a special fund does not require voter approval because it places no burden on the general tax revenues. Thus the purpose behind Article 13 Section 40 would not be served by limiting the city's authority regarding special funds. The city's appropriation of an amount to establish an initial bad debt fund does not interfere with limitations placed upon it by Article 13 Section 40 or Charter Section 6.304 as long as there is no promise to make further appropriations. San Francisco Charter Section 7.300 provides for the general laws of the state to apply regarding the City's authority to create bonded indebtedness. In California the general laws do not specifically authorize a city to incur indebtedness for the purpose of loaning money to private individuals to rehabilitate housing. California has sought to overcome this problem through legislation specifically creating such authority in the cities. This legislation is presently awaiting the governor's signature. The second innovative San Francisco housing program illustrates the City's ability to salvage defaulted housing projects. The case of Midtown Park Apartments demonstrates how cities can be successful in housing finance and management. Midtown Park Apartments was originally designed to provide modest-income families with co-operative garden apartments in the inner city. A private firm financed the construction of the housing project under the Federal Housing Administration (FHA) Section 213 for market rate co-operative housing. When the company defaulted on the mortgage, the City acquired the property. The acquisition was accomplished by establishing a non-profit corporation which acquired the property from FHA and then, upon FHA approval, transferred title to the City. The City then leased the property back to the non-profit corporation which manages it. The mortgage was acquired at a substantially lower rate of interest than is obtainable on the open market. This was possible because of an IRS ruling which exempted interest on the mortgage from the gross income of the mortgage and because of the City's guarantee of the rent rolls. When the City leased back the property to the non-profit corporation the City agreed to relieve the corporation of possessory interest tax liability created what in essence is a double tax break on which the savings is passed to the tenant in the form of lower rents. The advantages of this program are twofold. First, it provides adequate housing for moderate-income families. Second, because the City retains title, it has the authority to control the administration and management of the property. The development is managed by a board of directors comprised of Midtown Park residents and approved by the Board of Supervisors. The residents take great pride in the complex. The vacancy rate, once high, is now close to zero. Under the resident board's management the apartments are beautifully maintained at a fraction of the former cost of management. At present the residents are considering purchasing the development from the City for conversion into condominium housing. This would fulfill the original goal established ten years ago and would encourage San Francisco to continue financial assistance programs to rescue defaulted housing projects thus expanding housing resources for low and modest income families. (Enclosed are copies of the report, Midtown Park, which provides a general history and more details on this housing development, from the original construction to the current management by a corporation of residents). MIDTOWN PARK Acknowledgment The purchase of Midtown Park by the City of San Francisco and the subsequent management of the units by an organization of residents involved the following individuals and organizations: City and County of San Francisco Mayor Joseph L. Alioto John H. Tolan, Jr., Deputy for Development Wesley Slade, Special Assistant for Housing & Relocation United States Federal Government Philip N. Brownstein, Assistant Secretary for Mortgage Jack G. Tuggle, Assistant Director, San Francisco Office, Stanley S. Surrey, Assistant Secretary, Department of Midtown Park Board of Directors Clarence Green, President James Gibbs, Vice President (to December 1970) Claudine Burns, Treasurer Robert Love Nancy Van Houffel (to August 1970) Frances Huff The mortgage for Midtown Park was handled by Penn Mutual Life Insurance Company with local assistance from the Marble Mortgage Company of San Francisco. |