PURPOSE:    

The purpose of this report is for the Agency Board and City Council to consider agreements with the Burbank Housing Corporation to own, improve and operate the  Childcare Demonstration Project.

BACKGROUND:

The Agency Board approved the Housing and Childcare Center Demonstration Project in July of 2001.  The project is located at 2245-2251 North Fairview Street and 2242-2308 North Ontario Street in the Golden State neighborhood near the airport.  The project includes 20 small-lot single family homes and an 8,500 square foot childcare center that can accommodate 92 children.    Among other things, the Agreement called for the developer, M. David Paul, to construct the shell of the childcare center and sell the land and improvements of the center to an entity selected by the Agency for one dollar.  In addition, the Agency is to receive certain participation in the profits of the sale of the 20 homes.  The Agency then planned to provide funding to the proposed owner of the childcare center to complete the interior improvements and playground of the childcare center.

The Agency has anticipated that the entity that would own the childcare center would be the Burbank Housing Corporation (BHC).  The BHC is an independent, non-profit corporation that was formed six years ago to own, manage and rehabilitate affordable housing projects throughout the City in partnership with the Redevelopment Agency.  In their neighborhood revitalization efforts, BHC operates two after-school programs including the Achievement Center on the 100 block of West Elmwood and the Activity Center on the 200 block of West Verdugo Avenue.  In the Golden State neighborhood where the childcare center is being constructed, BHC has purchased and rehabilitated two nearby apartment buildings. 

CHILDCARE OPERATOR

Before the Agency and BHC could enter into any specific terms for completing the transfer of the center, an experienced childcare operator needed to be identified to make sure that the long-term operation of the Center would meet the goals of the Agency.  These goals were set out in a Request For Proposal (RFP) for childcare operators. Specifically, the Agency wanted to make sure 12 of the 92 childcare spaces would be available for infants (0 to 12 months), since the City currently has a severe shortage of infant care providers.  Also, the Agency requested that 20% of the spaces offer affordable, below-market tuition rates. Both of these requirements reduce the feasibility or profitability for an operator to run the center without requiring an ongoing subsidy. 

After issuing an RFP, the Agency received five responses from potential childcare operators.  An extensive review of the proposals was conducted which included several meetings with the City�s Childcare Committee, whose members include several childcare specialists.  In October 2002, staff recommended to the Agency to enter into negotiations with Knowledge Beginnings.

Knowledge Beginnings

As an attachment to proposed Agreement Pertaining to the Improvement, Use and Operation of the Childcare Center between the Agency and BHC is a proposed Management Agreement between BHC and Knowledge Beginnings (Exhibit �A�).  The Management Agreement sets forth various terms of the Agreement including: a five-year operating term; the Scope of Services provided by Knowledge Beginnings including pre-opening services; and management operating services; insurance; operating expenses and proposed tuition rates; the provision of furniture and equipment; and the selection priority for the children.

The operating services include obtaining all required licenses from the State as well as obtaining the highly regarded National Association of the Education of Young Children (NYAEC) accreditation within 30 months of opening (it usually takes at least 24 months to obtain this accreditation). 

The tuition rates are based on the age group of the children, which reflects the required staffing ratio for each age group. In addition, the proposed tuition rate structure offers a ten percent discount for 20% of the childcare spaces.  As the operation of the Center reaches a stabilized basis beginning in year four, it is anticipated that the ten percent discount will be increased, and perhaps broaden beyond 20% of the childcare spaces. 

The Management Agreement also outlines the selection priority for the children.  In keeping with the Agency�s and BHC�s goal to provide affordable and service-enriched housing, the selection priority is proposed as follows:

1. Residents of housing developments owned by BHC 

2. Residents of Agency and City-sponsored affordable housing projects.              

3. Residents of the Golden State �Enclave Area� (Exhibit �B� map) 

4. Residents of the City of Burbank 

5. An employee who�s principle place of work is within Burbank

BHC Responsibilities in the Management Agreement with Knowledge Beginnings

As the proposed owner of the childcare center, BHC will be taking on several typical responsibilities including the payment of property taxes and property insurance.  However, as mentioned before with the infant care and affordability requirements, BHC will be taking on additional responsibilities to make sure that a positive revenue flow is obtained from Knowledge Beginnings within three years after the opening of the facility.  They include paying for utilities and exterior maintenance, and installing the playground equipment.   In addition, BHC will pay for Knowledge Beginnings startup costs including pre-opening staffing, initial marketing and administration, and operational shortfalls expected for the first two years of operation until the Center reaches a stabilized basis.

These costs can be separated into two distinct types: regular ongoing expenses (property taxes, insurance, utilities and maintenance); and one-time expenses for the start-up of the center.   To pay for ongoing expenses, it is proposed that the Agency amend an existing promissory note on the Elmwood properties owned by BHC.  In two agreements with BHC, the Agency provides for the repayment of rental revenue received on various housing projects owned by BHC, less the cost for operating two after-school programs (i.e. the Achievement Center, and Verdugo Activity Center).  Similarly, for the childcare center, it is proposed that the Elmwood promissory note be amended to provide BHC $61,000 annually to pay for these ongoing expenses including replacement reserves.  This amount assumes that BHC will be paying $20,000 annually in property taxes.   Should the property taxes be reduced or exempted, the Agency�s note would be reduced accordingly to as little as $41,000 per year.

For the one-time expenses related to start-up costs, it is proposed that BHC in its agreement with the Agency, borrow $100,000 from the Agency, and begin repaying these funds beginning in year three, when the center has reached a stabilized basis.  The loan would be repaid over a five-year term at a 5% interest rate.  The proposed source of these funds is the $100,000 contribution towards childcare provided by the Zelman Company to the City for the development of the Empire Center.  The City and Agency will be recommended to enter into a Cooperation Agreement for the City to loan the funds to the Agency, and for the Agency to repay the City those funds once received from BHC including interest.

AGREEMENT BETWEEN THE AGENCY AND BHC

The Agreement between the Agency and BHC outlines that BHC will be the owner of the childcare facility, and that the facility will continue to operate in perpetuity as a high quality center.   This includes the requirement that the operator obtain the highly regarded NYAEC accreditation.  In addition, the Agreement outlines the scope of work for BHC to complete the interior improvement of the Center including the installation of playground equipment, and that the Agency provide the funds to complete these improvements. 

In order to finalize the Agreement, the Agency and BHC needed to determine the actual cost for completing the interior improvements and playground. In coordination with M. David Paul and Knowledge Beginnings, plans and specifications were prepared, and BHC issued a proposal to obtain bids.  A total of five bids were received ranging from $935,447 to $1,335,000.    This represents a range of $110 to $157 on a square foot basis.

Earlier on, the Agency had budgeted $588,000 for this work including $175,000 in CDBG funds.  (An additional $40,000 was planned from State grant funds, which were later rescinded by the State).  However, it was recognized that this work would cost more due the fact that the playground was added to the scope of work ($50,000), and that beginning in 2003, State law was amended requiring this work to be paid at prevailing wages, which could increase costs from 20 to 30%.  (Burbank�s ordinance exempted childcare improvements from prevailing wage.)  Nevertheless, the costs are still higher than anticipated.  Having said that, since there were five competitive proposals received, staff believes that the bid for $935,000 is considered a valid and acceptable bid.

It should be also noted that while costs have risen notably, the Agency is also anticipated to receive additional revenue from its participation in the sale of homes.  By the close of escrow on the homes later this month, the Agency is anticipated to receive $200,000 in additional revenue.

It is recommended that the Agency appropriate $522,447 from the Golden State Project Area for the work.  As outlined in a report to the Agency in October 2002, it was also recommended that the $175,000 in CDBG funds be returned to the CDBG account.  Staff  recommended that the CDBG funds be returned, because CDBG funds require at least 50% of the childcare participants must be low-income households.  While an affordability component is proposed for the childcare center, restricting 50% of the spaces to low-income households would have a severe impact to ongoing operations, requiring significant ongoing subsidies.  The net new appropriation is therefore $347,447. It is also recommended that the $200,000 in home sale proceeds be returned to the Agency�s 20% set-aside account. 

CONCLUSIONS:

The Cottages Housing and Childcare Demonstration Project was intended to accomplish many things including the elimination of blighted properties in the Golden State neighborhood and providing new home ownership opportunities with 50% of the homes designated for moderate-income homebuyers.   However, the centerpiece of the project is the childcare, which is the City�s first major effort to address the chronic shortage of quality childcare within the City.

When the Center is completed in December of this year, the public will have available a high quality center both in terms of architecture and program elements, and it will have been accomplished without any cost to the City�s General Fund.  It is therefore recommended that the Agency and City Council approve the proposed agreements.

FISCAL IMPACT:

It is proposed that $522,447 be appropriated from the Golden State Project Area fund (Acct. No. 301.ND000.30004), $175,000 be returned to the CDBG fund account, and that $200,000 in home sale proceeds be returned to the Agency�s 20% set-aside account.  In addition, the Agency�s promissory note on the Elmwood properties will be amended to provide BHC $61,000 annually to pay for ongoing property expenses.  Also, the Agency will borrow $100,000 from the City�s childcare funds (Acct. No. 001.ND00021040.1008.000000) to be repaid within eight years.

RECOMMENDATION:

It is recommended that the Redevelopment Agency approve the resolutions to approve the Agreement Pertaining to the Improvement, Use, and Operation of Childcare Center with the Burbank Housing Corporation, to appropriate $522,447 from the Agency, and to approve a Cooperation Agreement between the Agency and City to lend $100,000 to the Agency for start-up costs.

EXHIBITS:

A         Agreement Pertaining to the Improvement, Use, and Operation of Childcare Center

B          Map of Golden State neighborhood

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