PURPOSE

The purpose of this memorandum is to provide a status report on a variety of follow-up items related to the acquisition of 261 West Verdugo Avenue, as requested by the City Council/Redevelopment Agency Board at their meeting on March 20, 2007. 

BACKGROUND

On January 23, 2007 the City Council/Redevelopment Agency Board considered and approved the funding of a Burbank Housing Corporation (BHC) real property acquisition of 261 W. Verdugo Ave. (as well as two other properties at 2219 and 2329 North Niagara) for the purpose of increasing the City�s inventory of affordable housing.  The staff report recommending the approval of the affordable housing agreement among the City of Burbank (City), Burbank Redevelopment Agency (Agency), and BHC focused on the following:  an analysis of the subject property in its current condition; the level and cost of rehabilitation recommended for the property if acquired by BHC; household income and affordability requirements; proposed City/Agency financial assistance and loan terms; tenant relocation; the total project cost; and the fair market value of the property including the cost to acquire 261 W. Verdugo Ave. 

While the staff report focused on the merits of funding the proposed BHC property acquisition the City Council/Agency Board voiced its collective concern regarding the fact that information pertaining to a recent, private party, real estate transaction was not addressed in the staff report of January 23, 2007. 

This matter was discussed by the City Council/Agency Board on March 20, 2007 and staff was directed to return with additional information that falls into two general categories:  1) information that directly relates to 261 W. Verdugo; and 2) information regarding more general City/Agency practices and procedures. 

In addition, staff was also directed to proceed with a complete audit of BHC, including a financial as well as procedural audit.  In a memorandum to the City Manager dated March 27, 2007 (Queue List Item #806), staff indicated that the scope of the audit would come to the Council/Agency Board on April 24^th.  However, since that time, a meeting among the City Attorneys Office, Financial Services Department, Community Development Department, and Keyser Marston Associates (KMA) was held, and due to the magnitude of the BHC audit additional time is required to develop the audit scope and cost.  The Financial Services Department will take the lead in supervising the BHC audit.  It is envisioned to hire an independent audit firm along with KMA to perform the audit.  Staff anticipates bringing the audit scope, cost, and specific audit schedule back to the City Council/Agency Board in late May, then returning again to the Council/Agency Board once the audit is complete.  In the proposed May staff report, staff will also provide:  a comprehensive discussion of the City�s affordable housing program, including a review of the City�s historical and current efforts; the Blue Ribbon Task Force on Affordable Housing goals and programs; our concentrated efforts in our Focus Neighborhoods (along with a review of how and why these areas were selected); a discussion on how BHC fits within the City�s affordable housing program; and a five-year history of BHC�s real property transactions.

ANALYSIS

The balance of this report will focus on the two other general areas discussed by the Council on March 20^th:  information specific to 261 West Verdugo Ave.; and general City/Agency practices. 

261 WEST VERDUGO AVENUE

As discussed in the staff report of March 20, 2007, GILKO LLC (the then owner) sold the subject property to David and Mary Augustine for $1,035,000.  This sale date was September 18, 2006 and the sale was recorded on November 21, 2006. 

One of the questions asked on March 20^th was whether or not there was a real estate broker involved with the private party transaction (GILKO and Augustine) that occurred prior to the BHC transaction.  Staff has learned that the real estate firm of Marcus and Millichap was the real estate firm involved in that private party transaction and it represented both the buyer and seller.

The Council/Agency Board directed staff to instruct BHC to take steps to reverse the property purchase transaction with David and Mary Augustine (Seller).   This message was conveyed in a letter to BHC along with direction to cease all rehabilitation efforts, to which BHC complied with immediately.  In addition, staff was also directed to prepare a letter to the Seller for the Mayor�s signature expressing concern over the transaction and the apparent �windfall� profit.  As directed, staff sent letters to both BHC (Exhibit A) and the Seller (via the Seller�s attorney, Exhibit B) expressing the Council�s/Agency Board�s concerns.  As of the writing of this report, staff has not received a response from either Seller or the attorney of record. 

BHC sent a letter to the Seller indicating a desire to discuss the real property transaction and suggested a meeting to explore related options.  In response to that letter, the Seller relayed to BHC a message via his real estate broker that he is willing to meet, but would prefer his attorney to be present.  As of the writing of this report, this meeting is being arranged.  Should this meeting occur before April 24^th, staff will provide an update at the April 24^th Council/Agency Board meeting.

The final matter discussed by the Council on March 20^th, which is  property-specific, is that of tenant relocation.  In the above-mentioned memorandum to the City Manager (dated March 27^th), staff reported that a total of four tenants had been, or were in the process of being relocated.  However, since that time, one of the four tenants voluntarily decided to remain at 261 W. Verdugo Ave. resulting in a total of three (of the eight) tenants having been relocated.  All other tenant relocation efforts have been suspended.

GENERAL AGENCY PRACTICES

Several questions were asked on March 20^th that pertained to general City/Agency practices and revolved around two key areas:  real property appraisals and process; and the procedures for disclosure of information and confidentiality procedures and policies.

Real Property Appraisals   

Historically the City/Agency has used several different California-certified real property appraisers, including Otis Hackett, MAI, John Donahue & Company, MAI, James Reid & Associates, and Robert A. Swanson.  However, in more recent years as the real estate market has accelerated, and specifically the residential market, it has been more challenging to have multiple contracts with reputable, certified, MAI appraisers.  It is crucial that the City/Agency as public entities, work with only highly qualified appraisers that are intimately familiar with the Burbank market, be able to defend the City/Agency as necessary, and be timely and responsive. 

With regard to appraisals performed for BHC acquisitions, the Agency used two different appraisers during the period of 2002 to 2004 (Hackett and Donahue).  Hackett performed five separate appraisals with 25 units and Donahue performed three appraisals with 99 units.  Since 2004 to the present, Otis Hackett has been the primary appraiser for BHC real property transactions.  From June 2004 to December 2006, Hackett performed 13 appraisals with 49 units.  In many instances the BHC transactions require quick �turn-around� time (due to the specifics of real estate negotiations), and it has been extremely important to be able to get complete appraisal reports in a timely fashion.  Otis Hackett has provided excellent service to the City/Agency in terms of qualifications and timely delivery of appraisal reports.

Because of staff�s continued desire to have multiple appraisers, with whom to work, staff will be working with the City Attorney�s Office on a request for qualifications process in the hope that other qualified and responsive appraisers can be identified.  Having multiple appraisers under contract will be essential in the future, should we need to perform review appraisals.

Disclosure of Information & Confidentiality Requirements

The Council inquired about the practice of disclosing information in the context of private party transactions.  Historically, when the City/Agency is the lender on real property transactions (as opposed to the property buyer) information on historical private party transactions relative to a specific property in question has not been provided.  Rather, comprehensive and detailed information pertaining to the transaction, which the City Council/Agency Board is proposed to take action on, has been the focus.  However, private party transactions are considered as they relate to comparable sales data in determining the fair market value of a piece of property.

A question was also raised about confidential discussions regarding proposed real property transactions.  In accordance with Government Code, Section 54956.8, a conference with the real property negotiator can be held in �closed session�.  In order to do so, public disclosure of the following information is required:  name of the negotiator; address of property under negotiation; the party or parties the City/Agency is negotiating with; and the terms under negotiation (price and terms of payment concerning a lease or sale of real property).   The basic purpose of having confidential discussions on real property transactions is to provide information on a proposed transaction to the Council/Agency Board and to request direction to the real property negotiator, without compromising the City�s/Agency�s position and ability to fairly negotiate the terms of a lease or sale.  Typically, in the case of BHC transactions, these confidential discussions cannot be held inasmuch as BHC is the negotiator, not the City/Agency.   

CONCLUSION       

With the concerns raised over the funding of the acquisition of 261 W. Verdugo, several opportunities for program refinement have been identified:  staff will in the future, include as part of any acquisition or acquisition-related staff report, a summary of all real estate transactions associated with the property under consideration for the previous three years; staff will bring all property acquisitions and/or acquisition-related matters to the appropriate Council Sub-committee prior to making recommendations to the full City Council/Agency Board; staff will continue to pursue other qualified appraisers, with whom to work; and a comprehensive audit of the Burbank Housing Corporation will be performed in the upcoming months. 

These measures are anticipated to strengthen the City�s affordable housing program and assist the City/Redevelopment Agency as it continues in its commitment to provide safe, clean, service enriched, affordable housing to those residents of the community who find it difficult to afford adequate housing for their families.

RECOMMENDATION 

Staff requests any additional direction from the City Council/Redevelopment Agency Board as necessary.

LIST OF EXHIBITS

Exhibit A � Letter to BHC (March 23, 2007)

Exhibit B � Letter to Augustine�s Attorney (March 27, 2007)

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