BACKGROUND

On March 13, 2007, Council Member David Golonski requested to place on the City Council/Agency Board agenda, a discussion regarding the sale of 261 W. Verdugo Avenue to the Burbank Housing Corporation (�BHC�), which was funded by the Redevelopment Agency via an affordable housing agreement.

On January 23, 2007 the City Council/Redevelopment Agency Board considered and approved the funding of the 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 (attached as Exhibit A) recommending the approval of the affordable housing agreement among the City of Burbank (�City�), Burbank Redevelopment Agency (�Agency�), and Burbank Housing Corporation 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. 

ANALYSIS

Council Member Golonski remarked on January 13^th, that had he known of the previous private party transaction, he would not have voted to approve the funding of the property sale to BHC.   While the staff report focused on the merits of funding the proposed BHC property acquisition and relied on the information contained in the appraisal, and even though the most recent private party transaction had no bearing on the fair market value appraisal of the subject property, in retrospect, staff acknowledges that information regarding that below market sale could have been helpful to the City Council.

The following is a narrative of events, known to staff, for the eight-month period from June 2006 to January 2007 sale to BHC.               

Public records indicate that Walter and Pamela Gilmore sold the subject property to GILKO LLC (a company/corporation in care of Gilmore).  This sale was recorded on June 8, 2006, and no purchase price was listed.  The public record also shows another sale dated September 18, 2006, in which GILKO LLC sold the property to David and Mary Augustine for $1,035,000.  This sale was recorded on November 21, 2006. 

In late November 2006, a representative of PRC Management (a company that was hired by Augustine to manage the subject property) mentioned to BHC staff, that Augustine had purchased a property at 261 Verdugo that looked similar to the type of property BHC acquires.  During that same conversation, BHC staff asked if it had been on the market because BHC had sent a letter to the property owner two or three years earlier inquiring if they were interested in selling the property.  (As part of BHC�s acquisition strategy, BHC will from time to time, send letters to select property owners within all the focus neighborhoods to see if there are any opportunity purchases available.)

The PRC representative indicated that the property had not been listed on the open market when Augustine bought it; rather it was a private transaction.  BHC�s staff person mentioned BHC would have been interested in acquiring the property.  A very short time later during a subsequent conversation, the PRC representative told BHC staff that Augustine might be willing to sell the property to BHC. 

BHC was later informed that the asking price was $1.5 million, at which time BHC staff informed Agency staff of the dialogue(s) and the potential for a possible acquisition.  On December 1, 2006, a purchase agreement was executed between BHC and Augustine, contingent upon an appraisal and Council/Agency Board approval.

In accordance with California Community Redevelopment Law, Agency staff contracted for a real property appraisal.  A summary appraisal report was prepared by Otis Hackett, MAI, dated December 20^th with effective date of value as of December 8, 2006.   

After the purchase agreement was executed and BHC was in escrow, Agency and BHC staff learned that Augustine paid $1,035,000 and this information was considered by the appraiser and was mentioned in the appraisal report.  The appraisal also found the property to be valued in the range of $1.3 to $1.4 million with a specific fair market value of $1,350,000. 

When staff learned of the appraised value, BHC made an offer of $1.35 million on the property.  This offer was rejected and a counter-offer was made in the amount of $1.44 million.  Agency staff then advised BHC not to �counter back� above the $1.4 appraised value.  The seller accepted an offer of $1.4 and the matter went for Council/Agency Board consideration on January 23, 2007.  The City Council/Agency Board approved the affordable housing agreement that funded the BHC acquisition on January 23^rd and escrow closed on the property on January 30, 2007.  Since then, Agency staff has been working on tenant relocation efforts, and BHC has performed lead-based paint and asbestos assessments as well as developed a rehabilitation scope of work.

PROPERTY VALUATION

As previously mentioned, a summary appraisal report was prepared for the Redevelopment Agency, dated December 20, 2006, with an effective date of value of December 8, 2006.  The appraisal was prepared by Otis E. Hackett, MAI, ASA, CRE, FRICS, who is very experienced in performing real property appraisals for governmental entities. 

The appraisal took into consideration a total of 17 comparable sales.  While the appraisal considered the November 21, 2006 sale (at the price of $1,035,000) it was not used as a comparable sale, because in the appraiser�s expert opinion that sale was not consistent with the market.  In a follow-up letter from the appraiser (that will be provided to the Council/Agency Board prior to the City Council meeting) the applicable unit indicators associated with this sale were below the indicators of other 17 comparable sales.  The appraiser further notes that the purchase price of $1.035 million was �substantially below market value� and was not given any weight in the sales comparison approach analysis. 

The appraisal found the fair market range of value for the property to be between $1,300,000 and $1,400,000, with the specific fair market value of $1,350,000.  As outlined above, BHC originally offered $1,350,000 for the property, and when that was rejected with a counter offer of $1,440,000, BHC then offered $1,400,000, which was accepted by the seller.  The $1.4 million acquisition price is consistent and within the range of fair market value as stated in the summary appraisal report.

POTENTIAL CONFLICT OF INTEREST

As in the case of this particular staff report, when the staff report of January 23, 2007 went to the City Manager and ultimately the City Council/Agency Board the staff report was specifically from:  Greg Herrmann, Chief Assistant Community Development Director/City Planner; and Ruth Davidson-Guerra, Assistant Community Development Director for Housing and Redevelopment. 

Typically, staff reports generated by the Community Development Department would be reviewed by and be from the Community Development Director, Susan M. Georgino.  However, in this case, Ms. Georgino�s husband has been a partner with the seller in prior business transactions.  Ms. Georgino did not therefore make, participate in making, or in any other manner influence directly or indirectly, or have any involvement whatsoever with the subject BHC property acquisition or the related affordable housing agreement. 

FUTURE ACTIONS

With the concerns raised, 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.  In addition, 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. 

On March 13^th Council Member Golonski also included that the City Council request BHC to rescind the real estate transaction.  As previously mentioned in this report, escrow on the subject property closed on January 30, 2007 and since that time tenant relocation and initial rehabilitation activities have been underway. 

CONCLUSION

On January 23, 2007 the City Council and Redevelopment Agency Board approved an affordable housing agreement among the City of Burbank, Burbank Redevelopment Agency and the Burbank Housing Corporation.  This agreement included Agency funding for the acquisition of real property at 261 West Verdugo Avenue for the purpose of increasing the City�s inventory of affordable housing.  The purchase price for this property was $1.4 million which was within the range of fair market value as identified in an appraisal report by a certified, independent real estate appraiser.  Due to the concerns raised regarding a recent, below market, private party real estate transaction, staff will implement future measures to ensure that a three-year history of real estate transactions is included in future staff reports and will confer with the appropriate Council sub-committee prior to bringing any future real estate-related matters to the full City Council/Agency Board.  

LIST OF EXHIBITS

Exhibit A � Staff Report (January 23, 2007)

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