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REDWOOD CITY FAIR AND AFFORDABLE HOUSING ORDINANCE <br /> <br />Economic & Planning Systems, Inc. 33 Affordable Housing Impacts <br />Affordable Housing’s Unique Financial Structure <br />Affordable housing projects typically operate under structured financing <br />agreements that determine how project revenues are used. Each agreement is <br />unique, but project revenues are generally first applied to cover operating costs, <br />including resident services, and senior debt obligations, with any remaining cash <br />flow allocated to replacement reserves and other subordinate obligations such <br />payments to “soft lenders” in the form of residual receipts26. <br />If rents grow more slowly than operating expenses, net operating income will <br />decline over time. The first impact is often to reduce or eliminate residual receipts <br />payments to the soft lenders such as the City, County, or other public lenders. <br />Because these loans are subordinate and payable only from available cash flow, <br />they are among the first sources affected when project margins tighten. As shown <br />in Table 14, Redwood City has provided about $17.3 million in funding for <br />affordable housing projects, about 54 percent for projects built before 1995. <br />If financial pressure continues, affordable housing providers may then reduce <br />contributions to replacement reserves or defer maintenance and capital <br />improvements. Replacement reserves are critical to long-term preservation <br />because they fund major repairs and upgrades such as roofs, painting, and general <br />building systems (e.g., plumbing, electrical, HVAC, elevators). Depleted <br />replacement reserve funds will ultimately lead to deferred maintenance, <br />increasing probably of major failure, cost of future rehabilitation, and / or general <br />building deterioration. <br />Providers may also reduce resident services, staffing, or other discretionary <br />program expenditures. These services can be especially important in deeply <br />affordable, extremely low-income, senior, supportive housing, and formerly <br />homeless housing communities, where residents may rely on on-site staff, case <br />management, transportation assistance, after-school programs, food support, or <br />other stability services. While these costs may be more flexible than debt service, <br />reducing services can affect resident outcomes and long-term housing stability. <br />If projects exhaust their ability to use funds from more flexible accounts, such as <br />day-to-day maintenance, services, and residual receipts, the pressure may <br />eventually affect the ability to meet senior debt service. At that point, the long- <br />term financial viability of the project may be at risk. This risk may be especially <br />acute for smaller or local affordable housing providers that do not have large <br />portfolios or unrestricted reserves that can be used to cross-subsidize funds from <br />better capitalized properties. <br /> <br />26 Residual receipts are payments made only from remaining project cash flow after required operating expenses and senior <br />obligations have been paid. <br />8.A. - Page 92 of 168 <br />102