Agenda Index City of Vancouver

ADMINISTRATIVE REPORT

TO:

Vancouver City Council

FROM:

Director of the Housing Centre in consultation with the Director of the Office of Cultural Affairs

SUBJECT:

Lease Terms for the Core Artists Live/Work Co-op at 275 Alexander Street

 

RECOMMENDATION

[This recommendation implies a grant and therefore requires eight (8) affirmative votes of Council for approval.]

GENERAL MANAGER’S COMMENTS

COUNCIL POLICY

Council resolved at its meetings of June 25, 1996 (In Camera) and June 24, 1997 (In Camera):

THAT the 8 studios along with the 22 studios being conveyed to the City at no cost, be managed as Capital Assets, with the purchase funded by a loan from the Property Endowment Fund on terms acceptable to the Director of Finance.

THAT the 30 Studios be operated as a non-profit Artists’ Housing Co-operative and, subject to report back on operating terms for the Co-op, any net income remaining after all monthly operating expenses, including the replacement and subsidy pool reserves, and the PEF loan payment have been paid, be used to reduce the PEF loan principle and, once the PEF loan is retired, be allocated to the Affordable Housing Fund.

THAT Council require the developer, as a prior-to condition of rezoning enactment, to enter into a housing agreement with the City to guarantee for the life of the building the rental status of the 30 studios.

PURPOSE

This report seeks Council approval of the proposed lease terms for the Core Artists’ Co-op, which occupies 30 City-owned strata-title live/work studios at 275 Alexander Street in the Downtown Eastside as noted on Figure 1.
Figure 1

BACKGROUND

In 1995, the Al Gore Development Corporation (originally called, the Pemcor Development Corporation) applied to the City to rezone a 37,000 square foot, industrially zoned (M-2) site at the North West corner of Gore Avenue and Alexander Street, to mixed industrial and artist live/work studio use (CD-1).

The proposal was to develop 1 FSR of industrial studios on the ground floor and to develop the remaining 4 FSR above as artist live/work studios. The project would consist of 15 industrial studios on the ground floor, 30 City-owned artist live/work rental studios on the second and third floors along Alexander Street and part of Gore Avenue, and 120 artist live/work market studios in the rest of the building. All of the industrial and live/work studios would be stratified and managed by a single strata corporation. The 30 City-owned units would have a separate entrance and elevator. A two-storey, 7,000 square foot, shared amenity and workshop area would be available to all live/work studio residents.

Since the rezoning would generate a major increase in land value, a public benefit was negotiated between the developer and the City. As a result, the developer agreed to convey 22 artist live/work studios to the City at no cost. The market value of the 22 studios was estimated to be $2.3 million. After further negotiations, the City acquired an additional 8 studios for a total purchase price of $760,000 plus fees and taxes. The cost of the 8 additional studios was to be financed through a PEF loan to be repaid by the Co-op at market interest rates similar to a conventional residential mortgage.

In order to ensure that all costs to the City were immediately covered, the Co-op took occupancy under a license agreement from the City as soon as the City had completed purchase of the studios. Since that time, a Letter of Understanding (Appendix A) has been negotiated between the City and the Co-op, which describes the principles on which the Co-op will be managed and operated over the 60-year term of the lease.

LEASE TERMS

The principles on which the lease is to be based are contained in the Letter of Understanding attached to this report (Appendix A). The more significant terms are outlined below:

1. Term. The term will be for 60 years.

2. Basic Rent. The basic rent will be the greater of the monthly principal and interest payment on the PEF loan or 25% of the monthly market rental value of the 30 studios. Eight (8) of the 30 studios were purchased by the City on the understanding that the Co-op wouldpay for their purchase over 30 years. However, if interest rates decline and/or the rental value of the studios rises over time, the Co-op’s lease payments will be based on a percentage of the market rental value of the studios. This would also be the case after 30 years, when the PEF loan is paid in full. Twenty-five (25) per cent was chosen because, at today’s interest rates and market rental values, it is equivalent to the interest and principal payment on the PEF loan. This amounts to $4,750 per month or $57,000 per year.

The Manager of Real Estate Services advises that the market rent for the units is $216,000 per year. As the rent is below market, this is a grant requiring 8 votes of Council.

3. Supplemental Rent. If an operating surplus has been generated at year end, after all of the Co-op’s expenses including basic lease rent have been paid, 50% of the surplus will be to the Co-op’s account and 50% will be to the City’s account. Until the PEF loan, including interest, is fully paid, the City’s share will go to reduce the principal on the loan. Once the PEF loan is fully paid, the City’s share will go to the Affordable Housing Fund. The Co-op’s portion of the surplus, must go towards enhancing the collective purpose of the Co-op, such as topping up their reserves, buying new equipment for the shared workshop, or establishing an arts endowment fund. The effect of the supplemental rent will be to encourage the Co-op to operate in a cost-effective manner, accelerate the rate at which the PEF loan is repaid, and reduce the amount of the City grant towards rents.

4. Rent in-lieu-of Property Taxes. The Co-op will pay rent in lieu of property taxes equal to $350 per studio or a total of $10,500 per year. This is the minimum tax payable for residents eligible for the Provincial Home Owner Grant. Co-op members are eligible for the grant under the Home Owner Grant Act. Should the minimum tax payable under the Home Owner Grant be increased, the Co-op will pay the increased minimum amount. Should the Home Owner Grant be eliminated, the Co-op will pay full property taxes as would other co-op housing projects in the city.

5. Increase to PEF Loan. Upon written application to the City, the Co-op will be allowed to increase its PEF loan by a maximum of $25,000 to cover the potential cost of finishing, furnishing and equipping the shared amenity and workshop areas in the building as well as any other miscellaneous capital expenses necessary to make the Co-op’s common areas liveable and functional. These funds would be fully repaid by the Co-op, including interest.

6. Co-op Must Pay All of its Costs. The Co-op is responsible for paying all of its costs, including strata fees, interest and principal on the PEF loan, rent in-lieu-of property taxes, payments to the vacancy and rental loss reserve and the replacement and strata fee reserve, as well as normal operating expenses. The Co-op must also pay fines, penalties and interest assessed and levied by the strata corporation.

7. Co-op Cannot Financially Encumber its Lease. The Co-op cannot mortgage or otherwise financially encumber its leasehold interest in the studios. This includes an unqualified prohibition on assigning, mortgaging or pledging the lease.

8. Housing Charges (Unit Rents). The Co-op will set monthly housing charges (unit rents) for each studio at 30% of gross (after expenses but before taxes) household income, but not less than the B.C. Benefits maximum shelter allowance for single persons (currently set at $325 per month) and not more than 90% of appraised market rental value (currently estimated to be $575 per month). Expenses eligible for deduction from gross sales revenue or receipts from the sale of their art work shall be only those acceptable to the Federal income tax authority (Revenue Canada).

9. Minimum Low Income Occupancy Requirement. At any given time over the term of the lease, the Co-op will ensure that at least 30% of the studios are occupied by households whose gross (after expenses but before taxes) annual income is at or below B.C. Housing’s Core Need Income Threshold (CNIT’s) for a Studio Unit. The CNIT for a studio unit is currently $24,500 per year. B.C. Housing revises the CNIT’s annually. Should B.C. Housing cease to provide annual CNIT’s, the City will take the CNIT for the last year it was provided and increase the amount each year by the cost of living index (C.P.I.) for Vancouver.

CONCLUSION

This has been a unique public-private partnership between the City and a private developer. As a result, the City has acquired a valuable real estate asset at little or no direct cost, and affordable live/work accommodation for low and moderate income artists has been secured for the Downtown Eastside community on a long-term basis.

* * * * *

ag000201.htm

October 14, 1999
File: F841

President and Board of Directors
Core Artists Live/Work Co-operative Association
275 Alexander Street
Vancouver, B.C.
V6A 1C2

Letter of Understanding
between
City of Vancouver
and
Core Artists Live-Work Cooperative Association

Dear President and Board of Directors,

This is a Letter of Understanding between the City of Vancouver and the Core Artists Live/Work Co-operative Association regarding lease arrangements for the 30 City-owned strata-titled artist live/work studios at 275 Alexander Street in Downtown Eastside Vancouver.

The Letter outlines proposed lease arrangements between the City and the Co-op concerning the management and operation of the Project. By signing the Letter, the City and the Co-op acknowledge that they are aware of their respective roles and responsibilities, as well as the general terms and conditions under which the Project will be managed and operated during the 60-year term of the lease.

Purpose

The purpose of the Co-op is to provide live/work accommodation at affordable rents to low and moderate income artists either living in, working in, or having a history of association with, the Downtown Eastside community.

MembershipGuidelines

The Co-op will choose artists for residency in the Project through an open and transparent selection process based on the following criteria:

APPENDIX A
Page 2 of 7

The Co-op may not discriminate against any qualified artist by reason of race, ancestry, place of origin, religion, disability, gender, sexual orientation, or age.

The Co-op will maintain an active waiting list of qualified artists and will select artists based on the above criteria from the waiting list.

In the event of a dispute or charge of unfair selection practices, the Co-op may call upon the City, through the Office of Cultural Affairs, to mediate the dispute.

Terms and Conditions

1. Term: The term of the lease will be 60 years.

2. Commencement Date: The lease will commence on April 1, 1999. Notwithstanding the lease commencement date, the Co-op will remain liable for strata fees, City rent in lieu of property taxes, PEF loan payments, and other housing charges to be paid on a per diem per occupied unit basis, between the date of occupancy of individual studios and the lease commencement date.

APPENDIX A
Page 3 of 7

3. Basic Rent: Until the Property Endowment Fund (PEF) loan has been paid in full, including interest, monthly lease rent will be the greater of the monthly interest and principle payment on the PEF loan or 25% of the monthly market rental value of the 30 studios. Both the monthly principle and interest payment and the monthly market rental value of the 30 studios, will be reviewed every 5 years from the lease commencement date by the City’s Manager of Real Estate, and adjusted accordingly if appropriate.

PEF loan payments will be calculated on the basis of the market rate of interest charged for a conventional 5 year mortgage of $782,800 amortized over a 30 year period. The loan payment for the initial 5-year period will be based on an interest rate of 6.0 per cent per annum which equates to a principal and interest payment of $56,864.04 per year or $4,738.67 per month. In subsequent periods, the interest rate will be the posted interest rate for a 5-year closed mortgage at the main branch of the Bank of Montreal in Vancouver 30 days prior to the expiry date of the previous 5-year period.

Market rental value of the 30 studios will be based on a survey of similar types of accommodation in the same market area. A recent survey by the City’s Manager of Real Estate estimates the market rental value of these types of units in this market area to be about $1.20 per net square foot per month. This puts the market rental value of a single studio at $600 per month or all 30 studios at $18,000 per month. The PEF loan payment is about 25% of the market rental value of the 30 studios. Upon repayment of the PEF loan in full, including interest, the Co-op’s monthly lease rent will be allocated to the City’s Affordable Housing Fund.

4. Supplemental Rent: Notwithstanding that the Co-op must operate on a breakeven basis, including the required annual contributions to Co-op reserves, there may be years in which there is a surplus at year end. In such cases, 50% of the surplus will be to the Co-op’s account and 50% will be to the City’s account. Until principle and interest on the PEF loan is fully paid, the City’s share will go to reduce the principle on the loan. Once the PEF loan is fully paid, including interest, the City’s share will go to the Affordable Housing Fund.

5. Rent In-Lieu-of Property Taxes: The Co-op will pay rent in lieu of property taxes equal to $350 per studio per year. This is the minimum tax payable for residents eligible for the Provincial Home Owner Grant. Co-op members are eligible under the Act for the Home Owner Grant. This method of paying property tax is proposed to avoid the complication and uncertainty of the City registering the lease and applying to the B.C. Assessment Authority for the 30 studios to be placed on the property tax roll. Further, it will avoid the necessity of each member of the Co-op applying to the Province for the Home Owner Grant. In subsequent years, should the minimum tax payable under the Act increase, the rent-in-lieu-of property taxes will increase accordingly. Should the Home Owner Grant be eliminated at some time in the future, the Co-op will pay full property taxes as would other co-op housing projects in the city.

APPENDIX A
Page 4 of 7

6. Completing Shared Amenity and Workshop Areas: In the disclosure statement for the project, the developer undertook to provide $60,000 to the strata corporation to complete the finishing of the shared amenity and workshop areas of the project. The total cost of completing this work is now estimated at $80,000. This is $20,000 more than what the developer was offering to pay. Further, there is a chance that the developer will not come up with his $60,000 contribution due to less than satisfactory unit sales and difficulty in getting additional financing. In order for the Co-op not to be burdened with this additional expense, particularly at the outset when the Co-op’s reserves are low, it is proposed that the City, upon written application from the Co-op, allow the Co-op to increase its PEF loan by a maximum of $25,000. These funds would be used to cover the Co-op’s share of the cost of finishing, furnishing and equipping the shared amenity and workshop areas, as well as any other miscellaneous costs associated with settling into the project and ensuring that it provides a livable and functional housing and working environment for Co-op members. These additional funds, like the original PEF loan, would be fully repaid by the Co-op over the 30-year amortization period of the loan, including interest.

7. Lease Registration: The lease will not be registered in the Land Title Office. Since the Property Endowment Fund (PEF) loan is not a mortgage, no mortgage needs to be registered against the leasehold interest. And, since the Co-op will be paying rent in lieu of property taxes to the City, the
Co-op’s leasehold interest does not need to be placed on the Property Tax Roll. Thus, there is no need for the Co-op’s leasehold interest to be registered on Title.

8. Non-Encumbrance of Financial Interest: The Co-op cannot mortgage or otherwise financially encumber its leasehold interest in the 30 studios.

9. Establishing and Maintaining Reserves: The Co-op will establish a Replacement and Strata Fee Reserve and a Vacancy and Rental Loss Reserve.

Vacancy and Rental Loss Reserve: The purpose of the Vacancy and Rental Loss Reserve is to recover losses due to vacant units and/or delinquent housing charges. Each year, total contributions to the Vacancy and Rental Loss Reserve will be equal to 5% of the net annual operating budget. The net annual operating budget is equal to the total annual operating budget before Reserve contributions are included.

Replacement and Strata Fee Reserve: The Replacement and Strata Fee Reserve has two purposes. The purpose of the Replacement portion of the Reserve is to cover the cost of replacing such items as kitchen appliances, kitchen and bathroom cabinets, as well as plumbing and electrical fixtures. The purpose of the Strata Fee portion of the Reserve is to cover large and unexpected increases in strata fees. The Replacement and Strata Fee Reserve will be set initially at $5,000 per year.

APPENDIX A
Page 5 of 7

Contributions will be made to the Reserves each month on a pro rata basis. Reserves will be held in interest bearing accounts. Interest compounded over time will cover increases in strata fees, appliance costs and market rents due to inflation. Reserves will be held in trust in accordance with
the Co-operative Act of British Columbia. At least every 5 years, the Co-op will review the Reserve contribution formulas and caps in relation to future anticipated requirements.

10. Financial Responsibility: The Co-op is responsible for paying all of its costs. Costs include monthly strata fees to the strata corporation, as well as interest and principle on the PEF loan, and rent in-lieu of property taxes, to the City.

11. Financial Records: The Co-op must keep records of its expenses and revenues. This includes principal and interest payments on the Property Endowment Fund (PEF) loan and rent in lieu of property taxes to the City, as well as pro rata payments to the Co-op Vacancy and Rental Loss Reserve, and the Co-op Replacement and Strata Fee Reserve. An annual audit of the Co-op’s operating expenses and revenues, including the status of its capital reserves will be required.

12. Break-Even Operation: The Co-op must set monthly housing charges so that it operates on a break-even basis, including payments to the Vacancy and Rental Loss Reserve and the Replacement and Strata Fee Reserve. It cannot incur an operating deficit.

13. Setting Housing Charges: In order to ensure that the Co-op operates on a break-even basis, housing charges for each studio are to be 30% of gross (after expenses but before taxes) monthly household income, but not less than $325 per month (B.C. Benefits maximum shelter allowance) and not more than 90% of appraised market rental value initially estimated to be $575.

14. Household Income Mix: At any given time, at least 30% of the studios will be occupied by households whose gross (after expenses but before taxes) monthly household income is less than $24,500 (B.C. Housing’s 1999 Core Need Income Threshold).

15. Avoiding Deficits: Should it become apparent that the Co-op is heading for a deficit position, the following steps may be taken to rectify the situation in the order of preference set out below:

APPENDIX A
Page 6 of 7

16. Subletting: A resident member of the Co-op in good standing may sublet his or her studio for a maximum term of 12 consecutive months to another artist at the market rental rate prevailing at commencement of the sublease term. The temporary artist tenant must satisfy the membership criteria for the Co-op and be approved by the Co-op board. Preference will be given to Downtown Eastside artists.

17. Parking: The 15 parking stalls in the Co-op’s portion of the parking garage are for the exclusive use of co-op members who own vehicles. For the first 5 years only, any unoccupied parking stalls are to be first offered to other strata owners in the building at a rate of $50 per month. After this initial 5-year period has expired, the Co-op may offer any unoccupied parking stalls to whomever it chooses at whatever rate the market will bear. In all cases, the revenue generated by renting of unoccupied stalls shall be part of the gross revenue of the Co-op.

18. Physical Alterations: No physical changes shall be made to the interior of the units without approval of the Co-op board. Further, any proposed changes must meet all City bylaws, regulations and guidelines and, if necessary, the appropriate permits must be issued to the Co-op to carry out the work.

19. Proxy Votes: The City will transfer to the Co-op the City’s strata corporation voting rights for the 30 rental studios. The Co-op board will decide how the 30 proxy votes will be cast depending upon the issue at hand. On some issues, the Co-op board may wish to cast its vote as a single block of 30 votes. On other issues, the Co-op board may wish to split its 30 votes into two or more smaller blocks in order to reflect the diversity of views held by individual board members. The Co-op board cannot delegate its proxy votes to individual Co-op members.

20. City Audit: The Co-op will provide the City each year with a copy of its annual audited financial statements and its annual report submitted to the Registrar of Companies. From time to time, the City may examine the Co-op’s accounts to ensure that it is paying its bills and managing its finances in a responsible manner, including whether Co-op reserves are being maintained at appropriate levels and being invested prudently.

21. Lease Termination: At any time, subject to 180 days written notice, the City reserves the right to transfer or terminate the lease, should the Co-op be deficient or negligent in carrying out its responsibilities and obligations as set out in the terms and conditions of the lease. However, the City may not terminate the lease based on the personal views of City officials or City staff on the nature, quality or impact of art produced individually or collectively by members of the Co-op.

22. Disclaimer: No legal rights or obligations are hereby created and none shall arise hereafter until execution of all necessary legal documents by both parties.

* * * * *

ag000201.htm

APPENDIX A
Page 7 of 7

If you agree with the terms and conditions of the Letter, please have two directors of the Board sign all three copies of the Letter; send two copies to the City, and keep one for the Co-op’s records.

On behalf of the
City of Vancouver: On behalf of the

________________________ ____________________________
Cameron Gray Director

Director of the Housing Centre Witness:_____________________ Date:____________________ Date:________________________

_______________________________ _____________________________
Burke Taylor Director
Director of the Office of Cultural Affairs Witness:______________________

Date:____________________ Date:________________________

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