Palo Alto Senior Housing Project Inc., the nonprofit owner of low-income senior residences Adlai E. Stevenson House on Charleston Road, will partner with Lytton Gardens and a for-profit company for an undisclosed number of years to pay for its more than $36 million renovation project, according to the City of Palo Alto.
On Monday, the Palo Alto City Council will consider whether the arrangement would violate Stevenson House's Planned Community (PC) zoning designation. The city's 1965 PC zoning ordinance for the property limits the permitted use to "a nonprofit senior citizens housing development." The council will vote on the item, which is on its March 9 consent calendar.
A council staff report recommends approval, finding that there are adequate safeguards to keep the housing for low-income seniors. The City of Palo Alto neither owns nor operates Stevenson House.
Cara Silver, assistant city attorney, said in an email that the newly formed entity PASHPI Stevenson House LP would give the 99.9 percent ownership to Enterprise, a tax-credit syndicator that will bring in an undisclosed limited partner investor. The large percentage of ownership allows the for-profit investor to receive a proportionate amount of the tax credits.
Syndicators typically bring in investors or companies that need tax reductions. The for-profit investor "buys" federal Low Income Housing Tax Credit from the partnership, and the money is used by the nonprofit toward the renovations.
Nonprofit organizations alone cannot receive tax credits, which are designed to encourage for-profit companies to invest in low-income housing, she added.
"Because Low Income Housing Tax Credit is a tax program, the IRS requires that the ownership entity include a tax-paying member that can use the tax credit against its taxable income, so nonprofits have to form limited partnerships," Silver said.
Stevenson House would receive approximately $11.5 million in tax-credit equity funds, which do not have to be repaid, Silver said. Any funds Palo Alto Senior Housing Project receives from the development will be used to provide services to residents, such as meals and social services, she added.
While the for-profit partner will own the majority of Stevenson House, the nonprofit partner, in this case an affiliate of Palo Alto Senior Housing Project Inc. called PASHPI Stevenson House LLC, owns 0.01 percent. The for-profit limited partner cannot participate in active management of the property, so the LLC is the general partner, Silver said.
Lytton Gardens, a downtown nonprofit organization that has independent-living, assisted-living and skilled-nursing services, is also a member of the new LLC with Stevenson House, Silver said.
She did not immediately know the role Lytton would play in the partnership. Lytton Gardens Controller John Casey did not return requests for comment on its role.
According to the city staff report, PASHPI is also entering into a $6 million ground lease with the for-profit partner so that it can continue offering housing and services to the seniors. Terms of the ground lease have not been made public by the board of directors. But the partnership would dissolve at the end of the ground lease, according to the city staff report.
Stevenson House board President Patrick O'Regan has not returned requests for clarification on the partnership or for comment.
The board is taking considerable public funding for the renovations. The City Council approved a $1 million loan in November 2012, funds that stem from a development agreement with Stanford University Medical Center. The project will also receive a $4 million loan from Santa Clara County, according to its U.S. Housing and Urban Development (HUD) application.
Silver said that because the new ownership entity is a limited partnership, which is a separate legal entity from the parent organization, state law requires that the property manager must be a licensed real estate broker. PASHPI has contracted with for-profit John Stewart Company to become the official property manager of Stevenson House through a property management agreement, Silver said.
John Stewart took over on Feb. 19. The shift resulted in major staffing changes, including the dismissal of longtime executive director Thomas Pamilla. Board members and John Stewart Company representatives did not return requests for comment on the staffing changes.
City officials said that forming a limited partnership with a for-profit entity is not unusual.
"Any affordable-housing project in Palo Alto financed with tax credits will use this structure. The city's loan agreements allow for an entity structured as described ... to own the property," city staff noted in its recommendation.
Palo Alto Housing Corporation, another low-income-housing nonprofit organization, has also sought tax credits from time to time, said Candice Gonzalez, Housing Corporation executive director.
Partnerships between nonprofits and for-profit entities typically last 12 to 15 years, she said. When the partnership dissolves after the term of the annual tax credits ends, all assets and improvements revert back to the nonprofit.
The planned renovations include seismic upgrades, a new roof, improved accessibility, reconfigured common areas and water re-piping, according to a city staff report.