Blue Heron Asset Management, LLC 111 Cloister Court Suite 114 Chapel Hill, NC 27514 (919) 489-8656

AFFORDABLE HOUSING PROGRAM Timber Hollow 101 Timber Hollow Drive Chapel Hill, NC Chapel Hill Township, PIN 9789-37-6215

A community need for greater affordable housing alternatives in Chapel Hill has been identified in the 2020 Plan. Maintaining the existing stock of moderately priced housing has also been stated as a goal. The purpose of this “Affordable Housing Executive Summary” statement is to explain how the applicant’s plans for Timber Hollow support both of these objectives. [A more comprehensive presentation follows as an appendix.]

Preservation of Moderately Priced Housing Timber Hollow is a 25+ year old rental community that has been characterized as “organically affordable,” meaning that, without any form of government or private subsidies, it has long provided rental housing opportunities at rates that are below average rental rates for one and two bedroom apartments in the Chapel Hill area. However, TH can no longer defer significant expenditures for the repairs and renovations to the apartments and the common areas that are necessary to ensure that this development remains an attractive and desirable place to live. The challenge and opportunity facing the applicant is to find a way to preserve Timber Hollow as a moderately priced community serving a diverse range of residents – from graduate students, to members of Chapel Hill’s work force, to other long and short term residents - while engaging in a broad range of needed capital improvements (some of which have already begun with the WISE program whereby all HVAC units were replaced with 13 SEER units, digital controls, and upgraded

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lines tested to save no less than 25% on tenant utility bills). Replacement of polybutylene piping, installing building envelope insulation, tying in downspouts to prevent soil erosion, keeping water away from buildings and compromising footings, and siding replacement are costly and necessary repairs that will need to be undertaken. Original hot water heaters are breaking and need to be replaced. Cosmetic interior upgrades are also required for multi-family complexes of this vintage and are being considered, along with Energy Star appliances. We propose to meet this challenge by adding to this community 109 small scale and compact units (consisting of studios,one andtwo bedroom apartments) while making required renovations to our existing 198 units and associated common areas. In essence, the more new units that we can create, the easier it will be for the applicant to absorb the costs of renovating the existing development (estimated capital expenditures of $10,000 – $15,000 per unit) by spreading those costs across a larger number of units. For this reason we have requested that the property be rezoned from R-4 to R-5, which will allow an increase in density from 198 to 293 units. And that is why we are seeking to take advantage of the density bonus authorized in the affordable housing provisions of the Town’s Land Use Management Ordinance (Section 3.10.2).1 Under those provisions, we agree that a total of 14 Timber Hollow units, a number derived from and equal to 15% of the 95 units allowed by a rezoning to R-5, will meet the affordability criteria to be finalized as part of an Affordable Performance Agreement prior to the issuance of a Zoning Compliance Permit for the residential buildings. Total number of units will increase to 307 with the inclusion of the 14 bonus units.

The increased density will allow Timber Hollow to continue to provide moderately priced rental housing2 in the following ways3: 1. Students: 71% of our current population consists of this demographic component; only 3% are undergraduates. We will not raise the rental rate on current residents

1

We are pleased to note that, after consulting with the Town Attorney, the planning staff has agreed that it can support an application that includes the density/floor area bonuses set forth in LUMO’s inclusionary zoning provisions, subject to approval of an affordable housing performance agreement. 2 It should also be noted that adding density along a major transportation corridor and at a mass transit stop will both directly help our less affluent population through lower housing expenses but also lessen the need to rely on the automobile and its associated expenses. 3 Resident information included in this section, and in subsequent sections, was compiled through a lease audit performed in the first quarter of 2013

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enrolled in a graduate or undergraduate program by more than 3% per annum while they remain enrolled in their studies. 2. Long Term Residents: For those existing Timber Hollow residents who have been tenants at our community for five years or longer, we will not raise their rents by more than 3-5% per annum, regardless of the level of improvements to their units. 3. Other Residents in Renovated Units: We anticipate that, even if a resident does not qualify for a special rental rate under paragraphs 1 or 2 above, most of our inventory that is being renovated will be affordable to households earning at or below 80% of Area Median Income.

Fourteen Affordable Housing Units Section 3.10 of the Land Use Management Ordinance (Inclusionary Zoning) does not require a rental housing development to offer fifteen percent of the dwelling units at rental rates that meet the ordinance’s affordability criteria, but it provides that a developer of a multi-family project may voluntarily do so pursuant to an approved affordable housing performance agreement. And as indicated above, pursuant to such an agreement, the density bonus provisions of Section 3.10 become applicable.

Consistent with this authorization, we are proposing that fourteen Timber Hollow apartments will meet the following criteria:

1. Seven of the units at Timber Hollow shall be made available at a rental rate that is affordable to a household with an annual income that is at or below 65% of area median income, based on household size for the Durham-Chapel Hill MSA as determined by HUD. 2. Seven of the units at Timber Hollow shall be made available at a rental rate that is affordable to a household with an annual income that is at or below 80% of area median income, based on household size for the Durham-Chapel Hill MSA as determined by HUD.

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3. The units shall be made available per #1 and #2 above for a period no less than 30 years after a certificate of occupancy is issued for the last of the newly constructed apartments. However, if despite all reasonable efforts the town or applicant cannot reach an APA accord within 60 days of the issuance of the SUP, or if after three years the town or applicant finds this voluntarily offered program is not working despite all reasonable efforts of the parties, then either party may terminate this agreement upon payment to the town by applicant of $170,000. (This amount represents twice the average amount per affordable rental unit paid for the last four rental projects approved by the town: Shortbread, 123 W. Franklin, Charterwood, and Bicycle Apartments (See attached exhibit).) 4. The units described in paragraphs 1 and 2 above will be designated, but can be rotated periodically so long as any given unit is not rotated more than once per year. 5. Subject to the provisions of paragraphs 6 and 7 below, the applicant shall establish arrangements to ensure that (i) the units described in paragraph 1 above are offered only to households with an annual income that is at or below 65% of area median income, and (ii) the units described in paragraph 2 above are offered only to households with an annual income that is at or below 80% of area median income, based on household size for the Durham-Chapel Hill MSA as determined by HUD. The entity responsible for leasing the units within Timber Hollow shall maintain an updated waiting list of income qualified households. 6. When a vacancy occurs in a unit that must be rented as an affordable unit in order for the development to remain in compliance with the provisions of paragraphs 1-5, management shall offer to lease it only to an income qualified household if the opportunity to do so is reasonably available. The property manager may conclude that no such opportunity is reasonably available if, despite good faith efforts, (including checking the above referenced waiting list and contacting local agencies engaged in providing or promoting affordable housing), such entity is unable to enter into a lease with an income qualified household within thirty days after the unit has become vacant. 7. An affordable unit vacant for more than 30 days will retain its rent level (that which is affordable at either 65% or 80% of AMI) but may be made available to renters that meet 81%-100% of the area median income. At the end of a lease to a tenant that is above the designated level of AMI for an affordable unit, the tenant will be permitted to stay in the unit but a new affordable unit will be provided at the same designated level. At no time shall a designated affordable unit be rented to a household earning more than 100% of the area median income.

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8. Affordable units shall not be rented to full-time students.

9. The affordable units will be disbursed among the existing 198 units.

10. The owner of this development, or a third party property management company with a demonstrated ability to verify income data, shall submit quarterly reports to the Town that explain how the development has complied with the commitments set forth herein. Said report shall include, at a minimum, the following: a. Certifications by all occupants of affordable units over the age of 18 attesting to their income on a form approved by the Town of Chapel Hill. b. The occupancy levels for the affordable units sorted by AMI levels of 65%, 80% or 81-100%. c. The rent charged for each affordable unit and the method for determining rent.

Timber Hollow Affordable Housing Program (APPENDIX) Overview Timber Hollow is a 198 unit complex located at the northeast corner of MLK and Piney Mountain Road; it is located at a bus stop and across from future Carolina North’s proposed main entry. Built in 1987, the Timber Hill community provides one of the more affordable housing options in a town that is rapidly becoming less and less able to provide moderately priced options for graduate students and members of the town’s work force and professional community. The initial buildings at Carolina North will comprise 800,000 of their approved 3 million square feet and are slated to consolidate ancillary University office facilities, institutes, and serve as the future home of the law school.

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We are well positioned to be a place where graduate students, employees for main campus, UNC Hospital, Carolina North, and young professionals can conveniently reside. Renovations for the existing 198 units do not require Council approval nor are they part of this rezoning nor SUP modification. Yet, they tell an integral and essential part of the case for additional density and its capacity to mitigate rental increases as aging complexes require capital expenditures while continuing to serve a desired function within the fabric of the community. It is appropriate, therefore, that concern has been expressed about whether the existing units will remain affordable, even post-renovations, while the Council has also inquired about projected rental rates for the proposed units. Additionally, the question has been raised about whether or not long term residents will be displaced as a result of contemplated improvements. We’re pleased to be able to provide guidance for all of these queries.

First, let us state that no long term residents (defined as residents who have lived at the property for 5 years or more) will have to leave the Timber Hollow community as a result of any of our new construction nor contemplated improvements on the existing units. Rents on these residents will be limited to no more than 3-5% per annum regardless of the level of capital expended on their respective apartments. The capacity to accomplish this is attributable in large measure due to the requested rezoning, the results of which are enmeshed with the ability to mitigate rent increases and accomplish seemingly competing objectives. Second, it is a logical imperative that density helps mitigate the upward pressure on rents by spreading out the cost of physical plant improvements over a greater number of units. For example, the costs of all deferred maintenance expenses on the existing facilities and needed capital improvements would be spread across 307 units as opposed to being solely recaptured across the existing 198. The math is compelling: an increase in density of approximately 50% would reduce the required increase in rents by 33%. Take, for example, a $10,000 per unit expenditure to cover deferred maintenance items. If spread over 198 units, the required recoupment of such capital at a 5% interest rate over a ten year period would be $82 per unit. If this cost were spread across 307, that cost would be reduced to approximately $53 per unit. We are projecting that as much as $15,000 per unit will need to be spent to address required maintenance and deficiencies and desired

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improvements to this 25+ year old community. Increased density will enable us to absorb these costs across a broader base of apartments. Third, during the 2012-2013 leasing cycle, over 120 of the 198 units were not renewed. This is an enormous turnover and well in excess of industry standards of approximately 40%. Part of this turnover is due to the fact that the current living experience at Timber Hollow is not compelling due to functional obsolescence and improvements that need to be made to keep the community competitive and desirable.

Current Resident Average Income and Demographic Make-Up1,2 Tenant Group (Exclusive of tenants who have guarantors)

Graduate Students

Service Sector

UNC Workers

Other

All Timber Hollow Residents

Average Incomes

$42,173

$46,377

$44,125

$87,407

$46,959

# of Tenants

82

22

14

11

129

% of AMI

89%

98%

93%

184%

99%

(1) Resident data represents tenants for whom no guarantor was necessary. (2) Resident data was compiled during a lease audit performed in the 1st quarter of 2013

While heavily weighted toward students, Timber Hollow currently is home to 47 residents who are either employed in the service sector, work for UNC, are engaged in higher income professional positions, or are retired. Each of these sub-classes of residents average above 80% of Area Median Income with average earnings of 99% of HUD published AMI for the Chapel Hill-Durham MSA for all groups.3 We anticipate that all of these classes of residents will be represented in the units to be constructed with a likely shift toward more work force housing residents and professionals.

3

The applicant has reviewed leasing files to ascertain Timber Hollow resident data. All information provided reflects applicant’s reasonable efforts to determine and provide accurate demographic and income information. We have excluded income levels for those units for which a guarantor was required. For those units with more than one occupant, tenant income is reflected per apartment. The AMI level depicted in the appendices assumes one occupant per unit. Our definition of Timber Hollow rent follows the HUD monthly housing allowance calculation, which includes rent plus utilities (water and electricity). Unless otherwise specified, all rent numbers are expressed in 2013 dollars in order to make an “apples to apples” comparison.

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Sixty-eight percent of Timber Hollow’s residents are graduate students, and 3% are undergraduates. Fifty-nine students rely on a guarantor to qualify for a lease at Timber Hollow. (Compared to other comparable apartment communities of similar vintage but in inferior locations, the percentage of co-signing guarantors at Timber Hollow appears to be less than the community average). Sources of income include stipends, grants, part-time employment, and loans. Graduate students will continue to be a target demographic at Timber Hollow. We remain mindful of the need to keep these units moderately priced while making the necessary improvements to keep the property from falling into further disrepair. Lastly, we are keenly aware of the outmigration of the work force. While we hope to continue to attract graduate students, we are hoping that our eventual blend will be less weighted toward them but, instead, more heavily cater to work force residents, young workers and retirees to mitigate the transient nature of the community, and lessen our turnover expense and render Timber Hollow more economically stable. The renovations that we are considering and the sizing, design and finishes of the new units, will all be undertaken with the aim of creating a blended community that functions as a cohesive whole. Existing units only have eight foot ceilings and the ‘bones’ of the building and the size of the units prohibit one from ever being able to obtain Class A rental rates. Yet, while renovations may attract some additional work force residents and professionals, it will always be a demographic mix comprised predominantly of graduate students. (We will discuss these matters more fully below.) Our focus on deferred maintenance has already begun with nearly $600,000 of renovations. With the help of the Chapel Hill WISE program we recently began the process of replacing all HVAC units at Timber Hollow. Many of the old HVAC units were original to the property (from 1987), and were not only inefficient and costly for tenants, but they were also unsightly and bad for the environment. According to assessments done by energy consultants, these upgrades alone should increase the efficiency, and thus lower the energy bill of residents, by no less than 25%. One reason that this much of an energy savings is possible is that the current units use air blown over “heat strips” in order to heat the apartments. During the process of upgrading the HVAC units several people referred to this method of heating as “heating an apartment with a hair dryer”. This uses far more energy than the heat pump that the new HVAC units are equipped with. The heat pump pulls heat out of the air even when it’s cold outside and circulates that heat into the apartment. When the heat pump is not enough to maintain the temperature specified on the

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thermostat the units will use heat strips, but even these strips are more efficient than the ones installed in 1987. These upgrades have come at no cost to residents. This overhaul is only the beginning of our renovation package for Timber Hollow, much of which will be aimed at essential deferred maintenance items aimed at rendering the buildings more energy efficient, water tight, and lessening erosion and run off. The WISE program clearly demonstrates our commitment to increasing not only the aesthetic appeal and functionality, but also the affordability of the property for our tenants.

Demographics Currently 71% of Timber Hollow’s total apartment units are leased to students, with all but 3% of the total being at the graduate level. The other 28% of apartments (with 1% being vacant) are leased to a mix of professionals, area employees and retirees. This final group includes service industry workers who make up 13% of tenants, UNC workers who make up 6%, and a mixture of professionals in other industries and retirees who together make up the final 9% of tenants.

Timber Hollow Tenant Demographics Graduate Student

Undergraduate Student

Service Industry

UNC Worker

Other (Professionals and Retirees)

Vacant

1% 6%

9%

13% 3%

68%

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Comparable Properties In an effort to demonstrate our affordability as it relates to other properties in Chapel Hill we have gathered data on comparable properties in the immediate area, and in Chapel Hill as a whole, and compared it to 80%, 100% and 120% of AMI (area median income). In the following graphs Timber Hollow rents are expressed in 2013 dollars. This was done in order for us to make an “apples to apples” comparison between our projected future rents and current rents at other apartment complexes. All data included herein was current as of the 3rd quarter of 2013.

Timber Hollow Comparables (Current Timber Hollow Average 1 BR Price) $1,600 Cosgrove Hill, $1,373

$1,400

Meadowmont, $1,343

$1,200 $1,000 $800 $600 $400

Alta Springs, $1,047

Chapel Hill North, $1,077

Pointe at Chapel Hill, $891

Sunstone, $814

Chapel Ridge, $834

Timber Hollow, $749 Sagebrook, $723

Shadowood, $678

80% AMI 100% AMI

$200 120% AMI $0

1 BR Price

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Timber Hollow Comparables (Post Renovations Average 1 BR Price-expressed in 2013 Dollars) $1,600 Cosgrove Hill, $1,373 $1,400

Meadowmont, $1,343

$1,200

Axis Title

Alta Springs, $1,047 Chapel Hill North, $1,077 $1,000

Pointe at Chapel Hill, $891

Sunstone, $814

$800 Timber Hollow, $824 $600 $400

Sagebrook, $723

Chapel Ridge, $834 Shadowood, $678

80% AMI 100% AMI

$200 $0

120% AMI 1 BR Price

The graphs above show that Timber Hollow is more affordable on a “per bedroom” basis than most any other complex in the immediate area. This is not only true for our existing units but is anticipated for our renovated units as well. Our affordability has been achievable due to small apartment sizes, which is something that we will continue to pursue in our new 109. Smaller apartments mean lower construction costs, which in turn mean lower rents for tenants. If built correctly a small apartment can be both efficient and functional, while providing the resident with a lower monthly rental payment. Additionally, we will be building to NAHB Bronze Standards which will result in lower utility bills. Affordability The high percentage of graduate students, the age, size, and functional obsolescence of the existing units, all contribute to the community being described as one that is ‘organically’ affordable. It is our intention to maintain such a commitment and we see it

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as an essential contributing factor to full occupancy as the project continues to age. It is our understanding that Chapel Hill is utilizing a range of 80-120% of area median income (AMI) as a targeted economic range for workforce housing (see exhibits 5-13). At our Concept Plan Review, Councilman Ward inquired about how our pre- and post-renovation rents would relate to an 80% of AMI threshold. In order to make such a calculation, we apply the HUD housing allocation that places a ceiling of 30% of AMI toward rent and utilities (the housing allowance). The calculation is made by taking 30% of someone’s yearly salary (and other sources of income) and dividing it by 12 to find out what the person can apply each month toward their housing allowance. Currently at Timber Hollow, one bedroom units rent for an average of $749, with some as low as $699. For Chapel Hill in 2013, 80% of AMI means that a person should have the ability to pay $950 per month for housing. This is based on an area median income of $47,500 for one person households. (The income level rises for 2, 3 and 4 person households.)

Monthly Housing Allowance $1,353

Household Size

4

$1,100 $1,220

3

$991 80% AMI 65% AMI

$1,083

2

$880 $950

1

$772 $-

$500

$1,000

$1,500

Source: HUD (values were calculated by taking HUD’s yearly AMI, dividing it by 12 months, and multiplying that by 30%)

We do not yet know the level of renovations that we will undertake at Timber Hollow but we anticipate that they will be substantial and, again, while the approval of

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such is not part of our application it is indisputable that the recoupment of all necessary renovation expenditures will be positively impacted by higher density. Renovations could be limited to the WISE program only, or could include further energy saving measures such as building envelope insulation, replacing existing appliances with those that are Energy Star rated, replacing/re-facing cabinets, countertops, lighting, kitchen/bathroom fixtures, hot water heaters and floor covering. None of these alterations require any municipal or board approvals. Yet, even if we were to undertake our most costly renovation package, as leases turned over (recall that 60% of our leases were not renewed last academic leasing cycle), we envision that three years from now, rents could be held to increases of no more than $125-$150 per month per unit and still be affordable for someone at 80% of AMI due in large measure to the absorbing of such capital costs across a larger base of apartments. Essentially, the affordability of Timber Hollow is directly proportional to the number of additional units approved. In the absence of a rezoning from R-4 to R-5, necessary expenditures would result in rental increases 50% higher than our projected rents. (It should also be noted that our replacement of HVAC units, completed in May, will lower the electricity bills for residents by as much as 35%. This alone will offset our rent increases by $20 or more per month.) Long Term Tenants Not only does Timber Hollow already organically fall under the label of “affordable housing”, but it is our intention to maintain our price competitive status. We have proposed that even after we renovate the property , we will not raise rates on those members of the Timber Hollow community that have been living there for more than five years by more than 3-5% per annum. We realize the need to support these long term tenants as they have supported our community over the years, and we will work with them to ensure that they can remain at Timber Hollow. To summarize, increased density is integral to maintaining the affordability of a thirty year old community facing essential capital repairs. Density along mass transit service further increases the overall affordability of Timber Hollow by curtailing vehicular travel and the daily need for automobile usage. The renovation of existing product is far less than new construction. The addition of new units on land previously paid for with infrastructure already in place will always be less expensive than new apartments on greenfield sites.

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Exhibit 1

Exhibit 2

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Exhibit 3

Timber Hollow Tenant Demographics Graduate Student

Undergraduate Student

Service Industry

UNC Worker

Other (Professionals and Retirees) 7%

9%

12% 3%

Exhibit 4

69%

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Income Comparison 2016 Current Timber Hollow Resident

2015

Firefighter Teacher

2014

Policeman 2013 $-

$10,000 $20,000 $30,000 $40,000 $50,000 $60,000

Exhibit 5

Comparison of TH Resident Monthly Income vs. 80% of HUD AMI Housing Allowance 2016

2015

80% of HUD AMI Housing Allowance TH Resident Monthly Housing Allowance

2014

2013 $-

$200

$400

$600

$800

$1,000 $1,200 $1,400

Affordable Housing Program Timber Hollow Apartments Page 17 of 20 Exhibit 6

Current Timber Hollow Rents vs. Monthly Housing Allowance Current Timber Hollow Resident Timber Hollow Average 1 BR Rent Plus Utilities

Firefighter

Monthly Housing Allowance

Teacher Policeman $-

$200 $400 $600 $800 $1,000$1,200

Exhibit 7

Post-Renovation Timber Hollow Rents vs. Monthly Housing Allowance Current Timber Hollow Resident Timber Hollow Average 1 BR Rent Plus Utilities

Firefighter

Monthly Housing Allowance

Teacher

Policeman $-

$200 $400 $600 $800 $1,000$1,200

Affordable Housing Program Timber Hollow Apartments Page 18 of 20 Exhibit 8 4

Timber Hollow Student Tenant Housing Allowance vs. Timber Hollow Rents

TH 1 BR Unit Rent Plus Utilities 2014 Timber Hollow Student Tenant Monthly Housing Allowance 2013 $-

$200

$400

$600

$800

$1,000

$1,200

Exhibit 9 5

Timber Hollow Service Sector Tenant Housing Allowance vs. Timber Hollow Rents

TH 1 BR Unit Rent Plus Utilities 2014 Timber Hollow Service Sector Tenant Monthly Housing Allowance

2013 $-

$200

$400

$600

$800

$1,000

$1,200

4

2013 represents current rent plus utilities at TH; 2014 represents renovated unit prices plus utilities; Incomes are increased by 3% per year 5

2013 represents current rent plus utilities at TH; 2014 presents renovated unit prices plus utilities; Incomes are increased by 3% per year

Affordable Housing Program Timber Hollow Apartments Page 19 of 20 Exhibit 10 6

Timber Hollow UNC Worker Tenant Housing Allowance vs. Timber Hollow Rents

TH 1 BR Unit Rent Plus Utilities 2014 Timber Hollow UNC Worker Tenant Monthly Housing Allowance

2013 $-

$200

$400

$600

$800

$1,000

$1,200

Exhibit 11 7

Timber Hollow "Other" (Professionals and Retirees)Tenant Housing Allowance vs. Timber Hollow Rents TH 1 BR Unit Rent Plus Utilities 2014 Timber Hollow UNC Worker Tenant Monthly Housing Allowance

2013 $-

6

$500

$1,000

$1,500

$2,000

$2,500

2013 represents current rent plus utilities at TH; 2014 presents renovated unit prices plus utilities; Incomes are increased by 3% per year 7 2013 represents current rent plus utilities at TH; 2014 presents renovated unit prices plus utilities; Incomes are increased by 3% per year

Affordable Housing Program Timber Hollow Apartments Page 20 of 20 Exhibit 12 8

Timber Hollow Rents vs. 80% AMI Monthly Housing Allowance

TH 1 BR Unit Rent Plus Utilities 2014 80% AMI Monthly Housing Allowance 2013

$750

8

$800

$850

$900

$950

$1,000

2013 represents current rent plus utilities at TH; 2014 represents renovated unit prices plus utilities; Incomes are increased by 3% per year