November 11, 2003
SUBJECT: Sale of the Dorolou Swirsky House – 1133 Hollenbeck Road
REPORT IN BRIEF
Staff is recommending that City Council authorize the City Manager, or his designee, to sell a parcel of City owned property at 1133 Hollenbeck Road, otherwise known as the Dorolou Swirsky House. The property is 8,556 square feet and contains a 1,798 square foot, 3 bedroom, 2 bath, ranch-style house that was built in 1963.
The Swirsky House was donated to the City in March 2000 as part of the Dorolou Swirsky Trust. The Swirsky Trust was setup to benefit disadvantaged youth programs in the City.
In a Report to Council dated June 10, 2003 (RTC 03-201), staff suggested market conditions had improved to the point where the City should market the property after an appraisal was completed. In the RTC, staff estimated the market value of the Swirsky House at $625,000. Council gave their approval to proceed with marketing the property. An appraisal conducted later that month reported an appraised value of $655,000. The property was listed for sale on the local realtor multiple listing service (MLS) on August 11th at a price of $665,000. Despite numerous efforts to market the property, five weeks passed without any significant activity. The first offer, received September 21, 2003, was rejected as being too low. Another month passed without activity and on October 17th, the asking price was dropped $10,000, which generated three offers. These offers ranged from $600,000 to $625,000 (the highest offer includes a commitment to pay for $10,000 of repair work). Staff believes the $625,000 offer represents the highest and best price available in the current market (see Attachment “A” for a list of market comparables).
Other alternatives to selling the property were: 1) renting the property until next year; 2) spending approximately $50,000 (est.) to upgrade the kitchen, bathrooms and windows that would allow for a higher sales price next year.
Staff recommends selling the property as the best alternative. Proceeds of approximately $597,000 from the sale would be used to provide additional funding for the City’s disadvantaged youth programs and to repay an outstanding debt of $68,600 owed to the General Fund.
BACKGROUND
In August of 1993, City Council accepted Dorolou Swirsky’s gift of an ongoing Youth Opportunity Fund specifically addressing sports, recreational, social, cultural, and educational activities for disadvantaged youth living in Sunnyvale in the form of a Trust Estate.
The Dorolou Swirsky estate was donated to the City upon her death in March of 2000. The estate consists of a single family home located at 1133 Hollenbeck Road. At the time of donation an appraisal was performed on the property, and the total value was estimated at $555,000. Following the donation, the City established the Swirsky Youth Opportunity Fund to account for the proceeds. Ms. Swirsky had taken a reverse mortgage on the property in the amount of $110,943, which the City paid using General Fund monies. This amount was recorded as a liability in the Fund pending disposition of the house.
The property was rented out for $2,650 per month until July of this year. Net proceeds realized each year of the lease agreement were approximately $20-25,000.
In June, City Council authorized the City Property Manager to market the property and to solicit offers at least equal to the appraised value of the property ($655,000).
DISCUSSION
Alternatives
Other alternatives to selling the property that were considered were: 1) renting the property until next year or 2) spending approximately $50,000 (est.) to upgrade the kitchen, bathrooms and windows then asking for a higher sales price next year.
Renting the property, although generating additional rental income, would only defer the marketing problem another year. The same issues that made the property difficult to sell this year (busy street, old fixtures, single pane windows, older roof and plumbing, dry rot, termites…) can be expected to hinder marketing efforts again next year.
Due to the age of the house, it is also reasonable to expect maintenance costs to climb while market rents continue to fall. Major repairs to the building’s chimney and wood structures have already been determined. The 40-year-old galvanized steel pipe, original appliances, and aging roof may also require major repairs in the near future. If rented out for another year during this economic downturn, the revenue collected would probably fall to approximately $1800 per month or a net return on investment of 3.5%.
Due to the City’s limited financial resources, it is unlikely that $50,000 could be reallocated for other areas to improve the house. It is also not a certainty that the City would be able to fully recoup these costs with a higher sales price next year. While the real estate market remains strong, it is unlikely that buyers will see the record low interest rates of last Summer reoccur; especially with the continuing improvement in the national and local economies. It is difficult to predict what the appreciation rate on real estate will be over the next year, although the median price for single family homes has remained in the $600,000 range for the past three years.
Staff recommends selling the property as the best alternative. If accepted, the sale of 1133 Hollenbeck would provide approximately $597,000 in net proceeds to the Dorolou Swirsky Youth Opportunity Fund (see Attachment A for a comparison of offers). As mentioned above, part of the net proceeds would be used to repay an outstanding debt to the City’s General Fund of approximately $68,600. Remaining funds would be used to provide additional funding for programs that would directly benefit the disadvantaged youth of Sunnyvale. (See “Use of Proceeds” Section below)
Market Conditions
Some discussion is merited on accepting a final sales price of $625,000 in light of the appraised valuation of $655,000 in June 2003. Despite a continuing high volume of sales in Sunnyvale, rising interest rates have been forcing prices slightly downward. To complicate matters, the building’s outdated fixtures and numerous repairs required drove many potential buyers away.
This market evaluation was completed in late June 2003, at a time when interest rates had reached record lows. The market comparables used in determining value reflected the rising of sale prices due to the lowering of interest rates, which allows buyers to borrow more for the same monthly payment.
More recent market information from June to early October, contained in Attachment A indicates that the market for properties on busy streets (Hollenbeck, Mary, Remington…) has been in the neighborhood of $620,000 for similar 3 bedroom, 2 bath properties. Staff believes the timing of the appraisal report during the highpoint of the market tended to overstate the value of the property.
The Market Determines Value
Based on the $655,000 appraised value, the City continued to actively market the property throughout the months of August and September, without success. It was only when the MLS price was dropped from $665,000 to $655,000 on October 17th that offers began to flow. During the following week, 3 offers were received; one for $600,000, another for $608,000 and the offer that is being brought to Council at $625,000 (plus $10,000 in repair work by buyer).
The true indicators of market value are the offers received. In this case, four offers were received, ranging from $600,000 to $625,000. These offers, coupled with actual sales information from the June to October time period, support a lower market value than indicated in the appraisal report.
Staff believes the $625,000 offer for the property at 1133 Hollenbeck represents the highest and best offer in the current market. The City Property Manager will receive no commission for this sale, saving the City $11,250.
The offer of $625,000 includes the buyer purchasing the property “as is”, taking on the obligation of the seller to repair termite, dry rot, and chimney damages of over $10,000. This is advantageous to both seller and buyer. To the buyer, who receives a lower assessed value and therefore property tax on the property; and to the seller, who no longer has the obligation to repair damages to the property.
Use of Proceeds
City Council also requested that staff provide its recommendation as to how to use the proceeds from the sale of the house. The Dorolou P. Swirsky Youth Opportunity Fund provides a good deal of guidance, requiring that the annual proceeds of the fund be used “to help develop and support City programs aimed at providing positive sports, recreational, social, cultural and educational activities for disadvantaged youth living in Sunnyvale. As the need and interest arise, the Fund could also support other opportunities which promote these same values and goals. For example; use of the Fund for direct grants to organizations serving the targeted young people for purposes described above, including operations, staff development and training, and facilities development.”
Staff is reluctant to use these monies to develop new City services or programs for the following reasons:
1. At the current rate of portfolio interest, the amount of money generated by the net proceeds of sale is not likely to surpass $15,000 per year.
2. The corpus of the fund will not increase over time, and as a result, the interest it generates will not keep pace with inflation. Over time, this Fund will lose its purchasing power.
3. Interest rates will rise and fall, influencing the revenue stream created by the Fund year to year.
4. Once established, new programs take on a life of their own, and the public does not always understand or appreciate the need for future cuts. Staff does not want to create new programs, particularly during times of fiscal constraint, which do not have a guaranteed funding source able to keep pace with inflation.
Staff recommends these monies be applied to:
Supplement the City’s Fee Waiver Program:
Currently, the City provides a waiver of fees for recreational programs and activities under specific circumstances to individuals and families qualified by Sunnyvale Community Services as economically disadvantaged. Staff recommends that one-third of the interest generated by the Fund each year be granted to Sunnyvale Community Services for the provision of arts and crafts materials, sports equipment, and/or educational materials to disadvantaged youth living in Sunnyvale. This would supplement the City’s fee waiver program and its existing relationship with Sunnyvale Community Services, whereby SCS qualifies families and individuals for free use of City recreational programs.
Rather than provide supervised recreational experiences, this program would provide youth the supplies, materials and equipment with which to experience Summer activities on their own (for example, actually give them a basketball or paint set which they could then use on their own at any time). Staff recommends that the general framework of such an arrangement be included in a comprehensive “special agreement” between the City and Sunnyvale Community Services.
Provide Direct Grants to Outside Organizations Serving Disadvantaged Sunnyvale Youth:
Staff also recommends that the Parks and Recreation Commission and Arts Commission be authorized to grant in joint session the remaining two-thirds of the interest generated by the corpus of the Fund each year to outside groups serving the recreational, cultural, social and/or educational needs of disadvantaged youth living in Sunnyvale. Staff recommends these two Commissions work with staff to develop program policies and guidelines for future Council approval.
FISCAL IMPACT
Sale of 1133 Hollenbeck is expected to generate approximately $597,000 in net proceeds to be deposited in the Dorolou Swirsky Youth Opportunities Fund for use in funding programs for disadvantaged youth in the City of Sunnyvale. Approximately $68,600 of the net proceeds will be used to retire an existing debt owed to the City’s General Fund to account for additional funds borrowed through a reverse mortgage on the property.
PUBLIC CONTACT
Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page, publication of the Council agenda in the San Jose Mercury News, and the availability of the report in the Library and the City Clerk’s Office.
ALTERNATIVES
1. Authorizing the City Manager, or his designee, to sign all documents necessary to complete the sale of 1133 Hollenbeck Road. Net proceeds of approximately $597,000 from the sale would be used to provide Summer recreational equipment and supplies to disadvantaged youth through an agreement with Sunnyvale Community Services, to fund grants for agencies supporting disadvantaged youth to be administered through the joint Arts Commission and Parks and Recreation Commission, and to repay an outstanding debt of $68,600 owed to the General Fund.
2. Instruct staff not to sell the property at this time. Rent out the property until the Spring of 2004 at which time the property will be reappraised and remarketed.
3. Instruct staff to improve the property prior to remarketing next Spring. Improvements would include remodeling of the kitchen and bathroom areas as well as repairs to the wood flooring and chimney. Approve a budget modification of $50,000 for these improvements.
RECOMMENDATION
Staff recommends Alternative #1.
Prepared by:
Michael A. Chan
Senior Administrator/Property Manager
Prepared by:
Robert Walker
Director of Parks and Recreation
Reviewed by:
Marvin A. Rose
Director of Public Works
Reviewed by:
Mary J. Bradley
Director of Finance
Approved by:
Robert S. LaSala
City Manager
Attachments
A. List of Market Comparables
B. Net Proceeds - Comparison of offers
C. RTC dated June 10, 2003