HomeMy WebLinkAboutStaff Report 282-06City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL 4
FROM:CITY MANAGER DEPARTMENT: PLANNING AND
COMMUNITY ENVIRONMENT
DATE:
SUBJECT:
JULY 17, 2006 CMR: 282:06
APPROVAL OF DEFERRAL OF REPAYMENT OF CITY LOANS
FOR ARASTRADERO PARK APARTMENTS
RECOMMENDATION
Staff recommends that the City Council defer repayment of the Arastradero Park Apartments
Corporation (APAC) existing debt to the City; modify the repayment terms to reflect APAC’s
new-first mortgage loans and expected repayment date in 2041 and authorize the City Manager
to approve the subordination agreement for refinancing a loan not to exceed $8,000,000.
BACKGROUND
Arastradero Park Apartments is a Section 236 apartment complex consisting of 66 apartments
located at 574 Arastradero Road in Palo Alto. The property was acquired in 1995 by Arastradero
Park Apartments Corporation (APAC), a single-purpose entity created by the Palo Alto Housing
Corporation. APAC acquired the property through a HUD supplemental mortgage loan in
exchange for preserving affordable housing at the property. The City of Palo Alto assisted APAC
in its purchase of the property by making an acquisition loan of $305,000 and a subsequent loan
of $286,380 for repairs not included in HUD’s original scope of work, with both City loans being
subject and subordinate to the HUD-insured loans.
DISCUSSION
APAC has requested that the City defer the repayment of the two City loans to allow refinancing
a new HUD mortgage to accomplish major renovation of the property and to take advantage of
lower interest rates (Attachment A). The refinancing transaction is expected to raise about
$8,000,000 for repairs and improvements and will also result in a reduction of the property’s
annual debt service costs. APAC is still waiting for a final commitment on the loan from HUD.
Because of that the exact amount of the loan has yet to be determined since the interest rate wil!
not be locked until the HUD commitment. The transaction is fully consistent with the property’s
Use A~eement required by HUD in 1995, which mandates use of Arastradero Park Apartments
as an affordable housing project for its remaining economic life. A refinancing commitment
under HUD’s Section 223(f) program for a new 35-year loan (through year 2041) is pending at
HUD, and this and other required HUD approvals are expected to be obtained by August 1,
2006.
CMR: 282:06 Page 1 of 2
Under the existing City loan terms, payments are to be made on a surplus cash basis upon
maturity of the Section 24! (f) loan which occurs on May 1, 2035. Upon refinancing the property,
the City has the option to require prepayment of its debt but such prepayment is not mandatory.
If the City were to require prepayment, then APAC would not be able to complete any
significant renovations to the property (a reason for the refinancing) since 85% of the net
transaction proceeds would have to be paid to the City instead of being used for property
renovations.
Staff is supportive of deferring payment of the two existing City CDBG loans to allow the
refinancing. This would enable APAC to obtain current low interest rates, secure funds for
repairs and renovation of the complex and improve the quality of the City’s affordable housing
stock. Since the City loans would remain in place accruing interest with repayment deferred, the
City’s interest would remain protected.
RESOURCE IMPACT
The deferral of the loan repayment will not have any impact on the City’s General Fund since the
loans were CDBG-funded. Repayment will result in CDBG progam income which would be
used as funding for projects supporting low-income households. The improvement for the
APAC units would qualify for those funds.
ENVIRONMENTAL REVIEW
Deferral of the repayment and modification of the repayment terms is not considered a
project under CEQA.
PREPARED BY: JULtE~APORGN(~""/~
Advance Planning Manager ~
D EPARTM ENTHE AD REVIEW:[ / /’"/’~’~ ~ "~--Y~~,~
/ STEVE ElX~ISLIE
Director of Planning and Community Environment
CITY MANAGER APPROVAL: ~, ~
~sMslsLtan~ City MSanOa?~er ~
ATTACHMENTS:
Attachment A: Request for Deferral and Continued Subordination of City Loans
Attachment B: Subordination Agreement
CMR: 282:06 Page 2 of 2
ATTACHMENT A
LO ALTO HOUSING
725 Alma Street ¯ Pa!o Alto, CA 94301_ . (650) 32!-9709 . Fax: (650) 321-4341
June 19, 2006
Frank Benest
City Manager, City of Palo Alto
250 Hamilton Avenue
Palo Alto, CA 94301
RE: Arastradero Park Apartments
Request for Deferral and Continued Subordination of City Loans
Dear Frank:
The Palo Alto Housing Corporation (PAHC) is processing a transaction to refinance the federally.
insured HUD 236 and 241(f) loans on Arastradero Park Apartments owned by Arastradero Park
Apartments Corporation, an affiliate of PAHC. When we acquired the property in 1995, the City
assisted the acquisition with Community Development Block Grant funds amounting to a
combined amount of about $590,000. Those loans are subordinated to the HErD loans but require
full payment upon payment of the HUD loans. A refinancing will result in pay off of the HUD
loans and thus technically trigger payment of the City loans, at the City’s discretion.
We are requesting that the City defer the payment of the City loans to accommodate the new
HUD mortgage that will be in place for thirty-five years. The City loans are payable on a surplus
cash basis and were never expected to be amortized on a scheduled basis.
The purposes of the refinance are to take advantage of lower interest rates in effect today and to
accomplish major renovation of the property, to accommodate future years. This is the first
opportunity to refinance because of a ten-year lockout period on prepayment of the HUD loans.
Financial projections show that full payment of the City loans would leave very little for
renovation. PAHC takes pride in the properties it owns and manages for the benefit of our lower-
income residents and because of our long-
standing work in the community.
The Planning and Communi~ Development Department staff has indicated support for this
proposal. We request that the matter be place on a City Council agenda as soon as possible so that
the refinance can be finalized by August !, 2006.
Sincerely,
PALO ALTO HOUSING CORPORATION
Marlene H. Prendergast / I
cc: Steve Emslie
ATTACHMENT B
FREE RECORDING REQUESTED
PURSUANT TO GOVERNMENT CODE
SECTIONS 6103 AND 27383:
Recording Requested By And
When Recorded Mail To:
CITY OF PALO ALTO
Office of City Attorney
250 Hamilton Avenue
Palo Alto, CA 94301
SPACE ABOVE THIS LINE FOR RECORDER’S USE
SUBORDINATION AGREEMENT
NOTICE: THIS SUBORDINATION AGREEMENT RESULTS IN YOUR ENCUMBRANCE(S) ON THE PROPERTY
BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN SOME OTHER OR LATER ENCUM]BRANCE(S) ON THE
PROPERTY.
THIS SUBORDINATION AGREEMENT (this "Agreement"), dated as of this
day of July, 2006, is entered into by and among ARASTRADERO P~K
APARTMENTS CORPORATION ("Borrower"), a California nonprofit public
benefit corporation; PNC MULTIF~ILY FINANCE, INC. ("Lender"), a
Delaware corporation; and the CITY OF PALO ALTO ("City"), a chartered
city organized and existing under the constitution and laws of the State
of California, in connection with that certain Deed of Trust and
Assignment of Rents, dated April i, 1995, executed by the Borrower to
First American Title Guaranty Company, as Trustee, for the benefit of
the City, recorded in the Officia! Records of Santa Clara County,
California (the "Officia! Records") on Apri! 27, 1995 as Document No.
12873487, and modified by that certain Modification Agreement Deed of
Trust and Assignment of Rents, dated as of June I, 1998, between the
Borrower and the City, and recorded in the Officia! Records on August 5,
1998 as Document No. 14321437 (collectively, the "City Lien Documents"),
and affecting that certain multifamily residential housing project (the
"Development") on tea! property !ocated in the City of Pa!o Alto, County
of Santa Clara, California and more particularly described on Exhibit
"A" attached hereto and incorporated herein by this reference (the
"Project"), based on the fol!owing recita! of facts:
RECITAL OF FACTS
ho The City Lien Documents were executed and recorded against the
Development in connection with that certain "Agreement Between the
City of Palo Alto, The Arastradero Park Apartments Corporation,
and the Palo Alto Housing Corporation to Fund the Acquisition of
Arastradero Park Apartments at 574 Arastradero Road, Palo Alto",
dated February 6, 1995, between the Borrower, the City and the
Borrower’s sponsor, PALO ALTO HOUSING CORPORATION ("PAHC"), a
California nonprofit public benefit corporation, as amended by
that certain "P~endment No. 1 to Agreement Between the City of
Palo Alto, the Arastradero Park Apartments Corporation, and the
Palo Alto Housing Corporation to Fund the Acquisition of
Arastradero Park Apartments at 574 Arastradero Road, Palo Alto",
dated April 19, 1995, between the Borrower, PAHC and the City
(collectively, the "City Loan Agreement") and to secure two (2)
promissory notes: (i) that certain Residual Receipts Note
(Nonprofit Mortgagors) (FHA Form No. 1710 - Revised 2/69), dated
April !, 1995, executed by the Borrower in favor of the City in
the original face amount of $305,000 (the "initial Note"); and (2)
that certain Residua! Receipts Promissory Note Secured by Deed of
Trust and Assignment of Rents as Modified (Community Development
Block Grant Funds) dated April 27, 1998, executed by the Borrower
in favor of the City in the original face amount of $286,380 (the
"increase Note" and together with the "Initia! Note", the
"Consolidated Notes").
By their terms, the City Lien Documents and the Consolidated Notes
were made subject and subordinate to the following loan and/or
regulatory documents:
(a) Deed of Trust with Assignment of Rents, and the note
secured thereby, dated August 14, 1973, and recorded in the
Official Records on August 15, 1973, as Document No. 458536,
as modified by that certain instrument dated
, 1974 and recorded in the Official Records
on July 2, 1974 as Document No. ; and
(b) Regulatory Agreement, dated August 14, 1973, and
recorded in the Official Records on August 15, 1973, as
Document No. 458537 (collectively, the "Section 236 Lien
Documents");
and
(a) Regulatory Agreement, dated April I, 1995, and
recorded in the Officia! Records on Apri! 27, 1995, as
Document No. 12873481;
(b) Use Agreement and Amendment to Regulatory Agreement,
dated April !, 1995, and recorded in the Officia! Records on
April 27, 1995, as Document No. 12873482;
(c) Deed of Trust with Assignment of Rents, dated April i,
1995, and recorded in the Official Records on April 27,
1995, as Document No. 12873483; and
(d) UCC-I, Financing Statement, undated, and recorded in
the Officia! Records on April 27, 1995, as Document No.
12873486 (collectively, the "Section 241(f) Lien
Do cument s" ) .
The Borrower, PNC and the Secretary of Housing and Urban
Development (the "HUD Secretary" or "HUD") have agreed that the
Development shall be refinanced by the prepayment in full of the
mortgage loans insured by the HUD Secretary and secured by the
Section 236 Lien Documents and the Section 24!(f) Lien Documents
(together, the "Existing HUD-insured Mortgages") and that the
Existing HI!D-Insured Mortgages shal! be replaced with a new
mortgage !oan in the sum of $ or such other sum
as approved by HUD (the "Section 223(f) Loan Amount"), to be made
by Lender and insured by the HUD Secretary under Section 207,
pursuant to Section 223(f), of the National Housing Act, as
amended (the "Section 223(f) Mortgage").
Included among the Section 223(f) Mortgage documents are the
following:
(i) Deed of Trust Note, dated July i, 2006, from Borrower to
PNC in the sum of the Section 223(f) Loan Amount (the
"Section 223(f) Note");
(ii) Deed of Trust With Assignment of Rents, dated July !,
2006, securing the Section 223(f) Note to be recorded
concurrently herewith in the Official Records (the "Section
223(f) Deed of Trust");
(iii) Regulatory Agreement for Multifamily Housing Projects,
dated July !, 2006, between the Borrower and the HUD
Secretary (the "Section 223(f) Regulatory Agreement");
(iv) Security Agreement, dated July I, 2006, between the
Borrower, as debtor, and PNC, as secured party (the "Section
223(f) Security Agreement"); and
(v) UCC-I, Financing Statement, undated, among the Borrower,
as debtor, and PNC and the HUD Secretary, as secured
parties, evidencing and perfecting the security interests in
the Borrower’s personalty held by PNC and the HUD Secretary
and to be recorded concurrently herewith in the Official
Records (the "Section 223(f) UCC-!", and together with the
Section 223(f) Note, Section 223(f) Deed of Trust, Section
223(f) Regulatory Agreement and Section 223(f) Security
Agreement the "Section 223(f) Mortgage Documents").
The City, as holder of the Consolidated Notes and City Lien
Documents, has determined that it is in the best interest of the
Development that it should agree to subordinate the City Lien
Documents to the Section 223(f) Mortgage Documents.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and for other
consideration, the receipt and sufficiency of which are hereby
acknowledged, and in order to induce PNC to make and the HIID Secretary
to insure, respectively, the Section 223(f) Loan, the parties hereto
agree as follows:
2 o
Recital of Facts Incorporated. The Recital of Facts is hereby
incorporated into and made a part of this Agreement.
Subordination. The City and Borrower hereby subordinate the
City Lien Documents to the Section 223(f) Mortgage Documents.
Hereafter, the Section 223(f) Mortgage Documents shal!
unconditionally be, and remain at al! times, liens and
encumbrances on the Project prior and superior to the
encumbrances of the City Lien Documents and to all rights and
privileges of the parties thereunder, and the encumbrance of
the City Lien Documents, together with al! rights and
privileges of the parties thereunder, shal! hereby be subjected
and made subordinate to the lien and encumbrance of the Section
223(f) Mortgage Documents.
Further, from and after the recordation of this Agreement, City
Lien Documents shall be construed to include as documents to
which the City has agreed to subordinate the City Lien.
Documents, the Section 223(f) Mortgage Documents, both
individually and collectively.
4 o
Attorneys’ Fees & Costs. If any party shall take any action to
enforce or otherwise relating to this Agreement, the prevailing
party or parties shall be entitled to recover reasonable
attorneys’ fees and costs form the other party or parties.
Amendments. Amendments to this Agreement shall be in writing
and signed by all the parties hereto.
Governin@ Law. This Agreement shall be construed in accordance
with and be governed by the laws of California.
Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original and all of
which shall constitute one and the same instrument.
Invalidity. In the event any provision of this Agreement shall
be held invalid or unenforceable by any court of competent
jurisdiction, it shal! not invalidate or render unenforceable
any other part of this Agreement.
Successors and Assigns. This Agreement shall be binding on, and
inure to the benefit of, the Borrower, PNC and HUD Secretary,
including their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
NOTICE: THIS SUBORDINATION AGREEMENT CONTAINS A PROVISION WHICH ALLOWS
THE PERSON OBLIGATED ON YOUR REAL PROPERTY SECURITY TO OBTAIN A LOAN, A
PORTION OF WHICH MAY BE EXPENDED FOR PURPOSES OTHER THAN IMPROVEMENT OF
THE PROPERTY.
PNC:BORROWER:
PNC MULTiFAMiLY FINANCE,
INC.,
a Delaware corporation
ARASTR~ERO PARK APARTMENTS CORPORATION,
a California nonprofit public benefit
corporation
By
(Print Name and Title)
By
(Print Name and Title)
CITY:
CITY OF Pg~O ~TO,
a chartered city organized and existing under the constitution and laws
of the State of California
By
Mayor
ATTEST:
City Clerk
APPROVED:
City Manager
Director, Planning and Community Environment
APPROVED AS TO FOPS:
By
City Attorney
State of California )
SS.
County of San Francisco )
On July , 2006, before me,, a Notary Public,
personally appeared , personally known to
me (or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies) and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the
person(s) acted, executed the instrument.
WITNESS my hand and official seal.
Notary Public Signature
State of California )
SS.
County of Santa Clara )
On July , 2006, before me,, a Notary
Public, personally appeared , personally
known to me (or proved to me on the basis of satisfactory evidence) to
be the person(s) whose name(s) is/are subscribed to the within
instrument and acknowledged to me that he/she/they executed the same in
his/her/their authorized capacity(ies) and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf
of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
Notary Public Signature
State of California )
) ss.
County of Santa Clara )
On July , 2006, before me,, a Notary Public,
personally appeared , personally known to
me (or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies) and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the
person(s) acted, executed the instrument.
WITNESS my hand and official sea!.
Notary Public Signature