HomeMy WebLinkAboutStaff Report 7803
City of Palo Alto (ID # 7803)
City Council Staff Report
Report Type: Consent Calendar Meeting Date: 3/6/2017
City of Palo Alto Page 1
Summary Title: Sheridan Apartments Loan Agreement: Amendment No. 1
Title: Approval of Amendment Number 1 to the Promissory Note and
Amendment Number 1 to the Agreement Between the City and Palo Alto
Housing Corporation for the Acquisition of Sheridan Apartments at 360
Sheridan Avenue; and Approval of an Expenditure of Funds Held by PAHC for
the Acquisition of a Property Interest the Sheridan Apartments. The Project
is Exempt From the California Environmental Quality Act (CEQA) per Section
15061 (b) (3).
From: City Manager
Lead Department: Planning and Community Environment
Recommendation
Staff recommends that Council approve:
1. Amendment No. 1 to Loan Agreement Between the City of Palo Alto and Palo Alto Housing
Corporation Regarding the Sheridan Apartments at 360 Sheridan Avenue; and
2. Amendment No. 1 to the related Promissory Note (Residential Housing In-lieu
Funds/Community Development Block Grant Funds) Secured by (a) Assignment of
Promissory Note Secured by Deed of Trust and Assignment of Rents, and (b) Assignment of
Affordability Reserve Account.
3. Pursuant to Section 5.3 of the Loan Agreement, the expenditure of Affordability Reserve
Account Funds in the amount of Two Hundred Seventy-Nine Thousand Seven Hundred
Thirty One Dollars ($279,731) to finance Palo Alto Housing Corporation’s December 2016
purchase of the property from the Limited Partnership.
Background and Discussion
The Sheridan Apartments is an existing 57-unit affordable housing project that serves income-
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eligible seniors. The project is located at 360 Sheridan Avenue and is owned and operated by
the Palo Alto Housing Corporation (PAHC), a non-profit housing provider and long-time partner
of the City’s.
The City and PAHC entered into a Loan Agreement (Attachment C) in the amount of $2,450,000
on December 8, 1998 to fund the acquisition of the Sheridan Apartments by PAHC for their use
and operation as rental housing for low-income and very-low income households.1 In addition,
PAHC executed a Promissory Note (Attachment D) in favor of the City.
One of the provisions of both the loan agreement and the promissory note is that PAHC was to
establish an Affordability Reserve Account to protect against the reduction or termination of
affordability housing funds through the federal Section 8 assistance program. The Loan
Agreement states that once the Affordability Reserve Account reaches a balance of $1,000,000,
PAHC shall make payments according to the terms of the note and interest on the Note
increases from 3% to 9%. The Note specifies that PAHC shall make payments of principal and
interest to the City deferred until March 1st of the year following the calendar year during which
the total amount deposited in the Affordability Reserve Account reaches $1,000,000.
PAHC recently informed staff that the balance of the Affordability Reserve Account has reached
$1,000,000, triggering both the increased interest rate and payments on the Note. At this time,
repayment of the loan would not benefit the City, as the majority of the funds would be heavily
restricted under federal Community Development Block Grant (CDBG) regulations. In addition,
staff believes an increase in the Affordability Reserve Account is prudent in light of the passage
of time since the existing threshold was established, increased housing costs in that period, and
increased uncertainty regarding federal housing programs. Thus staff believes it is in the
mutual interests of the City and PAHC to restructure the Loan Agreement and Promissory Note
to increase the threshold amount of the Affordability Reserve Account to $2,600,000, delaying
the due date of payments and the increase in interest rate. If these changes are made
immediately, they would give the parties time to negotiate more comprehensive changes to the
Loan Agreement and Promissory Note.
In addition, PAHC has requested Council approval to draw $279,731 from the Affordability
Reserve Account in order to fund its December 2016 buyout of the Sheridan Apartments
property from the limited partnership that was formed when the property was first acquired.
Staff supports this request, as such use of Affordability Reserve Account funds is specifically
contemplated in the Loan Agreement. Section 5.3 of the Loan Agreement states, in pertinent
part:
1 Low income households are those earning 51-80% of the area median income or around $54K-$85K for a family
of four; very-low income households are those earning less than that.
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“Notwithstanding any other provisions of this Agreement, and subject to City
Council action and approval, and to any and all applicable CDBG and other
federal regulations, funds from the Affordability Reserve Account may, in
addition to the uses permitted under Section 5.2 of this Agreement, be
considered for use to fund future rehabilitation expenses of the Property or to
assist in the costs of purchase of the Property from the Partnership by PAHC or
by PAHC Sheridan Apartments, Inc.”
Policy Implications
The actions recommended in this report implement the City’s Housing Element policies and
programs supporting the development of low income housing, including:
1. H1.2 Policy – Support efforts to preserve multifamily housing units in existing
neighborhoods; and
2. H3.1.4 Program – Preserve affordable housing stock by monitoring compliance, providing
tenant education, and seeking other sources of funds for affordable housing developments
at risk of market rate conversions. The City will continue to renew existing funding sources
supporting rehabilitation and maintenance activities.
Resource Impact
With the requested action, PAHC’s payments of principal and interest will be deferred until the
Affordability Reserve Account reaches $2,600,000 and Palo Alto Housing Corp will be able to
use $279,731 from the reserve account to reimburse themselves for buy-out of the limited
partnership as anticipated in the agreement. These actions will have no impact on the City’s
general fund.
Timeline
The agreement will be executed and recorded after Council approval.
Environmental Review
The project is Categorically Exempt from the California Environmental Quality Act ( CEQA)
pursuant to CEQA Guidelines 15061(b)(3) because it can be seen with certainty that there will
be no significant effect on the environment. There are no plans for rehabilitating or
redeveloping the site. Any future proposal to reuse the site for another purpose or to redevelop
the site would need to be reviewed pursuant to CEQA prior to any City decision to provide
funding or approvals.
Attachments:
Attachment A: Sheridan Apartments Agreement Amendment No 1 (DOC)
Attachment B: Sheridan Apartments Promissory Note Amendment No. 1 (DOC)
Attachment C Loan Agreement (PDF)
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Attachment D Promissory Note (PDF)
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AMENDMENT NO. 1 TO AGREEMENT BETWEEN
THE CITY OF PALO ALTO AND PALO ALTO HOUSING CORPORATION
TO FUND THE ACQUISITION OF THE SHERIDAN APARTMENTS
AT 360 SHERIDAN AVENUE
This Amendment No. 1 (“Amendment”) to the Agreement to Fund the Acquisition of the Sheridan
Apartments at 360 Sheridan Avenue (“Loan Agreement”) is entered into March ____, 2017 by and
between the CITY OF PALO ALTO, a California chartered municipal corporation (“City”), and
PALO ALTO HOUSING CORPORATION, a California non-profit corporation, located at 725 Alma
Street, Palo Alto, CA 94301 (“PAHC”), with reference to the following facts:
R E C I T A L S
A. The City and PAHC entered into the Loan Agreement on or about December
8, 1998 to fund the acquisition of the Sheridan Apartments by PAHC for their use and operation as
rental housing for low-income and very-low-income households.
B. The City and PAHC concurrently executed a Promissory Note (“Note”) in
favor of the City in principal amount of $2,450,000.
B. Section 5 of the Loan Agreement provides that PAHC shall establish an
Affordability Reserve Account to protect against reduction or termination of affordable housing
funds through the federal Section 8 Assistance program.
C. Section 5 of the Loan Agreement further provides that once the Affordability
Reserve Account reaches a balance of One Million Dollars ($1,000,000), PAHC shall make
payments to the City in accordance with the terms of the Note.
D. In order to further secure the affordable status of the Sheridan Apartments,
regardless of federal assistance for affordable housing, the parties wish to amend the Loan
Agreement to increase the total amount that may be deposited in the Affordability Reserve Account
before payments of principal and interest are due.
NOW, THEREFORE, in consideration of the covenants, terms, conditions, and
provisions of this Amendment, the parties agree:
SECTION 1. Section 5.1 of the Loan Agreement, Establishment of Affordability
Reserve Account, is hereby amended to read as follows:
PAHC will cause PAHC Sheridan to contribute to PAHC all incentive
management fees paid to PAHC Sheridan by the Partnership. PAHC agrees that, to
the extent that it receives payments of principal and/or interest from the Partnership
pursuant to the terms of the Partnership Note (“Partnership Note Payments”) and/or
contributions of incentive management fees from PAHC Sheridan (“Incentive Fee
Payments”), PAHC will use such Partnership Note Payments and Incentive Fee
Payments for the following purposes only: (a) first, PAHC will deposit 100% of all
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Partnership Note Payments and Incentive Fee Payments in one or more segregated
interest bearing accounts established in PAHC's name with one or more financial
institutions satisfactory to City (collectively, the “Affordability Reserve Account”),
until such time as the total amount deposited therein, together with interest thereon,
equals the Affordability Reserve Completion Amount, as defined herein; and (b)
thereafter, to make payments to the City in accordance with the terms of the Note.
Effective January 1, 2016, the Affordability Reserve Completion Amount shall be
Two Million Six Hundred Thousand Dollars ($2,600,000).
SECTION 2. Except as herein modified, all other provisions of the Loan Agreement,
including any exhibits and subsequent amendments thereto, shall remain in full force and effect.
SECTION 3. This Amendment may be executed in any number of counterparts, each
of which shall be deemed an original, but all of which, when taken together, shall constitute one and
the same instrument.
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SECTION 4. This Amendment shall be governed by, and construed in accordance
with, the laws of the State of California, without reference to the principles thereof respecting
conflicts of laws.
IN WITNESS WHEREOF, the parties have by their duly authorized representatives
executed this Amendment on the date first above written.
CITY OF PALO ALTO
_________________________________
Mayor
ATTEST:
_________________________________
City Clerk
APPROVED AS TO FORM:
_________________________________
City Attorney
APPROVED:
_________________________________
City Manager
_________________________________
Director of Administrative Services
_________________________________
Director of Planning and Community
Environment
PALO ALTO HOUSING CORPORATION
By:______________________________
Name: ___________________________
Title:_____________________________
By:______________________________
Name: ___________________________
Title:_____________________________
SIGNTAURES TO BE NOTARIZED
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AMENDMENT NO. 1 TO PROMISSORY NOTE
(RESIDENTIAL HOUSING IN-LIEU FUNDS/COMMUNITY DEVELOPMENT
BLOCK GRANT FUNDS) SECURED BY (a) ASSIGNMENT OF PROMISSORY
NOTE SECURED BY DEED OF TRUST AND ASSIGNMENT OF RENTS, AND
(b) ASSIGNMENT OF AFFORDABILITY RESERVE ACCOUNT
This Amendment No. 1 (“Amendment”) to the Promissory Note for Residential Housing In-Lieu
Funds and Community Development Block Grant Funds (“Note”) is entered into March ____, 2017
by and between the CITY OF PALO ALTO, a California chartered municipal corporation (“City” or
“Holder”), and PALO ALTO HOUSING CORPORATION, a California non-profit corporation,
located at 725 Alma Street, Palo Alto, CA 94301 (“PAHC” or “Maker”), with reference to the
following facts:
R E C I T A L S
A. On or about December 8, 1998, the City and PAHC entered into an Agreement
to fund the acquisition of the Sheridan Apartments by PAHC for their use and operation as rental
housing for low-income and very-low-income households (“Loan Agreement”).
B. Section 5 of the Loan Agreement provides that PAHC shall establish an
Affordability Reserve Account to protect against reduction or termination of affordable housing
funds through the federal Section 8 Assistance program.
C. On or about December 8, 1998, PAHC executed the Note in favor of the City
in principal amount of $2,450,000, which was secured, in part, by the Affordability Reserve Account
required under the Loan Agreement.
D. Section 5 of the Note provides that PAHC’s obligations to make payments of
principal and interest to the City shall be deferred until March 1 of the year following the calendar
year during which the total amount deposited in the Affordability Reserve Account reaches
$1,000,000.
D. Section 6 of the Note provides that the interest rate applicable to the principal
amount of the note shall be 3% until the last day of the month during which the total amount
deposited in the Affordability Reserve Account reaches $1,000,000.
E. In order to further secure the affordable status of the Sheridan Apartments,
regardless of federal assistance for affordable housing, the parties wish to amend the Note to increase
the total amount that may be deposited in the Affordability Reserve Account before payments of
principal and interest are due.
NOW, THEREFORE, in consideration of the covenants, terms, conditions, and
provisions of this Amendment, the parties agree:
SECTION 1. Section 5 of the Note is hereby amended to read as follows:
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Maker shall pay Holder principal and accrued interest in annual installments on
March 1 of each year until the entire amount of principal and interest hereunder have
been paid in full. Maker shall make annual payments equal to the sum of (i) the
amount required to be paid to Maker by the Partnership each March 1 under the
Partnership Note; plus (ii) the amount paid by the Partnership to PAHC Sheridan
Apartments, Inc. as its incentive management fee for the preceding calendar year;
plus (iii) amounts from the Affordability Reserve Account that have become due and
payable to Holder for application to interest and principal under this Note, as
described in Section 5.2 of the Loan Agreement. Notwithstanding the foregoing,
effective January 1, 2016, Maker's obligation to make payments of principal and
interest to Holder shall be deferred until March 1 of the year following the calendar
year during which the total amount deposited in the Affordability Reserve Account
(together with all interest earnings thereon) ·first reaches Two Million Six Hundred
Thousand Dollars ($2,600,000) (the “Affordability Reserve Completion Year”; the
accumulation of $2,600,000 in the Affordability Reserve Account is referred to
herein as “Affordability Reserve Completion”). Annual payments thereafter shall
then be due and payable on or before March 1 of the calendar year following the
Affordability Reserve Completion Year and each subsequent year during the term of
this Note. Payments shall be credited first to any accrued but unpaid interest, then to
current interest then due and owing, and then to principal.
SECTION 2. Except as herein modified, all other provisions of the Note, including
any exhibits and subsequent amendments thereto, shall remain in full force and effect.
SECTION 3. This Amendment may be executed in any number of counterparts, each
of which shall be deemed an original, but all of which, when taken together, shall constitute one and
the same instrument.
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SECTION 4. This Amendment shall be governed by, and construed in accordance
with, the laws of the State of California, without reference to the principles thereof respecting
conflicts of laws.
IN WITNESS WHEREOF, the parties have by their duly authorized representatives
executed this Amendment on the date first above written.
CITY OF PALO ALTO
_________________________________
Mayor
ATTEST:
_________________________________
City Clerk
APPROVED AS TO FORM:
_________________________________
City Attorney
PALO ALTO HOUSING CORPORATION
By:______________________________
Name: ___________________________
Title:_____________________________
By:______________________________
Name: ___________________________
Title:_____________________________