Loading...
HomeMy WebLinkAboutStaff Report 8105 City of Palo Alto (ID # 8105) City Council Staff Report Report Type: Consent Calendar Meeting Date: 6/5/2017 City of Palo Alto Page 1 Summary Title: Sheridan Apartments Loan Agreement: Amendment No. 2 Title: Approval of Amendment Number 2 to the Promissory Note and Amendment Number 2 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 in 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 Number two (2) 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 Number two (2) 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. Background The Sheridan Apartments is an existing 57-unit affordable housing project that serves income- eligible seniors. The project, located at 360 Sheridan Avenue, 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 City of Palo Alto Page 2 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 specified balance PAHC shall make payments according to the terms of the Note and interest on the Note increases from 3% to 9%. In early 2017, anticipating that the loan would soon be subject to the 9% interest rate, PAHC approached the City with a proposal to immediately repay the entire outstanding balance of the loan. As explained below, due to federal regulations restricting the balance of Community Development Block Grant (CDBG) funds the City may hold in each fiscal year, early repayment of the loan would disadvantage the City’s CDBG program. On March 6, 2017, Council approved Amendment No. 1 to the Loan Agreement and Amendment No. 1 to the 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 the interest rate (CMR #7803). One important objective of these amendments was to permit the parties time to negotiate more comprehensive changes to the structure of the loans. Discussion PAHC remains ready and willing to repay the loan in full. However, the repayment of the loan at this time would not benefit the City, as the majority of the funds would be heavily restricted under Community Development Block Grant (CDBG) regulations and the City would be in violation of program requirements and subject to reduced CDBG funding in the future if it could not expend the funds on another eligible project within a relatively short amount of time. Following discussion and negotiation with PAHC, Staff recommends that Council approve the attached Amendment No. 2 to the Loan Agreement and Amendment No. 2 to the Note. The recommended actions recognize the mutual interests of the City and PAHC to develop additonal affordable housing and rehabilitate existing affordable housing units. The actions would restructure the Loan Agreement and Promissory Note to defer the accrual of interest and loan repayment until March 1, 2030 on the condition that PAHC uses the funds that would otherwise have been due to the City for another affordable housing project. If PAHC develops a new affordable housing project or rehabilitates an existing project with these funds prior to March 1, 2030, the City will forgive the loan. If PAHC is unable to develop an affordable housing 1 Low income households are those earning 51-80% of the area median income or around $59K-$85K for a family of four; very-low income households are those earning less than that. City of Palo Alto Page 3 project by the March 1, 2030 deadline, then any remaining loan amount will resume the accrual of interst and payments will be due under the terms of the Note. In recent years, the City has included provisions in its affordable housing loans making them entirely forgivable upon maturity. This amendment to the Sheridan loan, which was issued almost two decades ago, would thus bring the loan more into line with the City’s modern practice. To secure PAHC’s agreement to defer payment of the existing loan, the City would agree to amend the Loan Agreement and the Promissory Note such that the loan would stop accruing interest as of May 1, 2017. PAHC and staff have been in discussions on restructuring the loan terms since early 2017 and PAHC is concerned that the loan is continuing to accrue interest even though PAHC has been prepared to pay off the loan in full. The requested actions would also give PAHC greater flexibility in the use of the Affordability Reserve Account as described in Section 5 of the Loan Agreement and would specify that there are no restrictions on the use of surplus cash generated by the project so that PAHC has the ability use the funds as deemed necessary by PAHC to further affordable housing in Palo Alto. Finally, the City would agree to subordinate its interest in the property to any future financing PAHC seeks. If the amendment is not approved, PAHC has indicated that it will repay the loan in full, which has a current approximate balance of $2,222,324. Of this amount, $1,474,591 would be returned to the CDBG program and $747,733 would be returned to the residential housing fund. The negative consequence of this scenario is that the $1.474 million in CDBG funding would need to be expended on a CDBG-eligible project no later than April 30, 2018 due to the CDBG program’s strict expenditure requirements. Per the CDBG regulations at 24 CFR Section 570.902 (a)(i), sixty days prior to the end of a grantee’s current program year, the amount of funds available to a grantee in its letter of credit is not to exceed 1.5 times the entitlement amount for its current program year. HUD has not finalized the FY18 CDBG allocations, but it is anticipated that the FY18 CDBG allocation will be similar to the City’s FY17 allocation of $441,253. Using HUD’s expenditure threshold, the City cannot have more than $661,879 in its letter of credit balance by April 30, 2018. If the City is unable to spend the CDBG funds by the deadline, there would be a risk that the City would experience a permanent reduction of CDBG funds by the amount in excess of the 1.5x threshold. Under the recommended amendments, these CDGB funds would effectively remain available to PAHC until it is able to identify a suitable project in Palo Alto. 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 City of Palo Alto Page 4 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. 3. H3.4.4 Program – The City will work with affordable housing developers to pursue opportunities to acquire, rehabilitate, and convert existing multi-family developments to long-term affordable housing units to contribute to the City’s fair share of the region’s housing needs. Resource Impact With the requested action, PAHC’s payments of principal and interest will be deferred until June 30, 2030 and Palo Alto Housing Corp will be able to use the funds to develop a new affordable housing project. In the event that PAHC is unable to develop a new affordable housing project by June 30, 2030, PAHC will be required to repay the loan to the City. Approximately 66% of loan funds would go to the CDBG program and 34% would go into the residential housing fund. 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 Loan Agreement Amendment No. 2 (PDF) Attachment B: Sheridan Apartments Promissory Note Amendment No. 2 (PDF) Attachment C: Sheridan Apartments Loan Agreement (PDF) Attachment D: Sheridan Apartments Promissory Note (PDF) Attachment E: Sheridan Loan Agreement Amendment No. 1 (PDF) Attachment F: Sheridan Promissory Note Amendment No. 1 (PDF)