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Home My WebLink About0387.091i I t ', .. j I I I I • , - o ~staH t ~ -,.1>01-------I August 15, 1991 HONORABLE CITY COUNCIL Palo Alto, California LYTTON GARDENS III STATDS REP~'! Members of the Council: This is an informational report and no Council action is required. Report in Brie:.f In 1986 the city issued City of Palo Alto Insured Revenue Bonds Refunding series 1986 in a principal amount of $13,360,000, tor Lytton Gardens Health Care Cen~er (Lytton III). These bonds are insureq by the Office of statewide Health Planning and Development of the state of C31ifornia (OSHPD). It ... as anticipated that Lytt.on Gardens, Inc. (LGI). the n.;)nprofit corporation responsible for Lytton III, vould make all payments Cr". the bar-ds. LGI failed to make full payme:1ts for December 1989, June 1990 r Decerr.ber 1990 and June 1991. The trustee, security Pacific National Bank, upon direction of OSHPD. used the bond reserve account to supplement payments ~o that all bondhol aers could be paid in full ~ The reserve account .as established at $1.231,960 in 19a6~ As of June 30, 1991, tbe reserve account has been redlJCed to '$426.911. Staff has contacted OSHPD. ~ho have exp~pssed thei~ belief that further call on the reserve ~il1 net be necessary~ Staff has also met ~ith the management of LGI and received similar assurances. Background. Lytton Gardens, Inc. (LGI) is a California nonprofit public benefit co"t"poration established in May 1980 by Communit}o~ HOll.':;;ing, Inc. {CHI). CHI, also a nonprofit public benefit corporation, ~as created in February 197{), by :members of t .... o Palo Alto churches for the purpose of developing housing for senior citi.zens ~ith 10'. incomes. CMR:387:91 I I c l! , I t! LJ f ' . I r-j , . [ , I ~ - . '.~' .'.' Tl.'o apartment complexes, Lytton Gardens I ar,d II} were con:;truc~ed by CHI. In Lytton Gardens I, 250 people over the age of 65 reslde in their own apartmer.ts4 In Lytton Gardens II, 50 senio~s reside on their own and 50 seniors live 'Nith housekeeping assistance. The residents of Lytton Gardens I and II pay only a third of their incomes for rent. The remainder is paid by federal programs. Lytton Gardens IIr is a skilled nursing facility and convalescent h()spital built by CHI on webster Street adjacent to Lytton Gardens JI. Lytton Gardens III is no ... o',.ned and operat£d by LGr 4 All three of the Lytton Gardens facilities are located in do~nto~n Palo _'lto. in an area bounded by University Avenue, Lytton Avenue~ Middlefield Road and Webster Street. Ci:ty of Palo Alto In~\Jre.';S __ Health Faci~9.Dds. Series 1981. 19B __ ?-L and 1985 In October 19S), the city issued City of Palo Alto Insured Hedlth Facility Revenue Bonds in the principal amount of $9,570,000. Tbe proceeds of the 1981 Bonds .. :ere lent by the city to CHI tor the purpose of: 1) paying the cost of acquiring, constructing and equipping Lytton Gardens III; 2} paying inten~st and insurance premiums related to t!"i.e construction period; 3) funding a bond reserve account equal to $1,100.000; 4) retiring certain existing indebtedr.ess of CHI related to Lytton Gardens III; and 5) paying expenses relating to the issuance of the 1981 bor,os. In October 1982} the City advance refunded the 1981 bonds by issuing City of Palo Alto Insured Revenue Sonds Series 19B2 in the principal amount of $10,<00,000 .. in order to pay additional costs of completing Lytton III. Con.;;.truction of Lytton Garde!1s III began in November 1981. Ho~ever, due to a delay in construction, the health facility opened as a skilled nursing facility in June 1983. ior"hen the health facility became operational in June 1983; LGI assumed all liabili ties and obligations of CHI relating to the health faci li tr. including obligations urJder the loan agreement. the regulatory agreement and the contrc:.ct of insurance entered into in conjunction with the issuance of the 1982 bonds. In November 1986. LeI requested City Council approval to cerUrld the 1982 bonds. According to the official statement for the 1986 bond refunding, LGr was ~frequently unabie to make (the) monthly required deposits" for repa}'1Tlent of principa I ar,d interest on the 1982 bonds. The October 1984 and April 1985 paY1l1ents .'ere made by ~ithdra~ing funds from the bond reserve account. As a result of the 'Withdrawals from the bond reserve account, as .. rell as the failure to n;a.intain an adequate debt service rat.io and other teChnical deficiencies, the bonds " .. ere in technical default. The 1986 refunding bonds were expected to be issued for appro~i mately a 7 pe:rcer.t coupon rate~ compared to the existing 10.:25 CMR: J87: 91 2 f I I I I • - percent on outstanding debt, ~,rhich ljo,"Quld achieve a cash floW' savings of approximately $20,000 per month. On Kavernber 26, 1986 (CMR:569:6), staft reported to the Council tha~ there had not been time to st~dy the fina,ncial condition of LGI cr the structure of t.he proposed refunding, although staff h~d obtained audited financial statements for 1985 and 1986, which show"ed expenses exceede.d revenues. Staff confirrr.ed that t.he refunding ",,"culd enhance the financial viabi li ty of LGI, and that the refunding bonds would net. be dee!'.t::d a debt. of the city of Palo Alto. However, staff cautioned that the city" 5 exposo.;re .... 'ould be detrimental to its good name if the bonds ","'ere to gc into default. Council decided to approve tbe refunding .... ithol.lt fUrther staff review of the financial condition cf LGl r on the grounds that tne refunding ~ould save money. In December 1986, the City issued city of Palo Alto Insured Reven~e Bonds (Lytton Gardens Reelth Care Center) Refunding Series 19a& in the principal amount of $13,360,000. Interest on the bonds is at ratE'S bet .. ecn ,5.0 percent and 15. i percent and has provided the anticipated cost savings fo[" LGI. Proceeds from the bond sale 'Were l<.seCl to refund the 1982 bOI'lds, fund a b01"':d reserve fund of $1.2 million, fund an in~urance reserve account of $66,BOO, and pay expenses related to the bond issuance. The bC'nds require interest payme.nts of $443,2~O each June 15 and December 15 until 1997, 'When the first principal payments become due. J..t that time, annual debt service on the bonds viII total approximately $1.2 million. De....t_au.lt Situation The semi-annual interest payments to the holders of the 1986 bonds have been made O~ a timely basis. Ho .... ever, during the period irom December 1989 through April 1991, the corporation has been unable to make full deposits towa~d such payments and upon the direction of OSHPD, the trustee has used funds fro~ the bond reserve account. Reserve funds """ere used to supplement bondholder p-ayn1cnts in December 1959. June 1990, Dece~ber 1990 and June 1991. The $1.2 million reserve account :has been reduced to atJproximately $427,000. LGr is no'"" attempting to lI'.ake ~cnthly pay::,cnts to cover future interest payments. Tile December 19 9 1 interest pa~'ment on the bortds .... ill be ~ade from payments by LGI and, if necessary, from the reserves held by the trust8e. The lolithdra ... ·"'ls from the f€.serve account have. placed t.he bonds in tech~ical default. On page 55 of the City of Palo Alto Comprehen sive Annual Financial Report for the fiscal '.lear ended June 30, 1990~ the teChnical default "Io'as disclosed. At thdt time~ Lytton Gardens, Inc. indicated to the auditors. .and staff that they antici pated resuming full d.e:bt paYl1'cnts. C}1R::387:91 • , [:::;;;. ! ~.~ I. '.~; -. r , i , I I 3···-.···~····t' > .', .~, 0 • " : __ , ." ~: 1 .ie. f; • .. ~ J ", 0" . , ',' ! h.... . I .. '. .~ ... .-!. I - 9_ttioe of 6tatewi~e Heal t;.h Plal1~1_~_g _____ "r:ll:! Devel~en.! The 1986 bonds are ir.sured by OSHPD under. the California Health Facility Construction Loan Insurance Program~ ~he full amount of principal and interest on the Refund.ing Series 1986 Bonds is insured under the progrart'.. II" the event of a default ',,:here the bondholders ltI'ould r,ot be paid, insurance law provides that the State Treasurer shall ~pay such amounts authorized to be appropri a~ed to the nclders of the denentures out of any money in the State Treasury not otherwise appropriated.- On July 31, 1991, staff discussed the Lytton Gardens III situation ~ith Dale Flournoy of the OSHPD. Mr. Flourn~y confirmed his office had authorized ttHe use of bor.d reserve funds to assist in paying bondholders for payments in Decer,',ber 1989, June ar.d December 19$:0, and J",;ne 1991. Although he acknowledged the reserve has been reduced, his impression ....-es that LGI was on thE ""ay to solving its fin,'lncial problems. He salid that occupancy has moved from 89 percent up to 97 percent, and the operation is no~ sho~ing a profit rather than a loss. His office believes that the prob!ems have been solved. Finapcial Bt4tl.l.$.2.rm Lytton GarClens. IIl(;'m •. staff has revie,,'-cd t'he financial statements of LeI. The audited financial state:rnents for 1987-88 and 1988-89 sho·,..ed losses each year. Staff has not been able to obtain audited s.tatemer,ts for fiscal years 1989-90 or 1990-91, although the controller for the corporation indicates that they .... ill be available SOO;1. The unaudited financial statements for the fiscal year ended March 31, 1991 show a cumulative annual operating loss before deLt service payments of $435,259. Ho~ever, there ~as an excesS of revenues over E'xpenditures for the month of March of approxi~ately $20,000, before debt service. The accumulated negati ve fund balanr:e for the Lytton Gardens III project ~a$ $4.8 million. staff -recentl:r :rr.et 'ori th the management of LGI to discuss concerns about the status of the bonds. Their Chief Exec;,,;.tive Officer, Stephen Shipley, took over in August 1990. Since that ti·~er significant changes have been 1!lade in the manag:ament of the various Lytton prcjects r i;·,.:::luding consolidation of vverhead fUnctions and staffing changes. Mr. shipley indicated that Lytton III has been "turned around l1 fiTlancially to be ab)e to operate consistently lj,'ith excess revenues over expenditures. He also is lj,'orking 'With LGI's board on a long-term plan to increa$e the profitable areas of the operation. In Hay 1991, LGI began making full roonthly deposits of $81,938 to pay future inte~est. Mr. Shipley indicated that both he and the LGI board are confident that the:{ .... ill be able to continue CMR:3S1:91 L • I , I I '~ .. -~ • '~~ ;~"if4~, v_;· . , ", 1 I < o these debt service payments and begin replenishing the depleted reservt". in the near fut-UI"e. staff ~ill continue to maintain contact ~ith LGI and to monitor the reserve account held by Security Pacific Bank. Staff ~ill return to council if it appears that the pajnnents by LGI and the rese.rves held by Security Pacific Bank are T~ot sufficient to make pa}"1I1ents to the boncL"'olders. Respectfully submitted, £.:v~ +k:.-:w..x .'f~ EMILY '"HARRISON Director of Tinance 0!R:387: 91 5 ?~~f~~~,t: ., ,0 ~ •