SR-9-A (33)
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RMD:Housing:JM:NW:lihfguar/pc
Council Meeting: 11/10/92
NOV 1 0 1992
Santa Monica, California
To:
Mayor and City Council
From:
City staff
Subject:
to Approve Affordable Housing
Loan Program and Amend Housing Trust Fund
Allow City Guarantee of Predevelopment
Recommendation
Predevelopment
Guidel ines to
Loans
Introduction
ThlS report recommends that the City council approve the city of
Santa Monica/Low Income Housing Fund Predevelopment Loan Program
and authorize an amendment to the three city housing trust fund
guidelines in order to allow trust funds to be used as a guarantee
for predevelopment loans.
Background
Historically, predevelopment loans have been among the most
difficult types of financing for affordable housing developers to
obtain. As a result, the City has been forced to use City housing
trust fund dollars to fund predevelopment loans directly on most
City affordable houslng projects. Because of the cost of being the
sole lender of predevelopment dollars, city staff have been
particularly interested in structuring a program which increases
the
ability
obtain
housing
of
affordable
developers
to
predevelopment funds from non-City sources.
The Low Income Housing Fund ("LIHFII) is a nonprofit corporation
designed solely to increase the amount of private capital available
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for the development of low income housing. LIHF operates several
loan programs, including a direct loan program, a financial
intermediary program, and a technlcal assistance program.
LIHF has been working with the City for several years providing low
interest rate loans to several City-assisted affordable housing
projects. During the past year, City staff have been exploring
ways to expand that relationship with LIHF and, in particular, to
expand the ability to increase leveraging of the City's own
resources. The desire to improve the leveraging of City funds has
become even more urgent because sources of local funds are expected
to decrease in at least the near-term.
Discussion
The City of Santa Monica/Low Income Housing Fund Predevelopment
Loan Program
Recently, LIHF approached city staff with a proposed program under
which LIHF would dedlcate $400,000 specifically for predevelopment
loans to City-assisted projects. LIHF would require only that the
city guarantee the first 80 percent of the amount of the LIHF
predevelopment loan 1055 in the event of a developer default. Any
remaining loss would be borne by LIHF.
As the program is proposed, a maximum $100,000 predevelopment loan
would be made by LIHF. As the predevelopment loan is repaid,
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either at the start of constructlon or at certificate of occupancy,
the LIHF dollars would be used for predevelopment costs for another
Santa Monica affordable housing development. The initial program
is expected to operate for two years, with the possibility of
extending and expanding the program after two years, assuming that
the program is successful.
The predevelopment loans would be made only to affordable housing
projects which already meet existing guidelines for City housing
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trust fund loans and LIHF loans. ProJects would be reviewed first
by the City and referred to LIHF once the City has made a financing
commitment for construction or permanent financing.
City Housing Trust Fund Guidelines
The City currently administers three housing trust funds: (l)Pico
Neighborhood Housing Trust Fundi (2) cltywide Housing Acquisition
and Rehabilitation Program; and (3) Citywide Housing Trust Fund.
Current City housing trust fund guidelines do not permit funds to
be used to guarantee a predevelopment loan, even though the
guidelines do allow the Clty to dlrectly fund the same loan with
housing trust fund dollars. The amendment to the three trust fund
guidelines would permit the City to use trust funds to guarantee
predevelopment loans made by non-City lenders, like LIHF. By using
trust funds to guarantee loans, the City can encourage non-city
lenders to participate in affordable housing project financing.
The City is also able to provide the funds that are saved by this
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leveraging to other affordable housing projects.
structure of City Guarantee
LIHF has agreed to create thIs program and set funds aside
exclusively for Santa Monica projects. The issuance of a trust
fund guarantee would be made on a project-by-project basis, similar
to the way in which housing trust fund loans are made now.
The City would ensure that adequate funds are available to fund the
guarantee by maintaInIng a balance in the trust fund accounts
suffIcient to repay 80 percent of the amount of LIHF predevelopment
loans outstanding at anyone time. The city practice now is to
identify and set aside funds within one of the three trust funds at
the time that a City loan commitment IS made to an affordable
housing project. Since a LIHF predevelopment loan would only be
made to a project for which a CIty loan commitment had already been
made, but not yet funded, sufficient funds would in every instance
be set aside and available to pay 80 percent LIHF loan loss in the
event of a developer default.
BUdget/Financial Impact
When a commitment to guarantee 80 percent of a LIHF predevelopment
loan is issued, the amount of the guarantee will be encumbered on
the City's fInance systen against the appropriate Capital
Improvement Program account.
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Amending the trust fund guidelines to allow the use of trust funds
as a guarantee enables the city to more creatively use its scarce
subsidy dollars, reduce the amount of city funds which must be
disbursed for affordable housing projects, and expand the city's
partnership with LIHF.
Recommendation
staff recommends that the City council take the following two
actions:
(1) approve the Clty of Santa Monica/Low Income Housing Fund
Predevelopment Loan Program and authorize the city Manager to
execute any and all documents necessary to initiate and
implement the program; and
(2) authorize an amendment to the guidelines of the Pico
Neighborhood Housing Trust Fund,
the citywide Housing
Acquisltion and Rehabilltatlon Program, and the citywide
Houslng Trust Fund in order to allow the use of trust fund
dollars as a guarantee for predevelopment loans.
Prepared by:
Jeff Mathieu, Director
Nancy West, Housing PrograM Manager
Resource Management Department
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