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CDD:PC:NW:bw/fbl.housing.ced Santa Monica, California
Council Meeting: June 18, 1991
To: Mayor and City Council
From: city staff
Subject: Authorization to Provide Interim Financing for a Thirty
unit New Construction Affordable Housing Project
(Garcia Apartments)
INTRODUCTION
This report presents background information on the Garcia
Apartments (also known as the Greenwood Project) and recommends
that the city council approve three pieces of financing for the
project:
1) Fund a zero interest, three-year bridge loan in an
amount not to exceed $537,531. 00 in order to provide
interim financing of private equity investments in the
project;
2) Authorize transfer of a site located at 1747-15th
street from the Redevelopment Agency to a limited
partnership which has Community Corporation of Santa
Monica as its general partner; and
3) Authorize the funding of an interest reserve in an
amount not to exceed $151,830.00 in order to induce the
conventional lender to originate its construction loan
to the project. 6 -D /)
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BACKGROUND
The Garcia Apartments Project is a 30-unit scattered site new
construction affordable rental housing project which has been in
the planning and predevelopment stages for many years. When
completed, the project will provide a total of 10 one bedroom
units, IO two bedroom units, and 10 three bedroom units on the
following four sites:
1747 15th street 9 Units
1828 17th street 7 units
1968 19th street 7 Units
1544 Berkeley 7 units
The project is being financed through a combination of
conventional loans, a loan from the state Rental Housing
Construction Program, private investor equity (attracted by the
syndication of federal low income housing tax credits) and a loan
from a City-administered developer agreement payment made to the
City in connection with the Colorado Place development. A total
of 24 of the 30 units at Garcia Apartments will be affordable to
households making no more than 60 percent of area median income
(This 60 percent figure for a family of four currently is
$25,200). The remaining six units will be affordable to
households making no more than 80% of area median income ($33,600
for family of four).
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Oriqinal Proiect Financing
On April 17, 1989, the city Council approved a permanent loan of
$1,400,000.00 for the project. Approximately $1,100,000 of this
loan has been disbursed to date for site acquisition and other
predevelopment costs.
Bridqe Loan
Through the sale of housing tax credits to a pool of private
investors, the project is able to draw approximately $650,000 in
private equity. However, because private investors will make
their investments over a three-year period, instead of all at
once, the project needs a loan to "bridge" the time between the
start of project construction, when all funds are needed, until
the end of the three-year investor pay- in period. The maximum
amount of the bridge loan necessary is $537,531.00.
In order to minimize the city's risk, staff has required that a
minimum threshold of 90 percent presales of the tax credit
investment must be satisfied before the bridge loan would be
funded. National experience and industry standards for this
specialized type of investment has shown that the risk of
nonpayment, once the investment is sold, is extremely low.
Repayment of the bridge loan will come directly from the investor
payments and will be secured by promissory notes from the
Progressive Asset Management, the nonprofit syndicator of this
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project. The loan is proposed as a zero interest loan for three
years.
Deferral of Redevelopment Aqency site Acquisition Costs
In 1971, the 15th street site for Cemetery expansion. The total
site acquisition cost was $281,000.00. The site was later
declared surplus and, in 1985, was designated by the
Redevelopment Agency for affordable housing development by
Community Corporation.
Under the original financing plan, Community Corporation was to
have repaid the city at the start of construction. However, the
project development costs have increased since the project's
inception. Sufficient sources of financing do not exist to
enable the developer to make the $281,000.00 payment.
Staff proposes to reformulate this obligation to a deferred
payment loan, structured in a way which is similar to loans made
from the housing trust funds, (i.e, in consideration of the
developer's not having to payoff this obligation the project is
required to restrict rent levels and maintain the housing units
for occupancy by low and moderate income households; failure to
keep the property in its intended use would accelerate the
obligation and require its immediate payment in full).
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provision of Interest Reserve
The construction lender, First Nationwide Bank, has required that
an interest reserve be provided in order to guarantee any
shortfall in project revenue in the event that the permanent loan
is not funded at its projected below-market interest rate. The
permanent loan carries an effective interest rate of 7.5%, which
is the result of a special internal subsidy provided by the
lender. If the permanent loan is not funded at this rate,
additional revenue would be necessary because of the loss of this
special interest subsidy. This problem could be resolved either
by allowing rents on the project's six higher income units to be
increased to market levels or by providing an interest reserve.
The maximum total amount of the interest reserve which might be
necessary is $151,830.00. This reserve would be funded only in
the unlikely event that the permanent lender fails to make its
loan at 7.5% interest. This would only occur if the project
failed to reach construction completion, or if the developer
leased units to households who were not income-qualified. The
developer, as well as the construction lender, the state, and the
city will all have monitoring systems in place to ensure
construction progress and diligent lease-up procedures. The
City's commitment to make this interest reserve available would
terminate when the permanent loan is funded at its stated rate of
7.5% (approximately December 1992). If drawn, the reserve would
become a loan to the developer, evidenced by a note and secured
by a deed of trust.
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All three components of this proposed financing are necessary in
order to maintain the feasibility of this affordable housing
project.
FINANCIAL/BUDGETARY IMPACT
There are sufficient funds remaining in the Greenwood Development
Account to finance the bridge loan and to fund, if necessary, the
interest reserve. The account to be used to fund the bridge loan
and the reserve is Account Number 01-000-000-00000-9870-04683.
RECOMMENDATION
Staff recommends approval of the following actions:
1) Authorize a zero interest, three-year bridge loan in an
amount not to exceed $537,531.00 in order to provide
interim financing of private equity investments in the
Garcia Apartments project;
2) Authorize transfer of a site located at 1747-15th
street from the city to a limited partnership which has
Community Corporation of Santa Monica as its general
partner;
3) Authorize the commitment of an interest reserve in an
amount not to exceed $151,830.00 in order to induce
the conventional lender to make its construction loan
to the project; and
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4) Increase appropriation at account number
01-720-264-21688-8920-99059 by $151,830.00 and
authorize the city Manager to approve disbursement of
these funds from the interest reserve in the event that
the conditions outlined in this report exist to
activate this commitment; and
5) Authorize the city Manager to execute all documents
necessary to evidence the actions outlined above
Prepared by: Peggy Curran, Director
Nancy West, Housing Program Manager
Denise Altay, Senior Development Analyst
Community Development Department
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