SR-6M (8)
RAD:Housing:JM:PB:JMG/interest
Council Meeting: July, 26 1994
Santa
Monica~alt<or~
JUL 2 6 199't
To:
Mayor and city council
From: city staff
Subject: Recommendation that the city Council Approve an Amendment
to the Four Housing Trust Fund Guidelines in Order to Set
Interest Rates for City Loans
Introduction
This report recommends that the city Council approve an amendment
to the four housing trust fund guidelines in order to allow staff
to amend the interest rate provision of the city's four housing
trust fund guidelines for city loans of affordable housing
projects.
Background
The city staff currently administers four housing trust funds: (1)
pico Neighborhood Housing Trust Fund; (2) citywide Housing
Acquisition and Rehabilitation Program; (3) Citywide Housing Trust
Fund; and (4) HOME Investment Partnership Program. The four trust
funds provide gap loans to affordable housing projects,
supplementing financing sources from federal, state, county, and
private sectors.
As many outside funding sources have decreased recently, new
projects are becoming more and more reliant on the federal and
California Low
Income Housing Tax Credit programs (Tax Credit
Programs) established by Section 42 of the Internal Revenue Code of
1986, as amended, and Sections 17058 and 23610.5 of
the 6iforniM
JUL 2 6 199It
Revenue and Taxation Code. A revision of the interest rate
provision of the trust fund guidelines will help leverage more
funds from the Tax Credit Programs and its investors.
Discussion
Currently, the city's housing trust fund guidelines require that
the interest rate be set at the rate established by the Federal
Horne Loan Mortgage corporation (Freddie Mac) for the average
conventional commitment of a fixed rate, thirty year mortgage,
compounded annually. This requirement was adopted by the city
Council prior to the establishment of the Tax Credit Programs,
which has since become a significant source of financing for
affordable housing projects. The effect of the City's current
interest rate requirement (see Attachment A) is to reduce the up
front equity contributions (cash investment) from tax credit
investors, resulting in the need for an increased City subsidy.
The Tax Credit Programs allow for syndication of affordable housing
projects. Syndicators are non-profit and for profit corporations
that invest money in affordable housing projects for approximately
15 years in exchange for tax credit benefits. At the end of 15
years, the tax credit investors sell the project back to the non-
profit developers and no longer participate as investors in the
project.
Tax credits produce substantial tax savings, thus motivating the
investment in a project. In addition, certain other paper losses
arise in these types of financial structures - notably depreciation
and deferred interest payments due qovernmenta 1 lenders. The
deferred interest is reported by the investors as a loss. Because
the interest is deferred, the loss does not have to be paid at the
time it is incurred. However, the investor has to establish a
reserve which is needed at the time the property is sold (normally,
back to the non-profit developer) to repay the Internal Revenue
Service for the losses that were incurred from the deferred
interest. The greater the losses, the larger the reserve.
Accordingly, a lower interest rate on the governmental loan reduces
the losses and the amount needed in the loss reserve.
Briefly explained, a market interest rate City loan increases the
accumulated interest or debt in a project, which, in turn,
increases the tax credit investor's capital gains tax liability
upon sale of the project in year 15. To compensate for this
increased tax liability, the investor reduces the up-front equity
(cash) contribution to a project. Reduced tax credit cash
contributions to a project generally result in a need for increased
City subsidies.
other pUblic agencies and municipalities contacted by staff,
including the City of Los Angeles, County of Los Angeles, Pasadena,
Berkeley, Palo Alto and the Community Redevelopment Agency of Los
Angeles provide housing trust fund loans at interest rates of 3% in
order to maximize the Tax Credit Programs and conventional
financing in their affordable housing projects.
Bu~getary I~pacts
Amending the Housing Trust Fund Guidelines to allow a 3% interest
rate on loans that include tax credit syndicators or conventional
lenders will have no budgetary impact.
Recommendation
staff recommends that the City council authorize an amendment to
the guidelines of the pico Neighborhood Housing Trust Fund; the
Citywide Housing Acquisition and Rehabilitation Program; the
citywide Housing Trust Fund; and the HOME Investment Partnership
Program Guidelines in order to permit the City to set interest
rates of affordable housing projects that include tax credits or
conventional lenders, with a minimum rate of 3% simple interest.
Prepared by:
Jeff Mathieu, Director
Paula Burrier, Housing and Redevelopment Manager
Johanna Gullick, Senior Administrative Analyst
Resource Management Department
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