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SR-20080422-1Ic7® ~;ty of City Council Report Santa Monica City Council Meeting: April 22, 2008 Agenda Item: 1 To: Mayor and City Council Chairperson and Redevelopment Agency From: Andy Agle, Director of Housing and Economic Development Carol Swindell, Director of Finance Subject: Leveraging of Redevelopment Housing Set-Aside Funds to Accelerate Affordable Housing Production Recommended Action Staff recommends that: 1) the Redevelopment Agency adopt the attached resolution authorizing the Executive Director to enter into an agreemeht with the Bank of America (Bank), and take all necessary actions, to obtain a line of credit in the amount of $50,000,000 for purposes of accelerating affordable housing development, with an option to increase the line of credit by an additional $25,000,000; 2) the Council and ,Redevelopment Agency appropriate .$250,000 for origination fees, outside counsel; and fiscal consultants, and; 3) the Council and Redevelopment Agency appropriate $50,000,000. for affordable housing developments, pursuant to the line of credit. Executive Summary Establishing a line of credit to capitalize on the Redevelopment Agency's affordable housing set-aside revenue stream .accelerates the near-term funding of affordable housing by expanding available capital to take advantage of opportunities as they arise. This leveraging of set-aside funds enhances the City's ability to more immediately address the need for affordable housing and avoids inflationary increases in land and construction costs.. Current estimates indicate that the Agency's set-aside revenue stream can support a line of credit of significantly more than the amount recommended at this time. A $75,000,000 line of credit represents a balance between creating new affordable. housing finance opportunities and the cost of the bank commitment fee associated with a line of credit. The Agency's current affordable housing finance model is based upon a "pay-as-you- go" basis, which provides approximately $10 million annually. The subsidy amount required to develop affordable housing means this annual funding amount produces 1 roughly twenty-five family units (i.e., 2 & 3-bedroom units). This financing method does not leverage the Agency's ongoing revenue stream and results in missed affordable housing opportunities if sufficient funding is unavailable when .desirable properties emerge. A $75,000,000 line of credit increases the near-term funding available for affordable housing development while retaining several million dollars annually for pay- as-you-go funding. Background Staff evaluated several models for leveraging the Agency affordable housing set-aside funds and determined that a lihe of credit will provide maximum funding flexibility while minimizing borrowing costs. These various models and their respective pros and cons are described in detail in an Information Item issued to the City Council on June 15, 2007. The information item indicated that the two best models for leveraging would be a financial institution line of credit and borrowing from the City's revolving investment funds. After analysis of City fund liquidity, investment requirements, highly liquid and relative short term nature of the investment portfolio, staff recommends use of a line of credit from a financial institution. To identify potential credit providers, staff requested proposals in September 2007 from seven institutional lenders regarding a line of credit to the Agency. Lenders were asked to provide terms for providing an initial credit line of $50,000,000 with an option to increase the amount if estimated Agency revenues satisfied lender underwriting criteria. Three lenders responded with proposals: 1) Bank of America, 2) Citigroup and 3) JP Morgan. Bank of America provided the best proposal regarding the overall cost of establishing the line of credit, including origination and commitment fees, and the interest rate. Discussion The community's unmet affordable housing needs involve families, seniors, disabled and homeless persons and greatly exceed Agency's annual set-aside funding capacity. The "set-aside" funding refers to the requirement that 20% of the Agency's revenue be used for affordable housing development. Expanding the Agency's near-term funding capacity by borrowing against this revenue stream provides increased capital for 2 affordable housing production. The line of credit provides immediate access to cash as new affordable housing opportunities arise while minimizing the cost of unused funds. The goal of leveraging affordable housing revenue is to accelerate near-term affordable housing development. (this includes newly constructed housing. and acquisition and rehabilitation of existing housing) to better meet the community's immediate needs. The cost of property and construction has steadily increased and has outpaced any increase in Agency set-aside revenue. For example, the typical City subsidy needed to produce affordable housing in the recent past averaged about $150,000 a unit, yet currently the average subsidy required is estimated at closer to $400,000 per unit. This trend translates into a declining number of affordable housing units funded by the Agency each year. Unless a new model for financing affordable housing is utilized, the number of Agency-subsidized affordable housing units is anticipated to be approximately twenty-five ($10M / $400K subsidy per unit). The Agency's set-aside revenue stream can support borrowing more than $100,000,000. However, there is an annual commitment fee of 0.3% (0-.003) for any unused portion of the line of credit. Therefore, fiscal caution suggests that the initial line of credit amount should be significant enough to take advantage of new affordable housing opportunities. (i.e., $50 million) while simultaneously being cautious about the cost associated with any unused credit. Additionally, the line of credit agreement contains a provision that allows the Agency to increase the amount of the credit by $25,000,000 for a total amount not to exceed $75,000,000. The other costs of this borrowing. include the Bank's loan origination fee of $25,000, the Bank's outside counsel cost estimated at $15,000 and the Agency's fiscal consultants and special legal counsel estimated at $210,000. The initial term of the credit line is five years with interest-only payments on the portion that has been drawn down, with an option to extend the term to eight years. The interest rate will be variable and based upon a commonly used index. During the term of the credit line, the portion that has 3 been draw down will be converted into affixed-rate loan(s). The repayment source of the fixed-rate loan(s) is redevelopment housing set-aside revenue. Alternatives The alternative is to continue with the current pay-as-you-go affordable housing finance model Financial Impacts & Budget Actions The line of credit will provide $50-75 million for affordable housing projects. .The initial costs of the line of credit including loan origination fees, outside counsel, and fiscal consultants is estimated to be $250,000 and should be appropriated from Account No. 01264.555440.76027 to be reimbursed from the Redevelopment Agency. To receive the line of credit proceeds, it is necessary to establish a budget of $50,000,000 at account number 15990.601007. In addition the initial $50,000,000 should be appropriated to Account No. H150194.589000 to be used for affordable housing projects as-the line of credit is drawn down. 4 Prepared by: James Kemper, Acting Housing Administrator Economic Development Approved: ~~ Carol Swind II Director, Finance Attachments: Agency Resolution Authorizing the Executive Director to enter into an Agreement with Bank of America for a Line of Credit 5 Reference Contract No. 8922 (RAS) and Resolution No. 506 (RAS).