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
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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
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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
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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.
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Prepared by:
James Kemper, Acting Housing Administrator
Economic Development
Approved:
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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
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Reference Contract
No. 8922 (RAS)
and Resolution No.
506 (RAS).