1 STAFF REPORT
DATE: January 14, 2025
TO: Justin Hess, City Manager/Executive Director
FROM: Patrick Prescott, Community Development Director/Assistant Executive Director
VIA: Simone McFarland, Assistant Community Development Director, Housing and Economic Development
BY: Maribel Leyland, Housing Authority Manager
SUBJECT: Adoption of a Resolution Approving an Amended and Restated Master Loan Agreement and Related Documents with the Burbank Housing Corporation – Phase I
RECOMMENDATION
1. A dopt A RESOLUTION OF THE HOUSING AUTHORITY OF THE CITY OF
BURBANK APPROVING AN AMENDED AND RESTATED MASTER LOAN
AGREEMENT (PHASE I ) AND RELATED AGREEMENTS AMONG THE CITY OF
BURBANK, THE HOUSING AUTHORITY OF THE CITY OF BURBANK, AND THE
BURBANK HOUSING CORPORATION AND DETERMINING THE PROJECT TO BE
EXEMPT UNDER THE CALIFORNIA ENVIRONMENTAL QUALITY ACT (CEQA) (ATTACHMENT 1).
2. A dopt A RESOLUTION OF THE COUNCIL OF THE CITY OF BURBANK
APPROVING AN AMENDED AND RESTATED MASTER LOAN AGREEMENT (PHASE I) AND RELATED AGREEMENTS AMONG THE CITY OF BURBANK, THE
HOUSING AUTHORITY OF THE CITY OF BURBANK, AND THE BURBANK
HOUSING CORPORATION AND DETE RMINING THE PROJECT TO BE EXEMPT
UNDER THE CALIFORNIA ENVIRONMENTAL QUALITY ACT (CEQA)
(ATTACHMENT 2).
COMMUNITY
DEVELOPMENT
2 BACKGROUND
The City of Burbank and the non-profit Burbank Housing Corporation (BHC) have a long- standing (25-year) relationship that has created 326 affordable units. 322 of these units are subject to the consolidated loan agreement 1 utilizing the C ity’s/Housing Authority’s restricted housing funds (projects listed in Attachments 1 and 2). These funds have two sources: 1) federal HOME Investment Partnership (HOME) funds, and/or C ommunity Development Block Grant (CDBG) f unds (City funds/City Note ); and 2) Low- and Moderate-Income Housing funds of the former Redevelopment Agency (Authority funds/Authority Note ).2 BHC’s portfolio of units have restricted rents for the C ity’s Extremely-Low, Very-Low, Low- and Moderate-Income households. Between 1999 and 2006, the former Agency/City, and BHC had 12 separate Affordable Housing Agreements, which acted as separate loan agreements and disposition agreements, each with a separate promissory note and separate deed of trust to secure the loan. The separate projects had different dates to track affordability and payment obligations, making administration difficult for both parties.
Approved by the City Council (Council) in 2006, and signed in January 2007, the parties amended the prior documents creat ing one consolidated loan agreement for past and future projects, with one consolidated note (divided by City and Authority funds) and all secured by one deed of trust. Driving this effort was BHC’s need for assistance to pay off private lending on some of its housing projects.
3 In 2008, the consolidated documents
were amended to clarify certain terms after the Agency conducted an audit of BHC. The consolidated process treated each of the separate projects as one large project and added a remedy for default providing for cross collateralization and cross default , meaning if a breach occurred at one property, the City/Authority could foreclose on all of the properties. Terms of payment for the Authority loan were not changed and would only occur when income exceeded operating expenses (called residual receipts). The City loan (with minor exceptions) never accrued interest nor had payments due unless there was a default in affordability obligations. As part of the loan consolidation, the affordability covenants were all extended for a minimum of 55 years at each project.
Since 2006, the note balance has risen significantly and created bookkeeping challenges to BHC, since very little principal has been paid and a balloon payment is pending on one property in the next ten years . Since rents are restricted on many units, BHC income is limited and up to the 201 2 dissolution of redevelopment, any financing was limited to Agency and City because the Agency could provide a steady funding source for BHC . 4 1 Four accessory dwelling units are not a part of the current MLA discussed later in the report. 2 Redevelopment Agencies were dissolved in the State of California as of February 1, 2012., and the Housing Authority assumed the housing duties of the former Agency.
3 BHC had experienced problems paying private commercial lenders who held mortgages on five different properties requiring an annual payment in 2006 of $131,700. BHC had also experienced a default with a private commercial lender prior to 2006.
3 As most of the properties after 2006 were rehabilitated , they were added to the loan agreement (called the Master Loan Agreement). Now that future Agency/Authority funds have mostly been eliminated, and BHC has grown into a more sophisticated and experienced successful housing provider, the parties desire to modify the loan as discussed below.
2024 Study Sessions
Study sessions were held at Council meetings on August 13, 2024, and November 26, 2024, to discuss the long- time partnership between the City and BHC and present a proposal from BHC for proposed amendments to the Master Loan Agreement (MLA).
BHC’s proposed amendments have been divided into phases to ensure proper review and implementation. This report presents Phase 1 of the proposed amendments for Council’s consideration, which makes global accounting and oversight changes . As the Authority no longer receives ongoing r estricted housing funds to assist BHC, these changes may give BHC the flexibility to apply for other funding sources, such as grants to help finance the existing projects. The proposed amendments may also place BHC in a more favorable position to investors for future development , which would require Authority/City action, and which may involve state and federal tax credits or private funds.
In addition, the proposed changes would streamline the administrative process, allowing for the successful continuation and growth of BHC. Future phases may include efforts to provide increased cash flow and address other accounting matters, such as , but not limited to, reserve account policies. It is anticipated that it will take a minimum of three future meetings for Council to assess each area of policy consideration (future phases of MLA amendments would only be financial/policy matters and not subject to the California Environmental Quality Act).
During the study session on November 26, 2024, staff and BHC presented the proposed terms for Phase I of the MLA amendment. Council provided feedback and direction for consideration as described in the next sections of this report.
DISCUSSION
As discussed during the August and November 2024 study sessions , the City and Authority have utilized its restricted housing funds to finance BHC projects. L ong-term affordability covenants w ere handled on a project -by-project basis for a minimum of 55 years, following the more restrictive funding source requirements (which has been the Authority). In addition, the affordability period was extended on all projects each time a new property was added, known as the evergreen provision.
4 MLA Amendment Phase I Proposed Terms
The MLA Amendment Phase I proposes changes to the following financial terms with the assumption all interest past and present is forgiven:
1. Resetting balance of each loan to the actual amount loaned by the Authority and City when funds were initially dispersed making interest zero and forgoing all past and outstanding and future interest.
2. Forego 1/55th of the principal balance of each loan that used Authority funds each year provided BHC is in compliance with all the agreements (especially the Affordability Restrictions) of each property. Reset the term of the City Notes to be the date funds were dispersed until the 15-year, as required under HOME regulations, and forgive a portion of principal amount on the initial 15- year terms of each original note with one exception described in No. 5 below. This proposed term also removes the “Residual Receipts” payment requirement.
3. Reset the term of the Authority Notes to an additional 55 years to correspond to the Affordability Period.
4. Reset affordability restrictions ( the Affordability Period) to greatest feasible time and no less than 55 years on Authority loans and City loans. The new affordability covenants will terminate on April 1, 2080 for all of the units.
5. As to Fairview properties (projects No. 1, 7, 8a), these notes, City and Authority (collectively Fairview Notes) shall be modified, as above, but not as to forgiven annual payments; rather the notes are extended for 55 years, the entire balance deferred and due at the end of 55 years (which extends HOME obligations in City Notes as well). Also, the term of the City Notes is not shortened to reflect 15 years; instead, the Fairview Notes (including the City Notes) are all extended 55 years.
However, if the Fairview properties are not released from the Master Loan Agreement by Council action within five years, then the Fairview Note shall be changed administratively to include all of above consistent with other notes.
Interest Term Overview
During the November 26, 2024 study session, staff presented the alternative to BHC’s interest term that is to include accrued interest in a new note balance as of December 31, 2024. BHC’s concern with staff’s proposal is that it likely eliminates the opportunity for new financing. BHC shared with the Council that they need a positive balance sheet to secure new financing and develop the organization to create more affordable units in the community. Retaining the accrued interest with the promissory note balances protects the Authority’s right to recover the asset should there be a future foreclosure (Attachment 3) and, alternatively, assures the Authority a fair return on their affordable housing investment in the unlikely event a junior lender was to foreclose on the properties as the Authority’s senior loans would have to be paid off in such a foreclosure. With reduced loan amounts, this risk increases. The increased loan amounts create an additional level 5 of security to enforce BHC obligations, including the affordability restrictions. However, the Council could still forgo the interest and retain affordability of the units. T he City and Authority’s primary goals are the preservation, maintenance, and expansion of affordable housing opportunities rather than protection or repayment of principal and interest. These goals are best assured by enforcing recorded affordability covenants in the Regulatory Agreements, and by working with BHC to maintain existing assets and potentially expand their capacity to build more affordable housing.
Council is being asked to make the policy decision as to whether BHC’s potential growth outweighs the risk of potentially losing some of the value of invested housing funds if BHC defaulted on its obligations and/or if the City/Authority had to foreclose on a property. The Council asked staff to summarize BHC’s proposed interest term and staff’s alternative.
Amended and Restated Master Loan Agreement – Phase I and Related Documents To memorialize the proposed MLA Phase I, which is a loan modification reducing the amount owed by BHC to the Authority, several documents will be amended and restated to: reflect the new loan terms, extend the affordability covenant for an additional 55 years, and remove the provision of residual receipts payments for the Authority loans. Authority notes are proposed to be forgiven 1/55 th annually so long as BHC is in compliance with agreements; and City Notes will be reduced to th e terms required by HOME regulations (15 years) commencing with the dispersal of funds. This reduction may allow BHC to address over -income tenant issues without extra HOME regulations. The documents which are before Council/Authority Board for consideration are:
1) Amended and Restated Master Loan Agreement – Phase 1, which incorporates the term changes presented during the November 26, 2024 Study Session; and with the proposed forgiveness of the accrued interest (Attachment 4). 2) Amended and Restated Authority and City Promissory Note s to reflect new loan amounts with no interest (Attachment 5).
3) Amendment to the Regulatory Agreement s ( which includes the regulatory agreements that splits the Catalina and Fairview regulatory agreement for Project 8); and recorded for each property (Attachment 6).
4) Amended and Restated Deed of Trust to reflect the new loan amount ; a nd recorded (Attachment 7).
5) G round Lease amendments for three properties: i) 313 W. Valencia Avenue and 427 W. Valencia Avenue (two separate properties) , and ii) 1801-1805 and 1819 Grismer Avenue (third property). Leases are extended and amended to match the new affordability covenant of 55 years; modified to remove the interest and residual receipts provisions; and make other slight modifications for consistency with the Amended and Restated Master Loan Agreement (Attachment 8).
6 The documents listed as items 2-5 above are exhibits to Attachment 4, the Amended and Restated MLA, and can be considered by Council/Authority Board separately if desired.
Each document is included as a separate attachment to this staff report for ease of reference and consideration.
Authority and City Notes
The different Authority and City notes are tied to a specific BHC “project.” In most cases there is more than one loan per project/property comprised of both former redevelopment agency funds, or federal HOME/CDBG funds. There are a total of four notes for accessory dwelling units at 159 W. Linden Avenue and 2219 N. Niagara t hat are not a part of the MLA, and that already have the forgivable principal and zero interest terms . Therefore, those notes will not be a part of this proposed action of the MLA Phase I.
Furthermore, there will be one separate note for 2321 N. Fairview Street and 2321-2323 N. Catalina Street f or ease of future refinancing and new development opportunities (similar to the split of the Regulatory Agreement). The original note balance was divided between the two properties based on development scope. Finally, a list of the Authority and City Notes will be attached to the Amended and Restated Master Loan Agreement – Phase I for ease of reference (Attachment 9).
ENVIRONMENTAL REVIEW
The refinancing of the BHC loan is not a project subject to the California Environmental Quality Act (CEQA) under State CEQA Guidelines § 15060(c)(2), in that the refinancing will not result in a direct or reasonably foreseeable indirect physical change in the environment, and is further and independently exempt from CEQA under State CEQA Guidelines § 15061(b)(3), in that it can be seen with certainty there is no possibility the refinancing will have a significant effect on the environment.
FISCAL IMPACT
The MLA Phase I amendment changes have no fiscal impact to the City, but may have a fiscal impact to the Housing Authority . As to forgiving the payments, there is no fiscal impact to the City or Authority. The MLA, as it is currently structured, requires BHC to make payments on Housing Authority loans only if cashflow allows. The MLA utilizes the term “Residual Receipts” payment which means, under the current structure, BHC will only make a payment on Housing Authority notes after revenues are applied to all approved expenses, including funding operating and capital replacement reserve funds.
The intention has been that if there is cash left at the end of each year, the proceeds would go toward future capital improvements. The notes with the City for HOME and CDBG funds are structured as forgivable loans, and no payment is expected if obligations of the agreements are met.
7 Phase 1 of the MLA changes BHC’s books/accounting sheets by removing expected debt that exceeds revenues. Since the debt is only paid if certain BHC revenues exist, i t is unlikely that a substantial amount of the debt would ever be repaid. With the limited rent revenue received for these affordable housing units, and expenses that continue to escalate, BHC will not have the revenues to meet the current debt repayment terms of the MLA while continuing to fund agreement property obligations.
However, there is a fiscal impact to the Authority by eliminating all interest and resetting the balances of the notes to the amount loaned by the Agency. This impact is that the amount secured by a deed of trust is reduced, which would be problematic should a junior lender put BHC in default and foreclose. Should that happen, the Authority might be paid off by the junior lender and any security on that property eliminated. While that situation could occur without reducing the amount of the notes, the risk is higher once the note amounts are reduced. In other words, the Authority’s security is reduced.
Forgiving the accrued interest may allow BHC to secure new debt ; but it is not a guarantee. Most likely with any new debt, junior or otherwise, the City and Authority may likely be presented with other amendments, especially consideration to subordinate loans/deed of trust to the new debt. However, assuring preservation and maintenance of the affordable units themselves is also achieved by enforcing the affordability covenants recorded in the Regulatory Agreements, which the City and Authority can enforce regardless of when the accrued interest on the loans is forgiven.
CONCLUSION
The consideration of the MLA Phase I was presented to the City Council during a Study Session on November 26, 2024. During that discussion, staff summarized BHC’s proposed terms for Phase I, and staff’s alterative for one term only; forgoing accrued interest. As described earlier in this report, BHC desires a positive balance sheet in order to secure future financing to continue their mission of creating affordable housing in the community. Staff presented the alternative of adding the accrued interest t o the note balances. By approving the proposed term of forgoing the accrued interest, the Council is making the policy decision as to whether BHC’s potential growth outweighs the risk of potentially losing some of the value of invested housing funds if BHC defaulted on its obligations and/or if the City/Authority had to foreclose on a property. However, the City’s and Authority’s primary goals are the preservation, maintenance, and expansion of affordable housing opportunities rather than protection or repayment of note principal and interest. These goals are best assured by enforcing recorded affordability covenants in the Regulatory Agreements.
8 In summary, BHC’s MLA Phase 1 proposal will allow BHC to have favorable financial records, should it desire (subject to City/Authority approval) to work with other agencies or funding sources to receive outside assistance for projects ; to continue BHC’s Mission to provide affordable housing in the community . However, Phase 1 of the MLA may not make BHC solvent in the long- term. BHC provided an update to Council during the November 26, 2024 study session on their financial health, and provided an overview of future discussions on other proposed terms to be considered at later dates.
ATTACHMENTS
Attachment 1 – Housing Authority Resolution
Attachment 2 – City of Burbank Resolution
Attachment 3 – Interest Term Comparison
Attachment 4 – Amended and Restated Master Loan Agreement (MLA) – Phase I Attachment 5 – Amended and Restated Promissory Notes (as exhibits to the MLA) Attachment 6 – Amended Regulatory Agreements (as exhibits to the MLA) Attachment 7 – Amended and Restated Deed of Trust (as exhibit to the MLA) Attachment 8 – Ground Lease amendments for 313 W. Valencia Avenue, 427 W.
Valencia Avenue and 1801- 1805 & 1819 Grismer Avenue (as exhibits to the MLA)
Attachment 9 – List of Authority and City Notes