EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: September 20, 2022
TO: Honorable Mayor and Members of the City Council
VIA: Patrick Heisinger, Interim City Manager
BY: Hansom Hom, Deputy Manager, Special Projects
Patrick Heisinger, Interim City Manager
Karen Camacho, Housing Project Manager
SUBJECT: Renovation and Recapitalization of Nugent Square Apartments at 2361 University Ave
Recommendation
Adopt a resolution authorizing the City Manager to:
1. Negotiate and execute amendments to the City’s existing Loan and Regulatory Agreements to effectuate the transfer of the Nugent Square Apartments to a new limited partnership and the refinancing of the Nugent Square Apartments, in forms approved by the City Attorney.
2. Negotiate and execute subordination agreements subordinating the City's loan and regulatory agreement to the new financing, in a form approved by the City Attorney; and
3. Authorize the City Manager to execute any other documents necessary to complete the new financing provided such documents are approved by the City Attorney.
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
Priority No. 6: Create a Healthy and Safe Community
Background
In 2003, the Redevelopment Agency of the City of East Palo Alto (City) provided a loan of $1,100,000 (City Loan) to the partnership, Nugent Square Partners, LP, controlled by Eden Housing, Inc. and EPA CAN DO (jointly, the Developer) for the development of Nugent Square, a 32-unit affordable housing apartment building, of which 25 apartments were constructed and set-aside for very-low (up to 50% Area Median Income (AMI)) and 6 were setaside for extremely low-income households (up to 30% AMI), with 1 apartment as the onsite employee’s apartment (collectively, the Development). The City Regulatory Agreement that income-restricts the Development had an initial term of 55-years from completion of the Development, ending in 2059. The City Loan has a 40-year term and matures in 2044. Nugent Square also includes second-floor commercial office space which houses the headquarters of EPA CAN DO, the East Palo Alto Community Alliance and Neighborhood Development Organization.
In 2004, the Developer completed the Development and since that time has been managing it in accordance with the terms and conditions of all lenders who provided financing as well as the City’s regulatory agreement.
In March 2020, the City approved a resolution to modify the existing loan documents to allow the developer to refinance the permanent loan on the Development. The refinancing presented an opportunity for the City to negotiate key deal terms with the Developer, including: extending the regulatory agreement by 5 years to 2065, thus guaranteeing that the affordable units remained affordable for a longer time period; the City received a loan repayment of $50,000; the County of San Mateo received a loan repayment of $50,000; and the Developer paid the City a one-time $10,000 fee to cover the City’s legal expenses to facilitate the refinance. The March 17, 2020 staff report with an overview of the refinance can be viewed in Attachment 2.
As of September 2022, the property has made $76,797 in residual receipt payments to the City since being placed into service.
The purpose of this staff report is to: 1) provide the City Council with an understanding of the Developer’s proposal and the staff responses, 2) outline the steps required to complete the proposed refinancing, and 3) obtain approval from the City Council regarding the specific deal terms of the proposed refinancing and authorization to proceed with the refinancing.
Analysis
Developer Proposal
The Developer proposes to substantially renovate the Development with proceeds from a competitive tax credit (9% Low-Income Housing Tax Credits or “LIHTC”) award from the California Tax Credit Allocation Committee or “CTCAC” and $3.5 million in soft new loans from San Mateo County bearing 3% simple interest and repaid through residual receipts during the loan's 55-year term. The City’s existing loan on the property will be subordinated to these new County loans, as well as the loans for the construction and permanent mortgage lender.
The construction is anticipated to last from December 2022 to October 2023, and the work will improve the existing residents’ quality of life. No permanent relocation is anticipated and the Developer desires all current residents to continue living at Nugent Square. In-unit work will require temporary relocation of residents during construction for an anticipated duration of 4 weeks. Residents will continue to pay rent during relocation. Resident’s relocation costs, including moving expenses and accommodations at a nearby hotel, will be paid by the Developer in accordance with state and federal regulations. The scope of work has the following components:
· Repairing water damage to the stucco stairways
· Upgrading or replacing the elevator
· Replacing the roof
· Replacing and resurfacing the playground
· Improving the HVAC system in the management offices, services area and computer room.
· In-unit upgrades, including new mechanical/electrical/plumbing equipment when necessary, new cabinets and countertops and new flooring · Installing energy efficiency improvements such as LED outdoor lighting · Repainting the development and making other “curb appeal” improvements.
In order for the Development to meet tax credit financing regulations, the property will be transferred to a new limited partnership that will continue to have Eden and EPA CAN DO as the general partners. The City must consent to its existing outstanding loan balance of approximately $1.2 million being assigned to a new Limited Partnership that will own the Development. The terms of the City loan and regulatory agreement would be modified so both the loan term and affordability covenants would extend for 55 years from the completion date - anticipated to be 2078. The city loan currently matures in 2044 and the regulatory agreement ends in 2065. Interest will be paid at the compounding Applicable Federal Rate (AFR). As of September 2022, the AFR is 3.14%. The interest rate in the existing loan agreement is 1% so the new rate would be more favorable to the City. The City also would need to agree to subordinate its loan and regulatory agreement to the loan of San Mateo County, and to the loans of the construction and permanent bank lender.
The Developer proposes to pay the costs of the City’s legal fees up to $50,000 to modify the existing loan documents. The developer also proposes to extend EPA CAN DO’s commercial lease in the project to 20 years -from 2040 to 2060 at the same rent of $1 per year. The value of this lease extension is estimated at over $2,100,000 for 20 years based on market rents for comparable office space in East Palo Alto.
The new financing would be underwritten at a 1.15 debt service coverage ratio.
City Staff Proposal in Response
City staff support the Developer’s intent to recapitalize and rehabilitate the Development in order to provide structural improvements to the building envelope, enhance the common areas and provide in-unit upgrades.
The proposed recapitalization presents an opportunity to bring additional resources into a 100% affordable housing development within city limits. Opportunities to recapitalize and substantially renovate existing affordable housing developments in California have become increasingly rare in the last two years given the competitive landscape for both 4% and 9% tax credits.
The City recognizes the need for successful developers, such as Eden Housing and EPA CAN DO, to recapitalize and substantially renovate existing affordable developments to ensure that they remain preserved and affordable. The proposed refinancing offers the following benefits to the Developer and the City:
· Extends the long-term affordability covenants for a new 55-year term beginning at the issuance of the certificate of occupancy; this represents a 13-year extension of the affordability covenants from 2065 to 2078.
· Extends the loan terms 38 years, from 2044 to 2078, at a higher interest rate. · Invests over $7 million in construction costs into the project to ensure the units are preserved as long-term affordable housing with necessary repairs and renovations. · Allows for EPA CAN DO, an important community serving institution, to have a commercial lease at the site extended for 20 years, until 2060, at a nominal rent, assisting EPA CAN DO in remaining financially viable.
· The Developer will pay the City cost-recovery up to $50,000 for the City’s legal expenses to facilitate the recapitalization.
To conclude and summarize, the transaction will preserve the affordability restrictions of the units at Nugent Square by extending the duration of the City’s loan and the regulatory agreement. The refinancing also will ensure the affordable units continue to provide quality housing for the residents by improving the existing units. The lien position of the City’s loan will remain in the current position (subordinate to other existing debt including the County’s loan although the County loan amount will increase).
The table below reflects this proposed breakdown of the Developer’s new financing. All numbers are preliminary and subject to change due to potential changes in financing terms.
Table 1
Next Steps
The Developer intends to close on the recapitalization in November 2022, begin construction in December 2022 and complete construction in October 2023.
Fiscal Impact
The increased interest rate from 1% to 3.14% will result in a larger interest payment and revenue for the City at loan maturity. There is no other net fiscal impact for the City.
Public Notice
The public was provided notice of this agenda item by posting the City Council agenda on the City’s official bulletin board outside City Hall and making the agenda and report available at the City’s website and at the San Mateo County Library located at 2415 University Avenue, East Palo Alto.
Environmental
The action being considered does not constitute a “Project” within the meaning of the California Environmental Quality Act (CEQA), pursuant to CEQA Guideline section 15378 (b)(5), in that it is a government administrative activity that will not result in direct or indirect changes in the environment.
Photos:
View from University Avenue
View From Weeks Street
Attachments
A. Resolution
B. March 17, 2020 Staff Report