EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: March 17, 2020
TO: Honorable Mayor and Members of the City Council
VIA: Jaime M. Fontes, City Manager
BY: Rachel Horst, Housing Project Manager
Patrick Heisinger, Assistant City Manager
SUBJECT: City Council Consideration of Nugent Square Refinance 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 refinancing of the Nugent Square Apartments, in a form 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.
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 complex, of which 31 units were constructed and setaside for very-low and extremely-low income households, with 1 unit as the employee’s unit (collectively, the Project). The City Loan and Regulatory Agreement that income-restricts the Property has an initial term of 55-years from completion of the Project; the City Loan matures in 2044.
In 2004, the Developer completed the Project and since that time has been managing the
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Project in accordance with the terms and conditions of all lenders who provided financing. In January 2020, the Developer notified the City of their intent to refinance the Project’s senior loan. Please see Attachment 2 for a letter from the Developer.
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 feedback from the City Council regarding the specific deal terms of the proposed refinancing.
Analysis
Developer Proposal
By refinancing the Project at this time, the Developer aims to accomplish the following:
avoid approximately $500,000 in high yield maintenance fees; secure a lower interest rate of 4.26% (compared to current 6.73%); and reduce existing debt to the Project.
Through the refinance process, the Developer seeks to secure a new loan of $1,826,754, with an interest rate at 4.26%, which requires monthly interest-only payments, for an 18-month term with a 12-month option to extend. The Developer proposes the following allocations:
$1,566,000 Existing first mortgage repayment (in its entirety) $148,000 Other transaction-related costs, including City legal fees $50,000 Payment on City Loan
$50,000 Payment on subordinate loan with County of San Mateo The Developer is not requesting cash-out proceeds from the refinance. The new financing would be underwritten at a 1.15 debt service coverage ratio.
As a lender to the Project, the City must consent to the transaction before the Developer may take steps to refinance. As noted above, through the refinance process, the Developer will seek to lower the Project’s interest rate from 6.73% to 4.26%. This interest rate reduction would result in approximately $85,000 in additional annual cash flow from avoided debt service payments. The Developer proposes to set aside this additional cash flow in the replacement reserve account to make necessary short-term capital improvements to the Project.
The Developer intends to evaluate the possibility for resyndication for rehabilitation of the Project in or around 2021/22. Given recent changes at the State level, the Developer is uncertain if the Project is competitive to receive an allocation for new 4% tax credits.
Concurrently, the Developer will evaluate alternative financing solutions for the rehabilitation.
The Developer is seeking to obtain City approval in a timely manner to avoid the high yield maintenance costs that would be due at close of resyndication and create a negative financial burden on the Project if the Developer does not complete the refinance process within the allowable period of 02/01/2020 to 04/30/2020.
City staff support the Developer’s intent to refinance in order to secure a lower interest rate, avoid yield maintenance, and preserve property level cash flow for capital improvements and as a source for the rehabilitation.
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City Staff Proposal in Response
The potential refinancing of the Project presents an opportunity for the City to negotiate key deal terms with the Developer. City staff finds several of the deal terms originally offered by the Developer, as outline above, to be reasonable. The City recognizes the need for successful developers, such as Eden Housing and EPACANDO, to refinance properties to ensure that they remain preserved and affordable. The propose refinancing is beneficial for the City and the Project because it extends the affordable agreement, and the annual saving from debt service will be used for physical improvements to the Project, to repay a portion of the City Loan, and to support affordable housing developers like Eden Housing and EPACANDO.
The draft deal terms proposed by City staff allow for shared benefits for both City and Developer, including the following elements:
1. The regulatory agreement will be extended for 5 years, thus guaranteeing that the affordable units within the Project remain affordable for a longer time period.
2. The City should receive a loan repayment of $50,000.
3. The County of San Mateo should receive a loan repayment of $50,000.
4. The Developer will pay the City a one-time $10,000 fee to cover the City’s legal expenses to facilitate the re-finance.
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.
USES New First
Mortgage
% of
Total
Total $1,826,754 100%
Repayment of Existing First Mortgage $1,566,354 85%
Transaction related costs $148,400 8%
Partial Repayment of City Loan $50,000 3%
Partial Repayment of County Loan $50,000 3%
Contingency $12,000 1%
Surplus/(Deficit) $0
Next Steps
City staff intends to return to the City Council in April, to discuss and seek authority for the necessary actions to complete the refinance. The Developer intends to close on the loan by end of April 2020.
Fiscal Impact
If approved, the City would receive an early loan payment of $50,000.
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
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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.
Attachments
1. Resolution
2. Letter to City of East Palo Alto
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RESOLUTION NO.
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF EAST PALO ALTO
AUTHORIZING THE CITY MANAGER TO NEGOTIATE AND EXECUTE AMENDMENTS TO
EXISTING CITY OF EAST PALO ALTO LOAN AND REGULATORY AGREEMENTS RELATING TO
THE REFINANCING OF THE NUGENT SQUARE APARTMENTS
WHEREAS, in 2003, the former Redevelopment Agency of the City of East Palo Alto ("Former Agency") provided a loan of $1,100,000 (“City Loan”) to the partnership of Nugent Square Partners, LP, controlled by Eden Housing, Inc. and EPACANDO (jointly, “Developer”) for the development of the Nugent Square Apartments, a 32-unit affordable housing complex, of which 31 units were constructed and set aside for very low- and extremely low-income households, with one unit set aside as the employee’s unit (collectively, “Project”); and WHEREAS, the City of East Palo Alto (“City”) elected to be the housing successor to the Former Agency and succeeded to all of the rights and obligations of the Former Agency; and WHEREAS, in February 2020, the Developer notified the City of their intent to refinance the Project which requires City consent and/or approval; and WHEREAS, the City and Developer have negotiated mutually beneficial terms for the Project’s refinancing including:
1. The City’s Regulatory Agreement will be extended an additional 5 years;
2. All other terms of the City’s Regulatory Agreement and City Loan will remain unchanged;
3. The City will receive a loan repayment of $50,000 and the County of San Mateo will receive a loan repayment of $50,000; and
4. The Developer will pay the City a one-time $10,000 fee to cover the City’s legal expenses to facilitate the re-finance.
NOW, THEREFORE, BE IT RESOLVED THAT THE CITY COUNCIL OF THE CITY OF EAST PALO ALTO hereby authorizes the City Manager to:
1. Negotiate and execute amendments to the City’s existing loan and regulatory agreements to effectuate the refinancing of the Nugent Square Apartments, in a form 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.
PASSED AND ADOPTED this 17th day of March 2019, by the following vote:
AYES:
NOES:
ABSENT:
ABSTAIN:
SIGNED:
Regina Wallace-Jones, Mayor
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Packet Pg. 104 Attachment: Resolution (1155 : Nugent Square Refinance) ATTEST: APPROVED AS TO FORM:
Walfred Solorzano, City Clerk Rafael E. Alvarado Jr., City Attorney
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Packet Pg. 105 Attachment: Resolution (1155 : Nugent Square Refinance)
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Packet Pg. 106 Attachment: Letter to City of East Palo Alto (1155 : Nugent Square Refinance)