STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of July 9, 2024
TO: Mayor and Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
SUBJECT: Redevelopment Housing Successor and Business Loan Administration RECOMMENDED ACTION:
Provide direction on the administration of housing and business loans issued by the former Hercules Redevelopment Agency. Authorize writing off loans that are uncollectible due to foreclosure, bankruptcy, or business closure. Authorize staff to restructure non-performing loans that have overdue balances by negotiating amended loan agreements.
DISCUSSION:
Background
The former Hercules Redevelopment Agency (“Former Agency”) issued loans for seven housing programs from its Low- and Moderate-Income Housing Fund (“Housing Fund”) plus one small business development loan program. State law dissolved California redevelopment agencies in 2012. At the time, the City did not elect to become Housing Successor to retain housing assets and functions of the Former Agency. The Contra Costa County Housing Authority (“Authority”) became a Housing Successor by operation of law, but the Authority refused the transfer of any assets. Former Agency loans were not administered for several years as a result.
With the Authority declining to exercise Housing Successor functions, the City elected to become Housing Successor on February 27, 2024. As Housing Successor, the City gained access to over $4.9 million in affordable housing funds collected from housing loan repayments since its dissolution. The City may also resume the administration of outstanding housing loans issued by the Former Agency.
City Staff and the City’s consultant, RSG, have reviewed outstanding loan files and seek City Council direction on uncollectible and overdue loans prior to resuming loan administration. All outstanding balances and penalties cited in this report are as of June 30, 2023.
Outstanding Loans
There are 77 outstanding loans with a $6.8 million balance:
65 housing loans with a $5.5 million outstanding balance 12 business loans with a $1.3 million outstanding balance The outstanding loans are related to seven home loan programs and one small business loan program as shown in Table 1.
Table 1
Summary of Outstanding Loans
Most loans have a 30- to 40-year term with 3% simple interest and are payable monthly. Appendix 1 summarizes each loan program’s key loan terms, including policies regarding acceleration, resale restrictions, agency purchase option, and equity sharing (if any).
Annual revenues from loan repayments vary widely based on home sales activity. The City collects roughly $100,000 from recurring payments and $400,000 from loan payoffs on average per year. The City has also collected $1.7 million in funds from small business loans.
Allowable Use of Housing Loan Repayments
Loan repayments from the seven housing loan programs must be deposited into the Housing Successor Low- and Moderate-Income Housing Asset Fund (“Housing Asset Fund”). Housing Asset Funds may be spent on affordable housing development, homeless prevention (if eligible), and administration pursuant to California Health and Safety Code Section 34176.1.
Affordable Housing Development
Housing Asset Funds must be spent on affordable housing development. This includes new construction, acquisition and rehabilitation, substantial rehabilitation, acquisition of long-term affordability covenants, or preservation of affordable housing with expiring rental restrictions. In addition:
at least 30% of Housing Asset Funds must be spent assisting extremely low-income rental housing, no more than 20% of Housing Asset Funds may assist low-income households (60-80% of the Area Median Income), and no more than 50% of units assisted may be restricted to seniors.
Homeless Prevention and Rapid Rehousing
If the Former Agency met certain affordable housing production requirements, the Housing Successor may spend up to $250,000 per year on homelessness prevention and rapid rehousing services. Expenses must assist individuals and families who are homeless or who would be homeless but for the assistance. Hercules’ eligibility will be confirmed after analyzing market rate and affordable housing development activity since 2010.
Administration
Annual administrative expenses are generally capped at $200,000 per year adjusted for inflation since 2013-14, as calculated by the California Department of Housing and Community Development (“HCD”). The limit for 2023-24 was $263,100.
It is common practice to set aside at least $500,000 to $1 million in Housing Asset Funds for administrative costs. It is important to note there is no ongoing revenue source for housing successors. The only revenue source for the Housing Successor is loan repayments. If the Housing Successor assists affordable housing development, the assistance is commonly structured as a 55-year residual receipt loan, which is repaid annually based on available revenues net of certain expenses and repaid in full at the end of the loan term unless forgiven.
Items for City Council Direction
Write-Off Uncollectible Loans
Based on a review of loan files, 30 loans with an outstanding balance of $2.6 million are uncollectible due to foreclosure, bankruptcy, or business closure.
Foreclosure: There are 25 loans with an outstanding balance of $2.0 million that are uncollectible due to foreclosure. Of that amount, 21 homes were foreclosed and underwent a trustee sale. Trustee sales proceeds were insufficient to pay off all debt, leaving a balance due on Former Agency loans. There is no evidence the City or County Housing Authority filed a deficiency judgment to demand remaining payments, which must be filed within three months of the trustee sale. For the remaining 4 homes, the Former Agency exercised its option to purchase the homes and resell them to recover loan proceeds.
Bankruptcy: There are 6 loans with an outstanding balance of $676,760 that are uncollectible due to Chapter 7 or Chapter 13 bankruptcy. The City was invited to make a claim during bankruptcy proceedings but there is no evidence the City or County Housing Authority did so.
Of the 6 loans that are uncollectible due to bankruptcy, 3 loans with a $211,415 balance are also uncollectible due to foreclosure.
Business Closure: There are 2 business loans with an outstanding balance of $186,633 that are uncollectible because the businesses closed, and they no longer hold collateral property that can be used to repay the loans if they are sold. The City could file a legal claim to pursue repayment, however the legal costs associated with such an effort would likely outweigh the benefit.
City staff seeks City Council authorization to write off 30 loans with a $2.6 million balance that are uncollectible due to foreclosure, bankruptcy, and business closure as detailed above and summarized in Table 2.
Write-Off Penalties
Three loan programs impose penalties, typically $5 per day after the 5th day of the month that payments are late. There are 45 loans with $638,310 in estimated penalties, of which $381,940 is on uncollectible loans and $256,370 is on collectible loans. Table 2 summarizes penalties by loan type.
City staff seeks City Council authorization to write off penalties for uncollectible loans and forgive penalties for collectible loans. This avoids penalizing borrowers who did not make payments while loans were not actively administered after dissolution. Penalties may be enforced after the City resumes actively administering collectible loans.
Total Write-Offs and Remaining Collectible Loans
The recommended write-offs total $3.3 million (30 uncollectible loans totaling $2.6 million and $638,310 in penalties). This leaves 47 loans with an outstanding balance of $4.2 million that remain collectible.
Table 2 summarizes the number and outstanding balance of uncollectible and collectible loans and penalties. Table 3 summarizes loan status by program.
Table 2
Summary of Uncollectible and Collectible Loans
Table 3
Summary of Loan Status by Program
Restructure Non-Performing Loans
Of the 47 collectible loans, 21 loans are performing (no overdue balances) and 26 loans are non-performing (carry an overdue balance). Table 4 summarizes the number of performing and non-performing loans by program.
Table 4
Summary of Collectible Loan Performance
City staff seeks City Council authorization to restructure non-performing loans. This may include negotiating amended loan agreements that extend loan repayment periods and establish new monthly loan payments within each borrower’s ability to pay. City staff will develop an administrative plan to restructure non-performing loans and present it to City Council at a future meeting. Any amended loan documents will be presented to City Council for approval.
Summary of Recommended Actions
In summary, staff seeks City Council authorization to:
Write-off 30 loans with a $2.6 million balance that are uncollectible due to foreclosure, bankruptcy, and business closure as summarized in Table 2.
Write-off or forgive $638,310 in penalties for 45 loans as summarized in Table 2.
Restructure non-performing loans that have overdue balances. City staff will develop an administrative plan to restructure non-performing loans and present it to City Council at a future meeting.
FISCAL IMPACT:
The write-off reflects loan receivables with a $2.6 million outstanding balance and $638,310 in penalties due to foreclosure, bankruptcy, and business closure that are not likely to be collected. Therefore, these uncollectible loans receivable should not continue to be recorded as assets in the Housing Successor’s accounting records to comply with Generally Accepted Accounting Principles (GAAP).
ATTACHMENTS:
Resolution
Appendix 1: Loan Program Summary