To
Members of the Board
Rialto Housing Authority
From
Maryann Goodkind
Date
February 4, 2025
Direct line
+1 213 892 9328
Email
[email protected]
Re
Analysis of Citrus Grove Apartments – National CORE Proposal to Modify Housing Authority Loan and Forgive Estimated $14 Million
BACKGROUND
Citrus Grove Apartments (formerly known as Willow-Winchester Condominiums) In 2002, the City desired to redevelop the project known as Willow-Winchester Condominiums located at Willow and Winchester within the City which was generally characterized by a high crime rate and blighted conditions. The City desired to purchase all of the units and turn the units over to a 501(c)(3) nonprofit corporation to operate as multifamily residential rental property. In 2004 the Rialto Housing Authority (RHA) began the process of acquiring units, and entered into an Affordable Housing Agreement, dated February 1, 2005 (the “AHA”), with Southern California Housing Corporation (“Socal Housing”), pursuant to which, among other things, the Housing Authority agreed to sell to SoCal certain units of affordable housing and to provide a residual receipts loan in the original principal amount of $14,754,722 (the “Residual Receipts Loan”) to enable SoCal to acquire, renovate, convert and operate such housing units as 150 affordable rental units (the “Affordable Units”), plus 2 manager units (collectively, the “Project”). Socal Housing committed to leasing fifty percent (50%) of the Affordable Units to very low-income households and the remaining Affordable Units to lower-income households, all at affordable rent levels. The affordability period was set at fifty-five (55) years from the date the rehabilitation was completed.
The funds to acquire the units for the Project included the Housing Authority’s Residual Receipts Loan, County/HUD loan (“HOME” program funds) and California Housing Finance Agency (“HELP” program funds). The former Rialto Redevelopment Agency issued taxable housing set-aside bonds (“RDA Housing Bonds”), a portion of the proceeds of which were given to RHA to make the Residual Receipts Loan.
In 2006, the AHA was assigned by Socal to Inland Valley Housing Partners, L.P., a California limited partnership (the "Borrower"). National Community Renaissance of California (“National CORE”) has a direct interest in the Borrower and is the Manager for the Project.
The Residual Receipts Loan was evidenced by a promissory note (the "Note") executed by the Borrower in favor of RHA, dated August 1, 2006, and secured by a Deed of Trust (the "Deed of Trust"), dated August 1, 2006, and recorded against the Property. The Note accrues interest at a rate of 3% annually and has a maturity date of August 1, 2061.
Residual receipt loans are a common tool utilized by public agencies to create and assure affordable units over an extended period of time. Under a residual receipts loan, the nonprofit repays the loan from project revenues, on a highly subordinated basis. Some money may eventually come back to the public agency through the residual receipts note, but it is the expectation that because the residual receipts notes are payable after operating, capital and senior debt service expenses, the likelihood of full or substantial repayment is very remote. In 2004 the City was discussing whether or not to forgive the note after a period of years.
The benefit of the residual receipt loan is to provide affordable units and to lock in the affordability of those units over a lengthy period of time through an affordable housing agreement and regulatory agreement.
The Residual Receipts Loan is subject to the terms and conditions of a Regulatory Agreement (the "Original Regulatory Agreement") by and between RHA and the Borrower dated August 1, 2006 and recorded against the Property which contains the requirements applicable to tenant selection, tenant income levels and unit rent restrictions as well as the affordability period. There exists 2 other regulatory agreements on the property that also restricts the all or a portion of the units for a period of 55 years.
The total estimated costs of the acquisition and renovation of the Project was approximately $35 million. Improvements were made at the Project in 2005-2007 and permanent financing was put into place. Currently, the loans secured by the Project are as follows:
(i) a senior loan in the original principal amount of $19,300,000 originally made by Housing Capital Company and later assigned to U.S. Bank National Association, a portion of which loan was repaid when rehabilitation was completed leaving a balance owing in the original principal amount of $2,591,000 ("U.S. Bank Debt"); (ii) a loan in the original principal amount of $8,362,659 held by the Department of Housing and Community Development, a public agency of the State of California ("State HCD Debt"); (iii) the RHA Residual Receipts Loan;
(iv) a loan in the original principal amount of $3 million made by the County of San Bernardino under the “HOME” program; and (v) Federal Home Loan Bank (AHP) loan in the original principal amount of $1 million.
As was expected in a residual receipts loan, little of the Housing Authority Note has been paid down absent a payment of $700,242 that was made at the time of making of the permanent loan pursuant to the Note. The amount of repayment on the Residual Receipts Loan since 2006 is as follows:
Historical Cash Flow 2006-2024
The current balance on the Note is $21,978,163 (principal and accrued interest).
The Housing Authority shares the residual receipts with HCD Debt and the County “Home” Loan in proportion to their original principal loan and with the developer. The AHA, the Regulatory Agreement and Note reference that residual receipts are the Annual Project Revenue minus Operating Expenses, Senior Debt Service, Reserve Deposits, Deferred Developer Fees and a partnership management fees. The AHA states in the definition of Residual Receipts that “if such calculation results in a negative number, Residual Receipts shall be zero for that year.”
REVIEW OF NATIONAL CORE PROPOSAL
In November 2024, the Borrower submitted a formal request to the City regarding a financing plan to rehabilitate or renovate the Project leveraging the benefits of tax-exempt bond financing and tax credits.
In 2023, the Borrower commissioned a third party to prepare a property needs assessment for the Project. The Lallo Associate LLP Property Conditions Assessment (the “Assessment”) is attached as Appendix A. The Assessment confirms the need for renovations and improvements. The Assessment provides information on the scope of the needed renovations, use of capital reserves over the last five years, description of capital improvements, and amounts spent on an apartment at the time of tenant turnover. The Assessment confirms the need for renovations and general budget for the renovations of approximately $11-12 million for the renovations. The proposed improvements would include the addition the of new ADA units (Americans with Disabilities Act), replacement of all appliances and HVAC equipment, energy improvements, ADA path of travel, safety upgrades to the stairs, flooring, windows, countertops, and balcony improvements.
In 2023, National CORE applied to the California Tax Credit Allocation Committee for 4% tax credits to provide funding to rehabilitate the Project and was awarded $16 million funding on December 6, 2023. Due to Internal Revenue Code tax implications with the appraised value, the Project had to be reappraised and suffered a loss in some of the property value and eligible acquisition credits. The appraised value of the property came in at $26 million. The existing debt on the property of over $40 million therefore was much higher than the appraised value. National CORE’s tax credit investor as well as tax counsel for the proposed financing informed National CORE that due to tax reasons and recent case law, the "debt in excess of value" will prevent them from being able to enter the partnership and provide the necessary new money funding for the rehabilitation.
National CORE has requested that the Housing Authority (i) modify its existing Residual Receipts Loan by forgiving a portion of the Housing Authority debt that is in excess of the value, currently estimated at $13,913,212 in forgiveness, and (2) require the existing modified Residual Receipts Loan to be paid off from proceeds to be escrowed in a bank account during construction and to be returned to the Borrower at the completion of the rehabilitation through the issuance of a new Residual Receipts Loan with substantially similar terms of the existing modified Residual Receipts Loan. The existing modified Note and the new Note would reflect the lower principal amount (taking into account the forgiveness), would accrue interest at an estimated rate of 4.86% rather than 3% and would be extend the affordability period to fifty-five (55) years from the date of the project completion. The maturity date of the new note would be March 1, 2081.
The financing plan for the renovation includes a construction loan utilizing tax exempt bonds issued through the California Statement Community Development Authority (“CSCDA”) and purchased by J.P. Morgan Chase, during the construction period (allowing for payoff of the U.S. Bank senior loan, and payment of the existing modified Residual Receipts Loan and along with funding of the new loan by the Housing Authority in the same amount). The Federal Home Loan Bank loan will also be forgiven. The Borrower has not requested any forgiveness of the HCD and County loans. No additional new moneys would be required from the Housing Authority.
The resyndication of the tax credits and rehabilitation project is targeted to be completed within 18 months of closing on the construction financing. The close of construction financing is targeted to be no later than 3/17/2025, the final date of closing provided by the California Tax Credit Allocation Committee. If the RHA decides not to move forward with the forgiveness and restructuring of its debt, the $16.8 million in federal funding which would go to the Project ($110,000 federal subsidy/unit) though 4% tax credits will be returned to the State and reallocated to another affordable housing project in another city.
The proforma for the amount of the estimated residual receipts to be received by the Housing Authority following the proposed financing is set for in Appendix B. As noted, the amounts to be expected by the Housing Authority are under $13,000 annually. When comparing the historical note payments received by the Housing Authority (roughly $28,000) to projected residual receipts for the new note, the amounts are minimal in either case.
Additionally, the City will receive a $500,000 modification fee.
LEGAL ANALYSIS
We have reviewed all documents relating to the Residual Receipts Loan, including the Predevelopment Agreements, AHA, as amended, Regulatory Agreement, as amended, the Note, the Option Agreement and all RDA, RHA and City actions.
We have also reviewed the proposed draft documents in connection with the proposed resyndication and rehabilitation financing provided by the Borrower, including those listed on Appendix C.
We have reviewed and commented on the Modification to Loan Documents and Release of Option Agreement, and Second Amendment to the Regulatory Agreement, which modifies the principal amount to reflect the forgiveness, increases the interest rate from 3% to an estimated 4.86% and extends the guaranteed affordability period and maturity of the new note from August 1, 2061 to 55 years from completion of the rehabilitation. We have also reviewed the Assignment of Deposit Account, and the Subordination Agreement provided to us by the Borrower. We have prepared a new draft Affordable Housing Loan Agreement, Second Amendment to the Regulatory Agreement, Note, and Deed of Trust with substantially the same terms as those relating to the existing modified Residual Receipts Note. Such draft documents are attached hereto as Appendix D.
The proposed modifications to the existing loan documents are not prohibited by contract or by law. California Constitution, Article XVI, § 6 prohibits the giving or lending public funds to any person or entity, public or private. The courts have declared that there is no gift of public funds where there exists a public purpose for the disbursement, or in this case the forgiveness of debt.
The Borrower is in compliance with the existing Note, Regulatory Agreement and AHA. All reports and financial statements have been provided to the RHA in compliance with the Regulatory Agreement.
POLICY CONSIDERATIONS
BENEFITS
COSTS
Preservation of Affordable Housing: The proposed restructuring will:
Extend the affordability period to 55 years from completion of rehab.
Ensure quality affordable housing in Rialto for future generations, led by experienced non-profit.
Keeps project 100% affordable with same number of very low income (75 units) and lower income (75 units) Allows the City to meet its compliance obligations under its housing element.
If restructuring occurs by March 2025, it avoids potential future defaults. Borrower could attempt to secure alternative refinancing structure, with property meanwhile continuing to deteriorate in condition and incur higher financing needs. However, any alternative financing plan would very likely require another proposal for Authority loan forgiveness. Or, the lack of financing may result in a default action by RHA and/or foreclosure by a senior lender, resulting in an unknown outcome for the property, its ownership and management. In the latter case of default or enforcement of existing note(s), the most likely outcome is that RHA would still not be paid on the loan given its subordinate position, no collateral for repayment of all subordinate debt, or Housing Authority assuming operation and management of affordable units and subsidizing operating shortfalls)
1. Forgiveness of 14M in Housing Authority debt, which will leave approximately 8M debt owed by the property. Possibly lower residual receipts repayments to Housing Authority over life of new loan which repayments might have been recycled by Housing Authority for other housing uses.
Building Health and Safety: Critical building health and safety repairs, updated code compliance and enhanced accessibility improvements will be part of the overall rehab scope of work.
Financial Benefit:
The City receives an upfront benefit of $500,000.
The interest rate increases from 3% to 4.53%.
The project receives private investment of $16.8M secured by federal subsidy of 4% tax credit and tax exempt bond funding into an existing affordable housing project without need to utilize new City general funds or Housing Authority funds or any other new sources of funding.
Difference between expected current residual receipts and new residual receipts is nominal.
The intended rehab of approximately $70,000 per unit will help stabilize the property economically and improve its ability to generate future cash flow that could be used to pay residual receipts.
Appendix A
Property Conditions Assessment
[attach Assessment]
Appendix B
Pro Forma
Project Summary and Cash Flow
[attach pro forma]
Appendix C
List of Reviewed Documents
A. ORIGINAL HOUSING AUTHORITY LOAN DOCUMENTS
1. Affordable Housing Agreement
2. Regulatory Agreement
3. Estoppel Agreement
4. Option Agreement
5. Promissory Note
6. Deed of Trust
7. Historical Note Receipts
8. First Amendment to AHA
9. First Amendment to Regulatory Agreement
B. FINANCING LOAN DOCUMENTS
Modification to Loan Documents and Release of Option Agreement (RHA) Deed of Trust
Environmental Indemnity Agreement
Payment Guaranty
Completion Guaranty
Rate Lock Guaranty
Assignment of Deposit Account (Tax Credit Equity)
Assignment of Deposit Account (RHA)
Collateral Assignment of Rights to Tax Credits & Partnership Interest Collateral Assignment and Pledge of Developer Fees and Security Agreement Assignment of Management Agreement and Consent and Subordination of Manager Assignment of Construction and Design Agreements
Contractor’s Consent to Assignment
Architect’s Consent to Assignment
Engineer’s Consent to Assignment
Rate Lock Confirmation and Agreement
Replacement Reserve and Security Agreement
Subordination Agreements
19. Subordination Agreement (RHA)
20. Subordination Agreement (County)
21. Subordination Agreement (Sponsor/GP)
23. Subordinate Loan Documents – New Note (RHA)
Affordable Housing Loan Agreement
Promissory Note
Deed of Trust
Second Amendment to Regulatory Agreement
C. BOND DOCUMENTS
1. Regulatory Agreement
2. CSCDA Resolution
3. Master Pledge Agreement
4. Master Agency Agreement
D. ENTITY DOCUMENTS
1. Organizational Documents – Borrower
a. Amended & Restated LPA
b. Partnership Agreement
c. Certificate of Limited Partnership
d. Borrowing Resolution
2. Organizational Documents – Partner
a. Operating Agreement
b. Authorizing Resolution
3. Organizational Documents – Guarantor
a. Authorizing Resolution
D. UNDERWRITING
1. Sources and Uses
2. Evidence of Equity Requirement
E. PROPERTY DOCUMENTS
1. Preliminary Title Report
2. Signed Property Management Agreement
3. Purchase Contract
Appendix D
Drafts of Rialto Housing Authority Documents
[drafts of Modification to Loan Documents and Release of Option Agreement, Second Amendment to Regulatory Agreement, Note, Deed of Trust, Subordination Agreement and Assignment of Deposit Account on file with the Housing Authority] 296679464.3 - 1 -
296679464.3
The RDA Bonds are included in the Successor Agency ROPs and are payable from and secured by future tax increment. No payments under the Residual Receipts Loan are pledged to the payment of the RDA Bonds.
Letter to Robb Steel, Rialto Redevelopment Agency, from Norton Rose Fulbright dated September 13, 2004.
Section 402 of the Affordable Housing Agreement.
For more information on State’s program and award of federal tax credits and the list of awardees for the third round in 2023, including the Developer see https://www.treasurer.ca.gov/ctcac/2023/application.asp and line 47 of https://view.officeapps.live.com/op/view.aspx?src=https%3A%2F%2Fwww.treasurer.ca.gov%2Fctcac%2F2023%2F20230906-r3-award-list.xlsx&wdOrigin=BROWSELINK Members of the Board
Rialto Housing Authority
February 4, 2025
Memorandum
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