November 1, 2022
Community Development
DATE: November 1, 2022
TO: Mayor Butt and Members of the City Council
FROM:
Lina Velasco, Director of Community Development
Jesus Morales, Housing Manager
Subject:
Terraces Subordination Agreement
FINANCIAL IMPACT: There is no fiscal impact to the General Fund related to the execution of the Subordination and Intercreditor Agreement.
PREVIOUS COUNCIL
ACTION:
December 19, 2017
STATEMENT OF THE
ISSUE:
The Housing Division is requesting the City Council
authorize the City Manager to execute the Subordination and Intercreditor Agreement by and between the city of
Richmond, a California municipal corporation and Citibank, N.A. a national banking association, and acknowledged by Richmond Nevin Associates, a California limited partnership.
Failure to execute the subordination and intercreditor
agreement could result in a default of the loan agreement between the developer Richmond Nevin Associates and the lender Citibank, N.A.
RECOMMENDED
ACTION:
AUTHORIZE the City Manager to execute the Subordination and Intercreditor Agreement by and between the city of
Richmond, a California municipal corporation and Citibank, N.A. a national banking association, and acknowledged by Richmond Nevin Associates, a California limited partnership and make any changes to the Subordination and
Intercreditor Agreement that may be needed.– Community
Development Department (Lina Velasco/Jesus Morales 510- 620-6649).
AGENDA
REPORT
November 1, 2022
DISCUSSION:
On December 19th 2017, the City Council authorized the City Manager to negotiate the deferral of up to $1.2 million in project impact fees to offset development costs and facilitate construction of a 271-unit affordable multifamily apartment community on Nevin Avenue. The purpose of the fee deferral was to help close a potential construction funding gap that could occur because of the passage of a proposed tax federal tax reform bill. The exact amount and term of the proposed deferral would be determined after further review of the developer’s pro forma financial estimate.
Upon a review of the developers pro forma including other funding sources for this project the city agreed to defer $500,000 in certain city impact fees payable over a term of 40 years. Per the Fee Deferral Loan Agreement and the Fee Deferral Loan Note the outstanding principal balance of the note will bear simple interest at the rate of 3% per annum commencing on the earlier of (a) permanent loan conversion or (b) the 3rd anniversary of the project construction loan closing until the note is paid in full. The term of the note shall commence upon the date of issuance of certificates of occupancy for the project and shall expire upon the 40th anniversary of such date. The certificates of occupancy for both buildings, 2100 and 2200 Nevin Avenue, were issued on June 10, 2021. Until the original principal amount of the note and interest accrued thereon is repaid in full the developer shall make annual payments to the city of a sum equal to the amount of residual receipts (as defined in the loan agreement) to which developer is entitled in accordance with section 2.3 (a) of the loan agreement.
The Fee Deferral Loan Agreement and the Deed of Trust and Security Agreement both state that the city acknowledges that the city loan will be subordinate to a senior lien, in this case the conversion of the construction loan into the permanent loan.
A subordination agreement is an agreement that acknowledges that one party's interest or claim is superior to another in case the borrower's assets need to be liquidated to repay debts. This is used when there are one or more lenders that have provided mortgage loans on a property. The "junior" or second debt is referred to as a subordinated debt, in this case the city loan. The debt which has a higher claim to the asset is the senior debt, the Citibank loan. The subordinated party will only collect on a debt owed when and if the obligation to the primary lender has been fully satisfied in the event of foreclosure and liquidation. Subordination agreements also include language regarding notification protocol for each lender in case of a default for any loan and the how the right to cure the default can occur.
The senior lender, Citibank N.A., which provided the construction loan and conversion to the permanent loan, is seeking the cities acquiescence to execute the Subordination and Intercreditor Agreement. Failure to execute this Subordination and Intercreditor Agreement could result in a default of the developer’s loan agreement with the first lienholder which would negatively impact the security of the city’s loan. A default under the senior loan could lead to a foreclosure of the property, the loss of the affordable housing units, and the city’s loan of $500,000.
November 1, 2022
The Richmond Rent Board has notified staff that the developer has not made the required Residential Housing Fee. The fee is charged to all landlords who rent or offer for rent their dwelling unit(s). According to the Richmond Rent Program, as early as December 2018, Rent Program staff members had multiple meetings with AMG officials, including, Mr. Gene Broussard. These multiple meetings were held three years prior to AMG’s dwelling units being offered for rent and the topic of these meetings included compliance with Rent Board Fees and other applicable provisions of the Rent Ordinance. Rent Program staff members explained to AMG that under the Rent Ordinance, AMG is a landlord who is exempt from the Rent Ordinance’s rent control provisions. However, AMG is not exempt from the Just Cause provisions of the Rent Ordinance, as they do not fall under the “Homeowner Protections” provisions of the Rent Ordinance. Thus, AMG would be assessed the lower-tiered Fee. AMG was again reminded of this upcoming assessment in 2020, prior to their units being offered for rent.
In July 2021, when AMG began renting out its units, the Rent Program assessed Rent Board Fee to AMG. Despite every other Low-Income Housing Tax Credit, Section-8, and other rent restricted property meeting their obligation and paying the Rent Board Fee, AMG protested the Rent Board Fee through their counsel. In 2022, Mr. Gevorgian, through his counsel, wrote a letter to the Mayor and the City Council members, contesting the Rent Board Fee. Mr. Gevorgian also attended the City Council meeting where the Council considered the adoption of the Rent Board Fee. Despite AMG and Mr. Gevorgian’s protestations and arguments, the City Council passed the Rent Board Fee with one dissenting vote. To date, AMG owes the Rent Board an amount in excess of $70,000. According to Rent Program staff members, AMG has made no attempts to pay the Fee and has maintained that they will not pay the Fee.
Relative to the provision of project-based vouchers (PBVs) the development received 127 PBVs for seniors at 2100 Nevin (total of 128 units) and 27 PBVs for families at 2200 Nevin (total of 144 units). The development has PBVs on approximately 57% of the total units, 154 / 271, that provide Fair Market Rent subsidy for the various unit types in the development. The unit mix at both developments includes studio units, one bedroom, two bedroom, three bedroom, and four bedroom units.
EFFECTIVE DATE: October 1, 2022
All Other Cities Except Pittsburg:
0-BR 1-BR 2-BR 3-BR 4-BR 5-BR 6-BR 7-BR
PS $1,823 $2,165 $2,645 $3,458 $4,076 $4,687 $5,298 $5,910 % of FMR 109.95% 109.55% 109.98% 109.99% 109.98% 110.00% 109.99% 109.99%
FMR $1,658 $1,969 $2,405 $3,144 $3,706 $4,261 $4,817 $5,373 110% of FMR $1,823 $2,165 $2,645 $3,458 $4,076 $4,687 $5,298 $5,910
The City Attorney confirms that there is a Promissory Note for $500,000 with 3% interest due in 40 years to repay the deferred fees, that payments are supposed to be from
November 1, 2022
”Residual Receipts” under the Loan Agreement and we are not aware when such Residual Receipts may appear, that the Deferred Loan Agreement contemplated subordination of the Agreement to the permanent financing. The City Attorney could find no authority for the City Manager to approve the subordination, so it was referred to the City Council for action. No opinion is expressed as to other matters.
CONCLUSION:
City staff recommends that the City Council authorize the city manager to execute the subordination and intercreditor agreement and make any necessary changes to the Subordination and Intercreditor Agreement to protect the City’s loan security and prevent the potential of a loan default that could lead to a foreclosure of the property, the loss of the affordable housing units including the city’s loan of $500,000.
DOCUMENTS ATTACHED:
Attachment 1 – Subordination and Intercreditor Agreement Attachment 2 – Fee Deferral Loan Agreement