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File ID: 2022-01308 10/25/2022 Discussion Item 13.
City External Loan Policy for Public Benefit Projects and Gateway Mixed Income Housing Development Project Loan Recommendation [Two-Thirds Vote Required] File ID: 2022-01308
Location: Citywide and 3400-3401 Stockton Boulevard (Districts 5 and 6) Recommendation: 1) Pass a Motion by two-thirds vote waiving the 10-day posting requirements for contracts over $1 million provided in City Code section 4.04.020 and Council Rules of Procedure chapter 7, section E.2.d. and review of the following proposed budgetary adjustments by the Budget and Audit Committee pursuant to Council Rules of Procedure chapters 1 and 15; and 2) Adopt a Resolution: a) Approving the proposed City External Loan Policy for Public Benefit Projects in Exhibit A (Attachment 3); b) approving an interfund loan of $15 million from the Risk Management Fund (Fund 6502) to the Innovation and Growth Fund (Fund 2031) based on the terms outlined in Exhibit B (Attachment 4); c) authorizing the City Manager or the City Manager’s designee to make the associated budgetary adjustments for the interfund loan from available fund balance in the Risk Management Fund (Fund 6502) to the Innovation and Growth Fund (Fund 2031) and into the Stockton Boulevard Housing Development Project (I02189010); d) authorizing the City Manager or the City Manager’s designee to negotiate, enter into, execute, and amend from time to time a $15 million external loan with CT Gateway LLC for the purpose of providing a construction and permanent loan for the Gateway Project (“Project”); e) authorizing the City Manager or the City Manager’s designee to transfer the repayments of the external loan to the Innovation and Growth Fund (Fund 2031) back to the source of the originating fund, the Risk Management Fund (Fund 6502), as they are received and as detailed in Exhibit B; and f) authorizing the City Manager, or the City Manager’s designee, to perform all other actions related to the Project including executing related affordability agreement and other documents with CT Gateway LLC.
Contact: Danielle Foster, Housing Policy Manager, (916) 808-1869, [email protected], Office of Innovation & Economic Development, Michael Jasso, Assistant City Manager, (916) 808- 1380, [email protected], City Manager’s Office Presenter: Danielle Foster, Housing Policy Manager, (916) 808-1869, [email protected], Office of Innovation & Economic Development
Attachments:
File ID: 2022-01308 10/25/2022 Discussion Item 13.
1-Description/Analysis
2-Resolution
3-Exhibit A - City External Loan Policy for Public Benefit Projects 4-Exhibit B - Gateway Mixed Income Housing Development Project Loan (Interfund Loan from the Risk Management Fund (Fund 6502))
Description/Analysis
Issue Detail: As directed by City Council in July 2022 and adopted into the City Clerk’s Log of Councilmember Pending Requests, City staff has been assessing the availability of city-held fund balances that could act as a short- to medium-term loans for public benefit projects approved by Council (“external loans”). This policy is envisioned to ensure timely development and reduced construction and carrying costs to catalyze such projects. While some projects, like wholly affordable housing developments, require a long-term 55-year loan product, there are some opportunities for public-private partnerships that yield community benefits and would greatly benefit from this short- to medium-term financial assistance and enhance the likelihood the projects can be implemented.
Simultaneously, with the right terms and protections, these external loans can also benefit City funds that would gain annual interest on the loan repayments to support additional public benefit projects.
The proposed policy (Attachment 3) will provide a pathway for increased opportunity for timely redevelopment-type project construction and annual interest payments back to City funds. City funds would only be proposed for use under this policy after internal review and consideration of current and future projected needs on the funding source, including the due diligence review of actuarial reports, capital improvement project plans, and other fund information.
The proposed policy (Attachment 3) also works to mitigate risk against the use of City funds in a variety of ways including by: ensuring development track record of the borrower, requiring a general contractor construction performance bond, staff evaluation and ensuring compliance of projected debt service coverage ratio of 1.25 or better, and considering the City’s lien position on title ahead of developer equity and only behind conventional bank loans. The proposed policy was reviewed by Bay Area Economics, an economic financial consulting firm, and protects City loans in most, if not all, public benefit projects contemplated for approval by Council.
The Gateway Project is located at 3400-3401 Stockton Boulevard, at 9 th and 10th Street. College
Town International (CTI) has completed its planning entitlements and building permits application processes and is ready to proceed with construction pending this final financing. This 230-unit mixed income multi-family housing development represents a significant investment and the first mixed- income housing development on Stockton Boulevard. The Project is being recommended as the first loan to be assisted under this Policy as it is a pivotal project to the City’s Stockton Boulevard housing
File ID: 2022-01308 10/25/2022 Discussion Item 13.
anti-displacement work. With this funding, the Gateway Project is able to increase affordability, increasing its low-income housing units from 10 to 92 low-income units and adding 69 moderate- income units to the mixed-income development. Rounding out the Project with another 69 market- rate units allows for prospective tenants with a diversity of incomes in the surrounding workforce and neighborhoods to live together in a community and have ability to stay as their income changes. This mixed-income project will increase the housing stock within the City, provide some relief across market needs, and offer additional units for housing choice voucher usage. Increasing the number of units on Stockton Boulevard overall will allow more opportunities for all incomes to be better served as the Aggie Square reinvestment comes to Stockton Boulevard. With the 200-units Mercy Housing is developing and other planned housing developments, this project would be the second to develop in a 1400-unit pipeline of housing.
Policy Considerations: As to the External Loan Policy, utilization of this policy becomes another tool for the City Council to use in accomplishing public benefit projects. Investment in these projects is a balance of keeping available funding on-hand for future needs and ensuring the necessary benefit to both the fund and the City in providing this loan. Loans under this policy will ensure an interest rate that is 100 to 150 basis points over standard Pool A investments with adequate protections for the City and ability to offer 5-10-year loans based on funding availability and project needs.
Concerning the Gateway Project, prior to making this recommendation, staff reviewed the variety of City funds with balances that might be able to support this recommended loan. Staff reviewed the actuarial report dated October 3, 2022 prepared for the Risk Management Fund (Fund 6502). Based on this actuarial report, the Fund has adequate fund balance to cover the interfund loan.
Recommended loan terms for the Gateway Project are detailed in Attachment 4- Exhibit B.
Assisting the Project with a 10-year loan is particularly important due to increasing interest rates, high construction costs, and the need for a mix of housing types on Stockton. While Mercy Affordable Housing has started construction of its 200-unit deeply affordable development, continued housing construction on Stockton Boulevard is key to supporting the local residents and workforce. By providing this loan, the Project is also able to develop both properties on 9 th Avenue and 10th Avenue
at once and deliver all 230 units together. Supporting private investment along Stockton Boulevard also brings additional resources and interest to this corridor’s future development needs.
Economic Impacts: The proposed External Loan Policy will allow the City to more actively invest in local development projects benefiting both the City and the local economy through direct construction jobs and the indirect benefits of the resulting use. The policy provides for a balance of offering loans to public benefit projects as funding allows.
The City external loan for the Project is estimated to infuse the economy with a minimum of 233 jobs, 133 direct and 100 indirect with the construction of much needed affordable housing. The greater economic impact is the projected stabilization of housing costs for at least 92 low-income
File ID: 2022-01308 10/25/2022 Discussion Item 13.
households, reducing rent burden and other community costs for at-risk individuals and providing a platform for additional income and spending capacity of these community residents on Stockton Boulevard.
Environmental Considerations:
California Environmental Quality Act (CEQA): The current action for the establishment of a funding mechanism to finance various activities, including the development of housing and other projects is not a project pursuant to CEQA Guidelines section 15378(b)(4). The establishment of this funding mechanism does not constitute an approval of any particular project as defined by CEQA and does not foreclose the adoption of alternatives or mitigation measures because environmental review, as necessary, will be conducted in association with the development of projects. (CEQA Guidelines, § 15004(b).) The Gateway Project (Attachment 4) has already completed its necessary CEQA review process under the City’s standard zoning entitlement process.
Sustainability: This policy will support community benefit projects, including mixed-income and affordable housing opportunities and reinvestment/redevelopment projects within the city that promote the increased connection of housing, workforce centers, and other amenities and services. Further linkage of these community components will result in reduced vehicle miles traveled and increased all-electric construction more quickly. The Project will develop housing on a major commercial corridor, linking housing to public transportation, job hubs in the area, including Aggie Square, and other surrounding services that result in reduced vehicle miles travelled.
Commission/Committee Action: This policy bypassed the Budget and Audit Committee in accordance with Council direction from July 2022 regarding the urgency of the policy and the Project.
The Project has obtained their building permits and is ready to commence construction. In addition, the meeting schedule of the Committee does not include a regular October meeting. Based on the direction provided to staff from having this on the Council log, staff has proceeded with this report.
Rationale for Recommendation: Staff recommends adoption of this policy as a means for better utilization of city resources towards the development of priority projects that need short- to medium- term assistance to catalyze redevelopment, housing production, and other community purposes. This policy benefits available fund balances by providing regular interest payments and it supports overall city priorities with more timely construction of pivotal community projects.
Staff is recommending that the first project under this new Policy should be the Gateway Project on Stockton Boulevard because use of this financing mechanism for the Project does the following:
File ID: 2022-01308 10/25/2022 Discussion Item 13.
· Initiates timely construction of the entire project, rather than splitting it into two phases, delaying availability of housing, due to the increased construction costs and commercial loan interest rates;
· Acts as a catalyst for private investment along the Stockton Boulevard corridor, attracting additional reinvestment, service availability, and economic activity in the area to address local needs;
· Provides a mixed-income development through the construction of 161 low- and moderate- income housing units intermingled with 69 market rate housing units, in a market rate development where only 10 low-income units were previously proposed with 220 market-rate units;
· Yields additional housing options and resulting stability in an area of the city undergoing substantial redevelopment with the UC Davis Aggie Square Development; and · Supports the City’s work on housing anti-displacement and neighborhood support, providing housing options for existing area residents and workforce.
Financial Considerations: In reviewing potential funding options for the Gateway Mixed-Income Housing Development Project within the Stockton Boulevard Housing Development Parent Project (I02189010) staff reviewed available fund balances, flexibility of funding sources, and planned Capital Improvement Projects (CIPs) that might require funding reserves access. In this analysis, staff reviewed the actuarial report dated October 3, 2022, prepared for the Risk Management Fund (Fund 6502), and determined that the fund balance and projected demands could support an interfund loan of $15 million for the Project.
Local Business Enterprise (LBE): Not applicable.
Resolution 2022- October 25, 2022 Page 1 of 6
RESOLUTION NO. 2022-
Adopted by the Sacramento City Council
October 25, 2022
Resolution Approving the City’s External Loan Policy for Public Benefit Projects
BACKGROUND
A. The City Council desires to use interfund loans to provide external loans that further special projects with public benefits through short-term loans that provide seed funding for construction of these projects.
B. There is opportunity for the City to kickstart catalytic projects that inspire private investment on commercial corridors and in special project areas; such as funding redevelopment, housing, and other public benefit projects through short- or medium- term loans.
C. The City is able to offer more favorable terms than commercial banks, assisting these projects in starting construction sooner and with limited phasing needed, if any.
D. The Stockton Boulevard Gateway Project will provide a mix of low, moderate, and market rate units for rent on the boulevard, including 92 low-income units and 69 moderate income units. This 230-unit development will act as a catalyst for further private investment on Stockton Boulevard and supports City efforts to provide a mix of housing types and options that support existing residents from housing displacement.
This development provides for a mix of incomes and provides opportunity for Housing Choice Voucher placements as well. The City’s Risk Fund has sufficient resources to provide funding for this Project through a 10-year loan without affecting the current needs of the Fund.
BASED ON THE FACTS SET FORTH IN THE BACKGROUND, THE CITY COUNCIL RESOLVES AS FOLLOWS:
Section 1. The External Loan Policy for Public Benefits Projects, attached hereto and incorporated herein by this reference as Exhibit A, is hereby approved.
Section 2. The City Manager or the City Manager’s designee is authorized to transfer $15,000,000 from the Risk Management Fund (Risk Fund or Fund 6502) to the Innovation and Growth Fund (Fund 2031) for the Stockton Boulevard Housing Development Project (I02189010) as an external loan to CT Gateway LLC for the Gateway Mixed-Income Project (“Project”), as detailed in Exhibit B, which is attached hereto and incorporated herein by this reference, for the purpose of constructing 161 low- and moderate-income housing units within the 230-unit Resolution 2022- October 25, 2022 Page 2 of 6
multi-family housing development at 3400-3401 Stockton Boulevard.
Section 3. The City Manager or the City Manager’s designee is authorized to make the associated budgetary adjustments for the interfund loan from available fund balance in the Risk Management Fund (Fund 6502) to the Innovation and Growth Fund (Fund 2031) and into the Stockton Boulevard Housing Development Project (I02189010).
Section 4. The City Manager or the City Manager’s designee is authorized to negotiate, enter into, execute and amend a $15,000,000 external loan agreement and related documents with CT Gateway LLC for the Project under the terms described in Exhibit B, including a 20-year Affordability Agreement for the low- income and moderate-income units, as approved to form by the City Attorney’s Office, and to perform other necessary actions for project financing.
Section 5. The City is directed to transfer the repayments of the external loan to the Innovation and Growth Fund (Fund 2031) and back to the source of the originating fund, the Risk Management Fund (Fund 6502), as they are received and as detailed in Exhibit B. Any additional interest collected by the Innovation and Growth Fund can be used to cover administrative costs of servicing the loan and will be reused for additional redevelopment and affordable housing development.
Section 6. The City Manager or the City Manager’s designee is authorized to perform all other actions related to the Project including executing the related affordability agreement and other documents with CT Gateway LLC.
Section 7. Staff will return to the City Council with action on any future External Loan Policy Projects for Public Benefit Projects, considerations, or edits.
Table of Contents:
Exhibit A - City of Sacramento External Loan Policy for Public Benefit Projects.
Exhibit B – Gateway Mixed Income Housing Development Project Loan (Interfund Loan from Risk Management Fund (Fund 6502))
Resolution 2022- October 25, 2022 Page 3 of 6
Exhibit A
CITY OF SACRAMENTO
EXTERNAL LOAN POLICY
FOR PUBLIC BENEFITS PROJECTS
The purpose of this policy is to set forth the standards and process for providing interfund loans to be used for external loans to accomplish public benefit projects like redevelopment, workforce, and affordable housing construction projects in the city of Sacramento. This policy is designed to ensure consistency.
External loans may only be issued in accordance with this policy.
I. Policy Scope
This policy applies to the use of external loans funded by interfund loans to initiate public benefit projects that ensure full repayment of the external loan, with interest, within the loan’s term.
II. Definitions
The following definitions apply to this policy:
A. “Certificate of occupancy” means a document that certifies that a building in the city of Sacramento has been inspected for compliance with the California Building Standards Code and the Sacramento City Building Code.
B. “Construction performance bond” also called “Dual obligee construction performance bond” means a financial guarantee in a contract satisfactory completion of a project by a contractor. It is a collateral deposit of good faith money intended to provide security against the failure of the contractor in fulfilling their commitment to complete construction of a contracted development. A performance bond is usually provided by a bank or insurance company and is collectable by the named party if the general contractor does not fulfill their contract. Dual obligee means that it can be collected upon by more that one lending or contracting party.
C. “Debt service coverage ratio” means a metric that analyzes a property's income compared to its debt obligations. It is the ratio of the net operating income divided by debt service on the property.
D. “External loan” or “loan” means short- and medium-term loans between the City and a borrower/developer for public benefit projects such as redevelopment, workforce, and affordable housing projects.
E. “Financial performance bond” means a financial guarantee to the City against the failure of the borrower/developer of fulfilling their financial payment obligations. A performance bond is usually provided by a bank or insurance company and is collectable by the named party if the borrower does not make their required loan payments.
F. “Funding source” means funds from a City fund as described in the City’s Interfund Loans policy.
G. “Interfund loan” means a loan made pursuant to the City’s Interfund Loans policy.
Resolution 2022- October 25, 2022 Page 4 of 6
H. “Loan interest basis points” means a unit of measure used to describe the percentage change in the value or rate of a financial instrument, in the case of this policy, the loan's interest rate. One basis point is equivalent to 0.01% or 1/100th of a percent.
I. “Loan security” means ensuring adequate repayment mechanisms for an external loan to be fully repaid if the project does not proceed to construction completion and full lease-up or occupancy.
J. “Pool A Investments” means City investments made by the City Treasurer's Office into low-risk options that provide a favorable rate of return for City reserves.
K. “Public benefit projects” means developments or rehabilitation projects that further City goals of reducing blighted or vacant infill property and providing opportunities for affordable and workforce housing, economic vitalization, workforce employment training, redevelopment, public facilities, and other similar high-priority projects.
III. Objectives
A. Primary Objectives
External loans must have loan security, be repayable, have adequate interest, and be for the public benefit:
1. Loan Security, Repayment, Adequate Interest
As further described herein, loan security, repayment, and adequate interest are critical provisions of an external loan. It ensures the ability to establish other public benefit projects.
The following includes criteria that 1) must be considered and evaluated when establishing an external loan and/or 2) should be included in the terms of the loan agreement for the external loan:
a. Loan security: Limit issuance of external loans to projects with partners who have a track record of project completion and stabilization on a minimum of five similar projects, or other mitigating factors that protect the external loan. Other factors that limit exposure of the City’s investment, including a debt service coverage ratio of equal to or greater than 1.25 during construction and higher placement on title, can also be mitigating factors. In all cases, the City must record a deed of trust against the project property and must require other reasonable protections for its loan, including a general contractor’s performance bond, as detailed below. The loan must be senior to partnership equity and other obligations but can be subordinate to conventional debt if a 1.25 debt coverage exists and the risk is mitigated.
i. Performance Bond Requirement: Under this policy, lending to special projects with a public benefit will be permitted, subject to the following necessary protections for the City during the construction of the project and repayment period. During construction, the City will require a construction performance bond equal to the city-provided loan amount to protect the funds loaned. Post construction and prior to project stabilization or repayment, a financial performance bond will be used. The required performance bond(s) will be similar to the following unless another option is agreed to:
1. Dual Obligee Construction Performance & Payment Bond: City added as an obligee on the General Contractor’s (“GC”) performance bond issued to borrower/developer. Dual obligee bonds are commonly used in situations like this where the borrower’s/developer’s lender requests additional protection that the project will move forward. Essentially, the City would have the same rights as borrower/developer Resolution 2022- October 25, 2022 Page 5 of 6
under the GC’s construction performance and payment bond and could trigger the bond if the General Contractor disappears, goes bankrupt, or otherwise cannot perform and build the project as contracted. This bond secures the GC’s promise to build the project.
2. Financial Performance Bond: Borrower carries a financial performance bond to ensure financial repayment of the City loan. This bond secures borrower’s promise to repay the City on the loan.
It is triggered by the borrower’s failure to pay on the loan. This is not a common bond and requires some additional underwriting, and the surety company’s approval of the loan agreement terms. This bond may be utilized by the City for the time period between construction and Certificate of Occupancy or use of the project to adequate provide the revenue needed for borrower to initiate loan payments.
b. Repayment: The loan term must be limited to a duration that is reasonable for both the project and the fund to ensure timely repayment. Terms must range between 5 and 10 years, depending upon the fund and the project. Terms that are shorter than 5 years will not be feasible for most public benefit projects. The City must limit access to external loans based on what is reasonable in consideration of outstanding liabilities and expenditures, fund balance and repayment needs, and upcoming needs for the applicable Fund for other City capital projects outside of this policy.
c. Adequate Interest: Interest rates on external loans may be below-market rate, to accomplish the public benefit, but also balances with other options for the use of city funds. Staff must consider 100-150 loan basis points above the current return rate on City Pool A investments when setting an interest rate. This rate should be readjusted annually for each loan, providing a base interest rate and a maximum interest rate to ensure adequate interest payments and certainty for the development.
2. Public Benefit
This is not always an easily quantifiable benchmark and will ultimately be based on review and action by the City Council but should include components including housing provision and affordability, community reinvestment and stability, public use facilities, workforce benefits, innovative project concepts, and other Council-approved special projects with community benefits. External loans will be used as a last resort where there is no other available funding, or the rate to borrow other funding is too high and the timely construction of the project is of significant community value. These loans will support work to further fair housing principles, anti-displacement efforts, community reinvestment and City-identified priority projects and areas.
IV. Process
External loans are for public benefit projects only. To establish an external loan and associated public benefit project, staff must bring a recommendation for the loan and project before the City Council for consideration and action. In doing so, staff should review and vet potential public benefit projects and identify a viable funding source. The funding source must comply with the City’s Interfund Loan policy. If the project and the loan are approved by Council, interfund loans will be made and provided to the appropriate funding source, (e.g. the Innovation and Growth Fund) as the external loan, for the necessary accounting, monitoring, and loan servicing.
Resolution 2022- October 25, 2022 Page 6 of 6
V. Standard Terms and Conditions
The following includes standards for the terms of the loan document provided through this policy:
B. Loan Terms: Loan terms will vary based on funding source and project, but will likely range from 5-10 years in term, with a below-market interest rate, annual interest payments, and a single principal repayment.
Staff must consider 100-150 basis points above the current return rate on Pool A Investments when setting an interest rate. This rate will be readjusted annually for each loan, providing a base interest rate and a maximum interest rate to ensure adequate interest payments and certainty for the identified development providing the public benefit.
C. Monitoring: City staff must monitor these loans to ensure fulfillment of the public benefit, especially during the term of the loan, and loan repayment. There may be loan requirements like an affordability agreement recorded to the title of the property under the project or another mechanism for ensured long-term public benefit.
D. Repayment: It is envisioned that these loans will make annual interest payments and principal will be repaid in a lump sum or an agreed upon amount of payments that considers potential burden on city staff.
VI. Periodic Review
This policy will be reviewed regularly to ensure its effectiveness in both accomplishing public benefit projects and providing external loans of available City funds. Amendments to this policy are subject to City Council approval.
Exhibit B
Exhibit B
Gateway Mixed Income Housing Development Project Loan
Risk Fund (Fund 6502) Loan to the Innovation & Growth Fund (Fund 2031) for the Stockton Boulevard Gateway Project (I02189011) within the Stockton Boulevard Housing Development Project (I02189010)
Purpose:
The City Council has requested staff create an External Loan Policy that can utilize funding from City Funds as a means of furthering privately developed redevelopment, housing, and other public benefit projects. The funding would be provided as a five- to ten-year loan at a below-market interest rate that allows for a private project savings to yield the intended public benefit more quickly to the city.
The Stockton Boulevard Gateway Project (Project) will provide a mix of low, moderate, and market rate units for rent on the boulevard, including 92 low-income units and 69 moderate income units. This 230-unit development will act as a catalyst for further private investment on Stockton Boulevard and supports City efforts to provide a mix of housing types and options that support existing residents from housing displacement.
This development provides for a mix of incomes and provides opportunity for Housing Choice Voucher placements as well.
Funding Source:
Available Fund Balance in the Risk Fund (Fund 6502).
Availability of Funds:
The Risk Fund has sufficient resources to provide funding for this Project through a ten- year loan without affecting the current needs of the Fund.
Repayment of Interfund Loan:
This loan will be repaid with interest (City’s Pool A rate plus 100 basis points (bps), with a 2.5% interest rate floor and a 3.5% interest rate ceiling, updated annually) within 120 months of loan execution. Repayment will occur from the following:
1. Annual project interest payments from the Borrower, CT Gateway LLC, that start upon the issuance of a Certificate of Occupancy. Repayments are to be made back to the Innovation & Growth Fund (Fund 2031) with 0.5% of interest staying with Fund 2031 for reuse in public benefit projects and the remaining interest goes back to the Risk Fund (Fund 6502).
Exhibit B
2. Upon 120 months of the loan, full principal is due and payable. Prepayments of the principal can be made as part of the annual payments to the City. All payments of the principal will be returned to the Risk Fund (Fund 6502).
Loan and Official Documents:
1. The City Manager or the City Manager’s designee has the authority to execute the necessary loan documents and all necessary financial transactions to effectuate the External Loan Policy and the Project, including a twenty-year Affordability Agreement for the low- and moderate-income units in this project.
2. The City will require a general contractor’s construction performance bond during the construction phase of the Project and a financial performance bond or other acceptable guarantee from the borrower during the period from Certificate of Occupancy until the project is 85% occupied and with adequate cashflow to pay annual interest on the City loan.
3. Any excess proceeds of the Project from a sale or refinance of the Project will go towards repayment of the City loan first.