City of Sacramento
City Council - 2PM Report
915 I Street Sacramento, CA 95814
www.cityofsacramento.org
File ID: 2025-01164 7/22/2025
[Redevelopment Agency Successor Agency] Sacramento Montessori School - Amendment and Partial Termination of Regulatory Agreement
File ID: 2025-01164
Location: 1111 - 1123 D Street, District 4
Recommendation: Pass a Motion authorizing the Interim City Manager or designee to execute the attached Amendment and Partial Termination of the Regulatory Agreement for the Sacramento Montessori School at 1111 - 1123 D Street.
Contact: Leslie Fritzsche, Economic Investment Manager, (916) 808-5450, [email protected], Office of Innovation and Economic Development Presenter: None
Attachments:
1-Description/Analysis
2-Map
3-Regulatory Agreement Amendment
4-Fixzyn Request for Termination
Description/Analysis
Issue Detail: The Sacramento City Redevelopment Agency Successor Agency (“RASA”) is responsible for winding down the obligations of the dissolved Redevelopment Agency of the City of Sacramento (“Agency”) under the review of the Sacramento Countywide Oversight Board (“Oversight Board”), the State of California (“State”) Department of Finance (“DOF”), the State Controller’s Office, and the Sacramento County Auditor-Controller. The City Council for the City of Sacramento (“City”) serves as the governing body for RASA and City employees staff RASA’s activities. Other cities in the County with redevelopment agencies also have successor agencies with these same obligations.
One of the obligations of successor agencies is the monitoring of existing regulatory agreements placed on property usually in conjunction with an Agency loan.
In December 2004, the Agency gave a loan in the amount of $400,000 to the 12th Street Collaborative for Montessori Education, LLC (“Borrower”). The purpose of the loan was to provide
File ID: 2025-01164 7/22/2025
funding for Borrower’s acquisition and rehabilitation of an existing Montessori school located in two buildings at 1111 and 1123 D Street. The site acquisition included four parcels, (APNs 002-0075-009, 002-0075-010, 002-0075-025, and 002-0075-026) at or adjacent to 1111 and 1123 D Street in Sacramento (collectively, the “Property”) where the Sacramento Montessori School (“School”) is located (map included as Attachment 2).
The Property consists of the historic Marie Hastings building (1123 D Street), a newer single-story building (1111 D Street), and two parking lots. The parcels were deed restricted for childcare beginning in 1999 when a childcare facility was established as part of an obligation imposed on the developers of the Library Plaza building due to the need for a childcare facility downtown. Borrower purchased the Property and the childcare facility from the original owner with the Agency’s financial assistance.
In addition to the Agency’s loan, Borrower secured a private loan from Bank of the West (“Private Loan”) to complete purchase of the Property and construction of the new childcare facility (the private loan was later acquired by Commercial Loan Solutions III, LLC) (“Commercial Loan”). The $400,000 Agency loan was secured by a deed of trust in second lien position to the Private Loan. The Agency loan was funded through Alkali Flat Tax Increment funds and had a two-tier structure: $200,000 accrued interest at 4% annually and the other $200,000 did not accrue interest. The entire loan became due and payable upon sale of all or any part of the Property or a sale of 50% or more of the member interests in the Borrower entity.
If the Borrower operated the Property as a childcare center in accordance with the requirements of the Regulatory Agreement, then $20,000 of the loan would be forgiven each year (starting at the end of the fifth full year after the childcare facility was placed in service), up to a maximum of $200,000 in loan forgiveness. If the Borrower did not operate the Property in accordance with the Regulatory Agreement requirements for any given year, the Borrower was required to pay back $20,000 of the loan for that year.
The Regulatory Agreement’s requirement that 50% of the available attendance in the childcare facility be filled with children receiving subsidized childcare was put in place at the request of the adjacent neighborhood to ensure they would have the opportunity to utilize the childcare services provided at the School. However, the Borrower never met the requirement for 50% subsidized childcare and was never able to enroll the required 120 students. Despite attempts at collection by Agency staff, Borrower never paid the $20,000 amount that was due each year given the Borrower’s failure to comply with the Regulatory Agreement’s provisions. The School struggled financially as its business operation was poorly managed. The School faced numerous challenges with its state licensing and its license was suspended several times over the years. Accordingly, the School never made any loan payments to the Agency.
In January 2019, RASA staff received notice that two of the parcels comprising the Property, one of
File ID: 2025-01164 7/22/2025
which contains the Marie Hastings historic building, were going to be offered at a tax default sale, with approximately $60,000 in back taxes owed. RASA staff ordered a preliminary title report to further understand what had been recorded against the Property and the extent of the debts. What was discovered was that the School was in arrears on its property taxes, business income taxes, city utilities, and its private loan, and there were several judgement liens related to the business that were filed against the Property.
Staff contacted the County to provide notification of the Agency loan and deed of trust in the Property.
In early February 2019, the County contacted RASA staff and agreed to forestall the tax sale pending the Borrower’s indication that it would be submitting payments according to a payment schedule.
RASA staff learned from the title company that Commercial Loan (who was in first lien position on the Property) had paid the outstanding property taxes to the County and intended to foreclose on its deed of trust.
On February 26, 2019, a Notice of Default (“NOD”) was filed by Fidelity National Title on behalf of Commercial Loan. The original private loan on the Property was for $1,120,000, but with additional charges and interest, the NOD reflected an amount owed of $1,596,501 as of February 14, 2019.
RASA staff contacted Commercial Loan and they indicated that given the poor payment history and inability of the Borrower to fulfill other attempts at workouts on the private loan, Commercial Loan was going to proceed with an approximately 90-day foreclosure process.
The Agency’s loan was in a subordinate position to all the other debts for the Property, so RASA would have needed to pay off that debt to protect its ability to collect on the Agency loan. Given this foreclosure process occurred after the dissolution of redevelopment agencies, the Agency’s loans and obligations were now handled by RASA. RASA was not in a financial or legal position to pay off the debts given RASA’s charge to wind down operations of the Agency (per Health & Safety Code section 34181(a)(1). Accordingly, the Agency’s loan was foreclosed upon, and RASA’s position was eliminated.
The Property was sold in 2019 to a new owner, Fixzyn Incorporated (“Owner”). The Property required significant repairs due to deferred maintenance and aging, so the School was closed for a brief period while the new Owner completed renovations. Operations of the School resumed in March 2020, just before the COVID-19 pandemic. Owner created Little Stepping Stones, LLC to operate the School. To date, Little Stepping Stones, LLC has incurred a loss of approximately $612,000, but this amount was largely offset by various public programs and credits made available as a result of COVID recovery efforts. The net loss to Little Stepping Stones, LLC is approximately $70,280. This is in addition to a reported approximately $160,000 loss for Owner.
The Regulatory Agreement still remains on title and requires the Property be used as a childcare facility for 120 students, with 50% of available attendance for children receiving subsidies. Owner has requested removal of the Regulatory Agreement from three of the Property parcels (APNs 002-0075-
File ID: 2025-01164 7/22/2025
09, 002-0075-010, and 002-0075-026), that the requirement for the number of children served on the remaining parcel be reduced from 120 to 60, and that the requirement for 50% subsidized students be lessened. Owner intends to sell the three parcels specified above and retain a childcare facility at the newer building at 1111 D Street (APN 002-0075-025). Such amendment and partial termination of the Regulatory Agreement is being requested because of the School’s desire to remain financially solvent.
Owner stated that recruiting and retaining teachers to meet the required 120 child capacity has proven especially challenging given the shortage of childcare workers since COVID and labor costs.
Since acquiring the Property in 2019, the Owner has only ever had a maximum of 65 children at the‐ School. The requirement for 50% subsidized attendance also makes it difficult for the Owner to collect enough tuition to cover expenses. The Owner is therefore concerned it may have to close the School if it cannot find another revenue stream. The Owner is proposing to sell three of the parcels to generate revenue to keep the School open in the newer facility at 1111 D Street. If the School is forced to close, it would displace families, eliminate jobs, and diminish a community resource, contrary to the Agency’s original intent in 2004 when it provided $400,000 in funding.
This report requests City Council approval of an Amendment and Partial Termination of Regulatory Agreement to: (i) remove the Regulatory Agreement from three of the parcels; and (ii) retain the Regulatory Agreement on the fourth parcel, but reduce the number of required students to 60 and reduce the requirement for subsidized students to 25%. The Amendment and Partial Termination of Regulatory Agreement is included as Attachment 3.
Policy Considerations: The actions in the report are recommended to stabilize an existing childcare operation within the central city. The Oversight Board approved the Amendment and Partial Termination of Regulatory Agreement on May 12, 2025 (Resolution 2025-0009) and DOF approved on July 3, 2025.
Economic Impacts: None.
Environmental Considerations: The recommendation actions in this report are government fiscal activities which do not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment, and thus do not constitute a “project” under the California Environmental Quality Act (CEQA Guidelines § 15378(b)(4).
Sustainability: There are no sustainability considerations associated with the actions proposed in this report.
Commission/Committee Action: Not applicable.
Rationale for Recommendation: Per the Owner’s request (Attachment 4), RASA staff is seeking
File ID: 2025-01164 7/22/2025
termination of the Regulatory Agreement on three parcels, with it only remaining on 1111 D Street (where the new childcare building is located). This would allow the Owner to explore alternative uses or revenue streams for the three properties while continuing the School at 1111 D Street. RASA staff is also seeking to have the Regulatory Agreement modified on the fourth parcel so that the required number of total children at the School would be 60 rather than 120 and the required percentage of subsidized students would be 25% rather than 50%. The Owner has applied to the State’s licensing department to adjust the School’s maximum capacity to 66 students (16 infants ages six weeks to 18 months, 16 toddlers ages 18 months to three years, and 34 early childhood education (ECE) students ages three to five years) to reflect current staffing realities and student demand. 60 students would represent 90% of the licensing number.
This plan would preserve childcare services for existing families and retain all current employees, significantly lower overhead costs, and ensure sustainable operations for the future. By having the Regulatory Agreement only applicable on 1111 D Street, the Owner can maintain its commitment to childcare while addressing financial pressures that threaten the School’s existence. Currently the School only has approximately 60 children enrolled, so there would not be a reduction in the number of children served if the operations were run solely from the newer 1111 D Street building.
Financial Considerations: The original Regulatory Agreement included a “buy-out” provision.
Accordingly, RASA staff is recommending the Owner provide $63,350 to RASA for the termination of the Regulatory Agreement on three parcels and modification of the student number served and subsidy requirements for the remaining parcel. This figure was derived based on the calculation that there are 9.5 years left on a 30-year loan, so one-third of the original loan amount of $400,000 is $126,700 (the entire amount of $400,000 is used here given the School was never able to meet the requirements for loan forgiveness). Since the request is to lift the regulatory requirements on 1 of the 2 School buildings (half of the buildings), half of $127,000 is $63,500.
Half of this amount would be due within 14 days following execution of the Amendment and Partial Termination of Regulatory Agreement follow and half would be due upon sale of the first parcel on the Property. The Regulatory Agreement will not be released from the three parcels until the entire $63,500 amount is paid to RASA. Since the original Agency loan was foreclosed upon, the taxing entities never received any loan payments from the original loan and this $63,500 fulfills RASA’s charge of maximizing net revenues for the taxing entities pursuant to Health & Safety Code section 34181(e).
Once received by RASA, staff will provide the funds to the County for distribution to the taxing entities (of which the City is one) as part of the Redevelopment Property Tax Trust fund. These funds go into the City’s Innovation and Growth Fund (Fund 2031). It is estimated that the City would receive approximately $15,000 as part of this transaction.
Local Business Enterprise (LBE): Not applicable.
Attachment 2
Sacramento Montessori School
1111- 1123 D Street
Yellow – Parcel to remain as childcare and subject to Regulatory Agreement Red – Parcels to be removed from Regulatory Agreement
L
ittle Stepping Stones LLC, DBA Sacramento Montessori
1123 D St, Sacramento CA 95814
Phone: 916‐2562342 Fax: 916‐367‐6714
Raul Chavez
President, Fixzyn Inc.
Little Stepping Stones LLC
591 Watt Ave Suite 220
Sacramento, CA 95864
[email protected]
209
‐
423
‐
1121
A
pril 28, 2025
Sacramento Housing and Redevelopment Agency
Attn: Leslie Fritzsche, Economic Investment Manager
630 I Street
Sacramento, CA 95814
Subject: Proposal to Modify Regulatory Agreement for Sacramento Montessori School (1111 D Street) Dear Leslie,
Thank you for your call this morning and for facilitating discussions regarding our request to modify the Regulatory Agreement dated December 31, 2004, for Sacramento Montessori School at 1111 and 1123 D Street, Sacramento, CA. We appreciate your openness to finding a solution that aligns with the requirements of Health and Safety Code (HSC) Section 34181(e) and supports the continued operation of our child care facility.
As the owners of the properties through Fixzyn Inc. and operators of the school through Little Stepping Stones LLC, we have faced significant financial challenges over the past five years due to the agreement’s restrictive covenants. To address your feedback that any modification must reduce liabilities and increase revenues for taxing entities, we propose two options for consideration by the Successor Agency to the Redevelopment Agency of the City of Sacramento (RASA) and the Oversight Board. Both options aim to preserve the community benefit of the child care facility while providing financial relief to ensure its sustainability.
Background and Financial Hardship
Since taking over Sacramento Montessori School in March 2020, we have invested over $1,250,000 in the properties but incurred substantial losses: $160,519.96 for Fixzyn Inc. and $70,280.61 for Little Stepping Stones LLC, even after receiving $541,759.65 in external funding (COVID funds, Employee Retention Credit, Paycheck Protection Program, and grants). The Regulatory Agreement’s mandates— Attachment 4
exclusive child care use across multiple parcels (APNs 002‐0075‐009, 010, 025, 026), a minimum capacity of 120 children, and 50% subsidized enrollment—have limited our ability to adapt to staffing shortages and rising costs. We have also observed a local child care crisis, with inquiries from parents displaced by other struggling centers, underscoring the need to keep our school open.
Modifying the agreement would provide much‐needed relief after over five years of financial strain. By freeing certain parcels for alternative revenue streams, we can stabilize our operations, retain our dedicated employees, and continue serving the families currently enrolled without disruption. This would prevent the closure of a vital community resource, aligning with the Agency’s original intent when providing $400,000 in funding in 2004.
Modification
1111 D Street, Sacramento CA 95814
• Payment: We offer to pay the City of Sacramento a total of $63,350 as a partial recapture of the $400,000 Agency Funding to release the Regulatory Agreement from the parcels at 1123 D Street, 1116 C Street, and the alley parcel (APNs 002‐0075‐009, 010, 026), with the agreement remaining in effect only on 1111 D Street (APN 002‐0075‐025) until its original expiration on December 31, 2034.
• Upon execution of the amended Regulatory Agreement, Fixzyn Inc. shall pay the City of Sacramento, acting through the Successor Agency to the Redevelopment Agency of the City of Sacramento (RASA), the sum of $31,675.00 as partial recapture of the original $400,000 Agency Funding, in consideration for releasing the Regulatory Agreement from the parcels identified as APNs 002‐0075‐009 (1123 D Street), 002‐0075‐010 (1116 C Street), and 002‐0075‐026 (alley parcel). An additional payment of $31,675.00 shall be due and payable to the City of Sacramento upon the sale of any one of the three released parcels, with such payment to be made at the close of escrow for the first sale.
• We will operate the child care facility at 1111 D Street with an increased focus on low‐income families, increase compliance with the agreement’s requirements and maintaining services for current families and employees.
Thank you for your continued collaboration.
Sincerely,
Raul Chavez
President, Fixzyn Inc.
On behalf of Little Stepping Stones LLC, Operating Sacramento Montessori School
Litt
le Stepping Stones LLC, DBA Sacramento Montessori
1123 D St, Sacramento CA 95814
Phone: 916‐2562342 Fax: 916‐367‐6714