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AUTHORIZE SUBORDINATION OF A CITY LOAN PROVIDED TO WESTGATE COMMUNITY ASSOCIATES, L.P. (VISIONARY HOME BUILDERS) FOR THE WESTGATE TOWNHOMES
RECOMMENDATION
It is recommended that the City Council approve a motion:
1. Authorizing subordination of a City loan provided to Westgate Community Associates, L.P. (Visionary Home Builders) for the Westgate Townhomes affordable housing complex to new rehabilitation loans; and
2. Authorizing the City Manager, or his designee, to execute the Subordination Agreement(s) and take all necessary and appropriate actions to carry out the purpose and intent of the motion.
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Summary
In 1994, the City of Stockton loaned Visionary Home Builders (then A.C.L.C.) $1,555,000 for the construction of Westgate Townhomes, a 40-unit apartment complex located at 6119 Danny Drive (Attachment A - Vicinity Map). In 2013, Visionary determined that the property was in need of rehabilitation. To fund the needed work, Visionary applied for, and was awarded, Low Income Housing Tax Credits. They also obtained a loan from U.S. Bank National Association and are applying for a loan through the Federal Home Loan Banks' Affordable Housing Program (AHP). A condition of the loan from U.S. Bank is that it be in first position, which requires the City to subordinate its loan. If the AHP loan is approved, they will also request that the City subordinate. The City's 1994 Loan Agreement allows subordination to the other loans where the other loans do not exceed certain specified amounts. The new loans that have been obtained for the rehabilitation project exceed those specified amounts; therefore subordination requires City Council approval. If the subordination is authorized, the City's loan will be in the same lien position that it currently occupies after financing is closed.
DISCUSSION
Background
Westgate Townhomes is a 40-unit apartment complex located at 6119 Danny Drive which provides housing for low- and very-low income households. In 1994, the City provided a $1,555,000 loan, which included $500,000 of Community Development Block Grant (CDBG) funds and $1,055,000 from the HOME Investment Partnerships Program, to assist Visionary Home Builders (then A.C.L.C.) purchase the property and construct the complex. The City receives CDBG and HOME funds from the U.S. Department of Housing and Urban Development (HUD) to assist in the development of projects such as Westgate Townhomes that serve low-income households. The City's loan was provided as a 60-year, 3 percent interest loan with annual repayment based on Net Annual Cash Flow. Any remaining balance at the end of the loan term will become due.
In addition to the City's loan, the original construction project received other funding, including: Low Income Housing Tax Credits, a construction loan of $3,100,000, a permanent mortgage of $700,000, and a $350,000 subsidy provided through the Affordable Housing Program (AHP). The total cost of the construction project was approximately $4,915,000. The City's Loan Agreement states that the City would subordinate to these other funding sources provided that the loans did not exceed the amounts specified above. In 1994, the City subordinated its lien position to these loans. The construction loan was a temporary loan which was paid off at completion of construction, which put the City's loan in third position.
Present Situation
After almost twenty years of use, the units in the Westgate Townhomes apartment complex are in need of rehabilitation. To fund the approximately $5.5 million rehabilitation project, Visionary applied for, and received, Low Income Housing Tax Credits. To further assist with the rehabilitation, the U.S. Bank National Association has approved a $4,715,142 loan, consisting of a $4,077,542 construction loan and a $637,600 permanent loan. However, a condition of the approval of the new loan from U.S. Bank is that it must be in first position, which requires the City to subordinate its loan (Attachment B - Subordination Agreement). Visionary is also applying for a $390,000 subsidy through the AHP administered by the Federal Home Loan Bank of San Francisco which, if awarded, will also require the City to subordinate.
Because the City's Loan Agreement states that the City will only subordinate to the specific loan amounts identified above, and the proposed loan amounts are in excess of these amounts, Council approval is required. A comparison of the loan amounts specified in the 1994 Loan Agreement and the proposed new loans are shown below:
|
1994 Loan Agreement |
2014 Loan Amounts |
Difference |
Construction Loan |
$3,100,000 |
$4,077,542 |
$977,542 |
Permanent Loan |
$700,000 |
$637,600 |
($62,400) |
AHP Loan |
$350,000 |
$390,000 |
$40,000 |
TOTAL |
$4,150,000 |
$5,105,142 |
$955,142 |
The City's loan is currently subordinate to the $700,000 mortgage noted above and the AHP loan. These loans will be paid off through the closing of the new financing for the rehabilitation project. As was the original construction loan, the new construction loan is a temporary loan which will be paid off at the completion of the rehabilitation project. Therefore, if the subordination is approved, the City's loan will continue to occupy the same lien position and since the total amount of the new permanent loan and AHP loan is less than the original loans, the City's loan will be behind less debt.
The request from other lenders to have the City subordinate is not unusual. Private lenders are not willing to provide financing if their loans are not in a lien position above the City's loan, which means that there are no economically feasible alternatives to finance the rehabilitation without the City subordinating to the new loans.
The City's Regulatory Agreement will also be subordinate to the new loans, but will remain in effect and will guarantee that all of the terms and conditions of the City's loans continue to be enforceable.
FINANCIAL SUMMARY
The original loan was funded entirely with CDBG and HOME funds; there were no general fund dollars associated with the loan. No additional funds are being loaned and there will be no financial impact from the approval of this motion.
Attachment A - Vicinity Map
Attachment B - Subordination Agreement