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AUTHORIZE SUBORDINATION OF A CITY LOAN PROVIDED TO STOCKTON INVESTORS LIMITED FOR THE CAMBRIDGE COURT APARTMENTS LOCATED AT 6507 DANNY DRIVE
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RECOMMENDATION
It is recommended that the City Council by motion:
1. Authorize subordination of a City loan provided to Stockton Investors Limited for the Cambridge Court Apartments to a new permanent loan; and
2. Authorize the City Manager, or his designee, to execute the Subordination Agreement and take whatever actions are necessary and appropriate to carry out the purpose and intent of the motion.
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Summary
In 1995, the City of Stockton loaned Stockton Investors Limited (Stockton Investors) $1,042,000 of Community Development Block Grant (CDBG) funds to assist with the construction of Cambridge Court Apartments, a 132-unit apartment complex located at 6507 Danny Drive (Attachment A - Vicinity Map). In addition to the City funding, the project’s financing included approximately $2.5 million of Low Income Housing Tax Credits (Tax Credits) and a $7,233,270 bank loan. The City’s loan has always been in second position, subordinate to the bank loan. Stockton Investors is proposing to refinance the original bank loan and buy out the tax credit investor/ limited partner. Stockton Investors has received tentative approval for a new loan of $8,300,000 from Oak Grove Commercial Mortgage. The proposed refinancing, although increasing the permanent loan amount, will allow Stockton Investors to become sole owners of the property and to maintain sufficient cash flow to ensure the quality of the affordable housing units. A condition of the loan is that it be in first position, which requires the City to subordinate. The City’s 1995 Loan Agreement allows subordination to other loans when the loans do not exceed specified amounts; however the new loan exceeds these amounts and therefore subordination requires City Council approval. If the subordination is authorized, after the new financing is closed, the City’s loan will be in the same lien position that it currently occupies.
DISCUSSION
Background
Cambridge Court Apartments is a 132-unit apartment complex located at 6507 Danny Drive which provides housing for low- and very-low income households. In 1995, the City provided a $1,042,000 CDBG funded loan to Stockton Investors, a limited partnership with Affordable Housing Development Corporation (AHDC) as the managing general partner, to assist with construction of the project. The City receives CDBG from the U.S. Department of Housing and Urban Development (HUD) to assist in the development of projects such as Cambridge Court Apartments that serve low-income households.
The City’s loan was provided as a 40-year, three percent (3%) interest loan. Interest only payments were required during years one through ten of the loan term. Beginning in year eleven, the unpaid principal balance together with any accrued interest is due and is being repaid in thirty equal annual installments. Stockton Investors has been making payments and the total loan balance is currently $1,017,138, which consists of $847,240 of principal and $169,898 of interest.
In addition to the City’s loan, Stockton Investors received Tax Credits and a $7,233,270 loan from Midland Mortgage to construct the project. The loan from Midland Mortgage is in first position and the City’s loan is in second position.
Through the Tax Credit program, private investors provide financing for a project in return for tax credits for a period of fifteen years. The tax credit investor is also a limited partner in the project. After the fifteen year tax credit period, it is common for the managing partner to buy out the investor since they have no long-term interest in the project.
Present Situation
Stockton Investors is requesting that the City subordinate to a new $8,300,000 loan. The purpose of the new loan is to pay off the original loan which is due January 1, 2016, refinance at a lower interest rate (from 8.37% to an estimated 4.6%), and to buy out the limited partner. Refinancing to a lower interest rate will allow Stockton Investors to obtain sufficient funds to buy out the investor, thereby becoming the sole owner of the property, while still preserving sufficient cash flow to adequately maintain the property and ensure the quality of the affordable housing units within the complex and to make the annual payment to the City.
Stockton Investors has received tentative approval for the new loan from Oak Grove Commercial Mortgage; however, a condition of the approval is that it must be in first position, which requires the City to subordinate its loan (Attachment B - Subordination Agreement). The condition from Oak Grove Commercial Mortgage that the City subordinate to its loan is typical. Private lenders are not willing to provide financing if their loans are not in first position which will allow them to recover their loan first in the event of a default.
The City’s Loan Agreement states that the City will subordinate to the following loans as long as the loans are less than the amounts indicated:
• Construction Loan of $7,100,000;
• Permanent Loan of $4,000,000; and
• Equity Funding of $5,950,000.
Since the new permanent loan is more than the amount specified in the Loan Agreement, City Council approval is required for the subordination.
The City’s loan is currently subordinate to the $7,233,270 mortgage noted above. If this subordination is approved, the City’s loan will continue to occupy the same lien position. The City’s Regulatory Agreement will also be subordinate to the new loan, 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 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