CITY OF ELK GROVE CITY COUNCIL STAFF REPORT

Transcription

1 CITY OF ELK GROVE CITY COUNCIL STAFF REPORT AGENDA ITEM NO AGENDA TITLE: Consider approval of a conditional loan commitment of $5 million for the proposed Gardens at Quail Run affordable housing project (No further CEQA review required) MEETING DATE: June 13, 2018 PREPARED BY: DEPARTMENT HEAD: Sarah Bontrager, Housing and Public Services Manager Darren Wilson, PE, Development Services Director RECOMMENDED ACTION: The Affordable Housing Committee (Committee) recommends that the City Council adopt a resolution approving a conditional loan commitment of $5 million for the proposed Gardens at Quail Run affordable housing project. BACKGROUND: In September 2017, the City released a Request for Proposals (RFP) for new affordable multifamily development, with a specific focus on housing extremely low- and very low-income households. Pursuant to the terms of the Affordable Housing Loan Program Guidelines (Attachment 2), at the meeting of the Committee on December 13, 2017, the Committee reviewed the one proposal received and voted for the Gardens at Quail Run affordable housing project (Project), proposed by Pacific West Communities, Inc. (Developer), to move forward to the loan application stage. The loan application provides additional information with which to consider a project. Review of the loan application focuses on the strength of the development team and the finances and viability of the individual project. The Developer filed the loan application in late January. Staff subsequently evaluated the Project, in coordination with the City s underwriting consultant, and worked with the Developer to negotiate loan terms. 1

2 Elk Grove City Council June 13, 2018 Page 2 of 10 Gardens at Quail Run Project Summary A summary of key project features is shown in Table 1. Table 1 Gardens at Quail Run Project Summary Gardens at Quail Run Pacific West Communities, Inc. Idaho-based for-profit affordable housing developer with more than Developer 100 affordable properties in the Western U.S. In Elk Grove, they developed the Avery Gardens project, which opened in 2015, and the Bow Street Apartments project, which is under construction. Pacific Housing, Inc. Nonprofit Partner Sacramento-based nonprofit focused on assisting with the development of affordable housing. They will provide on-site social services at the Project. Location Portion of Bruceville Road (southwest corner of Bruceville Road and Quail Run Lane) Elementary/middle/high schools less than a mile from property; two parks (including Bartholomew Sports Park) nearby; on a local bus Nearby amenities route with minute weekday headways, but no weekend service; Walmart is very close, but there are limited other nearby shopping options Type of project Family Affordability Level (% of AMI) Total 1BD 2BD 3BD 30% Affordable unit description 1 40% % % TOTAL Total number affordable units 95 Total residential square footage 80,604 Total project cost $24,741,897 Construction cost $14,920,483 Cost per unit $260,441 Cost per residential sq. ft. $ Loan request $5,000,000 City subsidy per affordable $52,631 (21%) unit $15,041,897 9% tax credits Other financing/subsidy 2 $3,100,000 permanent loan $1,300,000 County fee waiver $300,000 deferred developer fee 2

3 Elk Grove City Council June 13, 2018 Page 3 of 10 Project amenities Social services offered Community building with fitness equipment and computers, swimming pool, children s play area, in-unit laundry Minimum of 15 hours per week of on-site supportive services, including up to 8 hours per week of after-school programming Site control status Purchase agreement expiring 6/19/18 1 The project also includes one, two-bedroom manager unit, which is not income-restricted. 2 As proposed, the City s financing will be junior to the tax credit Land Use Restrictive Agreement and the $3.1 million permanent loan. Conditional Loan Commitment In order to apply for highly competitive 9% federal and/or state tax credits in the next application round, the Developer must submit an application to the California Tax Credit Allocation Committee (TCAC) by July 2, For the City s funds to be a factor in the scoring of the application, the Developer must include conclusive evidence that any public funds have been firmly committed to the proposed project and require no further approvals. Loan commitments may be subject only to conditions within the control of the applicant. The Developer has indicated that the proposed conditional loan commitment will satisfy this point. ANALYSIS: Loan Application The Developer s loan application built off of the information submitted in their proposal. The components of the loan application are dictated by the Affordable Housing Loan Program Guidelines. The following items were not submitted: Market study. A complete market study has not yet been completed. However, a preliminary market study demonstrated a strong market for the proposed project. Similar projects reviewed by the market study preparer indicated similar properties report a 0% vacancy rate. Based on this and the City s review of vacancy rates at its other projects, it is highly likely that the completed market study will show adequate demand for the units. As-built property appraisal. This appraisal identifies the as is value of the land, and prospective market values of the property when complete and when stabilized under both the restricted rent and unrestricted rent scenarios. The Developer indicated that this appraisal is typically initiated by the lender. As negotiated with Avery Gardens and Bow Street, the City will require the as-built appraisal be a condition of the loan closing, but the City s conditional commitment 3

4 Elk Grove City Council June 13, 2018 Page 4 of 10 cannot be tied to the value identified in the appraisal because that is not a factor within the Developer s control. Loan Underwriting The goal of the City s underwriting process is to evaluate the financial feasibility of the project, including the Developer s ability to develop the site as presented and to maintain the Project in both the short-term and the long-term. Highlights of staff s underwriting efforts are noted below in the Project Strengths and Project Weaknesses sections. In addition to staff s underwriting efforts, the Committee conducted an independent review of the loan application and underwriting. Project Strengths The Gardens at Quail Run application has several strengths: Experience. The Developer has significant experience designing, funding, constructing, and managing affordable housing projects in California and other states. Since 2000, Developer has developed nearly 7,000 units of affordable housing in more than 130 projects representing over $1.4 billion in total development costs. The Pacific Companies, of which Developer is a part, is a vertically integrated firm, including their Pacific West Architecture and Pacific West Builders, which will serve as the architect and general contractor on this Project. On a combined basis, according to financial statements submitted by the Developer, the Developer and Pacific West Builders ended 2016 with current assets of $34.4 million and current liabilities of $14.2 million, showing strong liquidity. Developer s track record demonstrates an ability to consistently obtain Low Income Housing Tax Credit (LIHTC) awards and the accompanying private and public financing to complete their projects. Pacific Housing, Inc., the nonprofit partner, is locally-based and provides services to residents at several of the City s other affordable housing properties. Location. The Project is in close proximity to schools at all three levels, and is particularly close to the Bartholomew Sports Complex, which would prove to be an added off-site amenity for residents of the Project. The Project is also very near Walmart, which includes a fullservice grocery and pharmacy. 4

5 Elk Grove City Council June 13, 2018 Page 5 of 10 Unit affordability. The Project will add units affordable to extremely low-income and very low-income households, with rents as low as $385 for a one-bedroom and $614 for a three-bedroom. Overall, 66% of the units will be affordable to households at or below 50% of the average median income (AMI), the population with the most difficulty securing housing in Elk Grove. Additionally, the Developer made a commitment to partnering with the City to address homelessness, including by moving qualified homeless Elk Grove households to the top of the waitlist for any unit for which they are qualified. Revenue and operating cost assumptions. The Project s revenue and operating cost assumptions are in line with the standards of TCAC and past performance on the Avery Gardens project. At least in the short term, revenue is likely to exceed projections substantially as a result of higher than projected rents and lower than projected vacancy rates. Since the loan application was submitted, TCAC released 2018 rents, which are about 8% higher than the 2017 rents used by the Developer in their pro forma; additionally, similar projects are experiencing vacancy rates far below the 5% vacancy assumption used. On-site property management. The Project accounts for on-site property management by setting aside one non-income-restricted unit for a member of the property management staff. The proposed property management firm, Aperto Property Management, has experience managing market-rate and affordable multifamily units, and the Developer has worked successfully with them in other communities. Social services. Through partnership with Pacific Housing, Inc., the Project will provide a minimum of 15 hours a week of on-site social services, including up to eight hours per week of after-school programming. This service requirement, which is greater than that of most other affordable complexes in Elk Grove, will focus on helping households develop skills to move up and out of affordable housing. Project Weaknesses A key goal of the City s affordable housing programs is ensuring that units remain an excellent resource for low-income households over the duration of a project s life. However, in addition to the strengths noted above, the application for the Gardens at Quail Run has several weaknesses, mainly 5

6 Elk Grove City Council June 13, 2018 Page 6 of 10 related to financial assumptions. These weaknesses may impact the Project's ability to remain viable throughout the 55-year affordability period. Specifically, staff has identified the following weaknesses: There is a disparity between the projected increases in rental revenue and the increase in operating expenses. The Developer assumed that rents would rise at 2.5% annually, and that most operating expenses would rise at 3.5% annually, which is consistent with TCAC standards. In the current economic climate, a 2.5% increase in annual rents is possible, but in a less strong economic environment, increases in revenue may be dependent on increasing Section 8 receipts and/or maintaining a lower than standard vacancy rate. In the event operating costs continue to increase at a rate outpacing revenue increases, the Project s net operating income will decline, which may lead to a situation where the property cannot be adequately managed or maintained. Even with an annual adjustment of 3.5% per year, the proposed replacement reserve contribution of $250 per unit per year is most likely inadequate to fully maintain the Project over the 55-year affordability period. Although this contribution exceeds TCAC guidelines, which do not require replacement reserve deposits to be adjusted, the Developer has agreed to adjust the replacement reserve contribution in line with expectations for cost growth in other operating costs in order to help alleviate this concern. Even with the inflator, it would still take more than 200 years before the replacement reserves equal the non-inflation-adjusted construction cost of the Project. Underfunding the replacement reserves creates a situation where the Project may not be able to be maintained in line with the City s standards during the entirety of the affordability period, or could force the Developer to recapitalize the transaction to provide money for major improvements. The likelihood of the City receiving significant loan repayment throughout the loan term is small. The Developer initially proposed a flat asset management fee payment, but has since agreed to a residual receipts payment structure (50% of net operating income). Even under this structure, the loan would not be amortizing and the annual payments to the City would not be equal to annual interest on the loan, creating a scenario where the loan balance continues to grow. If rents fail to increase at the predicted pace; if expenses are 6

7 Elk Grove City Council June 13, 2018 Page 7 of 10 greater than estimated; and/or if vacancy is higher than anticipated, it is possible the City would not receive any payment at all. Historically, this has been the case for the majority of the City s residual receipts loans. Loan Negotiation On May 23, 2018, the Committee, following an independent review of the loan application and underwriting, recommended that the Council approve a conditional loan commitment of $5 million for the proposed Gardens at Quail Run affordable housing project by a vote of 2-0. The majority of the discussion at the Committee meeting focused on the loan terms, specifically: The requirement to perform annual income certifications and adjust unit rents accordingly. The Developer agreed to this term, with the methodology of the recertification to be further clarified in the loan documents. Annual payment calculation methodology. The amount of the annual payment was set at 50% of residual cash flow (the amount left after the property pays its direct costs, makes reserve and senior loan payments, pays asset management fees to its partners, and pays itself for any deferred developer fee). In the event there is no residual cash flow in a given year, the City will receive no payment. Bidding/change order requirements. The Developer will select their own general contractor (an affiliated company), but will competitively and publicly bid trades and subtrades. The City retains the right to approve usage of subcontractors whose cost is significantly higher than the low bidder and major change orders. If the contract term is breached, liquidated damages that escalate for multiple violations will apply. Security. The City will obtain corporate and personal guarantees from Pacific West Communities, Inc., TPC Holdings V, LLC, and Caleb Roope. Such guarantees will cover Project completion, replacement reserve deposits, and bad acts, such as fraud, losses from failure to maintain insurance, or misappropriation of Project-related funds. 7

8 Elk Grove City Council June 13, 2018 Page 8 of 10 Capital needs assessments. A capital needs assessment reviews the Project s likely capital needs over a given period of time, and may be a basis for changing the amount deposited into the replacement reserve fund, supporting the Project s long-term maintenance. A capital needs assessment will be required in the event the property is transferred, and the proposed loan term would require the Developer to set aside funds for short-term capital needs projects and increase reserve deposits for long-term capital needs projects. The Committee and the Developer were able to reach mutually-agreeable terms on each matter. Loan Term Sheet The loan term sheet (Attachment 1, Exhibit A) includes a summary of the key aspects of the loan. This document is used to prepare the loan documents, including a Loan Agreement, Regulatory Agreement, Promissory Note, and Deed of Trust. The intention of the loan term sheet is to protect the City s position and minimize risk, as well as to clarify the City s expectations for the Developer and the senior lender. Highlights of the loan terms include the following: Loan amount of $5 million; Interest rate of 4%; City commitment extends for three consecutive tax credit submittals or until December 31, 2019, whichever is shorter; Disbursements tied to Project framing completion, construction completion, cost certification, and Project stabilization; Provisions to assist the City in ensuring that the Project s costs are reasonable; Requirements related to insuring and reporting on the property; and A Regulatory Agreement that will restrict the units as affordable for a period of 55 years. Options The Council has three options in connection with the Gardens at Quail Run loan request: 1. Approve the conditional loan commitment, as recommended by the Committee. The Council could approve the loan with the stated terms or direct staff to modify the terms. This would allow the Developer to submit for tax credit financing on July 2,

9 Elk Grove City Council June 13, 2018 Page 9 of Request that staff and/or the Committee continue to negotiate with the Developer and bring a loan term sheet and conditional commitment option to the City Council at a later date. If brought back and approved at the June 27 Council meeting, this would still allow the Developer to submit a tax credit application on July Deny the loan. In this event, the Developer would likely not be able to move forward with this Project. Next Steps In the event that the Council elects to approve the conditional loan commitment, staff expects the Developer to submit an application to TCAC for funding in the July 2nd tax credit round. If the Project is not funded, the Developer will submit an application in the two 2019 rounds. Once an award of tax credits has been secured, staff will work with the Developer to draft loan documents. The loan documents will be brought back before the Council for final approval. ENVIRONMENTAL DETERMINATION: CEQA Guidelines Section (Public Resources Code ), provides that projects which are consistent with a Community Plan, General Plan, or Zoning for which an environmental impact report (EIR) has been certified shall not require additional environmental review, except as might be necessary to examine whether there are project-specific significant effects which are peculiar to the project or its site. An EIR was prepared and certified by the City Council as part of the City s General Plan Housing Element Update in 2014 (SCH ), which included the Project site in the analysis. Additionally, an EIR was certified by the City Council for the adoption of the City of Elk Grove General Plan in 2003 (SCH ). No potential new impacts related to the Project have been identified that would necessitate further environmental review beyond the impacts and issues already disclosed and analyzed in the General Plan EIR and the 2014 Housing Element Update EIR. No increase in development density beyond what was anticipated in the General Plan for the Project site would occur. No other special circumstances exist that would create a reasonable possibility that the proposed Project will have a significant adverse effect on the environment. Therefore, no further environmental review is required pursuant to Public Resources Code section and CEQA Guidelines Section

10 Elk Grove City Council June 13, 2018 Page 10 of 10 FISCAL IMPACT: The Developer requests a conditional loan commitment from the City totaling $5 million from the Affordable Housing Fund. The requested amount is the majority of uncommitted funding available in the Affordable Housing Fund. If approved, the conditional loan commitment will reserve the monies for the length of the commitment period and preclude other projects from consideration. There is adequate funding in the Affordable Housing Fund to cover staff costs associated with making the loan, including the creation of loan documents to secure the City s investment. The Affordable Housing Fund, including any residual receipts payments made by the Developer, will cover staff costs associated with regular monitoring of the Project s physical and financial condition. No General Fund contribution is anticipated for the loan or the Project monitoring and oversight. ATTACHMENTS: 1. Resolution Exhibit A Loan Term Sheet 2. Affordable Housing Loan Program Guidelines 10

11 ATTACHMENT 1 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF ELK GROVE APPROVING A CONDITIONAL LOAN COMMITMENT OF FIVE MILLION DOLLARS ($5,000,000) FROM THE CITY S AFFORDABLE HOUSING FUND FOR THE GARDENS AT QUAIL RUN AFFORDABLE HOUSING DEVELOPMENT BY PACIFIC WEST COMMUNITIES, INC. (NO FURTHER CEQA REVIEW REQUIRED) WHEREAS, the City of Elk Grove (the City ) has recognized the need to provide affordable housing to all economic segments of the City; and WHEREAS, the City s affordable housing development impact fee provides financial resources to promote and assist in the development of new affordable housing in the City; and WHEREAS, the Affordable Housing Fund (AHF) may be used to provide assistance with new rental residential development costs for low-income and very lowincome housing; and WHEREAS, Pacific West Communities, Inc., in partnership with Pacific Housing, Inc. and Kelley Ventures, LLC, proposes to develop a ninety-six (96) unit affordable housing project, including one unrestricted unit available for the full-time property manager or the maintenance supervisor, known as the Gardens at Quail Run (the Project ), and has submitted a request for gap financial assistance from the City to help achieve financial feasibility for the Project and maximize the affordability of Project units; and WHEREAS, the use of the City s housing funds in the manner described below will be of benefit to the City in assisting in the development of affordable housing opportunities for low- and very low-income households; and WHEREAS, the proposed Project would provide housing that furthers the goals and policies of the City s General Plan Housing Element in a manner consistent with the state-mandated Regional Housing Needs Allocation requirement determined by the Sacramento Area Council of Governments for the City; and WHEREAS, on May 23, 2018, the Affordable Housing Committee completed an independent review of the loan application and underwriting, and recommended that the Council approve a loan commitment of $5 million for the project, pursuant to defined loan terms. NOW, THEREFORE, BE IT RESOLVED, that the environmental impacts of the Project have been disclosed and analyzed in the General Plan EIR and the 2014 Housing Element Update EIR; no increase in development density beyond what was anticipated in the General Plan for the Project site would occur, and no other special circumstances exist that would create a reasonable possibility that the proposed Project will have a significant adverse effect on the environment beyond what has been previously analyzed in the aforementioned environmental documents; therefore pursuant to Public Resources Code section and CEQA Guidelines Section 15183, no further environmental review is required. 11

12 NOW, THEREFORE, BE IT FURTHER RESOLVED that the City Council of the City of Elk Grove hereby approves the Conditional Loan Commitment request for the Project and does hereby determine that the City shall conditionally loan up to five million dollars ($5,000,000) to the Project, subject to the terms and conditions of the Loan Term Sheet attached hereto as Exhibit A and incorporated herein by reference. PASSED AND ADOPTED by the City Council of the City of Elk Grove this 13 th day of June STEVE LY, MAYOR of the CITY OF ELK GROVE ATTEST: APPROVED AS TO FORM: JASON LINDGREN, CITY CLERK JONATHAN P. HOBBS, CITY ATTORNEY 12

13 Exhibit A - Loan Term Sheet: The Gardens at Quail Run June 13, 2018 Proposed Term Lender City of Elk Grove ( City ) Borrower Limited partnership to be created for this Project ( Owner or Developer ) Loan Amount $5,000,000 Funding Source Affordable Housing Fund Interest Rate 4% simple interest per annum Term City loan to have a term of 37 years. Balance due on sale. For amount due on refinancing, see Refinancing section. Construction and operation of a 96-unit affordable apartment project (commonly known as The Gardens at Quail Run, or Project ) that is deed-restricted by means of a Regulatory Agreement for 55 years. Purpose The affordability mix is as shown: Affordability Level (% of AMI) Total Units Number of Bedrooms 1BD 2BD 3BD 30% % % % Unrestricted *AMI is the area median income, adjusted for household size. Owner commits to working with the City to address homelessness, including by implementing a policy moving homeless Elk Grove households to the top of the waitlist for any vacant unit for which they are qualified. 13 Owner shall (1) perform annual income certifications or recertifications and adjust unit affordability accordingly; and (2) provide City, within 14 days of City s request, copies of any annual income certifications or recertifications. For example, this means that a household initially living in a 30% AMI unit and whose household income rises to 50% AMI would have their rent adjusted to the 50% AMI level, and the next available unit would be made available to a household earning 30% AMI. Nothing in this policy shall require Owner to violate any regulation of the California Low Income Housing Tax Credit (LIHTC) Program, but it is understood that this requirement may be beyond what is required by the LIHTC Program.

14 14 Proposed Term The unrestricted unit must be occupied by either the full-time property manager or the maintenance supervisor. Timing of Funding Project amenities must include a community building with computer room and exercise equipment, play area, bike racks, benches, and covered and lighted parking. On-site social services must include provision of resident support for no less than 15 hours per week, including up to 8 hours per week of after-school programming. Disbursements as follows: 1. 40% when the Project s framing inspection for all buildings is certified as complete by the City s Building Official, and provided that Developer has posted payment and performance bonds for the full amount of the construction contract % when the Project has received temporary Certificates of Occupancy for all buildings and the City has received proof of unconditional lien releases for general contractor or proof to City s satisfaction that Developer has posted a bond, at Developer s expense, from which to pay any judgment later entered against Developer or the property as a result of the lien, and proof of clear title to the satisfaction of the City; any bond issued pursuant to this section shall be in an amount sufficient to fully satisfy the lien, plus other recoverable costs and attorney s fees resulting from a judgment against Developer % when the Project has received final Certificate of Occupancy for all buildings and the City has received proof of unconditional lien releases for general contractor or proof to City s satisfaction that Developer has posted a bond, at Developer s expense, from which to pay any judgment later entered against Developer or the property as a result of the lien, and proof of clear title to the satisfaction of the City; any bond issued pursuant to this section shall be in an amount sufficient to fully satisfy the lien, plus other recoverable costs and attorney s fees resulting from a judgment against Developer % upon (1) approval by the City of the Project s Cost Certification prepared and signed by a third-party CPA, (2) a final construction inspection by City confirming that the Project was constructed and completed in the manner and form approved by City (amount provided to be less any cost savings as described further in the Cost Savings section), and 3) the City has received proof of unconditional lien releases for all subcontractors or proof to City s satisfaction that Developer has posted a bond, at Developer s expense, from which to pay any judgment later entered against Developer or the property as a result of the lien, or expiration of the lien period has occurred with no liens filed that have not been bonded for and proof of clear title to the satisfaction of the City; any bond issued pursuant to this section shall be in an amount sufficient to fully satisfy the lien, plus other recoverable costs and attorneys fees resulting from a judgment against Developer % when the Project has achieved Project Stabilization. This amount shall be held in a non-interest-bearing escrow account at the City as an operating reserve, over which the City has joint signing authority until Project Stabilization.

15 Proposed Term Project Stabilization will be defined as: 1. Physical occupancy of no less than 95% of all units; 2. Three (3) consecutive months of sustained economic occupancy (net rent collected divided by gross rent potential) of at least 95%; and 3. Three (3) consecutive months of sustained operating performance at or above a debt coverage ratio of 1.20 (inclusive of all amortizing debt payments). Following completion of construction, annual payments equal to 50% of Residual Cash Flow. Annual Payments Residual Cash Flow is defined as all rental and other income generated by the Project after: 1. Payment of the following operating expenses for the project: a. Property management fee not to exceed 5.0% of the Project s effective gross income; b. Advertising, legal, accounting, security, and other general office administration expenses; c. Utilities; d. Payroll expenses and payroll taxes; e. Maintenance, repairs, grounds, pool, and turnover costs; f. Property insurance; g. Taxes and assessments; h. Costs of social service programs offered to residents; 2. Cash deposited into the Project s Replacement Reserve and/or Operating Reserve in such amounts as are required by the Project lenders (including the City) and/or tax credit investor (including a requirement that if drawn, operating reserves must be replenished prior to any distributions of cash flow); 3. Cash deposited into escrow for property taxes and/or insurance as may be required by any of the Project Lenders; 4. Payment of senior loan debt service; 5. Payment of asset management fees to the tax credit investor limited partner in an amount no greater than $5,000 per annum escalating at a rate of no more than 3% with payments starting in the first year the project receives a certificate of occupancy; 6. Payment of asset management fees to the Managing General Partner of the project partnership in an amount no greater than $100 per unit per annum escalating at a rate of no more than 3% with payments starting in the first year the project receives a certificate of occupancy; and, 7. Payment of the deferred developer fee, if any. 15 Note: All payments not specified above, including those to General Partner(s), Limited Partner(s), or parties related thereto, and including but not limited to asset management fees, incentive fees, monitoring or oversight fees, and performance fees will be below the line and payable only from Residual Cash Flow.

16 16 Proposed Term Further, any identity of interest costs (e.g. use of a related party management company, vendor, or the like) included within the Project s annual operating budget must be disclosed and approved by the City as necessary and reasonable. Balloon Payment At the expiration of the loan term, 100% of the principal balance of the loan and all accrued interest will be due. Refinancing City approval shall be required for any proposed refinancing, including of the senior permanent financing. City loan will be secured by a deed of trust, UCC filing, and assignment of rents and leases junior to construction and permanent financing sources set forth. The City loan will be in second position, behind senior permanent financing in the amount of approximately $3,100,000. City approval shall be required for any changes to the senior loan, with such approval not to be unreasonably withheld. Excluding the investor limited partner, Pacific Housing, Inc., Kelley Ventures, LLC, and Mike Kelley, City will require joint and several corporate and personal guarantees from the underlying corporate and individual owners of the general partner(s), member(s), or other controlling entities of the Owner, the individual owners of any shell entities engaged in the ownership of the Owner and its partner(s), member(s), or other controlling entities and from any other guarantors required by the other financing sources investing in the Project, including without limitation Pacific West Communities, Inc., TPC Holdings V, LLC, and Caleb Roope (excluding The Roope Family Trust). Security Required guarantees will include: 1. An absolute guarantee of project completion; 2. A guarantee of replacement reserve deposits; and 3. A guarantee for full and prompt payment of any loss, damage, liability, action, cause of action, cost, or expense incurred by City as a result of, and to the extent of, i) fraud or material gross misrepresentation, ii) intentional bad faith waste, iii) losses resulting from Owner/Developer s failure to properly maintain insurance, iv) gross misappropriation of any of the rents, security deposits, loan proceeds, insurance proceeds, condemnation awards, or any other proceeds derived from the collateral security; and/or v) unauthorized disbursements of Residual Cash Flow. The absolute guarantee of project completion and the guarantee of replacement reserve deposits will each include a provision to the following effect: In the event any provision contained in this Guaranty causes Owner to violate any regulation of the LIHTC Program or causes Owner to be disqualified from receiving any federal or state tax credits through the LIHTC Program, such provision shall be deemed unenforceable and the remaining provisions of this Guaranty shall remain in full force and effect.

17 Proposed Term All construction subcontracts must be competitively and publicly bid, with a minimum of three qualified bids for each trade or subtrade. Owner to provide all bid records to City upon request. Owner must make a reasonable effort to secure a minimum of three qualified bids, including by publicly publishing notices related to bid opportunities in local or regional newspapers and providing plans and bid documents online. Owner must also advertise bid opportunities via the Sacramento Regional Builder s Exchange and the Sacramento Housing and Redevelopment Authority s MBE/WBE/Section 3 contractors list. Owner shall provide City with a list of all bids received by Owner, including the name of the bidder and contract information and the bid details. Bidding/Procurement Awards to any firm other than the lowest responsive and responsible bidder, in cases where the selected firm s bid exceeds the lowest responsive and responsible bid by more than 15%, must be approved in advance by the City. Procurement of nonconstruction goods and services shall be substantiated by a minimum of three cost estimates for like items for all purchases over $50,000; if the lowest-cost provider is not selected, written justification must be provided. City shall respond to such requests for approval within ten (10) business days of receipt of said request and shall not withhold approval unreasonably. 17 Change Orders Cost Savings The parties agree that if Owner breaches this term, it will be impracticable or extremely difficult to determine the damages suffered by the City. It is therefore agreed that (1) upon the second instance of Owner s failure to comply with this term, Owner shall pay the City the sum of $2,500 as liquidated damages, and (2) upon the third instance of Owner s failure to comply with this term, and for each additional instance of non-compliance thereafter, Owner shall pay the City the sum of $5,000 as liquidated damages. The amount of liquidated damages set forth herein shall be deducted from the available City loan amount. Written authorization from City for all change orders and/or line item budget adjustments of $75,000 or more for construction costs and $25,000 or more for soft costs is required. City shall respond to such request for approval within ten (10) business days of receipt of said change order and shall not withhold approval unreasonably. The parties agree that if Owner approves change orders or other line item budget adjustments in excess of the above-noted amounts and without the City s written authorization prior to approval (each, a Change Order Violation ), and such violation is irreversible or remains uncured, it will be impracticable or extremely difficult to determine the damages suffered by the City. It is therefore agreed that (1) upon the occurrence of the first Change Order Violation, Owner shall pay the City liquidated damages in the amount of the unauthorized amount of the applicable change order, (2) upon the occurrence of the second Change Order Violation, Owner shall pay the City liquidated damages in the amount of the unauthorized amount of the applicable change order, plus the lesser of 5% administrative cost or $2,500, and (3) upon the occurrence of each Change Order Violation thereafter, Owner shall pay the City liquidated damages in the amount of the unauthorized amount of the applicable change order, plus the lesser of 5% administrative cost or $5,000. The amount of liquidated damages set forth herein shall be deducted from the available City loan amount. If, at the completion and stabilization of the project development, there are excess proceeds as a result of a reduction in total development costs or a net increase in other permanent sources compared to the Project s approved Financing Plan after considering all final sources of funding and adjustments thereto that have been reasonably approved by the City (as will be further defined in the loan agreement between Owner and the City), City shall, at its option, be entitled to reduce its permanent loan to the project by 100% of such excess proceeds or approve the deposit of such an amount to the Project s Replacement Reserve. In the event the City has fully disbursed its loan prior to the Project s completion, the Owner will make a one-time

18 18 Proposed Term Bonding Developer Fee Insurance Reporting Conditions payment credited against the principal balance of the loan (i.e. effectively treating that portion of the City loan as construction lending only). In determining whether to require a reduction in the permanent loan, the City will consult with the California Tax Credit Allocation Committee to evaluate the implications under the QAP and scoring procedures. Payment and performance bonding will not be required on the construction, assuming the City does not provide funding during construction and the senior lender s loan documents do not obligate the City to fund any portion of the project cost prior to issuance of final Certificates of Occupancy. Unconditional lien releases or proof to City s satisfaction that Developer has posted a bond, at Developer s expense, from which to pay any judgment later entered against Developer or the property as a result of the lien and satisfactory evidence of clear title will be accepted in lieu of payment and performance bonding for the purposes of the loan documents; any bond issued pursuant to this section shall be in an amount sufficient to fully satisfy the lien, plus other recoverable costs and attorneys fees resulting from a judgment against Developer. Payment and performance bonding may be required for construction of public improvements per City policy and State law. Limited to the lesser of $2,200,000, 10% of total development costs (less the fee itself), or the developer fee approved by TCAC. In the event of increases in the total development cost, the developer fee will not be increased proportionately. Owner, Project, and Pacific West Communities, Inc. must carry insurance that meets the requirements of Attachment B of the Request for Proposals due on November 21, Further, the City retains the right to update insurance requirements (e.g. coverage limits) for its Affordable Housing Program from time to time. The Project must agree to comply with any such updates so long as those requirements are reasonable and consistent with standards applied to affordable housing projects financed with LIHTC. Additionally, insurance proceeds must be used wholly to repair or rebuild property in the event of damage except for those insurance proceeds specifically allocated for covering rent loss or loss of tax credits due to the casualty, as long as defined as a separate benefit in the policy. Initially, Owner will provide the City with monthly financial and occupancy reporting. Audited financial statements demonstrating compliance with the formula for the distribution of cash flow as described in the Annual Payments section of this term sheet will be due not later than the first month of the second quarter of the year following the reporting year. Failure to comply with the reporting requirements will result in liquidated damages of $500 per violation per month, provided that Owner has failed to cure the non-compliance within 30 days from written notice from City. Additionally, the City reserves the right to reasonably alter, supplement, or otherwise modify the frequency or content of required reports as needed to maintain adequate oversight of the Project, to address findings related to noncompliance by the Project, or to standardize reporting requirements across its portfolio of assisted projects. The funding of the City loan is conditioned on the following: 1. The Project has secured the unconditional commitment of all funding sources necessary to develop the Project pursuant to the pro forma, including the construction loan, the permanent loan, and 9% tax credit equity financing (or such substantially similar substitute financing may be available from the California Tax Credit Allocation Committee).

19 Proposed Term 2. The Owner has maintained clear title to the property to the satisfaction of the City. 3. The Owner and City have agreed as to the form of loan documents and have each executed the documents. 4. All insurance requirements are met. 5. An as-built appraisal that meets the Affordable Housing Loan Program Guidelines requirements has been submitted. Commitment Length Regulatory Agreement City loan commitment terminates after the earlier of: a) denial of award of 9% tax credit equity financing in three consecutive application rounds, the first of which is July 2, 2018, or b) December 31, Owner shall enter into a Regulatory Agreement, in a form provided by the City, which will include an affordability covenant to be recorded against the property, senior to all liens and junior only to the TCAC LURA, for the Project requiring that the units remain affordable at levels consistent with the affordability mix in the Purpose section. The Regulatory Agreement must remain against the property, binding against all successors in interest, for the full term, even in the event of foreclosure by the senior lender. Owner must establish and shall maintain an Operating Reserve Account and a Replacement Reserve Account (collectively, the Reserve Accounts). All Reserve Accounts shall be held in interest-bearing segregated accounts held in banks or credit unions fully licensed to do business in the State of California and insured to the maximum limit of either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA) as applicable. Any interest earned on the Reserve Accounts shall remain within the Reserve Accounts. All Reserve Accounts shall remain in place through the restriction period notwithstanding any change in ownership and in no circumstances may be disbursed for exit taxes upon any future transfer of limited partner interests. Reserves Any withdrawal or transfer from the Reserve Accounts shall require the written approval of the City, by and through its designee. The City s approval or request for additional information to substantiate the need for the withdrawal or transfer shall be provided within ten (10) business days of its receipt of a request for such action. Owner must establish the Reserve Accounts to require the signature of the City s designee and Owner for all withdrawals and transfers. Further, Owner shall authorize the financial institutions in which Reserve Accounts are held to provide the City, upon request, verified statements reflecting account balances and transactions. All reserve accounts may be jointly controlled by all third party lenders and the tax credit investors Operating Reserve Account: Not later than receipt of 8609s, Owner shall fund and maintain an Operating Reserve Account of not less than three months of underwritten operating expenses, replacement reserve deposits, and debt service. After Project Stabilization, the Operating Reserve Account may be used to pay operating costs and expenses to the extent the collected gross receipts are insufficient for such purpose. Further, the Operating Reserve Account may not be used to pay any identity of interest costs, including management fees. If drawn upon, the Operating Reserve Account must be replenished to its required minimum balance prior to distributions of Residual Cash Flow.

20 20 Proposed Term 2. Replacement Reserve Account: Owner shall fund a Replacement Reserve Account with annual deposits in the first year following construction completion (which may be prorated based on the actual date of completion) equal to $250 per unit. In subsequent years, the deposit to the Replacement Reserve shall be increased by 3.5% annually. Disbursements from this Replacement Reserve Account shall be for the purpose of effecting replacement of structural elements and mechanical equipment of the Project or for other similar purposes for the benefit of the Project. Prior to a Transfer Event, Owner shall submit to the City a Qualified Capital Needs Assessment. The entity which shall own the project subsequent to the Transfer Event (the Post Transfer Owner ) shall covenant to the City that the Post Transfer Owner (and any assignee thereof) shall: 1. Set aside at the closing of the Transfer Event adequate funds to perform the Short Term Work; 2. Perform the Short Term Work within three years from the date of the Transfer Event; 3. Make deposits to reserves as are necessary to fund the Long Term Work, taking into account any balance in replacement reserve accounts upon the conclusion of the Transfer Event beyond those required by Section 1 of this clause; and 4. Complete the long term work when required, or prior thereto, pursuant to the Qualified Capital Needs Assessment. For purposes of this section, the following terms shall have the following meanings: 1. Qualified Capital Needs Assessment shall mean a capital needs assessment for the property dated within one hundred eighty (180) days of the proposed Transfer Event which is prepared by an independent thirdparty architect, engineer, or other qualified firm approved by the City and clearly sets forth (1) the capital needs of the project for the next three (3) years (the Short-Term Work ) and the projected costs thereof, and (2) the capital needs of the project for the subsequent twelve (12) years (the Long Term Work ) and the projected contributions to reserves that will be needed to accomplish that work. 2. Transfer Event shall mean (1) a transfer of the ownership of the project, (2) the sale or assignment of a partnership interest in Owner and/or (3) the refinancing of secured debt on the project. The following shall not be deemed a Transfer Event: (1) the transfer of the project or a partnership interest in Owner in which reserves remain with the project and the debt encumbering the project is not increased, refinanced or otherwise modified, (2) the refinancing of project debt which does not increase the outstanding principal balance of the debt other than in the amount of the closing costs and fees paid to the project lender and third parties as transaction costs, provided that reserves remain with the project, (3) the replacement of a general partner by a limited partner upon the occurrence of a default by a general partner in accordance with partnership agreement of the project owner, or (4) a transfer pursuant to a foreclosure or deed in lieu of foreclosure to a non-related party.

21 Proposed Term Operating Budget Oversight Distributions of Residual Cash Flow Prior to the beginning of its fiscal year, Owner shall submit a proposed operating budget to the City for review and approval. The proposed budget must i) identify any identity of interest or related party costs if the management company is an affiliate of the Owner, ii) compare the proposed budget to the prior year s (or trailing 12 month) actual operating costs, and iii) provide explanations of substantive changes in the budget. Owner shall not make distributions of Residual Cash Flow to any Controlling Entity or related parties, other than for normal operating costs in the annual budget approved by the City, without written approval by the City based on a determination by the City that: 1. No default in the terms of the City s loan or related documents exists and is continuing; 2. All required Reserve Accounts and escrows are fully and properly funded; 3. The most recent annual audit of the Project has been received by the City and shows no material weaknesses or unresolved findings; and 4. Making a distribution of Residual Cash Flow will not require the property to access Operating Reserve Accounts. To obtain approval to make a Residual Cash Flow distribution, Owner shall submit to the City a request at least thirty (30) business days prior to any anticipated distribution together with a current financial statement for the Project that will enable the City to assess criteria above. Owner shall provide a prompt response to the City s requests for additional documentation, if needed. Unauthorized distributions of Residual Cash Flow will result in liquidated damages of $1,000 per day, provided that Owner fails to return any unauthorized distributions within three (3) business days of written notice from City. The City s willingness to make the loan as anticipated herein is contingent upon and made with specific reliance on the evaluation of the specific individuals and entities making up the Owner. Other Owner agrees that no sale or transfer of general or limited partnership interests, member interests, managing member interest, or other controlling interest in the Owner will be made without the prior written consent of the City. This will include but is not limited to: 1. The voluntary or involuntary re-assignment of the role of general partner, managing member, or other controlling entity or individual (collectively the Controlling Entities ) to another entity or individual; 2. Sale or transfer of the interest of any owner of a Controlling Entity; 3. Sale or transfer of any other interests in Owner, including but not limited to a limited partner interest, special limited partner interest, or member interest. 21 Notwithstanding anything to the contrary in this Agreement or any other Loan Document, the City consents to the transfer of the Investor limited partner s interest or Investor member s interest in the Owner among affiliates of the Investor. Owner must provide notice of such transfer to the City at least 30 days prior to the transfer.

22 22 Proposed Term Additionally, the City s willingness to make the Loan as anticipated herein is also contingent upon and made with specific reliance on the evaluation of the planned property manager for the Project. Initially, and throughout the term of this Agreement, the City must approve of any property management company, or another similar agent, employed by the Owner. The City s approval of a specific property management company or agent may be withdrawn at any time, and upon notice of same the Owner will identify and contract with a property manager otherwise acceptable to the City. Initially, the City has approved Aperto Property Management, Inc. as the property manager for the Project.

23 ATTACHMENT 2 CITY OF ELK GROVE Affordable Housing Loan Program Guidelines April 9, 2014 I. BACKGROUND The City of Elk Grove s Affordable Housing Fund (AHF) is supported by a development impact fee program that provides the financial resources to promote and assist in the development of new affordable housing in the City. The AHF s revenues come from residential and non-residential development impact fees paid by project applicants at building permit issuance. Revenues in the AHF must be used in compliance with Chapters and of the Municipal Code, which generally allow provision of loans or grants to support new residential development costs for low-income housing units, acquisition and rehabilitation of low-income housing units, homeowner downpayment assistance for low-income households, and other project or programs approved by the Council. The City s Affordable Housing Loan Program assists affordable housing developers by providing loans for development financing. The loans are intended to be gap financing. The gap is defined as the difference between total development cost and the maximum potential project funding raised from private and public sources other than Elk Grove s AHF. Thus, the public purpose of the City s housing loan funds is to provide financial assistance to incometargeted housing that a for-profit or nonprofit developer cannot secure from non-city sources, helping to assure financial feasibility of the project. II. OVERVIEW OF PROGRAM GOALS The Affordable Housing Loan Program goals, consistent with the City of Elk Grove s General Plan Housing Element, are as follows: a) Increase the supply of affordable housing through new construction; b) Ensure long-term affordability of very low- and low-income housing; c) Encourage the development of well designed, high quality, and energy efficient residential projects that meet the needs of individuals and families as well as seniors; d) Maintain quality living environments for residents of assisted affordable developments and surrounding properties; e) Support homeownership programs; f) Support the development of income-restricted apartment and/or single-family development projects; g) Encourage the production of the maximum number of units to be in compliance with the state mandated Regional Housing Needs Allocation (RHNA) requirement, determined by the Sacramento Area Council of Governments (SACOG) for the City. h) The current RHNA housing unit goals for the period between 2013 and 2021 are as follows: Affordable Housing Loan Program Guidelines Page 1 of 6 23