Honorable Mayor and Members of the City Council Phil Kamlarz, City Manager

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1 Office of the City Manager To: From: Honorable Mayor and Members of the City Council Phil Kamlarz, City Manager Submitted by: Jane Micallef, Director, Housing and Community Services Department Subject: RECOMMENDATION Adopt two Resolutions: 1. Authorizing the City Manager or his designee to execute the necessary documents related to the New Markets Tax Credits (NMTC) financing for the Ed Roberts Campus (ERC) project once ERC has met certain conditions; and 2. Authorizing the City Manager to grant back $490,000 to the ERC, which is the identical amount that ERC will pay the City pursuant to the City s transfer tax ordinance. SUMMARY On July 22, 2008, the City Council approved a $2,000,000 Brownfields Economic Development Initiative (BEDI) grant and a $6,000,000 HUD Section 108 loan to the Ed Roberts Campus, a California nonprofit corporation (ERC) for construction of the Ed Roberts Campus (the Campus), a universally-designed, transit-oriented development that would serve as a one-stop service facility for members of the disabled community. The Campus will consist of office space for social service organizations and advocacy groups, education center, recreation facility, child care center, meeting rooms and a café. The Campus is a collaboration between seven founding nonprofit organizations, or ERC Partner Organizations, whose missions focus on improving the lives and advocating for the rights of persons with disabilities: Bay Area Outreach and Recreation Program (BORP), Center for Accessible Technologies (CforAT), Center for Independent Living (CIL), Computer Technologies Program (CTP), Disability Rights and Education & Defense Fund (DREDF), Through the Looking Glass (TLG) and World Institute on Disability (WID). Equity Community Builders (ECB), a San Francisco-based for-profit real estate developer, is under contract with ERC to manage the project during construction and ECB Management, the property management arm of ECB, will manage the Campus once the project is completed and is operating. Through a multi-year capital campaign that began in 1996, ERC was able to raise $35,000,000 in grants from public agencies and private foundations. This fundraising, along with a $6,000,000 construction loan from Wells Fargo Bank, a $2,187,500 bridge 2180 Milvia Street, Berkeley, CA Tel: (510) TDD: (510) Fax: (510) manager@cityofberkeley.info Website:

2 construction loan from the Northern California Community Loan Fund (NCCLF) and the City s Section 108 loan and BEDI grant, enabled ERC to begin construction of the facility in September 2008 although ERC did not have all the funds in place to complete the project. The ERC Partner Organizations anticipated they would need to do additional fundraising in order to pay for tenant improvements and to repay the NCCLF construction loan which is due September As discussed below, the loan agreement between the City and ERC for the Section 108 Loan required ERC to continue these fundraising efforts and periodically update the City. To meet these outstanding obligations, ERC continued its capital campaign in 2008 and was successful in getting commitments of more than $2 million from a private donor, a foundation grant and 2009 and 2010 federal earmark dollars. However, when the economy took the turn for the worse in mid-september 2008, ERC s fundraising efforts were stalled and the organization was not able to meet its fundraising goals. At the end of 2009, the ERC still needed to raise an additional $2.6 million for the repayment of the NCCLF loan and for tenant improvements. With foundations and private donors scaling back on their grant giving, applying for New Markets Tax Credits (NMTC) financing became one of the few viable options for raising the funds necessary to complete construction of the Campus. Early attempts to pursue NMTC financing were unsuccessful since the Campus is not located in a Low Income Community as defined by the NMTC program. With support from the Housing & Community Services Department and technical assistance from the National Development Council (NDC), the City s advisor on the project, ERC pursued an alternate strategy and succeeded in securing an allocation of NMTCs under the Targeted Populations provisions of the NMTC program which is discussed further in the Background section of this report. The proposed NMTC transaction is based on the sale of a leasehold interest in the Campus to a Master Tenant, or Qualified Low-Income Community Business (QALICB). The QALICB will be a newly formed California nonprofit corporation named ERC QALICB, and ERC will be a member of ERC QALICB. To complete the NMTC financing, ERC is requesting the City to execute the necessary documents related to the New Markets Tax Credit Financing for the Campus, including (1) a Subordination Agreement in favor of the City; (2) Subordination, Non-Disturbance and Attornment Agreement with ERC and the Master Tenant; (3) written approval of the Master Lease between ERC and the Master Tenant; and (4) written consent to the ERC s entering into a contract for a two-day bridge loan which is required as part of the New Markets Tax Credits transaction. The ERC is also requesting the City to grant back to ERC the City of Berkeley transfer tax of $490,000 that is triggered by the sale of the leasehold interest in the ERC to the Master Tenant which must be paid at the time of the transfer. FISCAL IMPACTS OF RECOMMENDATION The NMTC financing will bring approximately $8.3 million in cash to the project after transaction fees and closing costs. The funds will be used for construction of tenant Page 2

3 improvements, completion of the remaining warm shell improvements and partial pay down of the Wells Fargo Bank loan. Without the NMTC financing, the ERC would need to raise funds from other sources. The NMTC transaction is based on the sale of the leasehold interest in the ERC to the master tenant, ERC QALICB. Under Berkeley Municipal Code 7.52, ERC is required to pay the transfer tax for the sale of the leasehold interest. ERC will pay the transfer tax at close of the NMTC escrow and is requesting the City grant back to the ERC the transfer tax, which is estimated to be about $490,000. ERC will use these funds to further reduce the project s existing permanent debt by the same amount. CURRENT SITUATION AND ITS EFFECTS The City Council approval of the Section 108 loan and BEDI grant in July 2008, was conditioned upon ERC raising enough funds to repay the NCCLF loan which is due in September 2011 and to pay for tenant improvements for the partner tenants. City Council approval also required ERC to lease sufficient space in the Campus to produce sufficient rental income to cover debt service payments on both the Wells Fargo permanent loan and the City s Section 108 Loan. The conditions Council adopted in July 2008 required that prior to disbursement of the 108 loan and BEDI funds, the ERC should have (1) secured a commitment of enough grant funds to repay the $2.187 million NCCLF loan; and (2) achieved a lease up rate of at least 87%, the level at which the project needs to be rented to have sufficient income to make debt service payments on both the Wells Fargo loan and the City s Section 108 Loan. Without both conditions being met, the Campus would not generate sufficient income to support the project s debt and HUD would reduce the City s CDBG annual fund allocation by the amount of the shortfall. Although ERC did not meet the leasing and fundraising goals by the June 2009 deadline, City Council authorized disbursement of the funds on June 9, 2009 since without the City funds, ERC would not have been able to continue construction and any delays would have resulted in increased construction costs. The City began to disburse the Section 108 and BEDI funds in February 2010 and by June 30, 2010 all funds will have been disbursed. Despite significant efforts of the part of ERC, the leasing and fundraising goals Council required have not been met. Below is an update of the leasing and fundraising activities to date. Leasing Goal: The ERC is 56% leased up and has executed leases with the seven ERC Partner Organizations. No new leases have been executed since the start of construction in September The ERC is negotiating lease terms with four nonpartner organizations, including two State Departments. Altogether these four organizations are anticipated to lease 16,638 square feet, or 25% of the leasable space. As a condition of closing on the New Markets Tax Credits financing, the investor, JP Morgan Chase, is requiring execution of the leases with the two State Departments. Page 3

4 Once the two Departments are under contract, the project will be 78% leased up - still below the 87% lease up rate necessary to provide sufficient rental income to make debt service on the project s permanent loans. Because it has been unable to meet its leasing goal, ERC is proposing to use part of the NMTC funds to pay down the Wells Fargo Bank loan to a level that enables the Campus to produce enough rental income to make payments on its remaining debt. If the ERC is successful in securing the leases with the State departments, the Campus will have sufficient rental income to cover payments on both the reduced Wells Fargo loan and the Section 108 loan. Without these State leases, however, the ERC will not have sufficient funds to cover the full amount of the Section 108 loan payment and thus the City s current and future CDBG funds, which are pledged to HUD pursuant to the Section 108 program, will need to be allocated to repay the 108 loan. Fundraising Goal: As a condition of the Section 108 loan, Council required ERC to secure funding commitments to repay the $2.187 million NCCLF loan by September The ERC faced many challenges with fundraising due to the downturn in the economy shortly after the project started construction in September In the fall of 2008 and throughout 2009, a number of private foundations that ERC had approached earlier scaled back on their giving or suspended awarding grants altogether. Obtaining additional transportation funds from local, state, and federal sources proved to be just as difficult as many of the funding programs were looking to fund new projects, not placing a priority on gap financing for existing projects. Despite these challenges, the ERC was able to secure $1,763,000 in additional funds: $1 million pledge from a private donor, Barclay Simpson; $50,000 Hearst Foundation grant; and $713,000 in 2009 federal earmarks through Representative Barbara Lee and Senator Barbara Boxer s office. ERC is proposing to use the Simpson pledge, savings from the first year of operations and additional fundraising to pay off the NCCLF loan. The federal earmarks will be used to cover construction costs; thus, enabling the ERC to draw down less of the Wells Fargo Bank loan. Other Costs Requiring Additional Fundraising: The original budget did not include the construction of tenant improvements for the partner spaces since ERC was to fundraise to cover those costs for the partner tenants and non-partner tenants were to pay for these improvements through higher rent payments. According to the current project budget, the ERC proposes allocating approximately $5 million of the $8 million in NMTC equity to complete the tenant improvements for the seven ERC Partner Organizations and to provide for some of the tenant improvement costs for the non-erc tenant space. The next section discusses the NMTC budget in detail. Page 4

5 New Markets Tax Financing Budget ERC is scheduled to complete construction of the base building in June 2010 under the $35.1 million contract with Cahill Contractors, Inc. This contract does not include construction of the tenant improvements for any tenants or warm shell buildout for offices spaces other than those of the Partner Organizations. ERC proposes to use NMTC financing to pay for these additional construction costs and also to reduce the Campus existing debt. Reducing the Campus long-term debt and making sure ERC has sufficient income to meet debt payments is the top priority for the City. The $6 million Section 108 loan to ERC must be repaid to the U.S. Department of Housing and Urban Development (HUD) and the City has pledged its current and future Community Development Block Grant (CDBG) funds as security. If the ERC is unable to repay the Section 108 loan, the City s CDBG allocation must cover the annual $546,000 payment to HUD. Since these funds are the primary vehicle for funding many nonprofit agencies that provide critical community services, the loss of funding for these services could significantly impact the quality of life for the low income and homeless community within the City of Berkeley. As such, staff has worked with ERC to determine the best use of the NMTC funds. Staff has consistently stressed the importance of using the funds to complete warm shell improvements in order to enhance the marketability of the non-partner Organization areas within the Campus and to reduce the amount of the project s permanent debt to a level it can afford with its committed rental revenue. In the past six months, staff has worked with ERC and ECB to attempt to develop a budget that meets both the City s priorities and the ERC s needs. Below is ERC s proposed uses of the 8,269,000 in NMTC funds: USES OF FUNDS Amount Tenant Improvements for Partner $ 2,547,382 1 Organizations Areas* square foot Warm Shell Buildout for Partner 393,568 2 Organizations Areas square foot Sub-Total Tenant Improvements (TI) for 2,940,950 Partner Organizations Tenant Improvements for Other Tenants 1,099,757 3 Areas** 4 Warm Shell Buildout of Other Tenant Areas $ -0- Sub Total TI Allowance for Other Tenant 1,099,757 Areas 5 Tenant Improvements for DOR 548,833 6 Tenant Improvements for DDTP 341,804 Sub Total TI Allowance for State 890,637 Departments Page 5

6 USES OF FUNDS Amount 7 Common Area Furnishings 85, Project Management Through TI 120, Construction Other Soft Costs related to Construction and 137, Leasing (Insurance, Leasing Commission, 9 Staffing Costs during Construction) 10 Fund City's Section 108 Interest Reserve 90, Sub-total Other Costs 432, Repayment of Existing Financing (Balance 2,905, of Net NMTC Funds) Total Uses of NMTC Funds $ 8,269,000 *Note: The total budget for Tenant Improvements (TI) for Partner Organizations is actually $2,725,132. The ERC Partner Organizations will cover $177,750 of the TI budget plus any cost overruns. [Source: ERC Sources & Uses of Funds, Equity Community Builders, 05/04/10]. **Other Tenant Areas refer to the currently unleased portions of the building. Summary of ERC s Proposed Uses of NMTC Funds 1. Allowance for Tenant Improvements and Warm Shell Buildout ERC proposes to use $2,940,950 of the NMTC funds for tenant improvements for the seven ERC partner organizations. This amount includes funding to complete warm shell buildout for the Partner Organization spaces. 1 The seven ERC Partner Organizations will contribute an additional $177,750 of their own funds to cover partner tenant improvement costs, bringing the total amount of TIs for Partner Organizations to $3,118,700 or $ per square foot. The tenant improvement allowance for Other Tenant Areas including warm shell buildout for the office spaces is $1,099,757, or $74.87 per square foot. The rate of $74.87 is an average amount and the actual tenant allowance will range from $40 to$85 per square foot depending on the need. Of the 14,690 square foot of office space that still remains to be leased out, 60% will be available in cold shell only which means future tenants will be responsible for building their own warm shell improvements. ERC noted it would be more prudent to wait until tenants are identified so the warm shell can be built according to the tenants specific requirements. However, staff believes that providing basic warm shell improvements would make the remaining unleased space more marketable, especially with so much empty office space available within the City. If ERC 1 Warm shell improvements are basic necessities required for a tenant to move into an office space including finishes to the space such as sheetrock walls, acoustical tile ceiling, floor finishes, distributed electricity, HVAC and fire sprinklers. Tenants can customize their office space with additional tenant improvements such as offices, cubicles, lighting, furniture, etc. Page 6

7 cannot offer move-in ready spaces with completed warm shell, then additional incentives, such as increased tenant allowance or discount on rents, might be needed to encourage prospective tenants to move into the unfinished spaces. This will likely affect the ERC s ability to command the rents they are anticipating. 2. Other Costs: Common Area Furnishings and Soft Costs related to Construction and Leasing These costs are typical of construction projects and include project management costs, insurance and operating costs during construction of the tenant improvements and warm shell build out. Fund Section 108 Interest Reserve Fund: The City s Section 108 Loan Agreement requires ERC to maintain an Interest Reserve Fund to ensure payment of interest on the Section108 loan during the interim loan period (December 2009 to September 2011) and during the initial lease up period. The ERC had initially deposited $405,000 of the BEDI funds in a Section 108 Interest Reserve Fund. The BEDI funds must be used by August 31, Since payments during the interim loan period have been interest only, and the interest rates have been much lower than projected, staff will release $390,000 of the interest reserve so that ERC can use the funds for construction costs. The use of these interest savings will allow ERC to draw down less of the Wells Fargo construction loan and will reduce the amount of the Wells Fargo permanent loan accordingly. However, ERC must still maintain an interest reserve fund for the remainder of the interim period ERC will allocate $90,000 of the NMTC funds to replenish the Section 108 Interest Reserve Fund. This amount will be sufficient to cover interest payments on the Section 108 loan for the first months of operations, depending on the interest rate at the time. Any shortfall in interest payments will be have to be covered with the project cash flow, or rental income. 3. Repayment of Existing Financing: Currently, the ERC has three loans $6 million construction loan from Wells Fargo Bank which converts to a $5.75 million permanent loan; $6 million Section 108 loan from the City of Berkeley; and $2.187 million construction loan from the Northern California Community Loan Fund (NCCLF). The above three loans on the property amount to about $14 million and each loan is secured by separate deeds of trust with Wells Fargo in first lien position, the City in second lien position and NCCLF in third. Staff analysis of the ERC s original funding proposal showed the Campus can only support permanent debt of $12,000,000, which is the combined amount of the Wells Fargo Bank permanent loan and the City s Section 108 loan. The appropriate underwriting standard for this type of financing is a debt coverage ratio of 1.2, which means that there is a 20% cushion between project income Page 7

8 and debt service. In order to achieve this ratio, ERC cannot exceed $12 million in permanent financing. As a result, Council conditioned funding the City s Section 108 loan on the ERC retiring the NCCLF loan at the end of its term in September ERC s current operating proforma shows an annual rental income of $893,432 from the seven Partner Organizations, ECB Management Office, Lighthouse for the Blind and the two State departments Department of Rehabilitation (DOR) and Deaf and Disabled Telecommunications Program (DDTP). This is not enough rental income to repay the current amount of permanent debt. To address this issue, ERC proposes to reduce the Wells Fargo Bank loan to approximately $2 million after the first year of operations. At this level, their projected revenue will cover this proposed adjusted amount of permanent debt. However, this scenario is premised upon the following assumptions: ERC Partner Organizations are able to afford higher rent than they pay in their current locations. ERC s projections for rental income are based on receiving $1.80 per square foot in rent from the ERC Partner Organizations. For five of the seven partner organizations, the rents will be higher than that which they are currently paying. For three organizations, the rent will be significantly higher 19% increase for DREDF, 38% increase for Center for Accessible Technologies (CforAT), and 100% increase for Center for Independent Living (CIL). Three of the Partner Organizations BORP, Through the Looking Glass and CILreceived Fiscal Year 2010 CDBG funds from the City. CIL has already proposed to use part of its CDBG grant towards rental payments for its new offices at the ERC. If any of the Partner Organizations are unable to pay this level of rent, it will further negatively impact the project s cash flow. ERC is able to execute leases with the two State departments DOR and DDTP- by June 15, Without the state leases, the ERC will not have sufficient income to make debt payments on both the Wells Fargo Bank loan and the Section 108 loan. The NMTC investor, JP Morgan Chase, is requiring execution of the state leases prior to funding the NMTC; therefore, ERC must execute the state leases before June 15, 2010, the anticipated NMTC closing date. Tenant Improvement Allowance of $74.87 for Other Tenant Space is sufficient. The rate of $74.87 is an average and the actual tenant allowance will range from $40-$80 per square foot, depending on the requirements of the prospective tenants. Tenant spaces that require warm shell build out will receive a higher tenant allowance. At a cost of $39.20 per square foot for warm shell buildout, tenants will have about Page 8

9 $35 per square foot to cover the rest of their tenant improvements. In comparison, ERC is budgeting a total of $ per square foot to cover both the warm shell buildout and tenant improvements for its own space. This is $35.00 more per square foot than the $74.87 per square foot allocated for Other Tenant Areas. Additional incentives such as increased TI allowance and discount on rents may be needed to encourage prospective tenants to lease the remaining space. ERC will be able to offset Wells Fargo Bank loan with construction contingency savings. ERC is projecting a savings of $250,000 in construction contingency. The City s construction manager agrees with this estimate but the final construction cost of the base building will not be known until the Campus is completed. Interest reserve savings will offset Wells Fargo Bank loan. ERC is projecting $797,518 in interest savings as a result of drawing down less of the Wells loan, NCCLF releasing the balance of its interest reserve and the City releasing part of its remaining interest reserve for the Section 108 loan. Staff believes this estimate is optimistic and may be as much as $40,000 less than ERC projects. Simpson Pledge will be funded by September In July 2008, the ERC received a pledge of $1,000,000 from a private donor, Barclay Simpson. The pledge is to be fulfilled within three years of the award date, or by July ERC submitted a request to the donor to accelerate the funding of the pledge to June As of the date of this report, the request is still pending. The Simpson pledge is the primary source for the repayment of the NCCLF construction loan which is due in September Without it, ERC would need to turn to other sources, none of which have made commitments. To ensure ERC achieves the proposed paydown of the Wells loan, the City Manager recommends the following conditions: (1) Prior to executing the City agreements required for the NMTC closing, the ERC must execute the leases with the two state departments DOR and DDTP. JP Morgan Chase, the NMTC investor, is also requiring execution of these leases. (2) Prior to the NMTC closing date, or by June 15, 2010, whichever comes first, the ERC must provide confirmation of the final amount of the Interest Savings and Construction Contingency Savings that can be counted towards reduction of the Wells Fargo loan. Page 9

10 (3) As of the close of the NMTC escrow, ERC must obtain an estoppel certificate from Wells Fargo Bank documenting that the amount owed to Wells Fargo Bank by ERC under the Wells Fargo Bank loan agreement with ERC is less than or equal to $2,035,000. Further that said loan must be current without any financial or non financial defaults as of the NMTC closing date. BACKGROUND The New Market Tax Credit Program is a sophisticated and fairly complex financial mechanism allowed under the Internal Revenue Code to attract private investment to low income communities and special targeted populations. The Ed Roberts Campus has secured an allocation of $40,000,000 in New Markets Tax Credits (NMTC) which translates to $15.6 million in tax credits to the investor, JP Morgan Chase, and approximately $11.5 million in cash for the project. After fees and transaction costs, there will be approximately $8.3 million remaining to be used towards tenant improvements and debt reduction. Since the project is not located in an eligible Low Income Community, ERC has secured the NMTCs under the Targeted Populations provisions of the program. To qualify as a targeted population project, the ERC must demonstrate that 40% of the employees of the project are low income (at or below 80% of area median income) at the time they were originally hired. The ERC Partner Organizations will only occupy about half of the building s office space. Therefore, in order to meet the Targeted Populations requirements, ERC will need to exclude the non-partner tenants who do not qualify as employers of lowincome people. The ERC will do so by creating a new entity that will be a Master Tenant consisting of the seven Partner Organizations. The Master Tenant will purchase a longterm lease from the ERC and will represent the Qualified Active Low-Income Community Business (QALICB) in the NMTC financing structure. It is the Master Tenant that must demonstrate that at least 40% of its employees are low income at the time of hire and thus, qualifies for the NMTCs. The transaction will be a total $40 million Qualified Equity Investment (QEI) which is converted into a loan, or a Qualified Low Income Community Investment (QALICI) from the Community Development Entities (CDEs) to the Master Tenant, also known as the ERC QALICB, will use the QALICI proceeds to purchase the lease from the ERC, complete tenant improvements and pay down part of the project s existing debt. ERC QALICB will collect rents from its sub-tenants and use the proceeds to pay debt service on the QALICI loan. The debt payments on the QALICI will ultimately pass through to the ERC as rents, and the ERC, in turn will use the funds to make debt service payments on the Wells Fargo Bank loan and the Section 108 loan. The $5.75 million permanent loan from Wells Fargo Bank and the City s $6 million Section 108 loan are not part of the NMTC financing structure and the loans will continue to hold the first and second lien position on the property. Page 10

11 In order to satisfy investor and lender requirements, the ERC must execute several documents, including a Subordination Agreement in favor of the City for the Deed of Trust to be recorded against the leasehold interest and a Subordination, Non-Disclosure and Attornment Agreement (SNDA) with the ERC and the Master Tenant. The investor is also requesting lender approval of the Master Lease and lender consent to ERC s entering into an agreement for a two-day loan with JP Morgan Chase. The required documents are further described below: (1) Subordination Agreement for the Deed of Trust on the Leasehold Interest. The ERC will execute a lease with the Master Tenant, ERC QALICB. In addition, to secure the repayment of the loan provided by the CDE s to the Master Tenant, the Master Tenant will execute a deed of trust to be recorded against the Master Tenant s leasehold interest. The Subordination Agreement between the City and ERC provides for subordination of the CDE s Deed of Trust on the leasehold interest to the City s Section 108 Loan. (2) Subordination, Non-Disturbance and Attornment Agreement (SNDA). The SNDA is an agreement between the City of Berkeley, ERC and the ERC QALICB. The SNDA provides for the following: (a) ERC QALICB acknowledges the lease is subordinate to the City s Deed of Trust; (b) the City acknowledges it will not disturb the tenant s occupancy as long as there is no default under the Master Lease (i.e., the Master Tenant is in compliance with the Master Lease); and (c) in the event of foreclosure by the city, ERC QALICB will look to the City as the landlord under the Master Lease. (3) Approval of the Master Lease between the ERC and ERC QALICB. Under the City s Section 108 Loan Agreement, the City must approve any assignment or transfer of a leasehold interest. The Master Lease does not materially impair the City s security interest as this lease is subordinate to the City s deed of trust, subject to the SNDA, and the rents paid by the subtenants (consisting of the seven Partner Organizations and other tenants) will be used to repay the City s loan pursuant to a pledge agreement executed by ERC in favor of the Wells Fargo Bank, the City and NCCLF. This pledge agreement will insure that the rents paid by the tenants within the Campus are passed through the NMTC structure, and are ultimately received by the ERC, as repayment of the ERC s leverage loan, are used by ERC to repay the permanent debt, including the City. (4) City consent to ERC entering into a loan agreement for a two-day loan with JP Morgan Chase. As the leverage lender in the deal, ERC will invest $28 million into the NMTC structure. Under the NMTC program requirements, a leverage loan will recapitalize the existing project through a two-day loan with JP Morgan Chase. This step is necessary in order for ERC to make the funds available for the ERC QALICB. The loan is literally a 48-hour loan which will be repaid once the funds are deposited into the NMTC structure. Page 11

12 (5) Grant back $490,000 in Transfer Tax Revenue. ERC is also requesting the City Council to grant back to the project $490,000 in transfer tax revenue. The NMTC transaction is based on the sale of the leasehold interest in the ERC to the master tenant, ERC QALICB. Under Berkeley Municipal Code 7.52, ERC is required to pay the transfer tax for the sale of the leasehold interest. ERC will pay the transfer tax at close of the NMTC escrow and is requesting the City grant back to the ERC the transfer tax, which is estimated to be about $490,000. RATIONALE FOR RECOMMENDATION The City Manager supports ERC s application for New Markets Tax Credits financing as it will bring in $8.3 million in cash that can be used to pay down of the project s existing debt and pay for tenant improvements. Paydown of the existing debt and completion of tenant improvements will help ERC lease up the remaining tenant space, improve the long-term financial viability of the project, guarantee repayment of the Section 108 loan, and ultimately, reduce the risk to the City s CDBG funds. Given the economic downturn, there are no other viable alternatives for ERC to raise the remaining needed funds to complete the Campus and lease the space. ALTERNATIVE ACTIONS CONSIDERED None. CONTACT PERSON Lourdes P. Chang, Community Development Project Coordinator, Housing and Community Services Department, (510) Attachments: 1: Resolution #1, Authorizing City Manager to Execute Necessary NMTC Documents Exhibit A 2: Resolution #2, Authorizing City Manager to Grant Back to ERC the Transfer Tax Payment of $490,000 Page 12

13 RESOLUTION NO. ##,###-N.S. AUTHORIZING CITY MANAGER OR HIS DESIGNEE TO APPROVE AND EXECUTE NECESSARY DOCUMENTS TO COMPLETE THE NEW MARKETS TAX CREDITS FINANCING FOR ED ROBERTS CAMPUS WHEREAS, on July 22, 2008, the City Council approved a $6,000,000 HUD Section 108 Loan and a $2,000,000 Brownfields Economic Development Initiative (BEDI) Grant to the Ed Roberts Campus, a California nonprofit corporation (ERC) for the construction of the Ed Roberts Campus (Campus); and WHEREAS, the Section 108 loan to ERC must be repaid to the U.S. Department of Housing and Urban Development (HUD) and the City has pledged its current and future Community Development Block Grant (CDBG) funds as security for the Section 108 loan; and WHEREAS, reducing the project s long-term debt and making sure ERC has sufficient income to meet debt payments on the Section 108 loan is the top priority; and WHEREAS, in September 2008, the ERC started construction without having all the funds necessary to complete construction of the Campus and as a condition of funding the Section 108 loan and BEDI grant, ERC was required to do additional fundraising to meet funding goals set by City Council; and WHEREAS, in January 2010, ERC applied for and received an allocation of New Markets Tax Credits (NMTC) that would provide the funds ERC needs to complete the necessary tenant improvements and pay down the project s existing debt; and WHEREAS, the ERC proposes to pay down the Wells Fargo Bank loan to $2,035,000 through the NMTC transaction, thereby reducing the risk to the City s Section 108 loan and ultimately the City s CDBG funds; and WHEREAS, the City Manager supports ERC s application for New Markets Tax Credits and the use of the NMTC funds to complete the required tenant improvements and to pay down the project s existing debt. NOW THEREFORE, BE IT RESOLVED that the Council of the City of Berkeley hereby supports ERC s efforts to secure NMTC funds through the NMTC program in order to complete the Campus and repay the City s Section 108 loan. BE IT FURTHER RESOLVED that the City Council hereby authorizes the City Manager or his designee to approve and execute the necessary documents related to the New Markets Tax Credit Financing for the Campus, including: (1) a Subordination Agreement in favor of the City; (2) Subordination, Non-Disturbance and Attornment Agreement with Ed Roberts Campus and the Master Tenant; (3) Written approval of the Master Lease between ERC and the Master Tenant; (4) Written consent to the ERC s entering into a

14 contract for a two-day bridge loan which is required as part of the New Markets Tax Credits transaction; and (5) any and all other documents or agreements necessary to evidence the approval of the NMTC structure and the lease of a portion of the Campus to ERC QALICB, including but not limited to a pledge agreement in favor of the City and other secured lenders and estoppel certificates. BE IT FURTHER RESOLVED that prior to final approval and execution of the documents from the City of Berkeley, the ERC meet certain conditions outlined in Exhibit A of this resolution BE IT FURTHER RESOLVED that the City Council hereby authorizes the City Manager or his designee to execute any amended documents in keeping with the intent of this resolution.

15 EXHIBIT A Conditions to Final Approval and Execution of Documents Related to the New Markets Tax Credits Financing for Ed Roberts Campus To ensure ERC achieves the proposed paydown of the Wells Fargo Bank loan to $2,035,000, the ERC must meet the following conditions: (1) Prior to executing the City agreements required for the NMTC closing, the ERC must execute the leases with the two state departments DOR and DDTP. JP Morgan Chase, the NMTC investor, is also requiring execution of these leases. (2) Prior to the NMTC closing date, or by June 15, 2010, whichever comes first, the ERC must provide confirmation of the final amount of the Interest Savings and Construction Contingency Savings that can be counted towards reduction of the Wells Fargo loan. (3) As of the close of the NMTC escrow, ERC must obtain an estoppel certificate from Wells Fargo Bank documenting that the amount owed to Wells Fargo Bank by ERC under the Wells Fargo Bank loan agreement with ERC is less than or equal to $2,035,000. Further that said loan must be current without any financial or non financial defaults as of the NMTC closing date.

16 RESOLUTION NO. ##,###-N.S. AUTHORIZING CITY MANAGER OR HIS DESIGNEE TO GRANT $490,000 TO THE ED ROBERTS CAMPUS (ERC) IN TRANSFER TAX REVENUE TO SUPPORT FURTHER REDUCTION OF THE ERC S PERMANENT DEBT WHEREAS, ERC applied for and received an allocation of New Markets Tax Credits (NMTC) for the Ed Roberts Campus project (Campus) to raise the funds it needs to complete construction of the Campus and to pay down the project s permanent debt; and WHEREAS, the NMTC transaction is based on the sale of a leasehold interest in the ERC to the master tenant, ERC QALICB; and WHEREAS, the sale of the leasehold interest triggers payment of a transfer tax; and WHEREAS, the ERC will be a member of the ERC QALICB, and the two parties are controlled by the same entity; and WHEREAS, under Berkeley Municipal Code 7.52, ERC is required to pay the transfer tax to the City for the sale of the leasehold interest; and WHEREAS, ERC will pay the transfer tax at close of the NMTC escrow and is requesting the City grant back to the ERC the transfer tax, which is estimated to be about $490,000; and WHEREAS, ERC will use these funds to further the public purpose of reducing the project s existing permanent debt by the same amount and thereby reducing the risk to the City s Section 108 loan and CDBG funds which are pledged as security pursuant to the HUD Section 108 Loan Program. NOW THEREFORE, BE IT RESOLVED by the Council of the City of Berkeley that City Council grant back the approximately $490,000 in transfer tax revenue to support further reduction of the ERC s permanent debt.