Memorandum. Adopt a resolution:

Transcription

1 COUNCIL AGENDA: 11/10/15 ITEM: 4 ^ CITY OF SAN JOSE CAPITAL OF SILICON VALLEY Memorandum TO: HONORABLE MAYOR AND CITY COUNCIL FROM: Jacky Morales-Ferrand Julia H. Cooper SUBJECT: SEE BELOW DATE: Approved Date /o/3t>//r COUNCIL DISTRICT: 3 SUBJECT: APPROVAL OF THE ISSUANCE OF TAX-EXEMPT MULTIFAMILY HOUSING REVENUE BONDS AND THE LOAN OF BOND PROCEEDS AND RELATED DOCUMENTS FOR CASA DEL PUEBLO APARTMENTS RECOMMENDATION Adopt a resolution: a. Authorizing the issuance of tax-exempt multifamily housing revenue bonds designated as "City of San Jose Multifamily Housing Revenue Bonds (Casa Del Pueblo Apartments), Series 2015D" in a principal amount not to exceed $30,000,000 (the "Series 2015D Bonds");. b. Approving a loan of Series 2015D Bond proceeds to Casa Del Pueblo Preservation Limited Partnership, a California limited partnership created by Preservation Partners Development III, L.P (the "Developer"), to finance the acquisition and rehabilitation of the Casa Del Pueblo Apartments (the "Development") located at 200 South Market Street in San Jose; c. Approving in substantially final form the Trust Indenture, Loan Agreement, Regulatory Agreement and Declaration of Restrictive Covenants, Bond Purchase Agreement, and Official Statement (collectively, the "Series 2015D Bond Documents"); and d. Authorizing and directing the City Manager, Director of Finance, Assistant Director of Finance, and Interim Director of Housing, or their designees, to execute and, deliver the Series 2015D Bond Documents and related Series 2015D Bond documents as necessary.

2 Subject: Bond Issuance for Casa del Pueblo Apartments Page 2 OUTCOME Approval of the recommended actions will enable the issuance of multifamily housing revenue bonds for the purpose of financing the acquisition and rehabilitation of an existing 165-apartment affordable rental development consisting of: (i) 163 apartments, the occupancy of which will be restricted to seniors and (ii) two unrestricted managers' apartments. The restricted apartments will be affordable for a new period of at least 55 years from issuance of the 2015D Bonds. This Development will continue to serve very low- and low-income senior residents with current annual incomes up to $51,030. EXECUTIVE SUMMARY In accordance with the City's Policy for Issuance of Multifamily Housing Revenue Bonds, Preservation Partners Development III, L.P., a California corporation (the "Developer"), has requested that the City issue tax-exempt multifamily housing revenue bonds in an amount not to exceed $30,000,000 (the "Series 2015D Bonds"). The Series 2015D Bonds will be structured as rated, non-credit-enhanced, cash collateralized and publicly offered short-term bonds that will be underwritten by Citigroup Capital Markets, Inc. The proceeds of the Series 2015D Bonds will be loaned to Casa Del Pueblo Preservation Limited Partnership (the "Borrower"), a California limited partnership created by the Developer. These Bond proceeds, together with other funds, will be used by the Borrower to finance the acquisition and rehabilitation of an existing 165-apartment rental senior housing rental development known as Casa Del Pueblo Apartments (the "Development"). The 163 restricted apartments and 2 unrestricted managers' apartments are all one-bedroom apartments. The 2015D Bonds will not be paid from or secured by the general taxing power of the City or any other City asset. The purpose of the proposed bond issuance is to allow for the acquisition of the Development by the new owner and to provide for the Development's rehabilitation. These actions are intended to ensure the Development's long-term physical and economic viability to serve as an affordable housing resource for the City. BACKGROUND Current Owner and Sale. The Development's current owner is the Retail Store Employees' Building Corporation, a California limited partnership created by the United Food and Commercial Workers Local 5 ("Current Owner"). The Current Owner has entered into a joint venture partnership with the Developer, a for-profit affordable housing developer based in Torrance, California, that specializes in repositioning and preserving HUD-financed affordable rental properties.

3 Subject: BondlssuanceTor Casa del Pueblo Apartments Page 3 Borrower. The Borrower is a California limited partnership created by the Developer for the purpose of purchasing and owning this Development in joint venture with the Current Owner. The Borrower will consist of: (1) Casa Del Pueblo Cornucopia LLC, a California nonprofit limited liability company, as Managing General Partner; (2) Casa Del Pueblo Preservation Partners LLC, as Administrative General Partner, and (3) Casa Del Pueblo Investor 2015, LLC, a tax credit investor limited partner created by the Candeur Group, LLC. The Developer has requested that the City issue the 2015D Bonds for the purpose of lending Series 2015D Bond proceeds to the Borrower. The proceeds of the Series 2015D Bonds, together with other funds, will be used by the Borrower to finance the acquisition and rehabilitation of the Development. Development Overview. The Development, originally built in 1976, consists of one residential building of 12 stories with 165 one-bedroom apartments the occupancy of which has been and will continue to be restricted to low- and very low-income seniors, except for 2 unrestricted managers' apartments. The Development will be subject to the following income restrictions: 154 apartments designed for single occupancy are and will continue to be rented to seniors with incomes that do not exceed 50 percent of the area median income ("AMI") (incomes at or below $42,550); 9 apartments designed for single occupancy will be rented to seniors with incomes that do not exceed 60 percent AMI (incomes at or below $51,030); and 2 apartments designed for single occupancy, are and will continue to be unrestricted managers' apartments. The 154 apartments restricted to 50 percent AMI are and will continue to be covered by Section 8 project-based rental vouchers. Those restrictions will remain in place so long as such Section 8 assistance remains on the Development - a minimum of 20 years from Bond closing. If the Section 8 contract expires and is not renewed, the Development will become subject to the following income restrictions: 33 apartments will be rented to seniors with incomes that do not exceed 50 percent AMI; 130 apartments will be rented to seniors with incomes that do not exceed 60 percent AMI; and 2 apartments will remain unrestricted managers' apartments. Once the Borrower acquires the Development, it plans to implement a scope of rehabilitation that includes: seismic retrofits; new Energy Star appliances (refrigerators, free standing ranges, microwave ovens); new cabinets and countertops; upgrades to the plumbing and air conditioning systems; new roofing system; comprehensive electrical upgrades (new smoke detectors and CO alarms, new interior lighting fixtures, new unit call system, replacement of circuit breakers)

4 Subject: Bond Issuance for Casa delpueblo Apartments - Page 4 replacement of all windows with new dual-glazed low-e aluminum windows; new flooring; and repainting of the interior and exterior of the building. The Borrower has allocated a budget of approximately $2.1 million for tenant relocation during the rehabilitation period. The tenants will have a choice to move temporarily to a local hotel, out of town, or with relatives. No permanent displacement of current residents is anticipated. No City Loan for the Development. The City has not made and does not have an outstanding loan with respect to the Development. City as Issuer of the Series 2015D Bonds. The City's Policy for Issuance of Multifamily Housing Revenue Bonds encourages the City to be the issuer of tax-exempt multifamily housing revenue bonds in connection with the financing of affordable rental housing developments in its jurisdiction. Sources of Development Funding. The Series 2015D Bonds will be structured as short-term fixed rate obligations in the estimated principal amount of $30,000,000. The Series 2015D Bonds will be repaid in full following completion of rehabilitation and lease-up ("at permanent") from the proceeds of a conventional FHA-insured, fixed-rate mortgage, Low Income Housing Tax Credits, and an equity bridge loan. Series 2015D Bond proceeds will fund a portion of the total development costs, which are currently estimated to be $62,613,311. The estimated sources of funding for the Development's rehabilitation phase and permanent phase are as follows: City of San Jose Casa Del Pueblo Apartments Plan of Finance - Sources of Funding* Source Construction Permanent Bond Proceeds $ 30,000,000 $ 0 FHA Insured First Mortgage Loan 0 24,983,000 Tax Credit Equity 12,580,000 19,597,000 Seller Carry-back 18,033,311 18,033,311 Developer Equity 2,000,000 0_ Total $ 62,613,311 $ 62,613,311 * Estimated as of the date of this report. The actual amounts may vary from these estimates. Financing History of the Development - Key Dates. The following are the key dates relating to the financing history of the Development: February 23, The City's Director of Finance held a TEFRA Hearing regarding the issuance of bonds by the City for the Development. The Mayor certified the actions of the Director of Finance on March 10, 2015.

5 Subjects Bond Issuanee-for Gasa del-pueblo Apartments Page 5 February The Interim Director of Housing submitted an application to the California Debt Limit Allocation Committee ("CDLAC") for an allocation of up to $30,000,000 in private activity bonds for the Development. The application contained an FHA Forward Commitment Request. June 10, The Borrower received from the California Tax Credit Allocation Committee ("CTCAC") a Federal tax credit allocation of $1,585,283 per year and a State tax credit allocation of $3,417,962 per year. September 15, FHA issued its firm commitment to provide an insured mortgage loan for the Development at permanent. September 16, The City received a private activity bond allocation of $30,000,000 from CDLAC as requested. ANALYSIS This portion of the report is divided into several sections to address the items in staffs recommendation to proceed with the financing for the Development. These sections describe financing structure, financing documents, financing team participants, and financing schedule. Bond Financing Structure Overview of the Multifamily Bond Financing General. Multifamily housing financing historically has involved the issuance of taxexempt bonds on behalf of private developers of qualifying affordable rental apartment projects. The City would issue tax-exempt bonds and loan the proceeds to the developer/borrower. The advantages of tax-exempt financing to developers include: below-market interest rates and access to low-income housing tax credits features that are not available with conventional multifamily housing mortgage loans. The bonds are limited obligations of the City, payable solely from loan repayments by the borrower and not by the general taxing power of the City or any other asset of the City. Requirements for Tax-Exemption. For a multifamily housing revenue bond to qualify for tax-exemption, federal law generally requires that one of two restrictions must apply: either (1) at least 20% of the apartments in the housing development must be reserved for occupancy by individuals and families whose income is 50% AMI or less, or (2) at least 40% of the apartments must be reserved for occupancy by individuals and families whose income is 60% AMI or less. This second restriction will be incorporated into the Regulatory Agreement for the Series 2015D Bonds.

6 Subject: Bond Issuance for Casa del Pueblo Apartments - Page 6 Structure of the Series 2015D Bonds Public Offering. The Series 2015D Bonds will be publicly offered obligations to be marketed and underwritten by Citigroup Capital Markets Inc. (the "Underwriter"). The Series 2015 D Bonds are expected to receive a rating of "AA+" from Standard & Poor's. Security Features. The Series 2015D Bonds will be 100% cash collateralized. Series 2015D Bonds proceeds will be held by U.S. Bank, National Association (the "Trustee") in a Development Fund under a Trust Indenture (as described in the next section of this Memorandum). The Trustee may release Series 2015D Bonds proceeds to the Borrower for the purpose of acquiring and rehabilitating the Development only if it receives a like amount of funds on behalf of the Borrower for deposit into a Collateral Fund to be held under the Trust indenture. The funds to be deposited in the Collateral Fund must be bankruptcy-proof. There will be no additional credit enhancement. Interest on the Series 2015D Bonds will be prefunded from Bond proceeds. Principal of the Series 2015D Bonds will be repaid from a separate FHA-insured mortgage loan and tax credit equity funds. FHA has issued its firm commitment to provide such insured mortgage loan. Principal Amount and Term. The Series 2015D Bonds are anticipated to be issued in an amount not to exceed $30,000,000 with a final maturity of approximately two years, subject to prior redemption in 18 months. After the rehabilitation of the Development is completed and the Development is leased, conversion to the permanent loan phase will occur (the "Conversion Date"), at which point the Series 2015D Bonds will be repaid in full from the proceeds of an FHA-insured mortgage loan and tax credit equity funds. Interest Rate. The Series 2015D Bonds will bear interest only at a fixed rate through the anticipated redemption date of approximately 18 months. The interest rate will be based on market conditions at the time of sale (expected on December 3, 2015). Based on current market conditions, the interest rate will be approximately 0.75%. If the Series 2015D Bonds are not redeemed on the redemption date in 18 months, the underwriter will need to remarket them through the final maturity of approximately 2 years. Financing Documents The following is a brief description of each document the City Council is being asked to approve and authorize its execution. Copies of these documents will be available in the City Clerk's Office and will be posted to the City's agenda website on or about October 30,2015. Staff recommends that the City's Director of Finance, Assistant Director of Finance, Interim Director of Housing or other authorized officer of the City be authorized to execute the agreements on behalf of the City as described below ("Authorized Officers").

7 Subject: Bond Issuance for Casa del Pueblo Apartments Page 7 As modifications may be required prior to the closing, staff also recommends that the Authorized Officers each be authorized to execute the final version of each of these agreements and to approve changes to the Official Statements upon consultation with the City Attorney's Office. Trust Indenture. The Series 2015D Bonds will be issued under a Trust Indenture (the "Indenture") between the City and the Trustee. The Indenture is executed by the Director of Finance, or other authorized officer on behalf of the City, and attested by the City Clerk. The Indenture sets forth the terms of the Series 2015D Bonds, including the interest rate, final maturity and redemption provisions. The Indenture establishes various funds and accounts for the deposit of Series 2015D Bonds proceeds and repayment sources. Pursuant to the Indenture, the Trustee is given the authority to receive, hold, invest, and disburse the bond proceeds and other funds; to authenticate the Series 2015D Bonds; to apply and disburse payments to the Series 2015D Bondholders; and to pursue remedies on behalf of the Series 2015D Bondholders. The Indenture sets forth the guidelines for the administration, investment, and treatment of investment earnings generated by each fund and account. The Indenture provides that the Borrower will compensate the Trustee for services rendered thereunder. Loan Agreement. The parties to this document (the "Loan Agreement") will be the City and the Borrower. The Director of Finance, Assistant Director of Finance or other authorized officer will execute the Loan Agreement on behalf of the City. The Loan Agreement provides for the loan of Series 2015D Bonds proceeds to the Borrower for acquisition and rehabilitation of the Development, and for the repayment of such loan by the Borrower. The loan is evidenced by a Note in an amount that corresponds to the principal amount of the Series 2015D Bonds. The City's rights to receive payments under the Note will be assigned to the Trustee, along with certain other rights under the Agreement, the Loan Agreement and the Bonds; however, certain reserved rights have been retained by the City, such as the City's right to indemnification. Regulatory Agreement and Declaration of Restrictive Covenants. This agreement (the "Regulatory Agreement") among the City, the Trustee, and the Borrower contains certain covenants and restrictions regarding the Development and its operations intended to assure compliance with the Internal Revenue Code of The Director of Finance, Assistant Director of Finance, Interim Director of Housing, or other authorized officers will execute the Regulatory Agreement on behalf of the City. The Regulatory Agreement restricts the rental of Development apartments (except for the two managers' apartments) to low-income residents for a period of at least 55 years as previously described.

8 Subject: Bond Issuance for Casa del Pueblo Apartments Page 8 Bond Purchase Agreement. This agreement ("Purchase Agreement") is among the City, the Borrower and the Underwriter. The Purchase Agreement sets forth the conditions under which the Underwriter will purchase the Series 2015D Bonds. It contains certain representations and warranties of the City and the Borrower, identifies the documents to be executed at closing, and specifies the conditions that may allow the Underwriter to cancel its purchase of the Series 2015D Bonds. The Director of Finance or other authorized officer will execute the Purchase Agreement on behalf of the City. Official Statement. This document is the public offering statement relating to the Series 2015D Bonds. An authorized officer of the Borrower will execute this document. The City does not execute the Official Statement, but Council approval to distribute the document is required. This document is prepared by the Underwriter's counsel and describes the terms and structure of the Series 2015D Bonds, the flow of funds, the Development and the security for the Series 2015D Bonds. During the marketing period for the Series 2015D Bonds, the Official Statement will be issued in preliminary form. After the Series 2015D Bonds are sold, the final pricing information will be included and the Official Statement will become "final". A copy of the draft preliminary Official Statement, in substantially finalform, will be posted on the agenda website on or about October 30, If any Councilmember has any personal knowledge that any of the material information in the Official Statement is false or misleading, he or she should promptly advise City staff of the matter; City staff, bond counsel and the financial advisor will be available at the Council meeting on November 10, 2015 to address any questions, issues and/or concerns. Financing Team Participants The financing team participants for the Series 2015D Bonds consist of: City's Financial Advisor: Bond Counsel: Trustee: Underwriter: Ross Financial Orrick, Flerrington & Sutcliffe LLP U.S. Bank, National Association Citigroup Capital Markets Inc. All costs associated with the Financial Advisor, Bond Counsel, Trustee and Underwriter are contingent upon the sale of the Series 2015D Bonds and will be paid from Series 2015D Bond proceeds, tax credit equity, and/or Borrower funds.

9 Subject: Bond Issuance for Casa del Pueblo Apartments Page 9 Financing Schedule The current proposed schedule is as follows: Council Approval of Bonds/Bond Documents Mail/Post Preliminary Official Statement Price Series 2015D Bonds Pre-closing Closing CDLAC Deadline for Closing November 10, 2015 November 10, 2015 November 18, 2015 December 1, 2015 December 3, 2015 December 15, 2015 EVALUATION AND FOLLOW-UP This Memorandum presents the set of recommendations related to the City Council's approval of the issuance of the Series 2015D Bonds and requires no follow-up to the City Council. Once the Series 2015D Bonds close, anticipated on December 3, 2015, and the rehabilitation of the Development commences, the Housing Department will provide updates in its Quarterly Construction Reports posted at under "Reports & Data." PUBLIC OUTREACH The method of notifying the community of the City's intent to issue a tax-exempt private activity bond is the Tax Equity and Fiscal Responsibility Act (TEFRA) Hearing. The TEFRA Hearings was held on February 23, 2015 before the Director of Finance. The public notice for the February 23, 2015 hearing was published in the San Jose Post Record on February 9, This Memorandum and Series 2015D Bond Documents will be posted on the City's website for the November 10, 2015, meeting. COORDINATION This report has been prepared by the Finance Department and the Housing Department in coordination with the City Attorney's Office and the Budget Office.

10 Subject: Bond IssuanceYor Casa del Pueblo Apartments - Page 10 FISCAL/POLICY ALIGNMENT This action is consistent with the City's Consolidated Plan , adopted by City Council on May 5, 2015, to provide homes for very low- and extremely low-income households. COST SUMMARY/IMPLICATIONS All issuance costs will be paid from proceeds of the Series 2015D Bonds, tax credit equity proceeds and/or Borrower funds. The Series 2015D Bonds are tax-exempt obligations that are 100% cash collateralized, with interest paid from capitalized interest and principal repaid from the proceeds of an FHA-insured mortgage and tax credit equity. The Series 2015D Bonds will not be paid from, nor secured by, the general taxing power of the City or any other City asset. City Fees. City fees consist of an upfront fee for issuing the Series 2015D Bonds and an annual fee for monitoring the restrictions applicable to the Development over the 55-year Regulatory Agreement. These fees will be paid from the low income housing tax credits and/or Borrower's funds. The total amount of fees that the City collects is subject to Federal Tax restrictions. Based on the currently estimated par amount of $30,000,000 for the Series 2015D Bonds, the upfront issuance fee will be $100,000 under the City's Policy. The annual fee under the City's Policy is equal to one-eighth of one percent (0.125%) of the principal amount of the Series 2015D Bonds, with a minimum fee of $7,500. Based on this formula and an estimated par amount of $30,000,000, the annual fee would be $37,500. The Borrower is obligated to pay this fee each year during the 55-year Regulatory Agreement term. At maturity of the Series 2015D Bonds or prior redemption, the City has the option to require the Borrower to pay the discounted value of the annual fee that would otherwise be due over the remainder of the Regulatory Agreement term. As the Bonds mature in two years (subject to prior redemption in 18 months), the annual monitoring fee is expected to be $37,500 during the term of the Series 2015D Bond and approximately $13,750 to $14,250 annually thereafter due to the impact of Federal Tax restrictions; if the remaining fees are paid when the Series 2015D Bonds are retired, the amount due from the Borrower would be approximately $725,000 (the present value of the future annual fees). No appropriation of funds is required under this action. Compensation for the financing team participants (Financial Advisor, Bond Counsel, Underwriter and Trustee) and other costs of the Series 2015D Bonds are contingent on the sale of the Series 2015D Bonds and will be paid from Series 2015D Bond proceeds, tax credit equity proceeds, and/or Borrower funds.

11 Subject: -Bond Issuance for Gasa del Pueblo Apartments Page 11 CEOA Exempt, Guidelines Section 15061(b)(3). No potential for causing a significant impact on the environment and 15301(d). Existing Facilities, File No. PP /s/ JULIA H. COOPER Director of Finance /s/ JACKY MORALES-FERRAND Interim Director of Housing For questions, please contact Dave Bopf, Interim Assistant Director of Housing at (408) Attachment A: Site Map

12 Attachment A SITEMAP CO Q? R- n> 5 f! Fountain Fairmont San Jose Sat] Atlt0nj 0 station (0) 0 El IP O a, ist The lech Museum of i!n novation FJa2tf De Cesar Chavez tl El Bijan Bakery & Cafe i 200 S Market St cv <\P* Psycho Donu' & 9^ OF C'(P ksice I Sail»n Convention >wn Center Station (0) rnncnn Nrkn ra EI Arcadia tl ^ San Jose Marriott California Theatre