SAN JOSE CAPITAL OF SILICON VALLEY

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1 CITY OF Cr SAN JOSE CAPITAL OF SILICON VALLEY TO: SUCCESSOR AGENCY BOARD BOARD AGENDA: 3/22/16 ITEM: 9.1 Memorandum FROM: Julia H. Cooper SUBJECT: SEE BELOW DATE: Approved Date?/////fc SUBJECT: MERGED AREA REDEVELOPMENT PROJECT TAXABLE SUBORDINATE HOUSING SET-ASIDE TAX ALLOCATION VARIABLE RATE BONDS, SERIES 2010C - EXTENSION OF MANDATORY PURCHASE DATE RECOMMENDATION Adopt a resolution by the Board of the Successor Agency to the Redevelopment Agency: a. Authorizing, in substantially final form and subject to the approval of the State Department of Finance ("DOF"), a Second Supplement to Fiscal Agent Agreement between the Successor Agency and Wells Fargo Bank, National Association, as Fiscal Agent (the "Fiscal Agent") relating to the Redevelopment Agency of the City of San Jose Merged Area Redevelopment Project Taxable Subordinate Housing Set-Aside Tax Allocation (the "2010C Bonds"); b. Approving, in substantially final form and subject to the approval of DOF, a Second Amended and Restated Continuing Covenant Agreement with Wells Fargo Bank, National Association ("Wells Fargo" or "Bank Bond Holder"), as initial bond holder of the 2010C Bonds; c. Authorizing the Executive Officer and Chief Financial Officer of the Successor Agency, or their designee, to take any actions and execute any and all documents necessary to complete this transaction. OUTCOME Approval of these recommendations will result in the extension of the Mandatory Purchase Date for the 2010C Bonds for one year to April 28, 2017, and a reduction in the Index Rate with Wells Fargo, included as the Bank Bond Holder.

2 March 10,2016 Page 2 EXECUTIVE SUMMARY The Agency issued the 2010C Bonds as multimodal taxable subordinate variable rate bonds with an August 1, 2035 maturity date. The current interest on the 2010C is set at an Index Rate, consisting of an interest rate that is set by reference to the LIBOR index plus a spread. In addition, Wells Fargo, as Bank Bond Holder, has the right to require the Agency to purchase 2010C Bonds on a Mandatory Purchase Date, as it may be reset periodically. The current all-in Index Rate is 3.36% and the Mandatory Purchase Date is April 29, By April 29, 2016, the Agency is required to (a) negotiate an extension to the Mandatory Purchase Date with Wells Fargo or (b) repay the outstanding principal ($77,945,000) of the 2010C Bonds either in twelve equal installments over three years with interest due on the unpaid balance at 7% interest rate increasing to 8% after 180 days or in full on the Mandatory Purchase Date (if an event of default is deemed to have occurred) with interest due on the unpaid balance at 10%. The Successor Agency has negotiated a one-year extension to the Mandatory Purchase Date to April 28, The new Index Rate on the 2010C will be equal to the one-year LIBOR swap rate plus a spread of 108 basis points (1.08%) - that together is approximately 1.64% in the current market. The extension to the Mandatory Purchase Date will result in the Successor Agency's ability to maintain the 2010C Bonds as low interest rate obligations that amortize in accordance with the current redemption schedule. The result of not extending the Mandatory Purchase Date would be to significantly increase the Successor Agency's debt service for the 2010C Bonds, to the detriment of the other taxing agencies in the County of Santa Clara. BACKGROUND In July 2011, the State Legislature enacted, and the Governor signed ABX1 26, which, together with certain reformations by the Supreme Court, and additional amendments by the legislature, is referred to herein as the "Dissolution Law". On January 24, 2012, the City of San Jose, pursuant to Resolution No , elected to become the Successor Agency to the Redevelopment Agency of the City of San Jose ("Successor Agency") as provided for in the Dissolution Law. On February 1, 2012, the Redevelopment Agency of the City of San Jose (the "Agency"), by operation of law, was dissolved, and the Successor Agency was established and began the process of winding down the affairs of the former Agency including the payment of enforceable obligations. The enforceable obligations include the 2010C Bonds. Outlined below is the history of the indebtedness and agreements between Wells Fargo and the Agency. April The Agency issued the 2010C Bonds in an aggregate amount of $93,000,000 as multimodal taxable subordinate variable rate bonds that mature on August 1, The 2010C Bonds were issued under a Fiscal Agent Agreement (the "Fiscal Agent

3 Page 3 Agreement"), dated as of April 1, 2010, between the Agency and Wells Fargo as Fiscal Agent (the "Fiscal Agent") and placed directly with Wells Fargo under the terms of the Continuing Covenant Agreement (the "Original CCA"), dated as of April 1, 2010, between the Agency and Wells Fargo as Bank Bondholder. The 2010C Bonds financed or refinanced loans made by the Agency, acting through the City's Housing Department, in connection with affordable housing developments. The issuance of 2010C Bonds freed up $40 million of housing set-aside funds that the City, pursuant to State law, loaned to the Agency. In turn, the Agency used the borrowed funds and other monies to pay an aggregate of $73 million into a county Supplemental Educational Revenue Augmentation Fund ("SERAF") in Fiscal Years and The 2010C Bonds are secured by a subordinate pledge of 20% housing set-aside revenues ("Housing Set-Aside Revenues") after payment of debt service on the Agency's senior lien housing-set aside bonds (the "Senior Housing Set-Aside Bonds"). Interest is payable quarterly on February 1, May 1, August 1 and November 1 of each year, with mandatory sinking fund payments of principal due on August 1 of each year. The 2010C Bonds, the Fiscal Agent Agreement and the Original CCA contained the following provisions: (1) The interest rate on the 2010C Bonds is an Index Rate reset on a monthly basis at a rate (the "Index Rate") equal to one month LIBOR plus an initial spread of 172 basis points (1.72%) (the "Applicable Spread"). The Applicable Spread is subject to increase in steps up to 280 basis points (2.80%) upon a downgrade in the ratings of the Senior Housing Set-Aside Bonds. When the 2010C Bonds were issued, the ratings on the Senior Housing Set-Aside Bonds were "Al" from Moody's Investors Service ("Moody's") 1 and "A" from Standard & Poor's ("S&P"). (2) The 2010C Bonds contained a mandatory purchase date of April 29, 2013 (a "Mandatory Purchase Date") on which date, Wells Fargo was entitled to tender the 2010C Bonds to the Agency for repayment in full. Absent a remarketing or refunding, the Agency would be required (a) assuming no default has occurred, to repay Wells Fargo the outstanding principal over a three year period in twelve equal installments, with interest accruing at an increased rate (minimum "Base Rate" of 8%) or (b) if a default has occurred, repay Wells Fargo the outstanding principal in full on the mandatory purchase date, with interest accruing on unpaid 2010C Bonds at a default rate of 11 %. 1 In the First Supplement to the Fiscal Agent Agreement, Fitch Investors Service replaced Moody's as the rating provider from which a downgrade would be based.

4 Page 4 June June Moody's downgraded the Senior Housing Set-Aside Bonds, in two steps, from "Al" to the "Ba" category in June 2012 in response to the Dissolution Law and the uncertainty created by it. The Moody's downgrades triggered a Special Termination Event under the CCA. Wells Fargo, pursuant to its discretion under the Original CCA and Fiscal Agent Agreement, did not declare the 2010C Bonds to be immediately due and payable, but increased the Applicable Spread to 280 basis points (2.80%). In addition, Wells Fargo entered a Forbearance Agreement (and three amendments thereto) under which it agreed not to exercise rights and remedies under the Original CCA. Wells Fargo also agreed to two extensions to the Mandatory Purchase Date from April 29, 2013 to September 30, These extensions were interim measures that allowed sufficient time for Wells Fargo and the Successor Agency to negotiate the terms of a longer extension of the Mandatory Purchase Date to April 29, September Wells Fargo agreed to remain as Bank Bond Holder and extend the Mandatory Purchase Date through April 29, At the request of the Successor Agency, the Index Rate changed from one-month LIBOR (reset monthly) to a fixed rate through April 29, 2016 based on three-year LIBOR (then 0.76%) plus an Applicable Spread of 260 basis points (2.60%) for an all-in rate of 3.36%. To address certain new regulatory restrictions applicable to banks and to address concerns arising from the impacts of the Dissolution Law, Wells Fargo and the Successor Agency entered into a First Supplement to Fiscal Agent Agreement (the "First Supplement") and a First Amended and Restated Continuing Covenant Agreement (the "First Amended CCA"). None of the new provisions in these agreements changed the original pledge applicable to the 2010C Bonds. However, the minimum "Base Rate" and default rate were lowered to 7% and 10%, respectively. February At the request of the Successor Agency, Wells Fargo agreed to extend the Mandatory Purchase Date for one year through April 28, 2017, with an Index Rate based on the one year LIBOR swap rate plus a spread of 108 basis points (1.08%). This Index Rate is lower by approximately 1.72% from the 2013 Index Rate resulting in an estimated monthly interest savings of $110,000. The actual rate will be set as of the closing date of the extension. To evidence this extension, the Successor Agency and Wells Fargo will enter into a Second Supplement to Fiscal Agent Agreement (the "Second Supplement") and a Second Amended and Restated Continuing Covenant Agreement (the "Second Amended CCA"). ANALYSIS The analysis section of this report includes ah overview of the Index Rate, overview of the modified bond documents, financing team participants and the financing schedule.

5 Page 5 Overview of Interest Rate Mode The 2010C Bonds were originally issued as multimodal bonds that were directly purchased by Wells Fargo as a private placement. The interest rate was reset monthly based on an Index Rate equal to one-month LIBOR plus the Applicable Spread. That Index Rate remained in effect until September 30, At that point, one-month LIBOR was 0.19% and the Applicable Spread was 280 basis points (2.80%) - resulting in an all-in Index Rate of 2.99%. In September 2013, the Index Rate for the 2010C Bonds was reset to an Index Rate of 3.36% through April 29, 2016, equal to three year LIBOR fixed (0.76%) plus a reduced Applicable Spread of 260 basis points (2.60%). That Index Rate remains until April 29, Effective April 29, 2016, at the request of the Successor Agency, Wells Fargo will provide an Index Rate based on the one-year LIBOR swap rate (currently 0.56%) plus a further reduced Applicable Spread of 108 basis points for an all-in estimated Index Rate of 1.64% based on the current market. This approach allows the Successor Agency to benefit from low short-term market rates and a reduced Applicable Spread and results in greater excess tax revenues for payment of other enforceable obligations and provides the Successor Agency greater flexibility to restructure the 2010C Bonds at an appropriate time. Financial Analysis The proposed Second Supplement and Second Amended CCA will preserve the current bond structure and repayment schedule of the 2010C Bonds, and maximize the Successor Agency's ability to repay outstanding debt. The result of not entering into the proposed Second Supplement and Second Amended CCA would be to significantly increase the Successor Agency's liabilities under the 2010C Bonds, as explained below. The proposed supplement and amendment will result in the Successor Agency's ability to maintain the 2010C Bonds as low interest rate obligations that amortize in accordance with the existing redemption schedule. The amortization schedule is as follows: Redemption Date Principal Amount Redemption Date Principal Amount (Aug. 1) to be Redeemed (Aug. 1) to be Redeemed $3,060,000 3,260,000 3,460,000 3,665,000 3,870,000 4,120,000 4,365,000 4,125,000 4,365,000 4,630, $4,910,000 5,210,000 4,205,000 4,385,000 3,745,000 3,970,000 4,205,000 2,750,000 2,920,000 2,725,000

6 Page 6 The failure to extend the Mandatory Purchase Date would result in an accelerated repayment of the outstanding 2010C Bonds ($77,945,000): (a) if no event of default has occurred, in twelve equal installments, payable quarterly, of $6.5 million ($26 million per year) with interest due on the unpaid balance at 7% increasing to 8% after 180 days or (b) if an event of default has occurred, in full on April 29, 2016 with interest then to accrue on the unpaid principal balance at the default interest rate of 10% per annum (approximately $7.79 million per year). By contrast, with the extension, the Successor Agency would be obligated to pay only the scheduled principal due on August 1, 2016 ($3,060,000) and interest (approximately $1.26 million) on the outstanding 2010C Bonds at the new Index Rate (approximately 1.64% following the extension). The accelerated repayment of the 2010C Bonds would have the effect of increasing the annual amounts due on the Agency's outstanding bonded indebtedness, thereby delaying payment of other enforceable obligations to the detriment of the other taxing entities in the County of Santa Clara. Amended Bond Documents To implement the extension of the Mandatory Purchase Date to April 28, 2017, the Successor Agency needs to enter into the Second Supplement and Second Amended CCA. Staff recommends that the Executive Officer and Chief Financial Officer of the Successor Agency, or their designees (the "Successor Agency Designated Officers"), be authorized to execute these documents as posted, subject to the approval of the Oversight Board and DOF, with such. modifications as the Successor Agency Designated Officers determine to be desirable or appropriate, upon consultation with the City Attorney/Successor Agency General Counsel. The forms of the proposed Second Supplement and Second Amended CCA will be posted to the agenda webpage for the Successor Agency Board Meeting on or about March 11, Second Supplement to Fiscal Asent Agreement - The Second Supplement to Fiscal Agent Agreement, dated as of April 1, 2016 (the "Second Supplement"), is between the Successor Agency and Wells Fargo Bank in its capacity as the Fiscal Agent. The Second Supplement supplements the Fiscal Agent Agreement as follows: (1) The Mandatory Purchase Date is extended to April 28, (2) The Index Rate through April 29, 2017 will be a set interest rate (to be based on the oneyear LIBOR swap rate) plus the Applicable Spread. (3) The Applicable Spread will be an initial spread of 108 basis points (1.08%). The Applicable Spread will be subject to increase in accordance with the terms of the First Supplement to Fiscal Agent Agreement, i.e., if the rating of the Senior Housing Set-Aside Bonds is downgraded by either Fitch Investors Service ("Fitch") or S&P as follows:

7 Page 7 a. Downgrade to "A-": Applicable spread will increase by 25 basis points (to 1.33%) b. Downgrade to "BBB+": Applicable spread will increase by an additional 50 basis points (to 1.83%) c. Downgrade to "BBB": Applicable spread will increase by an additional 75 basis points (to 2.58%) d. Downgrade to "BBB-": Applicable spread will increase by an additional 145 basis points (to 4.03%) The Senior Housing Set-Aside Bonds are currently rated "A" by both Fitch and S&P. (4) Early Breakage Fee - Because the rate on the 2010C Bonds, subject to adjustment as provided above, will be fixed to April 28, 2017, the Second Supplement will remain subject to the redemption breakage fee formula established in the First Supplement in the event the Successor Agency decides to redeem all or part of the 2010C Bonds prior to April 28, This formula will reimburse Wells Fargo for lost interest earnings in the event the 2010C Bonds are redeemed and Wells Fargo is not able to reinvest the prepaid amount at a rate similar to the rate being paid by the Successor Agency. This type of "make-whole" redemption breakage fee is common for taxable municipal bonds and would be financed as part of any refunding transaction. The Second Supplement does not change any other provisions of the First Supplement or the Fiscal Agent Agreement, including the pledge of Housing Set-Aside Amounts. Second Amended and Restated Continuins Covenant Agreement - The Second Amended and Restated CCA, dated as of April 1, 2016, is between Wells Fargo, as Bank Bond Holder, and the Successor Agency. The Second Amended CCA changes certain dates (e.g., Mandatory Purchase Date, and the dates as of which certain representations are made) and makes clear that Successor Agency payments made to Wells Fargo are to be made free and clear without withholding or deducting for taxes that might be imposed on Wells Fargo (except its income tax). Financing Team Participants The financing team participants consist of: Financial Advisor: Bond Counsel: Fiscal Agent/Bank Bond Holder: Ross Financial Jones Hall, A Professional Law Corporation Wells Fargo Bank, National Association

8 Page 8 Financing Schedule The key dates in the balance of the financing schedule are as follows: Oversight Board Approval March 10,2016 Successor Agency Board Approval March 22, 2016 State Department of Finance 2 April 25, 2016 Extension of Mandatory Purchase Date Takes Effect April 29, 2016 EVALUATION AND FOLLOW-UP This Memorandum presents the set of recommendations related to the Successor Agency's approval of changes to financing documents relating to the 2010C Bonds and requires no followup to the Successor Agency Board. The proposed documents will also require approval of the Oversight Board of the Successor Agency. As part of its approval, the Oversight Board will need to make findings that the proposed amendments will have the effect of reducing the Successor Agency's existing liabilities, which are in the best interests of the taxing entities in Santa Clara County. The Oversight Board approval is further subject to review and approval by DOF. PUBLIC OUTREACH The form of the proposed modified documents will be posted to the agenda webpage for the Successor Agency Meeting on or about March 11,2016. COORDINATION This report has been prepared by the City's Finance Department in coordination with the Successor Agency and the City Attorney's Office. 2 State Department of Finance has 45 days from receipt of Oversight Board Resolution to either approve or deny the action of the Oversight Board. Staff is working closely with the DOF to reduce the 45 day approval timeframe.

9 Page 9. COST SUMMARY/IMPLICATIONS The implementation of the proposed supplemented and amended documents will require the payment of certain transaction costs. The table below estimates the costs to be incurred: Bank Counsel $ 25,000 Bond Counsel 25,000 Financial Advisor 10,000 Fiscal Agent/Counsel 1,000 Contingency 4,000 Total $65,000 These costs will be covered either with RPTTF funds or other revenue available to the Successor Agency and must be paid in order to prepare and execute the necessary supplemented and amended documents. Final costs to be paid in connection with the proposed amended documents will be reflected on a future ROPS worksheet as part of a "true up" process. CEOA Exempt, Not Project, File No. PP16-066, Agreements and Contracts. /s/ JULIA H. COOPER Chief Financial Officer For questions, please contact Derek Hansel, Assistant Director of Finance for the City of San Jose at

SUBJECT: SEE BELOW DATE: May 5, 2016

SUBJECT: SEE BELOW DATE: May 5, 2016 SARA AGENDA: 5/17/16 ITEM: CITY OF SAN IPSE CAPITAL OP SILICON VALLEY TO: SUCCESSOR AGENCY BOARD Memorandum FROM: Julia H. Cooper SUBJECT: SEE BELOW DATE: Approved Date 5/6//fa SUBJECT: MERGED AREA REDEVELOPMENT