SUBJECT:    APPROVAL OF BUSINESS TERMS FOR A CONSTRUCTION/ PERMANENT LOAN TO 985 SOUTH SIXTH STREET ASSOCIATES, L.P. AND APPROVAL OF BUSINESS TERMS FOR A PERMANENT LOAN TO JSM ENTERPRISES, INC. FOR THE DEVELOPMENT OF PHASE II OF THE 6TH AND MARTHA FAMILY APARTMENTS PROJECT 

 

COUNCIL DISTRICT:  3

SNI AREA:  Spartan/Keyes

 

 

RECOMMENDATION

 

It is recommended that the City Council adopt a resolution approving business terms for a construction loan of up to $5,227,000 and a permanent loan of up to $5,646,000 to 985 South Sixth Street Associates, L.P., or its affiliate, for the development of an 88-unit housing project affordable to low and very low-income families on a 2.12-acre site located on the west side of 6th Street, northerly of Bestor Street.

 

BACKGROUND

 

On April 27, 1999, the City Council adopted a resolution to approve business terms for an acquisition and predevelopment loan of up to $4,752,000 to JSM Enterprises Inc. (JSM) for the development of an 88-unit housing project affordable to low and very low-income families on a 2.12-acre site located on the west side of 6th Street, northerly of Bestor Street.  The site is adjacent to one other project JSM is developing:  a 103-unit affordable family project, which is currently under construction.

 

In February 2001, JSM requested an increase of $475,000 in the City’s loan commitment, from $4,752,000 to $5,227,000, due to increases in estimated construction costs.  The request was approved under the Housing Department Director’s Delegation of Authority, which met the funding commitment requirements for an application to the California Debt Limit Allocation Committee (CDLAC) for an allocation of tax-exempt bonds. 

 

On May 8, 2001, the project was awarded an allocation of tax-exempt bonds from CDLAC. 

 

985 South Sixth Street Associates, L.P. (Sponsor) has secured construction and permanent financing commitments and is seeking approval of a construction/permanent loan of up to $5,227,000 during the construction phase and up to $5,646,000 during the permanent phase.

 

The authorization to issue the bonds and other recommendations related to the bonds will be completed under a separate report to the City Council on June 26, 2001.  The sole purpose of this report is to establish the business terms for the Housing Department’s construction /permanent loan to the project.

 

ANALYSIS

 

On May 8, 2001, the City of San José received an allocation from CDLAC for the issuance of $9,000,000 in tax-exempt bonds for the project.  The proposed bond will be structured as one tax-exempt series in an aggregate amount not to exceed $9,000,000.  Bond proceeds will be available for disbursement at the start of construction and will require interest-only payments during the construction and lease-up period.  Once the project achieves rental stabilization, the bonds will convert to a fully amortized 30-year permanent loan.

 

Total project costs are estimated to be $19,552,000, which includes construction-period interest on the City's loan.  In addition to the funds available from bond proceeds, the sponsor has applied for an allocation of 4% tax credits under the California Tax Credit Allocation Committee’s (CTCAC) non-competitive funding application.  The project will receive approximately $5,065,000 in equity from the proposed tax credit investor Lend Lease. 

 

In conjunction with the closing of the bond financing, the City’s acquisition/predevelopment loan of $4,752,000 will increase by the $475,000 that was approved under the Housing Department Director’s Delegation of Authority in February 2001, to an amount of $5,227,000, which will then roll into a construction/permanent loan.  Additional City funds will be disbursed at bond closing and the remainder during construction. 

 

Staff is recommending approval of business terms for a construction/ permanent City loan to the Sponsor, which will consist of a construction loan commitment of up to $5,227,000 and a permanent loan commitment of up to $5,646,000.  The City’s permanent loan amount consists of the City’s construction loan of $5,227,000 and estimated accrued construction interest of $419,000.  The City’s permanent loan will accrue interest at 4.00% and will be repaid from residual receipts.

 

Refer to the attached Fact Sheets for complete business terms for the City's loan.

 

PUBLIC OUTREACH

 

On February 18, 1999, a meeting with residents of the surrounding neighborhoods was held at Leininger Community Center.  The project sponsor and the Planning staff described the proposed project.  Councilmember Chavez was available to hear specific concerns from the residents.

 

On March 30, 1999, a subsequent neighborhood meeting was held at City Hall.  The project sponsor and Planning staff were present to explain changes to the original project concept, which included extending Bestor Street through the block between 5th and 6th Streets and designating the newly created parcel south of Bestor Street for a neighborhood park.  Councilmember Chavez was available to hear comments and concerns voiced by residents.   

 

COORDINATION

 

Preparation of this memorandum was coordinated with the Office of the City Attorney.

 

COST IMPLICATIONS

 

The additional funds of $475,000, to be provided during the construction phase of the project, are available from the Housing Department’s Fiscal Year 2000-2001 budget.  The additional funds of $419,000 for the permanent loan consists of interest earned during the construction phase of the project, so that no additional disbursement of funds will be necessary.

 

 

LESLYE CORSIGLIA

Acting Director of Housing

 

 

Attachments

 

6th and Martha Family Apartments (Phase II)

Fact Sheet

 

Development Team

 

Developer:                                            985 South Sixth Street Associates, L.P.           

Architect:                                              Ko Architects, Inc.

Contractor:                                           Branagh Construction

Property Manager:                                California Real Estate Management

 

Project Characteristics

 

Project Location:                                  West side of 6th Street, northerly of Bestor Street

Acreage:                                               2.12 acres

Council District:                                    3

Project Type:                                        Family Rental

Group Served:                                      Very low- and low-income households

Number of Units:                                  88 (27 very low-income; 60 low-income; 1 unrestricted manager unit)

Bedroom Mix and                                                       

Monthly Rent:                                                                       1  BR                2 BR             3 BR         

                                                            VLI (50% AMI)   16  @ $782     9 @ $928         2 @ $1,070

                                                            LI    (60% AMI)   16  @ $945   36 @ $1,125      8 @ $1,297

                                                            Unrestricted                                    1 Mgr Unit

                                                                                   

Other Amenities:                                   Elevators, recreation room, exercise room, community kitchen and covered parking structure.

 

Estimated Total Project Cost:                $19,552,000

Estimated Cost Per Unit:                       $222,181

Anticipated City Subsidy

   at Permanent Loan:                            up to $5,646,000

Anticipated City Subsidy per Unit

   at Permanent Loan:                            $64,897

Anticipated Leverage per Unit

  for Permanent Loan:                           2.46 to 1

 

 

Proposed Source of Funds (Construction) Estimated as of June 8, 2001

 

Lender/Investor                     Repayment Type                   Amount           Status*

Tax-Exempt Bonds                   Interest Payment                        $  8,622,000      C     

City of San Jose Loan               Interest Accrued                       $  5,227,000      P

Lend Lease                              Equity                                       $  5,065,000      C     

                                                                                    Total    $18,914,000

 

Proposed Source of Funds (Permanent) Estimated as of June 8, 2001

 

Lender/Investor                     Repayment Type                   Amount           Status*

Tax-Exempt Bonds                   Amortizing                                $  8,622,000       C

City of San Jose Loan               Residual Receipts                     $  5,646,000       P

Lend Lease                              Equity                                       $  5,065,000       C

Projected Lease-Up Income     Income                                     $     481,667**   P

                                                                                    Total    $19,814,667

 

985 South Sixth Street Associates, L.P. Construction/Permanent Loan: 

 

Construction/Permanent Loan During Construction Phase

 

Loan Amount:                                       $5,227,000

Term:                                                   24 months

Interest Rate:                                        4%, simple interest

Security:                                               Subordinated Recorded Deed of Trust

Repayment:                                          City Permanent Loan, includes Accrued Interest                       

Loan to Value:                                      244% based on land appraised value.

                                                            Less than 100% at construction completion.

Recourse:                                             The loan shall be recourse.

Subordination:                                      The City's Deed of Trust will be subordinate to the Bond                                                                       Deed of Trust.

Affordability Restrictions:                      55-year Affordability Restrictions for 87 units were recorded on the property at the time of acquisition and may be subordinated as permitted by State law.

 

Conditions:

 

1.      At the time of closing of the City's loan for this project, no default is present under any loan documents executed by the following entities: 985 South Sixth Street Associates, L.P. (Borrower) or any affiliate of the Borrower; JSM Enterprises Inc, or any of its affiliates; Foundation for Social Resources, or any of its affiliates.

2.      Satisfaction of all pre-funding terms and conditions as per the City’s executed Construction/Permanent loan agreement between the City and Developer, or its affiliates.

3.      Project cost savings (the difference between the budgeted project cost as reported in the final Project Summary approved by the Housing Department, and the final costs incurred, as evidenced by a CTCAC basis audit and cost certification) will be distributed as follows: 100% shall be applied first to reduce any outstanding deferred developer fee, then interest on the City loan, then any remaining amount to principal on the City loan.

4.      All refundable deposits and fees shall be first applied to reduce the deferred developer fee, then interest on the City loan, then any remaining amount to principal on the City loan.

5.      Any surplus funding from tax credit equity or permanent loan financing shall be applied first to reduce the deferred developer fee, then any outstanding interest on the City loan, then any remaining amount to principal on the City loan.

6.      Any changes to City loan terms and conditions requested by lenders or tax credit investors are subject to the review and approval of the Housing Department.

 

Construction/Permanent Loan During Permanent Phase  

 

Loan Amount:                                       $5,646,000

Term:                                                   30 years

Interest Rate and Repayment:                4%, simple interest

                                                            Repayment from Residual Receipts (net cash flow less permitted expenses).  See Condition #7 below. 

Security:                                               Subordinated Recorded Deed of Trust

Loan to Value:                                      Less than 100%

Recourse:                                             The loan shall be non-recourse.

Subordination:                                      The City's Deed of Trust will be subordinate to the Bond                                                                       Deed of Trust.

Affordability Restrictions:                      55-year Affordability Restrictions for 87 units were recorded on the property at the time of acquisition and may be subordinated as permitted by State law. 

 

Conditions:

 

1.      At the time of closing of the City's loan for this project, no default is present under any loan documents executed by the following entities: 985 South Sixth Street Associates, L.P. (Borrower) or any affiliate of the Borrower; JSM Enterprises Inc. or any of its affiliates; Foundation for Social Resources, or any of its affiliates.

2.      Satisfaction of all pre-funding terms and conditions as per the City’s executed Construction/Permanent loan agreement between the Borrower or its affiliates.

3.      Project cost savings (the difference between the budgeted project cost as reported in the final Project Summary approved by the Housing Department, and the final costs incurred, as evidenced by a CTCAC basis audit and cost certification) will be distributed as follows: 100% shall be applied first to reduce any outstanding deferred developer fee, then interest on the City’s loan, then any remaining amount to principal on the City’s loan.

4.      All refundable deposits and fees shall be first applied to reduce the deferred developer fee, then outstanding interest on the City loan, then any remaining amount to principal on the City loan.

5.      Any surplus funding from tax credit equity or permanent loan financing shall be applied first to reduce any deferred developer fee, then outstanding interest on the City loan, then any remaining amount to principal on the City loan.

6.      At a minimum, the project must continue to meet its proforma income and expense cash flow projections and timeline, as presented in the final project proforma approved by Housing Department staff.

7.      The Project will be allowed the following to be identified as permitted expenses for purposes of calculating net cash flow:

            a)   Partnership Management Fee in an amount and term that is acceptable to the Housing Department

.           b)   A City issuer fee for the bonds equal to one-quarter of a point (.25%) of the original principal amount of the Bonds for the term of the bonds.

8.      Any changes to City loan terms and conditions requested by lenders or tax credit investors are subject to the review and approval of the Housing Department.

 

Planning Issues

 

GP Designation:                                    Residential Support for the CORE Area (25+ DU/AC)  

PD Rezoning Status:                             Approved April 6, 1999

PD Permit Status                                  Approved March 3, 2000

Building Permits:                                   Pending

Article XXXIV Status:                          Authority from Measure D (1994) is available

Toxics Issues:                                       Phase I completed. Phase II investigation completed, no further studies recommended.  Clearance obtained from the Santa Clara Valley Water District on October 8, 1998.

Relocation Needed:                              Relocation report completed in April 1999 by Universal Field Services.  Relocation completed May 2001.

 

 

Estimated Project Development Timeline

 

 

June 26, 2001                                      Anticipated City Council Approval of Business Terms

 

June 26, 2001                                      Anticipated City Council Approval of Bond Issuance and Bond Documents

 

August  2001                                        Anticipated Issuance of Bonds and Loan Closing

 

August 2001                                         Anticipated Start of Construction

 

February 2003                                     Anticipated Completion of Construction

 


*        Status:  C = Committed, P = Proposed

**      Lease-up income will be first applied to reduce any outstanding deferred developer fee, then to reduce outstanding interest, then principal on the City loan.