Adoption of a resolution
authorizing the issuance of tax-exempt multifamily housing revenue bonds in the
principal amount not to exceed $6.8 million and approving a loan of bond
proceeds to Villages Parkway Associates, L.P., a California limited partnership
created by JSM Enterprises, Inc., for financing the construction of the
Villages Parkway Senior Apartments development including:
1.
Approving
in substantial form the Bonds, Trust Indenture, Financing Agreement, Regulatory
Agreement and Declaration of Restrictive Covenants, Multifamily Note, Mortgage,
Assignment of Mortgage Loan, Bond Purchase Agreement, Official Statement and
Remarketing Agreement; authorizing the Director of Finance and Acting Director
of Housing to execute and, as appropriate, to negotiate these documents and
other related documents as necessary.
2.
Approval
to allow the proceeds of the Bonds and the repayment of the Mortgage Loan to be
invested in one or more investment agreements with an institution(s) whose
participation in the financing will not adversely affect the expected rating on
the Bonds, as approved by the Director of Finance.
On January 30, 2001, the City Council adopted Resolution No.70140 expressing its intent to issue up to $7 million in tax-exempt multifamily revenue bonds to finance the construction of a 79 unit family rental apartment development to be located at 2875 Villages Parkway. This development is known as the Villages Parkway Senior Apartments (the “Development”). The resolution also authorized the Acting Director of Housing to file an application with the California Debt Limit Allocation Committee (CDLAC) for an allocation of up to $7 million in private activity bonds. A TEFRA Hearing for the Development was also held at the same Council meeting.
On February 15, 2001, the City submitted a request to CDLAC for an allocation of $6,800,000. On May 8, 2001, the City received an allocation from CDLAC in this amount.
Total Development costs are estimated to be $14.54 million. The difference between the aggregate par amount of the Bonds and total Development costs will be paid from tax credit equity and a loan from the City.
One of CDLAC’s requirements is that the bond closing for this Development must occur within 100 days of an allocation; therefore, the Bond closing for this Development must occur by August 16, 2001. It is anticipated that the Bonds will close on or around July 24, 2001.
The developer, JSM Enterprises (the “Developer”), requested the City to issue tax-exempt multifamily housing revenue bonds for the purpose of lending the bond proceeds to Villages Parkway Associates, a California limited partnership (the “Borrower”) created by the Developer. The proceeds of the loan will be used by the Borrower to finance the construction of the 79-unit Development. After construction is completed, 30% of the occupied units in the Development will be rented to families with incomes that do not exceed 50% of the area median income and 70% of the occupied units in the Development will be rented to families with incomes that do not exceed 60% of the area median income. These restrictions will remain for a period of 55 years.
This
portion of the report is divided into several sections to address the items in
staff’s recommendation to proceed with the Development financing. These sections include: description of the
bond financing structure, bond financing documents, discussion of financing
team participants, and review of financing schedule.
Bond Financing Structure
Overview of Multifamily
Bond Financing
As a
brief summary, multifamily housing revenue bonds are issued to finance the
development by private developers of certain rental apartment
developments. The City issues the bonds
and then loans the proceeds to the developer/borrower. The bonds are typically issued as tax-exempt
securities. For the bonds to qualify
for tax-exemption, generally, one of two restrictions must apply: either (1) at
least 20 percent of the units in the housing development must be reserved for
occupancy by individuals and families of very-low income (50% of area median
income) or (2) at least 40 percent of the units must be reserved for occupancy
by individuals and families of low income (60% of area median income).
The
advantages of tax-exempt bonds to developers include below-market interest
rates and long-term fixed rate financing – features not available in the
conventional multifamily construction loan mortgage market. The Bonds are limited obligations of the
City, payable solely from payments received from the repayment of the loan to
the Borrower and the credit enhancement.
Structure of the Bonds
for the Development
In this
Development, the structure consists of a single series of $6.8 million
tax-exempt Bonds. The Bonds will be
issued for a term of approximately 32 years. The Bond proceeds will be loaned
to the Borrower to finance the construction of the Development. During the construction and lease-up period,
the Bonds will pay interest only. Once
the Development is stabilized (i.e., 90% of the units after construction are
rented for 3 consecutive months and the Development has achieved the required
debt service coverage), the Bonds will begin to repay principal on a 30-year
amortization schedule.
The
Bonds will be credit enhanced by Fannie Mae resulting in a AAA rating from
Standard & Poor’s Rating Group.
Fannie Mae is a permanent lender and does not take construction or
lease-up risk. Therefore, the developer
is arranging a letter of credit from Bank of America in favor of Fannie Mae to
insulate Fannie Mae from such risk.
Once the Development rents are stabilized, Fannie Mae will release the
letter of credit back to Bank of America.
The
Bonds will be issued essentially as fixed rate bonds with the final interest
rate structure determined at the time of Bond sale on the basis of the then
current interest rate market. The basic
options are twofold: (1) a fixed interest
rate through final maturity (desired option) or (2) a fixed interest rate
through an initial Remarketing Date that will be 15 to 18 years after the
development is stabilized (likely option).
If the second option is implemented, a Remarketing Agent will need to
remarket the Bonds at the initial Remarketing Date at a rate based on then
current market conditions.
Guaranteed Investment
Contract
As part
of the City Council’s approval process of the financing, staff is recommending
approval to allow the Borrower to invest the proceeds of the Bonds, and the
pledged revenues, in one or more guaranteed investment agreements (the
“Investment Agreement”) pending disbursement for Development construction and
Bond repayment, as the case may be.
Investment Agreements are provided by financial institutions (each a
“Provider”) that agree to guarantee a certain investment return on invested
moneys. As has been the practice of the
City, even though the Bond proceeds to be reinvested are held in trust for the
Borrower, the City is requiring that the Investment Agreement be with an
institution whose unsecured, long-term obligations are rated at least AA by
Standard & Poor’s. Regardless of
the performance of the Investment Agreement, the Bonds will remain credit enhanced
by Fannie Mae.
In
addition, the following provisions will also apply:
·
Invested
funds will be available for withdrawal without penalty or premium at any time
unless otherwise requested by the Borrower with the consent of the City;
·
The
Investment Agreement will be an unconditional and general obligation of the
Provider;
·
The
Trustee receives opinion of counsel that the agreement is legal, valid, binding
and enforceable against the Provider;
·
During
the term of the agreement, if the Provider’s rating falls below the second
highest short-term rating category, the provider must either:
§
Post
collateral, or
§
Repay
principal of, and accrued but unpaid interest on, the investment with no
penalty or premium
The
Investment Agreement Provider(s) will be selected by the City or its agent,
which may include the City’s Underwriter or the City’s Financial Advisor,
through a competitive bid process in which at least three bids will be received
to meet the requirements of the Federal Internal Revenue Code. The Director of Finance, through approval of
this resolution, will be authorized to enter into the Investment Agreement, if
necessary.
The
benefits of the Investment Agreement include:
·
Efficient
method of managing the interest earnings on Bond proceeds and pledged revenues
·
Higher
rate of return on undisbursed Bond proceeds and pledged revenues
·
Efficient
means of managing the investment of funds subject to rebate
·
Maximum
liquidity to meet the Development draws.
Bond Financing Documents
The
following is a brief description of each document the City Council is being
asked to approve and authorize the execution of:
Trust Indenture. The Trust Indenture (the
“Indenture”) is between the City of San Jose and Wells Fargo Bank as the
trustee (the “Trustee”). This document
is executed by the Director of Finance, or other authorized officers on behalf
of the City, and attested by the City Clerk.
Pursuant to the Indenture, the Trustee is given the authority to
receive, hold, invest and disburse the Bond proceeds and other funds
established under the Indenture; to authenticate the Bonds; to apply and
disburse payments to Bond Owners; and to pursue remedies on behalf of the Bond
Owners. The Indenture sets forth the
guidelines for the administration, investment and treatment of investment
earnings generated by each fund and account.
The Indenture obligates the Borrower to compensate the Trustee for
services rendered under the Indenture.
Financing Agreement. This Agreement (the “Financing Agreement”) is between the City and the
Borrower. This document is executed by
the Director of Finance or other authorized officer on behalf of the City. The Financing Agreement provides for the
loan of the Bond proceeds to the Borrower for the construction of the
Development and for the repayment of such loan by the Borrower. The rights and interest of the City in
receiving payments under the Financing Agreement and enforcing the receipt of
such payments under the Financing Agreement have been assigned to the Trustee
under the Indenture; 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”) is among
the City, the Trustee and the Borrower.
This document is executed by the Director of Finance and the Acting
Director of Housing on behalf of the City.
The Regulatory Agreement contains certain covenants and restrictions
regarding the Development and its operations intended to assure compliance with
the Internal Revenue Code of 1986. This
Agreement restricts the rental of Development units to the appropriate
percentage of low or very-low income individuals or families for a period of
years required to maintain the tax-exempt status of the Bonds. In the case of the Development, 100% of the
units will be restricted for a period of 55 years, to individuals and families
earning 50% and 60% of area median income.
Multifamily Note. The Multifamily Note is executed
by the Borrower and is payable to the City.
The Multifamily Note evidences the mortgage loan made by the City to the
Borrower. The Borrower promises to pay
the City the principal of and interest on this Mortgage Note. The Mortgage Note will be assigned by the
City under the Assignment of Mortgage Loan to the Trustee.
Assignment of Mortgage
Loan. This
agreement (the “Assignment of Mortgage Loan”) is made by the City to the
Trustee and to Fannie Mae. The
Assignment of Mortgage Loan assigns the Note and the City’s interests and rights
in the mortgage loan made under the Financing Agreement to the Trustee and
Fannie Mae.
Bond Purchase
Agreement. The
Bond Purchase Agreement (the “Purchase Agreement”) is a contract between the
City, the Borrower, UBS PaineWebber Inc. (the “Underwriter”) and any other
initial purchasers of the Bonds, which may include Fannie Mae (collectively,
the “Purchasers”), under which the
purchasers Purchase the Bonds. The
Agreement specifies the representations and warranties of the City, the
Borrower and the Purchasers, the documents to be executed at closing, and the
conditions that allow the Purchasers to cancel their purchase of the
Bonds. This document is executed by the
Director of Finance or other authorized officer on behalf of the City.
Preliminary Official
Statement. This
document is the public offering statement for the issuance of the Bonds. This document is executed by the Director of
Finance or other authorized officer on behalf of the City and by an authorized
officer of the Borrower. This document
is prepared by the Underwriter’s counsel.
This document describes the financing program, the economic, financial
and social characteristics of the participating entities and the security for
the Bonds. The City will not mail the
Preliminary Official Statement until Fannie Mae has issued its Commitment to
provide credit enhancement and has given all other approvals.
A copy of the draft Preliminary Official Statement, in substantially final form, will be distributed to the City Council under separate cover. If any councilmember has any personal knowledge that any of the material information in the Preliminary Official Statement is false or misleading, City staff, bond counsel, the Underwriter, and the financial advisor will be available at the Council meeting on June 26, 2001 to address any questions, issues and/or concerns.
Remarketing Agreement. This Agreement (the “Remarketing
Agreement”) is among the City, the Borrower, and UBS PaineWebber Inc. as the
remarketing agent (the “Remarketing Agent”) for the Bonds. This agreement describes the procedures and
compensation for arranging for the remarketing of the Bonds at the initial
Remarketing Date and thereafter, if necessary.
The initial Remarketing Date will be determined at the time of the Bond
sale and will depend on interest rates.
The likely Remarketing Date will be March 1, 2022, unless Fannie Mae
agrees to an earlier date. Depending on
interest rates at the time of Bond sale, there may be no need to execute the
Remarketing Agreement. If a remarketing
is to occur on the Remarketing Date, the remarketing must be for a period of at
least ten (10) years, subject to Fannie Mae’s agreement to a shorter term. This
document is executed by the Director of Finance or other authorized officer on
behalf of the City.
The financing team participants consist of:
·
City’s
financial advisor: Ross Financial
·
Underwriter: UBS PaineWebber Inc.
·
Bond
counsel: Hawkins, Delafield & Wood
·
Trustee/Dissemination
Agent: Wells Fargo Bank
All costs associated with the financial advisor, underwriter (including its counsel), bond counsel and trustee/dissemination agent are contingent on the sale of the Bonds and will be paid from Bond proceeds, City loan proceeds and/or Borrower equity.
Financing Schedule
The
current proposed schedule is as follows:
CDLAC Deadline for Bond Closing August
16, 2001
The method of notifying the community of the City’s intent to issue tax-exempt private activity bonds is for the City Council to hold a Tax Equity and Fiscal Responsibility Act (TEFRA) Hearing. The TEFRA Hearing was held on January 30, 2001 by the San Jose City Council. The public hearing notice was published in the San Jose Mercury News on January 15, 2001.
COORDINATION
This report has been prepared by the Finance Department in coordination with the Housing Department and the City Attorney’s Office.
All costs will be paid from Bond proceeds, the City loan and/or Borrower equity. The Bonds are tax-exempt obligations secured by mortgage loans that are credit enhanced by Fannie Mae. The cost of the Fannie Mae credit enhancement is provided at the expense of the Borrower. No payment of the Bonds will be paid from or guaranteed through the general taxing power of the City or any other City asset. The City will receive an up-front fee equal to a half of one point (.50%) of the par amount of Bonds issued ($34,000) and an annual fee equal to one-eighth of one point (.125%) of the original principal amount of the Bonds ($8,500) for the staff work involved in the issuance of the Bonds and monitoring of the Bonds and Regulatory Agreement.
SCOTT P. JOHNSON LESLYE CORSIGLIA
Director of Finance Acting Director of Housing