Adoption of a resolution
authorizing the issuance of a single series of tax-exempt multifamily housing
revenue bonds in a not-to-exceed principal amount of $5,000,000 and approving a
loan of the proceeds to a limited partnership created by Corporation for Better
Housing for financing the construction of the San Jose Lutheran Senior
Apartments Project including:
1.
Approving,
in substantially final form, the Bonds, Trust Indenture, Financing Agreement,
Regulatory Agreement and Declaration of Restrictive Covenants, Multifamily
Note, Mortgage, Assignment of Mortgage Loan, and Bond Purchase Contract.
2.
Authorizing
the Director of Finance and the Acting Director of Housing to execute and, as
appropriate, to negotiate, execute and deliver these documents and other
related documents as necessary.
3.
Approval
to allow the proceeds of the Bonds to be invested in one or more investment agreements
with an institution(s) whose participation in the financing will not adversely
affect the expected ratings on the Bonds, as approved by the Director of
Finance.
On January 30, 2001, the City Council adopted a resolution (Resolution No.70137) expressing its intent to issue up to $5,000,000 million in multifamily tax-exempt revenue bonds to finance the construction of San Jose Lutheran Senior Apartments (the “Project”), located next to 1710 Moorpark Avenue (awaiting assignment of street address). A Tax Equity and Fiscal Responsibility Act (TEFRA) Hearing for the Project was also held at the same Council meeting. The resolution also authorized the Director of Housing to file an application with the California Debt Limit Allocation Committee (CDLAC) for an allocation of up to $5,000,000 in private activity bonds. On February 21, 2001, the City submitted a request to CDLAC for a tax-exempt bond allocation in the amount of $5,000,000.
On May 8th, 2001, the City of San Jose received a tax-exempt bond allocation from CDLAC in the amount of $5,000,000 for the Project. The Bonds for the project will be issued as a single series. Total Project costs are estimated to be approximately $10,007,000. The difference between the aggregate par amount of the Bonds and total Project costs will be paid from a combination of tax credit equity and a permanent loan from the City of San Jose (the “City Loan”) in the amount of $3,325,000. The City Loan was approved by the Council on February 13, 2001.
CDLAC requires that the Bonds for the Project be issued on or before August 27, 2001. It is anticipated that the Bonds will close on or about July 11, 2001.
Corporation for Better Housing (the “Developer”), has requested that the City issue tax-exempt and taxable multifamily housing revenue bonds for the purpose of lending the proceeds to a 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 63-unit Project. All of the units will be restricted to households earning 50% of the area median income (“AMI”) or less for a period of 55 years.
The 63 units in the Project will consist of 60 one-bedroom apartments, and 2 two-bedroom apartments with a single two-bedroom managers unit. Hard construction costs for the construction will total approximately $89,200 per unit. In the current calendar year, such restricted rent levels would be approximately $700 lower than market rate rents for comparably sized units in newly constructed market rate projects.
This
portion of the report is divided into several sections to address the items in
staff’s recommendation to proceed with the 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 AMI) or (2) at least 40 percent of the units must be reserved for
occupancy by individuals and families of low income (60% of AMI). California law requires that the restricted
units not only be occupied by households meeting the federal regulatory income
restrictions, but that, generally, the units also be rented at rents affordable
to households in the restricted income categories.
The
advantages of tax-exempt bonds to the developers include below-market interest
rates –– given the tax-exempt nature of the bonds –– and ability to access the long-term fixed rate market, features
not available in the conventional multifamily construction loan mortgage
market. Taxable bonds have higher
interest rates than tax-exempt bonds, but are otherwise structured in similar
fashion. The Bonds are limited
obligations of the City, payable solely from payments received from the
repayment of the loan to the developer and the credit enhancement, if any.
Structure of the Bonds
for the Project
In this
Project, the Bonds will be issued as a single series (Series A) of tax-exempt
bonds in the anticipated amount of $5,000,000. The Bonds will be issued for a
term of approximately 32.5 years. The
Bond proceeds will be loaned to the Borrower so that it may acquire a leasehold
interest for the site and construct the Project. The Bonds will be interest only during the construction period
and will be subject to interest and 30-year principal amortization during the
permanent period.
The
bonds will be issued as fixed rate bonds and sold on a private-placement basis
to Fannie Mae. The mortgage loan
underwriting will be performed by ARCS Commercial Mortgage, a Fannie Mae
designated underwriter/servicer (“DUS” Lender). The bonds will be unrated and non-credit enhanced. As such, Fannie Mae will be required to sign
an investor letter requiring, among other items, that there be a single bond
holder at all times, that the investor meet the definition of a “qualified
institutional buyer”, and that each subsequent investor sign and deliver to the
Trustee an investor letter containing the same terms and requirements as the
initial letter signed by Fannie Mae.
The
Borrower anticipates that a portion of the Bonds will be repaid at the end of
the construction period from proceeds of the City Loan and/or tax credit
equity. The remaining bonds outstanding
will reflect the Fannie Mae permanent conversion loan amount, anticipated to be
$3,850,000.
During
the construction period, the Borrower will secure a letter of credit from Bank
of America for the benefit of Fannie Mae securing the full amount of the
Bonds. Upon meeting certain conditions
of Fannie Mae and Bank of America, the letter of credit will be reduced to
reflect a paydown of a portion of the Bonds from City of San Jose loan proceeds
and/or tax credit equity, and to reflect the Fannie Mae permanent conversion
loan amount.
A
portion of the Bond proceeds may be released at bond closing to fund the
acquisition of a leasehold interest in the site. The remainder of the Bond proceeds will be held by the Trustee in
either an interest bearing account or guaranteed investment contract (subject
to provisions below), and will be disbursed as needed to fund construction
draws. The Borrower anticipates that
all Bond proceeds will be drawn down by construction completion.
Guaranteed Investment
Contract
As part
of the City Council’s approval process, staff is recommending approval to allow
the Borrower to invest the proceeds of the Bonds in a guaranteed investment
agreement pending disbursement. These
agreements are purchased from a financial institution (“Provider”) who agrees
to guarantee a certain investment return on moneys invested under the
agreement. 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 remain credit enhanced
by Fannie Mae.
In
addition, the following restrictions will also apply:
·
Invested
funds will be available for withdrawal without penalty or premium at any time
·
Investment
agreement will be an unconditional and general obligation of the provider
·
Trustee
receives opinion of counsel that the agreement is legal, valid, binding and
enforceable against the provider
·
During
the term of the agreement, if rating agency 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 will be selected by the City or its agent, which
may include the 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 Guaranteed Investment Contract, if necessary.
The
benefits of purchasing a guaranteed investment contract include:
·
Efficient
method of managing the interest earnings on the undisbursed portion of the
Mortgage Loan Fund
·
Higher
rate of return on the undisbursed monies in the Mortgage Loan fund
·
Convenient
means of managing the investment of funds subject to rebate
·
Maximum
liquidity to meet the Project 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.
Pursuant to the Indenture and attested by the City Clerk, the Trustee is
given the authority to receive, hold, invest and disburse the Bond proceeds and
Borrower’s equity contribution paid to it for credit to the various funds and
accounts established under the Indenture; to authenticate the Bonds; and to
apply and disburse payments to Bond Owners.
It 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 pay
compensation to the Trustee for services rendered under the Indenture.
Financing Agreement
This Agreement (the “Financing Agreement”) is among the City of San Jose, the Trustee, 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 project
and for the repayment of such loan by the Borrower. The interests 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.
Regulatory Agreement
and Declaration of Restrictive Covenants This
agreement (the “Regulatory Agreement”) is among the City of San Jose, 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 Project and
its operations intended to assure compliance with the Internal Revenue Code of
1986. This Agreement restricts the
rental of Project 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 Series A Bonds.
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 of San Jose the principal
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”) is made by
the City of San Jose to the Trustee and to Fannie Mae. The Assignment assigns the City’s interests
and rights in the Mortgage Loan made under the Financing Agreement to the
Trustee and Fannie Mae.
Bond Purchase Contract
The Bond Purchase Contract (the “Purchase Contract”) is a contract
between the City of San Jose as the issuer (the “Issuer”), Fannie Mae, and the
Borrower, under which Fannie Mae purchases the Bonds. The agreement specifies the representations and warranties of the
City and Fannie Mae, the documents to be executed at closing, and the
conditions that allow Fannie Mae to cancel its purchase of the Bonds. This document is executed by the Director of
Finance or other authorized officer on behalf of the City.
The financing team participants consist of:
·
The
City’s Financial Advisor: CSG Advisors
Incorporated
·
Cash
Flow Agent: Newman and Associates
·
Bond
Counsel: Jones Hall
·
Trustee/Paying
Agent: Wells Fargo
All costs associated with the financial advisor, cash flow agent and bond counsel are contingent on the sale of the Bonds and will be paid from bond proceeds and/or borrower equity.
Financing Schedule
The
current proposed schedule is as follows:
CDLAC Deadline for Bond Closing August
27, 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 TEFRA Hearing. The
TEFRA Hearing was held on January 30, 2001 by the San Jose City Council.
COORDINATION
This report has been prepared by the Housing and Finance Departments in coordination with the City Attorney’s Office.
All costs will be paid from Bond proceeds and/or Borrower equity. The Series A Bonds are tax-exempt obligations. The cost of the Fannie Mae loan underwriting 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 a point (0.50%) of the par amount of Series A Bonds issued ($25,000) and an annual fee equal to one-eighth of a point (0.125%) of the original principal balance of Series A Bonds ($6,250) 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, Finance Department Acting Director, Housing Department