TO:	Honorable Mayor and City Council	FROM:	Scott P. Johnson Leslye Corsiglia
SUBJECT:	See Below	DATE:	October 6, 2003

Council District: 7

SNI AREA: N/A

SUBJECT: APPROVAL OF THE ISSUANCE OF BONDS, Loan of Bond Proceeds AND RELATED DOCUMENTS FOR The Almaden Family Apartments Project

Recommendation

Adoption of a resolution of the City Council:

(a) Authorizing the issuance of tax-exempt multifamily housing revenue bonds designated as "City of San José Multifamily Housing Revenue Bonds (Almaden Family Apartments Project) Series 2003D" in an aggregate principal amount not to exceed $31,300,000 (the "Bonds");

(b) Approving in substantially final form the Bonds, Trust Indenture, Financing Agreement, Regulatory Agreement and Declaration of Restrictive Covenants, the Official Statement, Bond Purchase Agreement, Remarketing Agreement, Mortgage Note, LITHC Agreement, Assignment and Intercreditor Agreement, Subordinate Trust Indenture, Subordinate Loan Agreement, and other related documents; and

(c) Approving a loan of bond proceeds to Almaden Family Housing Partners, L.P., a California limited partnership, for financing the construction of Almaden Family Apartments to be located at 1525-1541 Almaden Road;

(d) Authorizing the issuance of subordinate tax-exempt refunding bonds at the time of completion of the Project in an amount not-to-exceed $5 million;

(e) Approving in substantially final form the Subordinate Refunding Bonds, Subordinate Trust Indenture, Subordinate Loan Agreement, and the Forward Bond Purchase Agreement.

(f) Authorizing the Director of Finance and Director of Housing to execute and, as appropriate, to negotiate, execute and deliver these documents and other related documents as necessary.

Background

The Simpson Housing Corporation (the "Developer") has requested that the City issue tax-exempt multifamily housing revenue bonds for the purpose of lending the bond proceeds to Almaden Family Housing Partners, L.P., a California limited partnership (the “Borrower”) created by Simpson Housing Solutions, Las Palmas Foundation, and Community Housing Development, Inc. The proceeds of the loan (the "Mortgage Loan") will be used by the Borrower, together with other funds, to finance the acquisition and construction of a 225-unit rental housing project known as Almaden Family Apartments (the "Project"). Upon completion of the Project, all of the units, with the exception of two managers' units, will be restricted to the rental to low- and very low-income individuals. These restrictions will remain in effect for 55 years.

On April 4, 2003, the Director of Finance pursuant to Municipal Code Section 5.06.430 held a TEFRA Hearing to receive public comment on the City's expressed intent to issue up to $35,000,000 in tax-exempt multifamily housing revenue bonds to finance the construction of the Project. On May 15, 2001, the City Council adopted Resolution No. 70348, which among other things authorized the Director of Housing to file an application with the California Debt Limit Allocation Committee (CDLAC) for an allocation of up to $35,000,000 in private activity bonds. On April 16, 2003, the City submitted a request to CDLAC for an allocation of $35,000,000. On July 9, 2003, the City received an allocation from CDLAC for this amount.

Total Project financing requirements, including reserves and land costs, are estimated to be $60,546,932. The difference between the aggregate par amount of the Bonds and total Project costs will be funded with a permanent loan in an amount of up to $13,775,000 from the City to the Borrower for permanent financing for the Project; and a Developer/tax credit equity of $14,249,766.

One of CDLAC’s requirements is that the bond closing for the Project must occur within the time period set by CDLAC. The Bond closing for this Project must occur by November 17, 2003. It is anticipated that the Bonds will close on or about November 7, 2003.

Analysis

This portion of the report is divided into several sections to address the items in Staff’s recommendation to proceed with the Project financing. These sections include descriptions of bond financing structure, bond financing documents, City loan, financing team participants, and financing schedule.

Bond Financing Structure

Overview of Multifamily Bond Financing

General As a brief summary, multifamily housing revenue bonds are issued to finance the development by private developers of certain rental apartment projects. The City issues the bonds and then loans the proceeds to the Borrower. The bonds are typically issued as tax-exempt securities. 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 housing construction loan mortgage market. The Bonds are limited obligations of the City, payable solely from loan repayments by the Borrower and any credit enhancement.

Requirements for Tax-Exemption For multifamily housing revenue 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). In the case of the Project, 100% of the units, except two managers' units, will be rented to individuals with low and very low income.

Structure of the Bonds

Principal Amount and Term The Bonds will be issued as variable rate tax-exempt bonds credit enhanced by FNMA in an amount not to exceed $31,300,000 for a term of approximately 33 years. After completion of the Project and at the conversion date when the Project achieves rent stabilization/debt service coverage for a requisite period (the "Conversion Date"), the permanent loan amount will be determined by Fannie Mae. If this amount is less than $31.3 million (the amount of the Series 2003D Bonds), then it will be necessary to issue refunding subordinate bonds in an amount that equals the difference between $31.3 million and the permanent loan amount. The proceeds of the refunding subordinate bonds will be used to redeem a like amount of the Series 2003D Bonds. It is currently estimated that, if subordinate revenues need to be issued, the amount will not exceed $5 million.

Interest Rate The Bonds will initially bear interest at a variable (weekly) tax-exempt rate. The Series 2003D Bonds have a maturity of approximately 33 years. The interest rate will be determined at pricing of the Bonds (and weekly thereafter), which is planned to occur on or about November 4, 2003.

Fannie Mae Structure Fannie Mae will provide the credit enhancement for the Bonds. The Bonds will be sold on a publicly offered basis through a negotiated underwriting. During construction and lease-up of the Project, and until the conversion date when the Project is complete and rent stabilization/debt service coverage is achieved for a requisite period (the "Conversion Date"), the construction lender, Citibank, will issue a letter of credit for the benefit of Fannie Mae. On the Conversion Date, and upon the conversion of the Project from the construction and lease-up phase (the "Construction Phase") to the permanent phase (the "Permanent Phase"), the letter of credit is removed and the loan converts from a construction loan to permanent financing. Fannie Mae will guarantee payments on the Bonds to the Bondholders, thereby reducing the risk of default on the payment of the Bonds as a result of a shortfall in Project revenues. Also, following conversion, which is approximately two and a half years after the issuance of the bonds, the principal of the Bonds will begin to amortize over the remaining 30 years. It is anticipated that the final commitment for the Fannie Mae credit enhancement for the Bonds will be received from GMAC Commercial Mortgage, the Fannie Mae DUS Lender, on or about October 24, 2003. Also, on the Conversion Date, it may be necessary based on the Fannie Mae underwriting criteria to reduce the amount of the Bonds outstanding by issuing subordinate refunding bonds (the "Refunding Bonds"). The Refunding Bonds would be purchased on a private placement basis by GMAC Commercial Holding Capital Corp. in an amount not to exceed $5 million. The Refunding Bonds would be non-rated, fixed rate tax-exempt bonds. The Refunding Bonds would be secured by a second lien on Project revenues.

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. Copies of these documents will be available in the City Clerk’s Office on or about October 20, 2003.

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 Official Statement until Fannie Mae has issued its commitment to provide credit enhancement and has given all other approvals.

A copy of the draft Official Statement, in substantially final form, will be distributed under separate cover on or about October 21, 2003. Staff has carefully reviewed the information contained in the draft Official Statement and believes it to be accurate and complete in all material aspects. If any council member has any personal knowledge that any of the material information in the Official Statement is false or misleading, the council member must raise these issues prior to approval of the distribution of the document. City staff, bond counsel, and the financial advisor will be available at the City Council meeting on October 28, 2003 to address any questions, issues and/or concerns.

Trust Indenture The Bonds will be issued under a Trust Indenture (the “Indenture”) between the City, Wells Fargo Bank, National Association, as the trustee (the “Trustee”) and the Borrower. The Indenture is executed by the Director of Finance, or other authorized officer 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 the 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 among the City, the Trustee and the Borrower, and 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 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, and is executed by the Directors of Housing and Finance or other authorized officers 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 and the CDLAC Resolution No. 03-107. The Regulatory Agreement restricts the rental of Project units to low and very-low income individuals for a period of 55 years as previously described.

Bond Purchase Agreement The Bond Purchase Agreement (the "Agreement"), is a contract among the City and Newman & Associates, a Division of GMAC Commercial Holding Capital Markets Corp. (the "Underwriter"), and the Borrower. The Agreement specifies the representations and warranties of the City, the Borrower and the Underwriter and the documents to be executed at closing. This document is executed by the Director of Finance or other authorized officer on behalf of the City. The interest rate will be a variable rate, weekly floating rate. The initial rate will be determined upon pricing of the Bonds on or about November 4, 2003.

Mortgage Note The Mortgage Note is executed by the Borrower and is payable to the City. The Mortgage 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 and Fannie Mae (jointly as the "Assignees").

LIHTC Agreement The LIHTC Agreement (the “LIHTC Agreement”) is among the City, the Borrower and Fannie Mae. The LIHTC Agreement incorporates the recitals of the Indenture for the Bonds into the LIHTC Agreement. Through the LIFHTC Agreement, the City as Issuer, the Borrower and Fannie Mae will preserve Fannie Mae’s ability to acquire an ownership interest directly or indirectly in the Borrower after the Closing Date, should the opportunity to do so become available, and Fannie Mae, in its sole discretion, desire to do so at that time.

Assignment and Intercreditor Agreement This document (the "Assignment") is among the City (the "Assigner"), the Trustee, and Fannie Mae (the "Assignee" and jointly with the Trustee the "Assignees"). The purpose of this document is to assign the City's rights to the Mortgage Note (including all proceeds of insurance or condemnation awards), the Security Instrument and certain other right in the Loan Documents and in and to all funds and accounts (other than the Rebate Fund) held, maintained or administered by the Trustee to the Trustee and to Fannie Mae, where applicable, under the Assignment. The Assignment also provides for certain limitation on the City’s rights under the subject documents.

Forward Bond Purchase Agreement The Forward Bond Purchase Agreement (the "Forward Agreement"), is a contract between the City and GMAC Commercial Holding Capital Corporation (the "Underwriter"), and is acknowledged and agreed to by the Borrower. The Forward Agreement specifies the representations and warranties of the City, the Borrower and the Underwriter and the documents to be executed at closing. This document is executed by the Director of Finance or other authorized officer on behalf of the City. The interest rate, not to exceed 12%, will be determined prior to the closing date.

The following two documents are approved in form and will only be executed if subordinate bonds need to be issued at the point of conversion.

Subordinate Trust Indenture The Refunding Bonds will be issued under a Subordinate Trust Indenture (the “Subordinate Indenture”) between the City, Wells Fargo Bank, National Association, as the trustee (the “Trustee”) and the Borrower. The Subordinate Indenture 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 Subordinate Indenture, the Trustee is given the authority to receive, hold, invest and disburse the Refunding Bond proceeds and other funds established under the Subordinate Indenture; to authenticate the Refunding Bonds; to apply and disburse payments to the Refunding Bond owners; and to pursue remedies on behalf of the Refunding Bond owners. The Subordinate Indenture sets forth the guidelines for the administration, investment and treatment of investment earnings generated by each fund and account. The Subordinate Indenture obligates the Borrower to compensate the Trustee for services rendered under the Subordinate Indenture.

Subordinate Loan Agreement This agreement (the "Subordinate Loan Agreement") is among the City, the Trustee and the Borrower, and is executed by the Director of Finance or other authorized officer on behalf of the City. The Subordinate Loan Agreement provides for the loan of the Refunding Bond proceeds to the Borrower for the refunding of a portion of the Series 2003D Bonds. The interest of the City in receiving payments under the Subordinate Loan Agreement and enforcing the receipt of such payments under the Subordinate Loan Agreement have been assigned to the Trustee under the Subordinate Indenture; however, certain reserved rights have been retained by the City, such as the City's right to indemnification.

City Housing Loan

The Housing Department will also provide a permanent loan to the Project in an amount not to exceed $13,775,000. The permanent loan was approved by City Council on April 1, 2003, Resolution No. 71477.

Financing Team Participants

The financing team participants consist of:

· City’s Financial Advisor: E. Wagner & Associates, Inc.

· Bond Counsel: Sidley Austin Brown & Wood LLP

· Underwriter Newman & Associates, A Division of GMAC

Commercial Holding Capital Corp.

· Trustee: Wells Fargo Bank, National Association

All costs associated with the financial advisor, bond counsel and trustee 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:

· Council approval of Bond documents October 28, 2003

· Pricing of the Bonds November 4, 2003

· Pre-Close and Close Bonds November 5-7, 2003

· CDLAC Deadline for Bond Closing November 17, 2003

Public Outreach

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 April 4, 2003 by the Director of Finance. The public hearing notice was published in the San Jose Mercury News on March 20, 2003.

Coordination

This report has been prepared by the Finance Department in coordination with the Housing Department and the City Attorney’s Office.

Cost Implications

All costs will be paid from Bond proceeds, City loan or Borrower equity. The Bonds are tax-exempt obligations that are payable from Project revenues guaranteed by an irrevocable letter of credit during the Construction Phase and a Fannie Mae guarantee during the Permanent Phase of the financing. The Refunding Bonds, if and when issued at the Conversion Date, are secured by a second lien on Project revenues. No payment of the Bonds or Refunding 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 of $103,250 and an annual fee equal to one-eighth of a point (0.125%) of the original principal amount of the Bonds, approximately $39,125, for the staff work involved in the issuance of the Bonds and monitoring of the Bonds and the Regulatory Agreement.

No appropriation of funds is required at this time. Compensation for the financing team participants (financial advisor, bond counsel, underwriting and trustee), as well as the costs of the financing, is contingent on the sale of the Bonds and will be paid from Bond proceeds, City loan proceeds and/or Borrower equity. This action is consistent with the Mayor’s Budget Strategy adopted by the City Council on February 4, 2003, under both General Principles and Economic Recovery.

CEQA

Negative Declaration (PDC-SH-98-089).

SCOTT P. JOHNSON	LESLYE CORSIGLIA
Director, Finance Department	Director, Housing Department