Subject: ALMADEN SENIOR HOUSING APARTMENTS
Adoption of a resolution
1. Authorizing
the issuance of tax-exempt multifamily housing revenue bonds in the aggregate
principal amount not to exceed $6,050,000;
2. Approving
a loan of bond proceeds to Almaden Senior Housing Partners, L.P., a California
limited partnership created by Las Palmas Foundation and Simpson Housing
Solutions, LLC for financing the construction of the Almaden Senior Housing
Apartments located at 1735 Almaden Road;
3. Approving
in substantial form the Bonds, Trust Indenture, Financing Agreement, Regulatory
Agreement and Declaration of Restrictive Covenants, the Bond Purchase Agreement
and Remarketing Agreement; and
4. Authorizing the Director of Finance and Acting Director of Housing to execute and, as appropriate, to negotiate, execute and deliver these documents and other related documents as necessary.
On May 15, 2001, the City Council adopted Resolution No.70349 expressing its intent to issue up to $8,000,000 million in tax-exempt multifamily revenue bonds to finance the construction of a 66 unit senior housing project to be located at 1735 Almaden Road. This project is known as the Almaden Senior Housing Apartments (the “Project”). 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 $8 million in private activity bonds. A TEFRA Hearing for the Project was also held at the same Council meeting.
On May 31, 2001, the City submitted a request to CDLAC for an allocation of $6,050,000. On August 22, 2001, the City received an allocation from CDLAC in this amount.
Total Project financing requirements, including reserves and land costs, are estimated to be $12,580,000. The difference between the aggregate par amount of the Bonds and total Project costs will be funded during construction from a bridge loan to be provided by the project developer, Simpson Housing Solutions, LLC, a California liability company (the "Developer"), and from the tax credit equity and deferred Developer Fee ($2,773,000). After completion of the Project, a portion of the bridge loan will be redeemed with a permanent loan from the City in the amount of $3,757,000.
One of CDLAC’s requirements is that the bond closing for the Project must occur within 90 days of an allocation. Therefore, the Bond closing for this Project must occur by December 10, 2001. It is anticipated that the Bonds will close on or about December 5, 2001.
The Developer requested the City issue tax-exempt multifamily housing revenue bonds for the purpose of lending the bond proceeds to Almaden Senior Housing Partners, L.P., a California limited partnership (the “Borrower”) created by the Developer. 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 66 units of senior rental housing known as Almaden Senior Housing Apartments (the "Project"). Upon completion of the Project, all of the units in the project, with the exception of one manger's unit, will be restricted to the rental to seniors of low and very low income as follows: (1) 53 units at 60% of area median income; and (2) 13 units at 50% of area median income. These restrictions will remain in effect for 55 years.
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: description of the
bond financing structure, bond financing documents, discussion of financing
team participants, and review of the 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
developer/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 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 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 this Project, 100% of the units, except one manager’s unit, will be
rented to seniors earning no more than 60% of area median income.
Structure of the Bonds
Principal Amount; Term. The Bonds will be issued as
tax-exempt bonds in an amount not to exceed $6,050,000 for a term of
approximately 33 years.
Interest Rate. The Bonds will bear interest at a
fixed tax-exempt rate for approximately 22 years to be determined at pricing of
the Bonds on or about November 27, 2001.
On January 15, 2023, the Bonds are subject to mandatory tender and
remarketing and the interest rate on the Bonds will be adjusted to a new
tax-exempt interest rate for the remaining life of the Bonds (i.e., until their
maturity on January 15, 2035).
Fannie Mae Structure.
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 (East-West Bank) will issue a letter of credit to Fannie
Mae that guarantees the construction and lease up of the project until the
Conversion Date. 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 Bond to the Bondholders, thereby removing the risk of
default on the payment of the Bonds as a result of a shortfall in Project
revenues. The obligation of Fannie Mae
to make payments to the Trustee in the amounts due and payable on the Bonds
results in the Bonds receiving a "AAA" credit rating from Standard
& Poor's, the highest available rating.
Also, upon conversion, which is approximately three 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 Red Mortgage Capital, the Fannie Mae DUS
Lender, on or about November 5, 2001.
Guaranteed Investment Agreement
There
will be no investment agreement in connection with the Bonds.
Bond Financing
Documents
The
following is a brief description of each document the City Council is being
asked to approve and authorize the execution. Copies of these four documents
will be available in the City Clerk’s Office on or about November 5, 2001.
Trust
Indenture. The
Bonds will be issued under a Trust Indenture (the “Indenture”) between the City
of San Jose and 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 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 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 thereunder.
Financing
Agreement. This Agreement (the
"Financing Agreement") is among the City, 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 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
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 low or very-low income seniors for a period
of 55 years as previously described.
Bond
Purchase Agreement. The Bond Purchase Agreement (the
"Agreement"), is a contract between the City, Red Capital Markets,
Inc. as the underwriter of the Bonds (the "Underwriter"), and the
Borrower, under which the Underwriter purchases the Bonds. The Agreement specifies the representations
and warranties of the City, the Borrower and the Underwriter, the documents to
be executed at closing, and the conditions that allow the Underwriter 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 as long as the interest rate does not exceed 7.5%. The interest rate will be a variable, weekly
floating rate to be determined weekly and initially upon pricing/closing of the
Bonds on/or about November 28, 2001.
Remarketing Agreement.
The agreement between the City, the Borrower and Red Capital Markets,
Inc. as the remarketing agent (the "Remarketing Agent") describes the
procedures and compensation for resetting interest rates and arranging for the
remarketing of the securities to other investors when put back (returned) by
the bondholders. 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. This document is prepared by the
underwriter's counsel for the City.
This document thoroughly describes the financing program, the economic,
financial and social characteristics of the participating entities and the
collateral for the Bonds.
A copy of the draft of the Preliminary Official Statement, in
substantially final form, will be distributed to the City Council under
separate cover. Staff has carefully
reviewed the information contained in the Preliminary Official Statement and
believes it to be accurate and complete in all material respects as to the
City. 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,
underwriters, and the financial advisor will be available at the Council
meeting on November 13 to address any questions, issues and/or concerns.
City Housing Loan
The
City’s Housing Department will also be providing a permanent loan in the amount
of $3,757,000 to fund the Project. The
details of this funding will be set forth under separate cover and scheduled
for City Council review also on November 13, 2001.
The financing team participants consist of:
·
City’s
Financial Advisor: E. Wagner & Associates,
Inc.
·
Bond
counsel: Jones Hall
·
Underwriter/Remarketing
Agent: Red Capital Markets, Inc.
·
Trustee/Dissemination
Agent: Wells Fargo Bank,
National Association
All costs associated with the financial advisor, bond counsel and trustee/dissemination agent are contingent on the sale of the Bonds and such costs, along with the costs of the underwriter and its counsel, will be paid from Bond proceeds, City loans, and/or Borrower's equity.
Financing Schedule
The
current proposed schedule is as follows:
Pricing of the Bonds November
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 Tax Equity and Fiscal Responsibility Act (TEFRA) Hearing. The TEFRA Hearing was held on May 15, 2001 by the San Jose City Council. The public hearing notice was published in the San Jose Mercury News on April 27, 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, Borrower equity and/or the City loan. The Bonds are tax-exempt obligations that are payable from Project revenues guaranteed by a irrevocable letter of credit during the Construction Phase and a Fannie Mae guarantee during the Permanent Phase of the financing. 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 of $30, 250 and an annual fee equal to one-eighth of a point (.125%) of the original principal amount of the Bonds (approximately $7,562.50) 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