SUBJECT: APPROVAL OF A LOAN TO MORRONE
GARDENS ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP, FOR THE IMPROVEMENT OF
MORRONE GARDENS, AN EXISTING 102-UNIT SENIOR RENTAL DEVELOPMENT LOCATED AT 1107
LUCHESSI DRIVE, SAN JOSE.
COUNCIL
DISTRICT: 9
It is
recommended that the City Council adopt a resolution approving a loan for up to
$236,827 at Zero percent interest with a loan term not to exceed two years, to
Morrone Gardens Associates, a California Limited Partnership (“Morrone L.P.”),
to provide funds for rehabilitation and preventative measures associated with potential
mold hazards.
BACKGROUND
On
September 23, 1994, Morrone Gardens, a 102-unit senior housing project located
at 1107 Luchessi Drive, was completed.
Funding consisted of a $2.9 million first position loan with California
Community Reinvestment Corporation (“CCRC”), and $1.6 million of 20% Low and
Moderate Income Housing Funds leveraged with $8,021,180 in tax credits. Morrone L.P. leases the land from the
Housing Authority of the County of Santa Clara (“HACSC”), the landowner and
lessor for the project.
On May
18, 2001, the Housing Department was notified by Rotary Plaza/HACSC, HDC, Inc.
(“HDC Inc.”), general partner of Morrone L.P., of its intent to file suit
against Branagh Construction Inc., its subcontractors, and its material
suppliers for construction defects, improper installation of siding and the use
of inferior products. HDC Inc. informed
the City that water has infiltrated the siding, and moisture membrane behind
the siding causing buckling and mold growth.
On August 20, 2001, Morrone L.P. and the HACSC filed suit and are
proceeding with their case. They do not
expect to go to court until later this year should the case not be settled out
of court.
On
September 23, 2002, HDC Inc. requested funding to pay for previous repairs,
remediation analysis and ongoing testing of Morrone Gardens, on behalf of
Morrone L.P.
The
Housing Department recommends that the City Council approve a loan to Morrone
L.P. to reimburse costs associated with remediation analysis and work performed
to reduce the water damage to the building.
Housing staff has monitored this project since being informed of the
problems and has confirmed water damage and mold conditions. The HACSC has continued testing air quality
and monitoring the health of the residents to ensure their safety until the
lawsuit is settled and the remediation is complete.
Morrone
L.P. requested a loan at 0% interest for up to 24-months to be repaid from
proceeds from the lawsuit. The Board of
Commissioners of the Santa Clara County Housing Authority adopted a resolution
authorizing the repayment guarantee of up to $236,827 to the City of San
José. This guarantee is in lieu of
securing the loan with a deed of trust on the property and is a more expedient
solution than further encumbering title.
The
HACSC has also given CCRC periodic reports regarding the mold and litigation
issues. All first mortgage payments
have been made to CCRC and Morrone L.P. is expected to remain in full
compliance with obligations under their loan documents. As CCRC is a lender and does not have an
ownership interest in the project, it cannot have any interest in settlement
proceeds as long as payments continue and no default occurs under its mortgage
loan obligations.
Morrone
Gardens continues to have ongoing meetings with the tenants to keep them
apprised of any developments that may impact the status of the mold
situation. No additional public
outreach has occurred.
Preparation of this memorandum was coordinated with the
Office of the City Attorney.
COST IMPLICATIONS
Funds for the project are available from the Housing
Department’s Loan Management Appropriation-Fiscal Year 2002-2003 20% Low and
Moderate Income Housing Fund Budget.
Addressing the mold situation in a timely fashion can help
to limit the spread of the mold and thereby reduce the cost of
remediation. Therefore, this action is
consistent with the Council-approved Budget Strategy which seeks to emphasize
prevention and expenditures that reduce costs to the City.
CEQA
Not a project.
LESLYE CORSIGLIA
Director of Housing