b.     Approving a loan of the bond proceeds to a limited partnership created by Fairfield      Affordable Housing LLC for financing the acquisition and rehabilitation of the Turnleaf Apartments project.

c.     Approving, in substantially final form, the Bonds, Trust Indenture, Financing Agreement,

Regulatory Agreement and Declaration of Restrictive Covenants, Intercreditor Agreement, Official Statement and the Bond Purchase Contract; authorizing the Director of Finance and the Director of Housing to execute and, as appropriate, to negotiate, execute and deliver these documents and other related documents as necessary.

BACKGROUND

On January 7, 2003, the City of San Jose Director of Finance and Director of Housing adopted Declaration No. 2003-1 (“the Declaration”) expressing their intent to take the actions necessary to induce the City to issue up to $16,000,000 in multifamily tax-exempt revenue bonds to finance the acquisition and rehabilitation of Turnleaf Apartments (the “Project”), located at 3210 Loma Verde Drive in the City of San José.  The Declaration expressed the intent of the Director of Finance and the Director of Housing to take all necessary actions – including obtaining an allocation of private activity bonds from CDLAC in an amount not to exceed $16,000,000.

On January 16, 2003, the City of San José submitted to CDLAC an application for tax-exempt bonds in the amount of $15,290,000 for the Turnleaf Apartments project.  On March 26, 2003, the City of San Jose received a tax-exempt bond allocation from CDLAC in the amount of $15,290,000 for the Project. 

The Bonds for the Project will be issued as a single series.  Total Project costs are estimated to be approximately $29,575,668.  The acquisition cost is approximately $19,200,000 and the hard rehabilitation costs will total approximately $3,344,000 (or $21,750 per unit).  The difference between the aggregate par amount of the Bonds and total Project costs will be paid from a combination of tax credit equity, cash flow during construction, deferred developer fee, and a subordinated permanent loan from the City of San Jose (the “City Financing”) in the amount of $2,775,000.  The Council approved the City permanent financing on December 10, 2002, pursuant to Resolution No. 71334.

CDLAC requires that the Issuer issue Bonds for the Project on or before July 14, 2003.  It is anticipated that the Bonds will close on or about May 29, 2003.

Fairfield Affordable Housing, LLC (the “Developer”), has requested that the City issue the tax-exempt multifamily housing revenue bonds for the purpose of lending the proceeds to a limited partnership (the “Borrower”) created by the Developer.  The limited partnership will consist of the Developer as the administrative general partner, Wakeland Housing and Development Corporation as the managing general partner, and the tax credit investor, the Paramount Financial Group, as the limited partner.  The proceeds of the loan will be used by the Borrower to finance the acquisition and rehabilitation of the Project. 

The Project will consist of 152 total units:  33 studio units, 61 one-bedroom units, and 58 two-bedroom units.  Sixteen (16) units will be restricted to households earning 50% of the area median income (“AMI”) or less, and 135 units will be restricted to households earning 60% or less of AMI.  One manager’s unit will not be income restricted.  All restricted units will be subject to affordability requirements for 55 years.

ANALYSIS

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

In general, multifamily housing revenue bonds are issued to finance the acquisition, rehabilitation, or new construction and, in some cases, the refinance of certain rental apartment projects by private developers.  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, the project financed by the bond proceeds must meet either of the following affordability restrictions: (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 are also 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 the ability to access the long-term market, features not generally 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 from the credit enhancement.

Structure of the Bonds for the Project

The Bonds for Turnleaf Apartments will be issued as a single series of weekly variable rate demand tax-exempt bonds in the anticipated amount of $15,290,000. The Bonds will have a nominal maturity of approximately 33 years but, as variable rate demand bonds, will be callable at any time.  The Bond proceeds will be loaned to the Borrower to finance acquisition and rehabilitation of the Project.  The Bonds will be interest-only (i.e., there will be no principal amortization) during the construction period and will be subject to interest and 30-year principal amortization during the permanent period.

The Bonds will be secured by a direct pay credit enhancement provided by Freddie Mac.  Since Freddie Mac does not accept construction risk, the Borrower has arranged for Bank of America to provide a stand-by letter of credit for the benefit of Freddie Mac during the construction period.  Freddie Mac will agree to continue to provide its credit enhancement after the construction period if the project meets all of its requirements for “conversion.”

The Freddie Mac credit enhancement will have a term of approximately 33 years (including the construction period).  Freddie Mac does not require an interest rate hedge, but the Borrower expects to purchase a hedge in the form of an interest rate cap.

The Borrower expects that all of the Bond proceeds will be disbursed at bond closing to reimburse the acquisition cost of the property. 

The Bonds will be sold publicly by the firm of RBC Dain Rauscher acting as underwriter and remarketing agent for these variable rate 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 of:

Official Statement  This document is the public offering statement for the issuance of the Series 2003A 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 terms of the 2003A Bonds, the security for the 2003A Bonds and the economic and financial characteristics of the transaction, the Project and the participants.  The City will not mail the Official Statement until all commitments to provide the credit enhancement have been received. 

A copy of the draft Official Statement, in substantially final form, will be distributed to the City Council under separate cover on or about May 13, 2003.  If any Councilmember has any personal knowledge that any of the material information in the Official Statement is false or misleading, City staff, bond counsel, and the financial advisor will be available at the Council meeting on May 20, 2003 to address any questions, issues and/or concerns.

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 officer 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 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 Bonds. 

Bond Purchase Agreement  The Bond Purchase Agreement (the “Purchase Agreement”) is an agreement between the City of San Jose as the Issuer,  RBC Dain Rauscher as purchaser of the Bonds and Fairfield Turnleaf, L.P. as the Borrower.  The agreement specifies the representations and warranties of the City, RBC Dain Rauscher, and the Borrower, the documents to be executed at closing, and the conditions that allow RBC Dain Rauscher 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.

Intercreditor Agreement This document is by and among the Issuer, the Trustee, Freddie Mac and Bank of America, as construction lender.  This document is the instrument by which the signatories agree upon their respective rights arising from an Event of Default.

Financing Team Participants

The financing team participants consist of:

l        City’s Financial Advisor:  CSG Advisors Incorporated

l        Bond Counsel:  Jones Hall

l        Trustee/Paying Agent: Wells Fargo Bank

l        Underwriter: RBC Dain Rauscher

All costs associated with the financial advisor 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 schedule is as follows:

l        Council approval of bond documents                                 May 20, 2003

l        Price Bonds                                                                      May 28, 2003

l        Pre-Close and Close Bonds                                              May 28 and 29, 2003

l        CDLAC Deadline for Bond Closing                                  July 14, 2003

l         

PUBLIC OUTREACH

The method of notifying the community of the City’s intent to issue tax-exempt private activity bonds is for the City to hold a TEFRA Hearing.  The TEFRA Hearing was held on January 7, 2003, by the City of San Jose’s Director of Finance.

CEQA

Exempt (PP 02-11-331).

RELOCATION

The Developer will retain the services of a relocation specialist. If the relocation survey analysis determines that some of the households are over the income limits set by the City’s affordability restrictions, those households will be relocated. The Developer will assume all relocation costs for the Project. The relocation plan shall be acceptable to the City.

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 and/or Borrower equity. The Bonds are tax-exempt obligations.  The Borrower bears the cost of the Freddie Mac loan underwriting.  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 $63,225 (assuming an issuance amount of $15,290,000) and an annual fee equal to one-eighth of a point (0.125%) of the original principal balance of the Bonds ($19,112.50) for the staff work involved in the issuance of the Bonds and monitoring of the Bonds and Regulatory Agreement.  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. 

            SCOTT P. JOHNSON                                    LESLYE CORSIGLIA

            Director, Finance Department                           Director, Housing Department