REPORT TO COUNCIL
SUBJECT
Title
Action on Amendments to the Promissory Note and Covenants with Klamath Associates, L.P. and South Drive, L.L.C. to Modify Existing Terms and Extend the Affordable Housing Requirements for Two Santa Clara County Housing Authority Projects, Klamath Gardens and Bracher Gardens
Report
COUNCIL PILLAR
Promote and Enhance Economic and Housing Development
BACKGROUND
When local Redevelopment Agencies (RDA) in California were dissolved in 2012, their affordable housing functions and assets were transferred to housing successors. The City, as the housing successor, took over the responsibilities and assets related to affordable housing projects previously managed by the RDA. This includes managing loans, enforcing covenants, and ensuring the continued provision of affordable housing.
Klamath Gardens and Bracher Gardens are two 100% affordable housing projects that were funded by the RDA and are currently controlled and owned by entities related to the Santa Clara County Housing Authority (SCCHA). The SCCHA has requested changes to the City’s loan terms for these projects to help address financial challenges. In exchange the City will be receiving an extension of the affordability period, allowing the projects to maintain their affordable status and financial stability. The project details are provided below.
Klamath Gardens:
Klamath Gardens is an affordable housing complex located at 2051 Klamath Avenue, Santa Clara, CA. It has 17 apartments for very low-income households and families. The property is owned by Klamath Associates, a California limited partnership affiliated with the SCCHA.
The complex was built with financing from the Low-Income Housing Tax Credit (LIHTC) program, a $681,176 loan from the City of Santa Clara Redevelopment Agency (RDA), and a $750,000 conventional loan from Citibank due in May 2027. The City Loan is evidenced by a Promissory Note dated February 22, 1995, bears 6% simple interest and is payable from 75% of residual receipts, maturing on February 22, 2025. The Promissory Note is secured by a Deed of Trust dated February 22, 1995 recorded on February 22, 1995 in the County Recorder’s Office as Document #12810716. In addition to the Promissory Note and Deed of Trust, the City recorded a 55-year Agreement Containing Covenants including Affordable Housing Requirements dated February 22, 1995 (the “Covenants”). The RDA has since been dissolved in 2012 by state law and the City has assumed responsibility for managing the housing assets of the Agency, including the City Loan and Covenants.
The Borrower, (SCCHA), has requested that the City extend the maturity date and modify certain terms of the loan.
Bracher Gardens:
Bracher Gardens is an affordable housing complex at 2665 South Drive, Santa Clara, CA. It has 72 apartments for very low-income senior households. The property is owned by South Drive, LLC, a California limited liability company affiliated with the SCCHA.
The complex was built with financing from the LIHTC program, a $1,550,000 loan from the City’s RDA, and a $1,950,000 conventional loan from Citibank due in January 2026. The City Loan, evidenced by a Promissory Note dated August 30, 1994, bears 6% simple interest and is payable from 75% of residual receipts, maturing on August 30, 2024. The Promissory Note is secured by a Deed of Trust dated August 30, 1994, recorded on August 30, 1994, in the County Recorder’s Office as Document #12632299. In addition to the Promissory Note and Deed of Trust, the City recorded a 55-year Agreement Containing Covenants Including Affordable Housing Requirements dated August 30, 1994 (the “Covenants”).
SCCHA desires to extend the maturity date of the City Loan.
DISCUSSION
Klamath Gardens
In June of this year, SCCHA requested the City to extend the City Loan maturity and amend certain terms as the project is operating in a deficit. The SCCHA has made this request to address cash flow challenges and to provide more time to pay down the Citibank loan that is senior to the City loan and will not mature until May 2027. In the last four years, the City has received an average of $22,000 per year in receivable loan payments. It is anticipated that the City will receive increased payments once the Citi Bank senior loan is paid off in 2027. The current loan balance is $681,176.00 in principal and $1,001,352.96 in interest.
The City loan is currently maturing; however, the terms of the senior loan prohibit the full repayment of the City’s junior loan before the senior loan is paid off. Extending the maturity date mitigates the risk of the senior loan being foreclosed, which would jeopardize the repayment of the City’s loan and could extinguish the City’s covenant restrictions due to their subordinate positions. By extending the City loan maturity date beyond 2027, the City is foregoing the opportunity to call its loan due sooner. However, this refinance will add ten years to the affordability period, which has the benefit of extending the affordability requirement for 10-years in return.
This project is small (17 units) and is designed for larger families which makes it more challenging to generate enough cash flow for maintenance costs. In addition to extending the City Loan maturity date, SCCHA is proposing to modify certain terms of the existing City Loan as summarized below.
1. Maturity Date: The City Loan will be extended from February 22, 2025 to February 22, 2035. The 10-year extension will prevent Citibank from calling its loan due and payable prior to its loan maturity date of May 2027. As noted above, the Citibank loan is senior to the City Loan.
2. Interest Rate: The interest rate shall be reduced from fixed, simple, 6% to fixed, simple, 3%. Reduction of interest rate enables the project to generate cash flow necessary to fund operating deficits. To date, SCCHA has advanced the project a total of approximately $400,000 to cover deficits as they arise.
3. Payments: Annual payments of 75% from Residual Receipts plus the amount by which 25% of the Residual Receipts exceeds $7,500 shall be amended to annual payments of 50% from Residual Receipts due to the City and 50% due to SCCHA. Additionally, the contract oversight fee equal to 0.75% of the operating revenue paid to the sponsor will no longer be allowed as a Permitted Expense prior to calculation of the residual receipts. The change to the Residual Receipts payment structure is to enable the distribution of cash flow to also benefit SCCHA, providing them with an incentive to operate the Project effectively in their role as the project sponsor and owner.
4. Increase Deposits to the Replacement Reserve Account: Increase the annual deposits to the Replacement Reserve Account, from $8,593 to $17,000. The additional $8,407 will only be funded if cash is available, prior to calculation of residual receipts. The increase will build up the replacement reserves to spend on repairs and preventive maintenance to correct any conditions that may affect the health or safety of residents.
In exchange for the requested modification to the Promissory Note, City staff requested to extend the affordability covenants’ expiration date from October 21, 2051 to October 21, 2061, thereby preserving the affordability of seventeen (17) units for an additional ten (10) years. See the term sheet in Attachment 1 for details.
Bracher Gardens
In conjunction with the request for the Klamath Gardens as discussed above, SCCHA also requested the City Loan to be extended from August 30, 2024 to August 30, 2029. Based on the cash flow projections, the City Loan is anticipated to be repaid in full within three (3) years. The property has consistently maintained positive cash flow and has fully funded reserves to cover necessary repairs and ongoing maintenance.
In exchange for the requested modification to the Promissory Note, staff requested to extend the affordability covenants’ expiration date from November 30, 2050 to November 30, 2055, thereby preserving the affordability of 72 units for an additional five (5) years. See the term sheet in Attachment 2 for details.
ENVIRONMENTAL REVIEW
The actions being considered do not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(b)(5) in that it is a governmental organizational or administrative activity that will not result in direct or indirect changes in the environment.
FISCAL IMPACT
There is no cost to the City for these agreements other than administrative time and expense. As noted above, the proposed amendments would ultimately delay full repayment of the City loans and the lower interest rate for Klamath will only apply to the extension of the term. However, in exchange, the City will be receiving an extension of the affordability period, allowing the projects to maintain their affordable status beyond the initial timeframes and alleviate the projects’ financial strain and enhance their overall financial stability.
COORDINATION
This report has been coordinated with the Finance Department and City Attorney’s Office.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
1. Klamath Gardens: Authorize amendments consistent with the term sheet to the Promissory Note and Covenants with Klamath Associates, a California limited partnership, an affiliate of the Santa Clara County Housing Authority to modify the terms of the City Loan and extend the term of affordable housing requirements for 17 rental units within the project located at 2051 Klamath Avenue.
2. Bracher Gardens: Authorize amendments consistent with the term sheet to the Promissory Note and Covenants with South Drive, LLC, a California limited liability company, an affiliate of the Santa Clara County Housing Authority to extend the maturity date of the City Loan and extend the term of affordable housing requirements for 72 rental units within the project located at 2665 South Drive.
Staff
Reviewed by: Afshan Hamid, Director, Community Development Department
Reviewed by: Alexander Abbe, Assistant City Attorney
Approved by: Jovan Grogan, City Manager
ATTACHMENTS
1. Klamath - Term Sheet
2. Bracher - Term Sheet