REPORT TO CITY COUNCIL
SUBJECT
Title
Action to Authorize the City Manager to Amend the City Loan Terms for the Belovida Apartments to Enable the County to Structure a Hard Loan to Replace the Current Bank Loan to Stabilize the Project and to Increase the City loan by up to $90,000 to Cover the Gap in Repair Costs and Approve the Related Budget Amendment
Report
COUNCIL PILLAR
Promote and Enhance Economic, Housing and Transportation Development
BACKGROUND
In July 2008, the City of Santa Clara appropriated up to $4,955,000 for a loan (the “City Loan”) to CORE Affordable Housing LLC and Charities Housing Development Corporation (“Developer”) for the construction of Belovida Santa Clara, a new affordable senior housing project with 27 one-bedroom units for residents with incomes ranging from 30-50% of area median income. The project is located at 1828-1878 Main Street in Santa Clara and consists of one three-story residential building (the “Project” or “Belovida Apartments”). The project was initially funded through bond funds, a loan from the City, a loan from the California Housing Finance Authority, a bank loan, and tax credit equity. The City Loan came from set aside funds collected by the Redevelopment Agency of the City of Santa Clara. The City Loan was structured to mature on June 30, 2065 with a 2.75% interest rate to be paid by residual receipts when cash flow is available after covering senior debt service, ground lease payments, and other permitted expenses. The City entered into this agreement in July 2008 to further affordable housing goals pursuant to California Community Redevelopment Law.
The City Loan is secured by a leasehold deed of trust. The ground lease between the Developer and a third-party family trust requires annual lease payments of $48,000 with an annual increase of $500. The lease is set to expire on February 28, 2077.
Residents at Belovida Apartments are elderly and extremely low-income. The Developer has held rents lower than allowed by State income limits to avoid the displacement of vulnerable residents and this has put financial strain on the Project. The result is that the Project has been unable to produce enough cash flow to make payments on the City Loan and maintenance has been deferred. The Project is nearing the end of its 15-year Low Income Housing Tax Credit (LIHTC) compliance period and now is a good time to reposition the Project financially.
City staff have been working with the Developer, the County Office of Supportive Housing, Department of Veteran’s Affairs, and Destination Home to structure a long-term solution to stabilize Belovida Apartments and to address deferred maintenance. The current strategy will replace the existing bank loan with a low-interest loan from the County and will convert seven units into supportive housing for veterans using a variety of sources, including Veteran Affairs Supportive Housing (VASH) vouchers. Charities Housing also received a commitment from Destination Home for a two-year rent subsidy to eliminate the rent burden for existing elderly tenants and to partially fund rehabilitation work for deferred maintenance. Destination Home intends to use this as a pilot project for addressing the growing problem of severely rent burdened seniors living in income restricted affordable housing.
On May 28, 2024, the City Council allocated up to $409,950 from the City’s Permanent Local Housing Allocation (PLHA) to help rehabilitate the Belovida Apartments. Following this meeting, County staff determined that PLHA funds could not be used for repairs on this specific project type. To address this, the County intends to pay for repairs using another source and to use PLHA funds as the operating subsidy to lower rent for impacted residents. This funding swap will create a $90,000 gap in the repair budget.
On October 8, 2024, the County committed up to $1,310,500 to originate two loans to stabilize the Project: (1) a new County Affordable Housing Fund (AHF) permanent loan for $990,050 to pay off the higher interest rate private loan from Bank of America and (2) a PLHA permanent loan for $319,950, using the City’s allocation, was also approved to subsidize rents for extremely low and very low-income seniors.
The County anticipates requiring hard payments on the County AHF loan while the PLHA loan will require residual receipts payments.
DISCUSSION
The funding swap mentioned above has resulted in the City putting only $319,950 in PLHA funds into this preservation deal. This leaves the project $90,000 short for meeting the stated repair budget. To make the project whole and allow the full scope of repairs and maintenance to move forward, staff recommends increasing the City Loan by up to $90,000 from $4,955,000 to $5,045,000.
The County AHF loan terms require hard payments which means that the County will receive a fixed annual principal payment of approximately $24,147 subject to net available cash flow. After operating expenses, ground lease, and County AHF loan payments are made, any residual cash flow would be split proportionally between the City and the Developer (50/50). The City’s share will be used to pay the City Loan and the PLHA loan. The County AHF loan will bear a 2.75% interest rate and will mature on February 28, 2065 with a 41-year term for the affordability restrictions. However, the County AHF loan (junior lien) will have priority for payments during the term of the loan. In the event of a sale or foreclosure, the City Loan (senior lien) shall have priority in repayment. Without the restructuring of the loans, it is unlikely the City will be repaid with the cash flow that the project has incurred. A lower cost loan and vouchers and one-time repairs will reposition the project to restart to pay the City’s loan while keeping senior vulnerable residents in place.
The financial repositioning of Belovida will allow the project to continue operating at deep affordability levels, it will prevent the displacement of vulnerable residents, and it will safeguard against the risk of foreclosure. It is unlikely the project will pay off the entire City Loan and accrued interest by February 28, 2065, but the Developer estimates the Project could begin paying down the City Loan by 2036.
The term sheet for the City Loan Amendment is included as Attachment 1.
ENVIRONMENTAL REVIEW
The action being considered does 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
This Project has yet to generate sufficient cash flow to begin repaying its soft debt. However, this Project restructuring will lower debt service cost by replacing the existing senior bank loan and adding funding from various sources including Veterans Affairs Supportive Housing (HUD-VASH) vouchers. This will increase cash flow and help ensure that the City Loan will be at least partially repaid. Without this collaborative restructuring, it is likely the City would see little or no repayment over the same term.
Increasing the City Loan by up to $90,000 will allow for deferred maintenance and repairs to move forward and will ensure the building can operate well in future years. This increase is recommended to be funded using available unrestricted fund balance in the City Affordable Housing Fund.
Budget Amendment
FY 2024/25
|
|
Current |
Increase/ (Decrease) |
Revised |
|
City Affordable Housing Fund (165) |
|
Expenditures |
|
|
|
|
Capital Outlay |
$10,264,353 |
$90,000 |
$10,354,353 |
|
|
|
|
|
|
Fund Balance |
|
|
|
|
Unrestricted Ending Fund Balance |
$5,631,765 |
($90,000) |
$5,541,765 |
COORDINATION
This report was coordinated with City Manager’s Office, City Attorney’s Office, Department of Finance, and Department of Community Development.
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 <mailto:clerk@santaclaraca.gov> or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
1. Approve and authorize the City Manager or designee, to negotiate, execute and amend the loan documents to permit the repayment of the County AHF loan in a junior lien position prior to the repayment of the City loan in a senior lien position, before the distribution of residual receipts, in a final form approved by the City Attorney;
2. Approve and authorize the City Manager or designee, to negotiate, execute and amend the loan agreement to increase the City Loan by up to $90,000, from $4,955,000 to $5,045,000 to address the gap created when the PLHA funds were swapped and replaced with Destination Home funds to pay for repairs, to make modifications to the loan documents consistent with the Term Sheet and as reviewed by the City Attorney for form and consistency; and
3. Approve the FY 2024/25 budget amendment in the City Affordable Housing Fund, increasing the Capital Outlay appropriation in the amount of $90,000 and decreasing the unrestricted ending fund balance in the amount of $90,000 (five affirmative Council votes required for the use of unused balances).
Staff
Reviewed by: Afshan Hamid, Director of Community Development
Approved by: Jovan Grogan, City Manager
ATTACHMENTS
1. City Loan Amendment Term Sheet