REPORT TO CITY COUNCIL
SUBJECT
Title
Action on the Proposed Standstill Agreement for the Santana Terrace Apartments with Alpha Z San Jose Apt 1, LLC, Located at 190 N. Winchester Boulevard to Extend the Time for Refinance Lenders to Comply with Affordability Covenants Consistent with Fannie Mae/Freddie Mac Loan Requirements
Report
BACKGROUND
The Santana Terrace Apartments complex is located at 190 N. Winchester Boulevard and was completed in June 2020. The 92-unit, multi-story apartment project was originally permitted as an age-restricted development limited to senior households age 55 and older.
In September 2021, the City Council adopted a Resolution approving a rezone of the project site removing the age restriction requirement language and instead allowing resident occupation for all ages. The original entitlement allowed construction of the senior housing development consisting of two and three-level rental housing units and resident amenities over a parking podium, along with carports and a reduced number of surface parking spaces totaling 105 parking spaces.
As of September 2021, about one year after construction, only 20 units were rented and occupied. According to the Developer, marketing efforts to attract and achieve residency by seniors 55 years of age and older were severely hampered by the pandemic, resulting in low and slow occupancy of the development, whereas the rental apartments available for residency of all ages were less impacted.
At the September 9, 2021, City Council meeting, the City Council approved the Developer’s request to remove the age-restriction, conditioned upon the following: (1) that the Developer deed restrict 15% of the resident-occupied units, which is 14 total units, at income levels that did not exceed one hundred percent (100%) of the Area Median Income for Santa Clara County (AMI), and that the Developer install a security gate at the Property. The affordability restriction is consistent with the City’s Affordable Housing Ordinance requirements.
At the November 9, 2021, Special City Council meeting, the City Council approved and authorized execution and recordation of a 55-year Agreement Containing Covenants and Restrictions (“Restrictive Covenants”), which were executed and recorded on December 14, 2021, to ensure long-term affordability of the 14 units. It is important to note the City did not provide the project with a loan, and only has affordability covenants.
Earlier this year, the Santana Terrace developer approached the City with a request to subordinate the City’s Restrictive Covenants to a senior lender in connection with a proposed refinancing of the project. This request was denied because it is not the city’s policy to subordinate affordability covenants as that could permanently wipe out long-term affordability if a senior lender foreclosures its loan. As an alternative, the developer requested a standstill agreement which temporarily prevents the city from exercising certain remedies during a fixed period of time if a default occurs. The City Council will need to act before this refinance can occur.
The standstill agreement proposed for this project prohibits the City from exercising the City’s enforcement rights authorized by the Restrictive Covenants for a 90-day period following notice to the lender. It also authorizes the City Manager to agree to extend the standstill period for an additional 90-days.
Because housing projects periodically refinance their senior loans to secure more favorable terms, the frequency of such requests is expected to increase when rates improve or when existing loans approach maturity. Typically, senior loans for multifamily properties are structured with a 30-year amortization period but carry a 10 or 15-year term. Therefore, staff anticipate receiving more requests from developers and senior lenders for standstill agreements when affordability covenants are in place.
DISCUSSION
Overview of Proposed Refinancing
The property owner intends to refinance the project with a senior mortgage loan that will be backed by Fannie Mae under its Delegated Underwriting and Servicing (DUS) multifamily loan program.
Fannie Mae and Freddie Mac agency loan programs are a primary source of long-term financing for multifamily housing in California, including projects that contain affordability restrictions. These entities purchase loans from lenders which frees up lending capital for those lenders to make more loans. This adds liquidity to the residential mortgage market. Lenders impose standardized underwriting and loan servicing requirements designed to ensure they can sell loans to Fannie Mae and Feddie Mac. One key term is to have adequate time to cure borrower defaults and preserve the value of the collateral securing the loan.
In order to meet these requirements, senior lenders must set terms for making their loans ensuring they are in compliance with Fanne Mae’s guidelines and requirements. For this refinance transaction, the lender is requiring a minimum cure period of 90 days, to remedy a borrower default before subordinate lienholders or covenant holders may exercise enforcement remedies.
City Affordable Housing Agreement Enforcement Requirements
The City’s Agreement Containing Covenants and Restrictions requires that property owners comply with the affordability restrictions placed on the 14 income-restricted units. Under these provisions, if the City identifies a violation of the restrictive covenants, the City may provide the property owner with a written notice and a 30-day period to cure the violation before the City may pursue enforcement actions.
This 30-day cure period is shorter than the standard cure period required under Fannie Mae and Freddie Mac loan programs, which generally require up to 90 days for a senior lender to cure borrower defaults.
Need for a Standstill Agreement
Because the City’s Restrictive Covenants allow enforcement after a 30-day cure period, the covenant structure does not currently align with the 90-day cure period required under Fannie Mae DUS loan underwriting standards.
As a result, the senior lender has requested that the City enter into a Standstill Agreement as a condition of the refinancing. The purpose of the Standstill Agreement is to temporarily pause the City’s enforcement rights under the Restrictive Covenants for an additional 60 days, thereby aligning the City’s total enforcement timeline with the 90-day cure period required by the lender. It also authorizes the City Manager to approve an additional 90-day standstill period if so requested.
The Standstill Agreement would therefore:
• Maintain the City’s existing 30-day notice to cure requirement under the Restrictive Covenants
• Provide the senior lender an additional 60 days to cure any borrower default
• Authorize the City Manager to approve an additional 90-day standstill period if requested for a maximum total of 180 days.
This accommodation allows the lender sufficient time to cure a default or take corrective action to preserve the property and maintain compliance with affordability requirements.
Importantly, the proposed Standstill Agreement does not subordinate the City’s Restrictive Covenants to the senior lender and does not alter the City’s affordability requirements. Instead, the agreement simply temporarily delays the City’s enforcement remedies to allow the senior lender the opportunity to cure any default.
Limited Applicability of the Standstill Agreement
The proposed Standstill Agreement would apply only to the specific senior loan associated with the current refinancing of the Santana Terrace project.
The agreement would:
• Apply only to the refinancing loan being issued at this time
• Not apply to any prior loans secured by the property
• Not automatically apply to future refinancing transactions
• Not modify or weaken the City’s 55-year affordability covenant
Any future refinancing that requires a similar agreement would require separate City review and approval.
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(a) as it has no potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment.
Alternative, the action being considered is exempt from the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15061(b)(3) as the activity is covered by the general rule that CEQA applies only to projects which have the potential for causing a significant effect on the environment. Where it can be seen with certainty that there is no possibility that the activity in question may have a significant effect on the environment, the activity is not subject to CEQA.
FISCAL IMPACT
There is no cost to the City for processing the proposed standstill agreement other than administrative staff time and expense.
COORDINATION
This report has been coordinated with the Finance Department and the 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
Approve and authorize the City Manager to execute the Standstill Agreement for the Santana Terrace Project on the terms presented in a final form approved by the City Attorney.
Staff
Reviewed by: Afshan Hamid, Director, Community Development
Approved by: Jovan Grogan, City Manager
ATTACHMENTS
1. Santana Terrace Standstill Agreement