HomeMy WebLinkAbout80A - JOINT - CORNERSTONE APTSREQUEST FOR COUNCIL/
HOUSING AUTHORITY
ACTION
CITY COUNCIL MEETING DATE:
NOVEMBER 20, 2018
TITLE:
APPROVE COMMITMENT TO
RESUBORDINATE THE EXISTING
AFFORDABLE HOUSING LOANS FOR THE
CORNERSTONE APARTMENTS TO
$8,700,000 IN DEBT TO FUND
REHABILITATION COSTS
(STRATEGIC PLAN NO. 4, 5)
,F� P,J��
C TY MANAG EXECUTIVE DIRECTOR
JOINT RECOMMENDED ACTION
CLERK OF COUNCIL USE ONLY:
❑ As Recommended
❑ As Amended
❑ Ordinance on 16' Reading
❑ Ordinance on 2nd Reading
❑ Implementing Resolution
❑ Set Public Hearing For
CONTINUED TO
FILE NUMBER
Authorize the City Manager and Executive Director of the Housing Authority to execute a
commitment letter to:
Resubordinate the current affordable housing loans for the Cornerstone Apartments at 805
- 904 South Minnie Street, Santa Ana, California to tax-exempt multifamily bonds (Bonds)
in an amount not to exceed $8,700,000. The Bond funds will be used to substantially
rehabilitate the Project.
2. Authorize the City Manager and Executive Director of the Housing Authority to execute the
necessary documents to level all rents onsite at the 50% TCAC rents instead of the
existing Health and Safety Code rents.
DISCUSSION
The Cornerstone Apartments at 805 — 904 South Minnie Street is collectively a 126 -unit
affordable housing project that is requiring more repairs as the project gets older. For a single-
family homeowner, when their home gets older and in need of repair typically the homeowner will
refinance their mortgage to take out a loan to do some rehabilitation work on their home. On the
other hand for a multi -family affordable housing project owner, when their project gets older and
in need of repair typically the owner will do something called "resyndicate" by applying for
additional 4% tax credits and obtaining additional Bond proceeds to complete necessary repairs.
This type of transaction using public funds is much more complicated than a single-family home
80A-1
Approve Commitment to Resubordinate Loans for Cornerstone Apartments
November 20, 2018
Page 2
and it requires approvals from all of the various lenders (e.g. the City and Housing Authority) who
have a financial interest in the project. Jamboree Housing Corporation (Jamboree), owner of the
Cornerstone Apartments, is undertaking this complicated process in order to ensure the long-
term viability of their asset which will protect the health and safety of the residents and extend the
term of affordability for the project.
Specifically, in 2001 and 2003 the City of Santa Ana and Housing Authority of the City of Santa
Ana made a series of forty-two (42) loans (City Loans) to Wakeham -Grant Apartments, LP for the
Cornerstone Apartments (Project). The Project consists of 8 apartment buildings consisting of
126 units in total. These loans were for the acquisition and rehabilitation of existing market rate
units that were converted to affordable units that were in part financed with Low Income Housing
Tax Credits (tax credits). Jamboree is now requesting to resyndicate and recapitalize the project
in order to rehabilitate the 126 affordable rental units at Cornerstone Apartments (Exhibit 1). A
request for resyndication and recapitalization of a project such as this one involves Jamboree
submitting an application for non-competitive 4% tax credits, tax-exempt bonds, and including a
new tax credit investor into the Project's ownership structure.
Commitment to Resubordinate Current Affordable Housing Loans
As was the case when the Project was originally undertaken, it will be necessary for the City
Loans to be subordinated to the Bonds in the Project's loan hierarchy (e.g. financing stack).
Currently, the City Loans are subordinated to a senior lien of approximately $3.95 million. Under
the proposed transaction, the City Loans will be resubordinated for up to $8,700,000 in Bond
debt. The proposed Commitment to Resubordinate Existing Affordable Housing Loans is
presented as Exhibit 2. The acquisition of the former Limited Partner's interest in the Project, and
the proposed rehabilitation activities will be funded with the proposed Bonds, the equity
generated from the sale of 4% tax credits, the resubordination of the City Loans, a Seller
carryback note, and the deferral of a portion of the Developer Fee included in the Project's
rehabilitation budget.
Due to the insufficient rehabilitation scope by the original developer in 2001 and 2003, there are
significant capital needs to address through the proposed rehabilitation. An approximate budget
of over $7.4 million will be used to install new windows, roofs, Americans with Disabilities Act
improvements, install new kitchen and bathroom cabinets / countertops, new sinks and plumbing
fixtures, new flooring throughout the units, install new appliances, install new hot water heaters
with solar hot water collectors, and reline all waste lines. A more comprehensive rehabilitation
scope was provided to City staff. A site needs assessment was conducted in March 2018 and
found that parking is one of the most significant concerns of existing residents (Exhibit 3).
Therefore, Jamboree is also addressing the significant parking issues in the neighborhood by
installing parking lifts for residents. Another significant part of the rehabilitation scope is the
addition of a large solar installation, with a portion of the energy savings going to offset resident
electricity demand, reducing their electricity bills.
80A-2
Approve Commitment to Resubordinate Loans for Cornerstone Apartments
November 20, 2018
Page 3
While the proposed resyndication of the Cornerstone Apartments will result in additional debt
being in a senior position to the City's Loans, the recapitalization will preserve the improvements
which is the source of the City's repayment. The physical needs assessment confirms that the
existing property cash flow cannot support the future long term capital needs, necessitating this
rehabilitation. Any cash flow currently received may be negatively impacted if these long term
capital needs are not addressed.
As of the end of FY 2017-18, the outstanding principal and interest balance of the City Loans was
$9,039,410.21. This includes a current principal balance of $6,792,940.43 and $2,246,469.78 in
accumulated interest (Exhibit 4). The source of the loans include the former Low and Moderate
Income Housing Funds (Tax Increment "TI"), HOME Investment Partnerships Program funds
(HOME), and Tax Increment/California Housing Finance Agency (TI/CHFA) funds. As mentioned
previously, the City Loans are already in a subordinate position to a senior loan and therefore this
request is to resubordinate the existing loans to the new financing. The City and Housing
Authority loan documents prohibit the distribution of any sales proceeds to the general partner
before the City Loans are repaid. In adherence to this requirement, Jamboree will not be
receiving any sale proceeds from the resyndication and recapitalization transaction. As proposed,
Jamboree will make a $500,000 payment on the City Loans when the Project financing closes.
These funds will be used to reduce the accumulated interest obligation on the City Loans. As
such, the total principal and interest balance of the City Loans to be resubordinated will be
approximately $8,539,410.21, with the final amount determined at the close of financing (e.g. up
to no more than $8.7 million). Keyser Marston Associates, Inc., (KMA) the City's financial
consultant, has evaluated the proposed transaction in an analysis that is presented in Exhibit 5.
KMA recommends the City and Housing Authority to subordinate the City Loans up to a
maximum of $8.7 million in Bonds.
The approval of the commitment to resubordinate the City Loans to an amount not to exceed
$8.7 million in Bonds will increase the amount to which the City Loans are subordinated by
approximately $4.75 million. This will extend the repayment of the City Loans by increasing the
debt service payments on the senior lien, which will reduce the cash flow available for annual
debt service payments on the City Loans. Specifically, this means that the City and Housing
Authority will not be repaid in the same time period as originally agreed upon, and therefore the
affordable housing funds from the repayment of those loans will not become available to the City
until a later date. Based on projections, the City and Housing Authority does not anticipate
receiving any additional residual receipt payments until Year 22, which is projected to be in FY
2040-41. This is only an estimate and is subject to change. Nonetheless, the City Loans are
interest bearing, and as a result, the total debt service payments on the City Loans will exceed
the amount that was originally anticipated.
Although the City Loans will be resubordinated, the proposed rehabilitation cost will extend the
useful life of the Project and will enhance the quality of life for the residents who live at the
Project. It is important to note that without the proposed rehabilitation, the Project can be
anticipated to continue to decline and diminish the quality of this affordable housing asset. The
only resource from which to fund the repairs and maintenance costs will be the Project's cash
• I .
Approve Commitment to Resubordinate Loans for Cornerstone Apartments
November 20, 2018
Page 4
flow. Current cash flow projections indicate that insufficient funds will be generated to cover the
Project's existing physical needs.
If the commitment to resubordinate the City Loans is approved, staff will return at a later date with
various Subordination Agreements for consideration by City Council and the Housing Authority
prior to the issuance of the Bonds and Jamboree's application for the non-competitive 4% tax
credits required for the rehabilitation. At that time, the City and Housing Authority will have the
exact dollar amount of the Bonds, and the then outstanding balance of the City Loans. In
addition, a new TEFRA hearing will also need to be held prior to closing in mid -2019, as the
current TEFRA will expire in December 2018.
Commitment to Increase Rents
If the commitment to resubordinate the City Loans is approved staff will also need to return at a
later date with various Amendments to the Loan Agreements for consideration by City Council
and the Housing Authority to increase the rents at the project to 50% Area Median Income TCAC
rents. These amendments are necessary in order for Jamboree to create an additional $800,000
in appraised value which in turn will yield rehabilitation credits as well as sale proceeds for the
City repayment. The increased Bond funds would be used to make an upfront payment of
$500,000 on the City Loans, with the balance dedicated to rehabilitation costs.
An analysis of the current rent roll (dated October 25, 2018) reveals that the effective increase to
91 % of residents will be about $25 per month or $300 per year. This will generate approximately
$34,000 in additional revenue per year for Jamboree. Six percent (or equivalent of eight units)
have been residents onsite less than 12 months, and at their one year anniversary will have their
rents gross up to a level where they would see the same $25 per month effective increase. The
remaining three percent (4 units) of the tenants would see rent increases of $31/month.
Staff supports the request for a rent increase due to the level of rehabilitation needed and the
value of increasing sustainability onsite and protecting residents from potential spikes in the cost
of electricity due to the large photovoltaic system. Prior to the levying of any rent increase,
Jamboree has also agreed to provide a minimum 60 day notice instead of the statutory 30 day
notice.
STRATEGIC PLAN ALIGNMENT
Approval of this item supports the City's efforts to meet Goal # 4 Fiscal Sustainability, Objective #
1 (maintain a stable, efficient and transparent financial environment) and Goal # 5 - Community
Health, Livability, Engagement & Sustainability, Objective # 3 (Facilitate diverse housing
opportunities and support efforts to preserve and improve the livability of Santa Ana
neighborhoods).
Approve Commitment to Resubordinate Loans for Cornerstone Apartments
November 20, 2018
Page 5
FISCAL IMPACT
The Residual Receipt payment schedule under the current Loan Agreements call for the City
Loans to be repaid at the end of a 40 -year term. Under the proposed Resubordination, the City
and Housing Authority will receive approximately $500,000 from the resyndication at Bond
closing. The $500,000 payment will be applied to the various sources according to the table
below:
In FY 2017-18, residual repayments received by the City/Housing Authority for the existing loans
were as follows:
Program Account
Tax Increment
TI/CHFA
HOME
TOTAL
$ 84,172.36
Fund 607
Fund 607
Fund 130
$242,799.01
Outstanding Loan
Balances as of
$3,130,677.28
$920,751.43
$4,987,981.50
$9,039,410.21
6/27/2018
Projected Allocation of
$ 173,168.23
$ 50,929.84
$ 275,901.93
$ 500,000.00
$500,000 Payment
New Loan Balances
$2,957,509.05
$869,821.59
$4,712,079.57
$8,539,410.21
In FY 2017-18, residual repayments received by the City/Housing Authority for the existing loans
were as follows:
Program Account
Amount
HOME 13018002-56901
$134,014.11
Tax Increment 60718002-56901
$ 84,172.36
Tax Increment/CHFA 60718002-56901
$ 24,612.54
Total
$242,799.01
The above annual receipts provide the scope of the revenues to be deferred as a result of the
recommended action.
The City is not forgiving any of the current debt or accrued interest, merely extending the term an
additional 55 years and Jamboree is not requesting any new funds in support of the proposed
rehabilitation.
Approve Commitment to Resubordinate Loans for Cornerstone Apartments
November 20, 2018
Page 6
Steven A. Mendoza
Executive Director
Community Development Agency
APPROVED AS TO FUNDS AND ACCOUNTS:
Kathryn Dowhs, CPA
Executive Director
Finance and Management Services Agency
Exhibits: 1. Request for Consent from Jamboree Housing Corporation
2. Commitment to Resubordinate Existing Affordable Housing Loans and
Increase Rents
3. Cornerstone Apartments Site Needs Assessment
4. List of City Loans as of June 27, 2018
5. Analysis by Keyser Marston Associates
EXHIBIT 1
Jamboree
411,
September 28, 2018
Judson Brown
Housing Division Manager
City of Santa Ana
Community Development Agency, Housing and Neighborhood Development Division
20 Civic Center Plaza (M-26)
Santa Ana, CA 92701
RE: Wakeham Grant Apartments Request for Resubordination
Dear Judson:
As you know, we have been diligently working to balance the capital needs evident onsite at
Wakeham Grant Apartments ("Cornerstone") with the available capital since earlier this year.
Located in one of the most expensive counties in California to live, we understand the value of
every affordable unit in the City's housing stock. The initial rehabilitation of Cornerstone left many
capital needs unmet, and we now have our only opportunity for the next 15+ years to properly
recapitalize the improvements to ensure the long term financial security of these affordable units.
That said, we similarly understand the concern that the City is not receiving any repayment from
this resyndication and have worked to restructure the capital to allow for $500,000 in
sale proceeds to repay the existing City obligation. This revised proposal allows us to
properly recapitalize Cornerstone to ensure the financial health of the property for the next 15
years, as well as address several goals outlined in the City Strategic Plan.
We have generated a superior debt offer from Union Bank yielding about $1 million in additional
debt proceeds. It is important to understand that while the budget has decreased, short of the
loss of the community building, the overall scope of the rehab remains largely the same. In most
cases, we were able to identify VE opportunities stemming from using materials that were lower
cost, but of a quality necessary to preserve the long term economic health of Cornerstone. One
such example is identifying the silicon product for the reroofing, which costs a fraction of the TPO
overlay roof but maintains both the cool roof properties as well as the 20 year warranty.
J A M B 0 R E E H 0 U E I N G C 0 R P 0 P A T 1 0 N
REGIONAL DFFICES.
SACRAMENTO AND SAN DIEGO
17701 COWAN AVENUE SUITE 200 IRVINE CA 92614
P84.9.263,9676
F 949 263 0647
jamboreehousing. com
EXHIBIT 1
We therefore respectfully submit the following proposal requesting the subordination
of $8,632,441 of the current City debt and accrued interest as well as approval to level rents at
the full 50% TCAC level. This will allow us to recapitalize Cornerstone at a level necessary for
a 60 year old asset, as well as address some of the major concerns expressed in the community
needs assessment previously. Due to the significant level of rehabilitation currently proposed,
we are hopeful that there will be sufficient contingency to install a modular community building
where the new building was originally planned. However, until we get deeper into the rehab,
we will not know if this is financially feasible.
We believe the Cornerstone recapitalization will generate significant public benefits, with no new
capital investment required from the City. Nearly $5.5 million in current and future rehabilitation
needs have been identified in the previously submitted Physical Needs Assessment. Reviewing
the cash flow in the last 4 years, there has been on average $201,000 of free cash flow available
for distribution for payment of fees and subordinate loans. Over the next 15 years, assuming 3%
annualized growth, this equates to less than $3.15 million. In short, even assuming capital needs
will not increase with age, the property will not be able to fund the projected needs of the project
in the next 15 years. Not recapitalizing Cornerstone will result in the loss of these units from the
affordable inventory for the City as the property will not be able to support breakeven operations.
Ultimately, this will affect the City Financial Stability Strategic Plan goal, with the potential
foreclosure of the asset that is repaying the existing City debt. Furthermore, this also affects that
Community Health, Livability, Engagement, & Sustainability goal with the potential loss of
affordable units; the linkage between personal health and affordable housing is well established.
Aside from addressing the projected capital needs of the project, we are also responding to what
was communicated to us in the resident needs survey that was shared with City staff. While
TCAC and ADA require us to convert 7 units to full mobility units, it is the loss of parking that is
more impactful. The addition of 7 ADA parking spaces will result in the loss of 14 total parking
spaces for residents. Consequently, we have prioritized adding parking lifts to offset the lost
spaces. Instead of losing these spaces, we are now adding 30 new spaces. As anyone that has
attempted to park in the neighborhood in the evening can attest, any reduction in parking will
affect the quality of life for residents significantly. Recognizing that leveling rents at the 50% AMI
TCAC rents results in rent increases to most units, we are also installing a large solar photovoltaic
system that will reduce energy bills between 50-80% depending on current usage. This will help
offset the increases in rents necessary to support the proper recapitalization of Cornerstone as
well as supports the Community Health, Livability, Engagement, & Sustainability goal of the
Strategic Plan.
CELEBRATING
25YEARS
OF STRONGER
COMMUNITIES
J A M a 0 R E E H 0 U S I N G C O R PC R AT I ON REGIONAL OFFICESSACRAMENTO AND SAN DIEGO
17701 COWAN AVENUE SUITE 200 IRVINE CA 92614 Pd 9.p638e676 F 949.263.0647 www.lamboreehausing.com
EXHIBIT 1
We remain committed to the long term preservation of the Cornerstone project as affordable, but
reiterate the projected capital needs are akin to a ticking time bomb. It is not a question of if, but
rather when they will come due. A shoddy rehabilitation that was completed by the original
developer of this project has resulted in capital needs that jeopardize the economic viability of
these affordable units going forward. We feel strongly that the proposed scope of work will
address these needs, represent good stewardship of public resources, and therefore request the
approval of the project as currently proposed.
We value our continued partnership with the City of Santa Ana and hope you are in agreement
that it has been positive relationship. If you have any questions, please do not hesitate to contact
either John Okura at 949-813-6923 (iokuraOiamboreehousina.com) or Tung Tran at 949-263-
8676 (ttrariftamboreehousina.com).
Sincerely,
Michael Massie
Senior Vice President
Jamboree Housing Corporation
25YEARS ,
s`X.)PAMUNITIES
J AM G ORE E H o U s I N G C 0 R P 0 R A T 1 0 N REGIONAL OFFICES. SACRAMENTO AND SAN DIEGO
17701 COWAN AVENUE SUITE 200 IRVINE CA 92614 Pgg9.Z63§676 F 949 263 0647 www.jemboreehousing.com
EXHIBIT 1
Attachment A.0
Pro Forma Sources & Uses
25YEARS
OF STRONGER
COMMUNITIES
J A M B O R E E H 0 U S I N G C 0 R P O R AT I ON REGIONAL OFFICES: SACRAMENTO AND SAN DIEGO
17701 COWAN AVENUE SUITE 200 IRVINE CA 92614 P 949.263.8676 F 949 263 0647 www.jamhoreehousing.com
80A-10
EXHIBIT 1
Cornerstone
Sources & Uses City of Santa Ana
Inifial Proforma
07/17/17
175,121
USES OF FUNDS•
•N
NEW OR
REHAB COST
ELIGIBLE
HISTORIC
ELIGIBLE
NOT
TOTAL
Land al $1,475,410 Per Acre or $33.87 Per SF
2,700,000
0
0
0
0
2,700,000
21,429
Existing Structure
14,860,000
14,860,000
0
0
0
0
117,937
Other Acquisition Costs
1
1
0
0
0
0
0
Hard Cost Residential 5,087,500 40,377
5,000,000
0
5,000,000
0
5,000,000
0
39,683
Site Improvements
0
0
0
0
0
0
0
General Conditions, Profit & Overhead 0.00%
0
0
0
0
0
0
0
GC Bond / Insurance / Leiter of Credit 1.75%
87,500
0
87,500
0
87,500
0
694
Hard Cost Contingency 10.00%
508,750
0
508,750
0
508,750
0
4,038
Construction Interest (3.5%)al Perm. Rate +-12: 3.50%
524,763
0
28,125
0
28,125
496,638
4,165
Bridge Interest at 10.00%
293
0
0
0
0
293
2
Construction Loan Fees
82,500
0
82,500
0
82,500
0
655
Permanent Loan Fees
98,364
0
0
0
0
98,364
781
Bridge Loan Fees
1
0
1
0
1
0
0
4% Related Costs / Cost of Issuance
287,750
0
275,000
0
275,000
12,750
2,284
Accoun0ng&Audit
20,000
0
20,000
0
20,000
0
159
Appraisal/Market Study
20,000
0
20,000
0
20,000
0
159
Architecture (Architect, Landscape Architect)
570,000
0
570,000
0
570,000
0
4,524
Civil Engineering
60,000
0
60,000
0
60,000
0
476
Construction Manager
125,000
0
125,000
0
125,000
0
992
Consultants (CM, Geo, LEED, Utilities, exc.)
185,000
0
185,000
0
185,000
0
1,468
Environmental (EIR, Phase I, Asbestos. exc.)
50,000
0
50,000
0
50,000
0
397
Financial Advisor/ Syndication Consultant
0
0
0
0
0
0
0
Furnishings
150,000
0
150,000
0
150,000
0
1,190
Parking Lifts
1,303,000
0
1,303,000
0
1,303,000
0
10,341
Lease -up & Marketing Expenses
50,000
0
0
0
0
50,000
397
Legal
190,000
0
145,000
0
145,000
45,000
1,508
MHSA Construction Period Fees
0
0
0
0
0
0
0
�Operating & Debt Service Reserve (3-mo's / debt 3-
345,294
0
0
0
0
345,294
2,740
Other (Admin, Repro. & Reimb.)
15,000
0
15,000
0
15,000
0
119
Other (Bank Inspections)
25,000
0
25,000
0
25,000
0
198
,Other- Bond Negative Arbitrage
0
0
0
0
0
0
0
Allowance- Community Building
0
0
0
0
0
0
0
Permit Fees
127,188
0
127,188
0
127,188
0
1,009
Property Taxes and Insurance
217,500
0
187,500
0
187,500
30,000
1,726
Relocation
150,000
0
150,000
0
150,000
0
1,190
Allowance - PV/ Solar Thermal installation
1,100,000
0
1,025,000
0
1,025,000
75,000
8,730
Soft Cost ConlIngency 8.84%
450,000
0
450,000
0
450,000
0
3,571
Tax Credit Fees (App., Mon., & Res.)
53,000
0
2,000
0
2,000
51,000
421
Title & Recording
45,000
0
32,250
0
32,250
12,750
357
Developer Overhead
0
0
0
0
0
0
0
Developer Fee
2,158,000 1
01
2,083,000
1 -OJ
2,083,000 1
75.0001
17.127
TOTAL USES
31,558,904
14,860,001
12,706,814
0
12,706,814
3,992,090
25D 467
80A-11
80A-12
MAYOR
Miguel A. Pulido
MAYOR PRO TEM
Michele Martinez
COUNCILMEMBERS
P. David Benavides
Vicente Sanniento
Jose Solodo
Sal Tinajero
Juan Villages
November 20, 2018
CITY OF SANTA ANA
20 Civic Center Plaza a P.O. Box 1988
Santa Ana, California 92702
www.santa-ana.ora
Cornerstone Housing Partners LP
c/o Jamboree Housing Corporation
Attn: Laura Archuleta
17701 Cowan Avenue, Suite 200
Irvine, CA 92614
EXHIBIT 2
CITY MANAGER
Raul Godinez II
CITY ATTORNEY
Sonia R. Carvalho
CLERK OF THE COUNCIL
Maria D. Huizar
Re: 126 Unit Affordable Housing Apartment Project Known as Cornerstone Apartments
Located at 805 - 904 South Minnie Street, Santa Ana, California
Dear Ms. Archuleta,
On November 20, 2018, the City of Santa Ana and the Housing Authority of the City of
Santa Ana (collectively, the "City") authorized the City Manager and Executive Director
of the Housing Authority to execute a commitment letter to: 1) resubordinate the current
affordable housing loans for the Cornerstone Apartments at 805 - 904 South Minnie
Street, Santa Ana, California ("Property") to tax-exempt multifamily bonds (Bonds) in an
amount not to exceed $8,700,000 for the rehabilitation of the Property, and 2) execute
the necessary documents to level all rents onsite at the 50% Tax Credit Allocation
Committee ("TCAC") rents instead of the existing State of California Health and Safety
Code rents.
The City previously has made forty-two loans to Wakeham -Grant Apartments L.P.
("Existing Owner') in the aggregate principal and interest amount of $9,132,442 secured
by deeds of trust encumbering all or portions of the Property (individually, a "City Loan"
and, collectively, the "City Loans'). A description of each City Loan is set forth on
Exhibit "A" attached hereto. Cornerstone Housing Partners LP (the "New Owner")
desires to purchase the Property from Existing Owner, in order to obtain a new
construction and permanent tax-exempt loan (the "Senior Loan") to acquire and
substantially rehabilitate the Property, to obtain a seller carryback loan from Existing
Owner to pay a portion of the purchase price for the Property ("Carryback Loan"), to
obtain a new allocation of low income housing tax credits pursuant to Section 42 of the
Internal Revenue Code (`Tax Credits") and to assume the City Loans.
SANTA ANA CITY COUNCIL
WguelA Pul Ushele Marline, Mcente Sarmiento Jose Solono P. David aenavides Juan UJlepes Sal Tinajero
Maya, Mayor Pro Tem. Ward 2 Wad Wada Wad Ward Wad
rmulido®sama-ana.aa mimaAnm0santa-ana.om vsarmiento0sadaana or rA dbenavides0saniaana.sw 'villeaasdurta-ana.ora 54 naierortsanta-ana.ora
EXHIBIT 2
The City now commits itself, subject to the terms of this letter, to permit the New Owner
to assume the City Loans and to subordinate the lien of the deeds of trust securing the
City Loans and the regulatory agreements encumbering the Property related to the City
Loans to the lien of the deed of trust securing the Senior Loan (the "Assumption"), but
not the Carryback Loan on the following terms and conditions:
Borrower: Cornerstone Housing Partners LP
Collateral: Deed of Trust encumbering the Property subordinate to the
Senior Loan, but senior to the Carryback Loan.
Assumed Loan
Amount: Outstanding principal balance and accrued and unpaid interest
on the City Loans, less any net proceeds from the sale of the
Property to New Owner (but excluding the Carryback Loan).
Non -Recourse: The City Loans shall remain non-recourse to New Owner and
the partners of New Owner.
Assumption
Documents: The form of the assumption agreement and Subordination
Agreements for the Senior Loan shall be approved by the City
and Housing Authority after the New Owner obtains their Tax
Credits.
Commitment
Expiration Date: November 20, 2020
Additional Terms: The City and Authority agree to subordinate the City Loans to a
maximum of $8.7 million in Bonds.
The City Loans will continue to be repaid from 50% of the
residual receipts generated by the Project.
Residual receipts will be defined as cash flow remaining after
payment of approved cash operating expenses, Bond debt
service, repayment of the deferred Developer Fee, and payment
of approved Limited and General Partner asset management
fees.
100% of the Project's cash flow after payment of operating
expenses and Bond debt service will be allocated to repaying
the deferred Developer Fee.
The payment of Limited Partner asset management fees will
terminate at the end of 15 years.
• I .
EXHIBIT 2
The rents may be increased at the Property up to 50% of Area
Median Income. Prior to the levying of any rent increase,
Jamboree will provide a minimum 60 -day notice instead of the
statutory 30 -day notice.
This Commitment contains the entire understanding between New Owner and the City
with respect to the Assumption, supersedes all prior oral or written communications, and
may not be modified or waived except in writing, and signed by the party to be bound
thereby. This Commitment and all Assumption documents shall be governed by
California law. This Commitment is personal to New Owner and is not assignable or
transferable by New Owner. The fulfillment of this Commitment is subject to the
approval of various Subordination Agreements and Amendments to the Loan
Agreements by City Council and the Housing Authority.
If you have any questions or require any additional information regarding this
Commitment, please contact Judson Brown, Housing Division Manager, by telephone at
(714) 667-2241 or by e-mail at ibrown(a)santa-ana.org.
Sincerely,
Raul Godinez II
Steven A. Mendoza
City Manager
Executive Director
City of Santa Ana
Housing Authority of the City of Santa Ana
,
Jamboree
CORNERSTONE NEEDS ASSESSMENT
March 2018
Demographics & Methodology:
Median Income - Comparison
80000
60000
0000
20000
0
Wakeham/Grant City of Santa Ana County of Orange
Jamboree commissioned focus groups and one-on-one interviews:
• Monolingual Spanish and Monolingual Khmer residents
• Spoke to 21% of households
• 90% of participants are foreign -born
Themes from Focus Group:
1. Working Class
• Hard-working; trying their best to get ahead
• Long-term residents are connected to this neighborhood
2. Determined
• Want to learn English and get better jobs
• Want kids to be able to go to college
3. Misinformed
• Limited access to resources and trainings they are interested
in (like ESL, workforce programs)
• Want to better understand the school system
4. Interested in Mental Health Services and Access to Basic Needs
EXHIBIT 3
Wakeham/Grant Breakdown
of Race
- Latino/Hispanic - Asian - White = Other
Average Age at Wakeham/Grant:
30 years old
"1 know people drive through our
neighborhood and assume we are poor
or do not have an education. But some
of us come to this country with a
wealth of experiences. Some of us
attended the university in our home
country.
We are simply having a difficult time in
the U.S. But it takes time. We have the
will to excel and programs like
Jamboree are helping us."
"Man, some people just need time to breathe... Parents are tired. People work endless hours to
make ends meet. We come home and hear all the yelling. I feel for them. I know there isn't much I
can do, but if Jamboree can help them with parenting classes, or something like that — we need
that — kids need that support. Supportfor their parents."
80A-17
Jamboree
dk
Service Recommendations
• ESL Classes
• Workforce Development classes
• FAFSA and College workshops
• After School Program
EXHIBIT 3
• Mental Health programs/Parenting Skills classes
• Food Access
• Create Resident Leadership group to help plan and
promote programs
�
m
j
Ed
Foorlymcl
EXHIBIT 5
,G01>
KEYSER MARSTON ASSOCIATES,
ADVISORS IN PUBLIC/PRIVATE REAL ESTATE DEVELOPMENT
MEMORANDUM
ADvisORs IN:
Real Estate
To:
Judson Brown, Housing Division Manager
Affordable Housing
Economic Development
City of Santa Ana
BERKELEY
A. Jerry Keyser
From:
Kathleen Head
Timothy C. Kelly
Debbie M. Kern
David Doezema
Date:
November 8, 2018
LOSANGELFS
Kathleen H. Head
James A. Rabe
Gregory D. Soo -Hoo
Subject:
Cornerstone Apartments Rehabilitation Analysis
Kevin E. Engstrom
Julie L. Romey
SAN DIEGO
Paul C. Marra At your request, Keyser Marston Associates, Inc. (KMA) evaluated the proposal
submitted by Jamboree Housing Corporation (JHC) to restructure the financial
transaction for the 127 -unit Cornerstone Apartments (Project). The purpose of the KMA
analysis is to assess the impact of the proposed transaction on the loans that the City of
Santa Ana (City) and the Housing Authority of the City of Santa Ana (Housing Authority)
provided to the Project.
BACKGROUND STATEMENT
In 2001 and 2003, the City and the Authority provided 42 loans to a partnership that
used the loans to fund a portion of the costs incurred to acquire and rehabilitate the
Project (City Loans). The balance of the Project costs were funded with Tax -Exempt
Multifamily Bonds (Bonds) and 4% Low Income Housing Tax Credits (Tax Credits). As
requirements of the Bonds/Tax Credits and the City Loans, long-term income and
affordability covenants were imposed on the apartments. Specifically, the covenants
require the units to meet the following standards:
1. The units must be rented to very -low income households that earn less than 50%
of the area median income (AMI). The definition of very -low income is provided
in California Health and Safety Code Section 50105 (H&SC Section 50105).
500 SOUTH GRAND AVENUE, SUITE 1480> LOS ANGELES, CALIFORNIA 90071 > PHONE 213.622.8095
W W W.KEYSERMARSTON.COM
80A-21
1810020.SNA:KHH
19190.017.003
Judson Brown, City of Santa Ana
EXHIBIT 5
November 8, 2018
Cornerstone Apartments Rehabilitation Analysis Page 2
2. The very -low income rents must be calculated using the methodology defined in
H&S Section 50053.
The Project was structured as a partnership comprised of the developer as the General
Partner and the Tax Credit investor as a Limited Partner. It is important to understand
that the Limited Partner's role was limited to a passive investment that is tied to the tax
benefits provided by the Tax Credits and the related tax losses. As is typical, after the
initial 15 -year compliance period imposed by the Internal Revenue Service (IRS), the
Limited Partner chose to exit the partnership.
In May 2018, the City Council and the Authority Board approved JHC's request to
purchase the Limited Partner's interest in the Project. Following the purchase, JHC
proposed to form a new partnership for the purposes of obtaining new Bond financing
and resyndicating the Tax Credits. These funds are proposed to be used to pay for the
acquisition costs and to substantially rehabilitate the Project.
ANALYSIS
The KMA analysis evaluates the following components of the proposed transaction:
1. Does the proposed acquisition price represent the Project's fair market value?
2. Is JHC receiving any proceeds from the sale of the Project to the newly formed
partnership?
3. Is the proposed rehabilitation scope necessary for the continuing operation of
the Project in at a decent, safe and sanitary quality level?
4. Is the Developer Fee amount that is included in the Project's budget warranted?
5. JHC is requesting that the City and the Housing Authority modify the affordability
covenants to allow the rents to be based on the Tax Credit rents for households
at 50% of the AMI. These rents are published annually by the California Tax
Credit Allocation Committee (TCAC).
a. What is the average amount of the monthly rent increase per unit?
How will the proposed modification to the rent setting methodology
impact the rents paid by existing tenants?
1830020.8NA:KHH
19190.017.003
80A-22
Judson Brown, City of Santa Ana
EXHIBIT 5
November 8, 2018
Cornerstone Apartments Rehabilitation Analysis Page 3
C. Is the proposed modification to the rent setting methodology necessary
to support the proposed acquisition and rehabilitation activities?
6. Is it reasonable for the City and Authority to agree to subordinate the City Loans
to up to $8.7 million in Bond financing?
Proposed Acquisition Price
The newly formed partnership is proposing to acquire the Project for $17.56 million. In
an appraisal dated August 16, 2018, the Kinetic Valuation Group, Inc. (KVG) determined
that the Project's fair market value is $17.5 million. The less than 1% difference
between the appraised value and the proposed acquisition cost can be considered
inconsequential.
Sales Proceeds Allocation
The $17.56 million in sales proceeds are proposed to be distributed as follows:
1. The sales price is offset by a credit to reflect immediate capital repair needs
required by the Project.
2. The principal and interest balance on the existing Bonds will be repaid.
3. The prepayment penalty that is imposed on the existing Bonds will be paid.
4. The exit taxes incurred by the Limited Partner will be paid.
5. The City will receive a $500,000 payment that will be used to reduce the
principal balance of the City Loans.
6. The remaining principal and interest balance on the City Loans is deducted from
the sales proceeds, and will be assumed by the newly formed partnership.
A JHC note and accrued interest related to capital repairs costs are deducted
from the sales proceeds, and will be assumed by the newly formed partnership.
8. The remaining balance of the sales proceeds will be structured as a seller
carryback loan. The seller carryback loan will be repaid over time from the 50%
of the Project's cash flow that JHC is entitled to receive.
1810020.SNA:KHH
19190.017.003
EXHIBIT 5
Judson Brown, City of Santa Ana November 8, 2018
Cornerstone Apartments Rehabilitation Analysis Page 4
The sales proceeds are proposed to be allocated in a typical fashion. The proposed
allocation complies with the City Loans prohibition on JHC receiving any cash proceeds
from a sale of the Project until the City Loans are fully repaid.
Proposed Rehabilitation Scope
JHC engaged EMG to conduct a Physical Needs Assessment (PNA) for the Project that
complies with the requirements imposed by the California Tax Credit Allocation
Committee and by Fannie Mae. The PNA was used as a starting point in the
development of a proposed rehabilitation scope for the Project. In addition, based on
the results of a resident needs survey, JHC is proposing to add parking lifts to the Project
which will provide 30 additional parking spaces. JHC is also proposing to install a solar
photovoltaic system to serve the Project.
It is anticipated that the execution of the proposed rehabilitation scope will meet the
physical needs exhibited by the Project over the next 15 years. The proposed scope also
meets tenants' needs by providing additional parking and a solar voltaic system that will
reduce the energy costs incurred by the tenants.
Developer Fee
The Developer has included a $2,158,000 Developer Fee in the Project's budget. This
Fee represents approximately 15% of the development costs excluding the Project
acquisition costs. The proposed Developer Fee comports with the requirements
imposed by the Tax Credit program. Moreover, it is KMA's opinion that given the
amount of rehabilitation work that is proposed to be undertaken, a Developer Fee of
this magnitude is acceptable.
It should also be noted that the Developer has agreed to defer $1,050,000 of the
Developer Fee. This represents nearly half of the total Developer Fee amount. The
deferred amount will be recouped from the cash flow generated by the Project over
time.
1810020.SNA:KHH
19190.017.003
EXHIBIT 5
Judson Brown, City of Santa Ana November 8, 2018
Cornerstone Apartments Rehabilitation Analysis Page 5
Affordable Rent Calculation Methodology Issues
Average Rent Increase
Prior to the JHC submission of a resyndication proposal, the City had informed JHC that
the rents being charged at the Project did not comply with the rent calculation
methodology imposed by H&SC Section 50053. As part of the resyndication proposal,
JHC is requesting that the affordability covenants be modified to allow the use of TCAC
rents at 50% of AMI. If this modification is approved, the average rent paid by the
tenants is estimated to increase by an average of $25 per month over the amounts
currently being paid.
Impact of the Proposed Rent Increase on the Tenants
The proposed rehabilitation scope includes the installation of a solar photovoltaic
system. It is anticipated that that this system will result in decreased electricity costs for
the tenants, and will protect the tenants from potential increases over time. Utilities
cost reductions would reduce the impact of the rent increases being proposed by JHC.
Financial Feasibility
The rent increase being proposed by JHC is projected to increase the supportable.Bond
amount by approximately $800,000. The increased Bond funds would be used to make
an upfront payment of $500,000 on the City Loans, with the balance dedicated to
rehabilitation costs. Without the rent increase it would not be possible to provide any
upfront payment of the City Loans, and the rehabilitation scope would need to be
reduced.
Subordination Issues
JHC is proposing that the City and Authority allow the City Loans to be subordinated to a
maximum of $8.7 million in Bonds.' This is $4.75 million more than the $3.95 million in
existing Bond debt. To evaluate this issue, KMA undertook the following analyses:
1. A 55 -year cash flow projection for the transaction being proposed by JHC; and
'The Bond amount is currently estimated at $8.63 million.
1810020.SNA:KHH
19190.017.003
EXHIBIT 5
Judson Brown, City of Santa Ana November 8, 2018
Cornerstone Apartments Rehabilitation Analysis Page 6
2. A 55 -year cash flow under which the City Loan continues to be subordinated to
the existing $3.95 million Bond, and the rehabilitation costs must be paid for
from the cash flow generated by the Project over time. For analysis purposes,
the future cash flows are discounted to the present value at a 10% rate.
The results of the KMA analyses are summarized below. The detailed projections are
presented in Appendices A and B, which follow this memorandum.
Resyndication Supportable
Analysis Cost Analysis
I. Resyndication Cost Analysis
A. Direct Rehabilitation Costs 2 $8,149,000 $8,149,000
B. Available Rehabilitation Cost Funding
NPV of Project Cash Flow 3 $2,932,000
Available Funds During Construction 518,000
Total Available Rehab Cost Funding $8,149,000 $3,450,000
C. Shortfall --$0-- $4,699,000
As a Percentage of Direct Rehab Costs 58%
II. Loan Subordination Amount $8,631,000 4 $3,950,000
III. City Loan Repayment
Upfront Payment $500,000 $0
NPV of Repayment Over 55 Years 42,000 88,000
NPV City Loan Repayment $542,000 $88,000
IV. Outstanding City Loan Balance —Year 55 $21,084,000 $18,065,000
' Based on the pro forma analysis included in the 1HC proposal letter dated October 3, 2018.
3 Net present value (NPV) calculations are based on a 10% discount rate.
4 Current estimate of the Bond amount. The subordination amount is capped at $8.7 million.
1810020.SNA:KHH
19190.017.003
FO ' M T,
EXHIBIT 5
Judson Brown, City of Santa Ana November 8, 2018
Cornerstone Apartments Rehabilitation Analysis Page 7
As can be seen in the preceding table, if the rehabilitation costs are funded solely from
the cash flow generated by the Project over a 35 -year period, the supportable costs are
projected to be limited to $3.45 million. This is approximately $4.7 million less than the
estimated direct costs to complete the proposed rehabilitation scope. In other words,
only 42% of the proposed rehabilitation scope could be completed under this scenario.
The JHC proposal includes an upfront payment of $500,000 to reduce the principal
balance of the City Loans. When the net present value of the residual receipts
payments are included, the present value of the City Loans repayment is estimated at
$542,000. Comparatively, the net present value of the payments under the alternate
scenario are projected at $88,000.
It should be noted that under both alternatives, the available cash flow is projected to
be insufficient to cover the 3% simple interest that currently accrues on the City Loans.
At the end of the 55 -year period, the outstanding principal and interest balance is
projected at $21.1 million under the structure proposed by JHC, and $18.1 million under
the alternate scenario.
TRANSACTION STRUCTURING RECOMMENDATIONS
Based on the results of the preceding analysis, KMA offers the following
recommendations for the financial components of the transaction:
1. The 42 City Loans should be consolidated into three loans that are tied to the
funding sources that were originally used to fund the loans.
2. The City and Authority should agree to subordinate the City Loans to a maximum
of $8.7 million in Bonds.
3. The City Loans should continue to be repaid from 50% of the residual receipts
generated by the Project.
4. Residual receipts should be defined as cash flow remaining after payment of
approved cash operating expenses, Bond debt service, repayment of the
deferred Developer Fee, and payment of approved Limited and General Partner
asset management fees.
1830020.SNA:KHH
19190.017.003
80A-27
Judson Brown, City of Santa Ana
EXHIBIT 5
November 8, 2018
Cornerstone Apartments Rehabilitation Analysis Page 8
a. To comply with IRS timing regulations, 100% of the Project's cash flow
after payment of operating expenses and Bond debt service will need to
be allocated to repaying the deferred Developer Fee.
b. The payment of Limited Partner asset management fees should
terminate at the end of 15 years.
C. The repayment of the seller carryback loan should not be treated as a
Project cost. Instead, the repayment should be derived solely from JHC's
50% share of the Project's residual receipts.
5. It is anticipated that the residual receipts payments generated by the Project will
be insufficient to cover the 3% simple interest obligation currently imposed on
the City Loans. This will likely result in a large balloon payment obligation at the
end of the term. It may be advisable to consider reducing the interest rate that
is imposed on the City Loans to mitigate this financial burden.
1810020.SNA:KHH
19190.017.003
FO •
10::11.1kip
APPENDIX A
t
RESYNDICATION ANALYSIS
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