Housing Successor Agency
MEETING DATE: 10/14/2015
TITLE:
Title
Creekside Promissory Note Purchase
End
FROM:
Tami E. Scott, Administrative Services Director
RECOMMENDATION:
Recommendation
Staff recommends the City Council authorize McCormack Baron Asset Management to purchase the Creekside Promissory Note at a discount of 7.5% for a Net Present Value of $526,415.
Body
BACKGROUND:
The Creekside Project was a 185-unit affordable rental housing community, placed in service in January 2005. Pursuant to a CTCAC (California Tax Credit Allocation Committee) Regulatory Agreement, the affordability period is through 2034. The project was constructed as a 4% bond transaction, with bonds issued by the California Statewide Communities Development Authority.
The Owner of the Project is Cathedral/Creekside L.P. a California Limited Partnership. The original developer and general partner of the Owner was Charles Ashley. The Managing General Partner was and remains, Community Housing Assistance Program, Inc. (CHAPA). The Limited Partner investor was and remains SunAmerica Housing Fund 1035 (Sun). In 2005, Sun exercised its rights, pursuant to the partnership agreement, to remove Charles Ashley's entity as general partner and to replace it with MBS GP 134 LLC, an affiliate of McCormack Baron. Another affiliate, called McCormack Baron Management Inc. provides the property management services at the site.
The Project financing consists of the following with unpaid principal balances as of 12/31/14:
1st Mortgage bond loan, serviced by PNC Real Estate $ 9,042,800
2nd Mortgage bond loan, serviced by Wells Fargo $ 471,447
3rd Mortgage loan, CC RDA (Housing Successor Agency) $ 1,800,000
The 1st and 2nd mortgage loans bear interest of 5.28% and 6.2% respectively and are current. The 3rd mortgage loan (the Housing Agency Loan) is non-interest bearing, and principal payments are payable from 50% of available residual receipts, defined as gross receipts less actual cost of operation, reserves and payments of principal and interest on other loans.
DISCUSSION:
The Limited Partner investor, Sun, originally authorized McCormack Baron Asset Management ("McCormack") to propose a discounted purchase of the Housing Agency Loan to buy-out the $1,800,000 non-interest bearing residual receipts note at a 9.5% discount rate which equates to a value of $351,413. This request was made in an effort to improve the project’s overall financial picture and to encourage Sun America, the limited partner, to continue to advance operating deficits to this troubled property and continue to maintain the property. It also retains the affordability of these 185 units. Additionally, it will make either refinancing or a sale of this property more feasible in the future which would improve the project’s overall cash flow and provide dollars needed for capital reinvestments. Staff received direction from City Council for certain parameters in which a purchase of the note would be considered. After considerable discussion between staff and McCormack, they have agreed to purchase the note at a 7.5% discount for a Net Present Value of $526,415.
Cathedral Creekside continues to require deficit funding annually to maintain breakeven operations. Management has been able to increase rents towards current LIHTC (low income housing tax credit) maximum levels for new move-ins and raise rents for existing. However, even with the additional income and maintaining operating expenses, deficits are projected to continue. The 2015 budget operating deficit was projected at $204,006 of which Sun has funded $143,767 year-to-date. Sun also funded a total of approximately $394,000 in 2014. It is anticipated that Cathedral Creekside Apartments will require significant additional operating funds for 2016.
There have never been any distributions of residual receipts or surplus cash to any of the partners and no payments on the Housing Agency Loan since inception. No distributions are anticipated for the foreseeable future. The Housing Agency Loan, dated July 15, 2003 in connection with an Owner Participation Agreement dated November 1, 2002, doesn’t mature until 2035.
This agreed upon discount rate of 7.5%, subject to City Council approval, provides a benefit to the Housing Agency in the form of current funds available to offset maintenance and carrying costs of existing Housing Agency Assets until disposition and the partial funding of shortages for recent relocation and demolition costs of current Housing Agency rental units. The alternative is to continue to hold the loan until maturity, or wait for a possible earlier sale. In that case, any payment to the Housing Agency would only be made after the 1st and 2nd mortgages are paid in full. The Owner's alternative is to refinance the 1st and 2nd mortgages, requiring the Housing Agency Loan to be re-subordinated and the term extended for an additional 13-20 years.
FISCAL IMPACT:
7.5% Net Present Value of $526,415 to the Housing Fund
ATTACHMENTS:
None