2003-12-17 (Report) (2) / JOINT MEETING OF THE
CITY COUNCIL AND THE
HOUSING AUTHORITY OF THE CITY OF
ENCINITAS AGENDA REPORT
Meeting Date: December 17,2003
TO: City Council � •I
VIA: Kerry L. Miller,Ci
FROM: Finance Doartmont Planning&Building Department
Leslie Browder,Director Patrick Murphy,Director
Jay Lembach,Finance Manager Dave de Cordova,Principal Planner
f.
g -Amanda Mills,Housing& Grants Analyst
SUBJECT: Approve permanent financing and ownership arrangements for the Pacific Pines
affordable units by: approving City Council Resolution 2003-75 and Housing Authority
Resolution 2003-01 authorizing the execution a loan agreement with Southwest Community
Bank and transfer of title of the Pacific Pines units to the Encinitas Housing Authority for an
interim period; and authorizing the establishment of a non-profit corporation for purposes of
holding permanent title to and assuming the debt of the units.
BACKGROUND: In March 2003, the City Council approved a plan for acquiring units at the
Pacific Pines Condominiums to be preserved as affordable housing. The City assisted 18
households in all. Two households were assisted to purchase their own units and sixteen units are
owned by the City and occupied by lower income households.
The City Council also authorized the City Manager to negotiate and execute any contract(s)
necessary to carry out this plan. In September 2003, staff issued a Request for Proposals (RFP)to
financial institutions and underwriting firms to finance acquisition costs not covered by grants.
Three companies responded to the RFP. A summary of the proposals is given as Attachment A.
Proposals were evaluated based on cost, financial strength of the company, and experience with
affordable housing projects.
ANALYSIS:
The key issues are described as follows:
FINANCING
Southwest Community Bank submitted the most favorable proposal, offering a term of 30 years
with an interest rate at 90% of the 10-year U.S. Treasury adjusted every six years at the same
spread to the 10-year U.S. Treasury. The interest rate on the 10-year U.S. Treasury was 4.25% on
November 26, 2003. The acquisition of 16 units was completed in early October 2003 at a total
purchase price of$3,899,400. We currently anticipate borrowing approximately $1.9 million to
cover the portion of costs not funded by grants, as well as bank, legal and other related fees. The
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lender will take a security interest in the real property being acquired based on the appraisals
obtained prior to closing on the property. The lender has agreed to waive any prepayment
penalties in the event we wish to accelerate the loan term or make additional payments.
Southwest Community Bank holds assets of $250 million and is headquartered in San Diego
County with its administrative offices in Carlsbad.
INTERIM TITLE
In March, the City Council authorized the creation of a non profit organization to maintain
ownership of the units. The City has taken title to the units on an interim basis while the various
ownership alternatives were being evaluated. Through the financing process, staff has learned
that the City of Encinitas can not carry the debt on or title to the property. Therefore, in order to
complete the process on the permanent financing, the City must transfer title to an eligible entity.
Until the creation of the non-profit organization is complete, including tax-exempt status
approval from both the State and Federal governments, the debt and title must be held by the
Encinitas Housing Authority.
However, this is not a desirable long-term solution as the Encinitas Housing Authority's
ownership of the units would result in a loss of approximately $9,000 in administrative fees
annually. This is because Federal regulations significantly reduce administrative fees for Section
8 vouchers leased in a Housing Authority owned unit. As Section 8 vouchers are being used in
conjunction with these units to make them affordable, the Encinitas Housing Authority would
earn significantly less in administrative fees on the 16 vouchers utilized on the project.
LONG TERM OWNERSHIP
The most beneficial ownership scenario is for the City of Encinitas to establish a non-profit
corporation under Section 501(c)(3) of the Internal Revenue Code that would hold title to the
condominium units. Ownership by a non-profit corporation resolves the Section 8 administrative
fee issue. Another benefit is that a non-profit corporation is completely property tax exempt
according to the Tax Assessor, whereas government agency (including a Housing Authority)
owned units still incur possessory interest tax liability. The bank has indicated that ownership
can be transferred during the loan term incurring only documentation costs. The application
process for non-profit tax exempt status can take approximately six months.
FISCAL AND STAFF IMPACTS• The bank's proposal estimates that the annual debt service
on a loan of $1.9 million with an interest rate of 4.068% would be $110,000. Staff provided
financial projections to the bank for the first fifteen years of the loan term. During that period,
annual net rental income, after deducting operating expenses and an allowance for vacancies, is
expected to average $200,000. A portion of the net income from the project could be used to pay
down the debt on the existing units or reinvested into affordable housing within the City of
Encinitas.
RECOMMENDATION:
I) Authorize the transfer of title of the Pacific Pines units from the City of Encinitas to the
Encinitas Housing Authority.
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2) Approve City Council Resolution 2003-75 and Housing Authority Resolution 2003-01
authorizing the execution a loan agreement with Southwest Community Bank.
3) Authorize staff to begin processing the establishment a non-profit corporation and
application for tax exempt status in order to transfer ownership of the Pacific Pines
condominiums from the Housing Authority to the non-profit corporation. Articles of
Incorporation and By-Laws will be brought to the City Council at a later date for ratification.
i
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I� 3. 3
. ATTACHMENT A
SUMMARY OF PROPOSALS
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ATTACHMENT B
CITY COUNCIL RESOLUTION 2003-75
HOUSING AUTHORITY RESOLUTION 2003-01
RESOLUTION NO. 2003-57
A RESOLUTION OF THE CITY OF ENCINITAS CITY COUNCIL
AUTHORIZING THE TRANSFER OF THE PACIFIC PINES HOUSING
PROJECT FROM THE CITY OF ENCINITAS TO THE HOUSING AUTHORITY,
THE EXECUTION AND DELIVERY OF NOT TO EXCEED $2,000,000
PRINCIPAL AMOUNT OF ITS MULTIFAMILY HOUSING LOAN FOR
PACIFIC PINES HOUSING PROJECT APPROVING DOCUMENTS, MAKING
CERTAIN FINDINGS IN CONNECTION WITH THE EXECUTION AND
DELIVERY OF SAID LOAN
WHEREAS,there is a shortage in the City of Encinitas (the"City") of decent, safe
and sanitary housing which is affordable by persons in the lower end of the income spectrum and
a consequent need to encourage the construction and availability of rental units affordable by such
persons and otherwise to increase the housing supply in the City for such persons; and
WHEREAS, the Housing Authority of the City of Encinitas (the "Authority") is
authorized pursuant to Article 5 of Chapter 1 of Part 2 of Division 24 of the California Health and
Safety Code (the "Act") to provide assistance in financing multifamily residential rental housing
developments; and
WHEREAS, the City purchased 16 units of condominium rental housing project
known as Pacific Pines Condominiums(the"Project")to be owned by the Authority, which Project
is to be located at 1720 S. El Camino Real, Encinitas, California; and
Project; and WHEREAS, the Authority proposed to execute a loan for the acquisition of the
WHEREAS, said loan is to be executed pursuant to a Loan Agreement by and
between the Authority and Southwest Community Bank (the "Bank"), in a principal amount not to
exceed $2,000,000 (the "Loan"); and
WHEREAS, the City has adopted Resolution No. 2003-57 on August 27, 2003
(the "Inducement Resolution")which established the intent of the City to issue bonds to reimburse
the City for the acquisition of the Project; and
WHEREAS,all acts,conditions and things required by the Act,and by all other laws
of the State of California, to exist, to have happened and to have been performed precedent to and
in connection with the execution and delivery of the aforesaid loan exist, have happened,and have
been performed in regular and due time, form and manner as required by law, and the Authority is
now duly authorized and empowered,pursuant to each and every requirement of law, to issue such
revenue bonds for the purpose, in the manner and upon the terms herein provided; and
RVPUBViAM663880 03- 7
aWHEREAS. there has been presented to this meeting supporting
documentation to the Loan in the form of a promissory note, deed of trust and assignment of rents,
and financing statements, whereby the Bank will secure its lien on payments to be made by the
Authority;
NOW, THEREFORE, BE IT RESOLVED, DETERMINED AND ORDERED BY
THE CITY COUNCIL OF THE CITY OF ENCINITAS AS FOLLOWS:
Section 1. Recitals. The above recitals, and each of them, are true and correct.
Section 2. Transfer of Project. The City hereby approves the sale and transfer of the
Project to the Authority. The Authority hereby approves the acquisition of the Project and accepts
the transfer of the project from the City.
Section 3. Loan Agreement. The Loan Agreement (the "Loan Agreement") by and
between the Authority and the Bank, whereby the proceeds of the Bonds are to be loaned to the
Authority for the purpose of financing the Project is hereby approved and the President or the
Executive Director of the Authority is, and each of them are,hereby authorized and directed,for and
in the name of the Authority to execute the Loan Agreement in substantially the form hereby
approved,with such changes therein as the officer executing the same may approve, such approval
to be conclusively evidenced by the execution and delivery thereof.
Section4. Executive Director Authorized t oFstahlisb Final Terms ofSaleof Bond
S.
The Executive Director of the Authority, based on such advice of staff as he may deem necessary,
is authorized and directed to act on behalf of the Authority to establish and determine (i)the final
principal amount of the Loan, which amount shall not exceed $2,000,000; (ii) the interest rates on
the Loan, provided that in the event of a variable rate loan, the maximum interest rate which may
be paid shall not exceed 12%per annum;and (iii)such other matters as may relate to the final terms
and provisions for the Loan as may be consistent with the Loan Agreement.
Section 5. Other Acts. The officers and staff of the City and Authority are hereby
authorized and directed,jointly and severally, to do any and all things, to execute and deliver any
and all documents,including but not limited to,a deed of trust and assignment of rents,a promissory
note,financing statements or any other document requested by the Bank which is deemed necessary
to effectuate the purposes of this Resolution,and any such actions previously taken by such officers
are hereby ratified and confirmed.
Section 6. Special Counsel. The law firm of Best Best & Krieger LLP is hereby
retained as Special Counsel on the terms set forth in its proposal letter on file with the City.
adoption. Section 7. Effective Date. This Resolution shall take effect immediately upon
PASSED, APPROVED AND ADOPTED this 17th day of December, 2003.
RVPUR\KA13\663880 2 "43
AYES:
NOES:
ABSENT:
Mayor
ATTEST:
DEBORAH CERVONE, City Clerk
RVPUBT,AB\663880 3
RESOLUTION NO. 2003-01
A RESOLUTION OF THE HOUSING AUTHORITY OF THE CITY OF
ENCINITAS AUTHORIZING THE TRANSFER OF THE PACIFIC PINES
HOUSING PROJECT FROM THE CITY OF ENCINITAS TO THE HOUSING
AUTHORITY, THE EXECUTION AND DELIVERY OF NOT TO EXCEED
$2,000,000 PRINCIPAL AMOUNT OF ITS MULTIFAMILY HOUSING LOAN
FOR PACIFIC PINES HOUSING PROJECT APPROVING DOCUMENTS,
MAKING CERTAIN FINDINGS IN CONNECTION WITH THE EXECUTION
AND DELIVERY OF SAID LOAN
WHEREAS, there is a shortage in the City of Encinitas (the"City") of decent, safe
and sanitary housing which is affordable by persons in the lower end of the income spectrum and
a consequent need to encourage the construction and availability of rental units affordable by such
persons and otherwise to increase the housing supply in the City for such persons; and
WHEREAS, the Housing Authority of the City of Encinitas (the "Authority") is
authorized pursuant to Article 5 of Chapter 1 of Part 2 of Division 24 of the California Health and
Safety Code (the "Act") to provide assistance in financing multifamily residential rental housing
developments; and
WHEREAS, the Authority proposes to execute a loan for the acquisition of 16 units
of condominium rental housing project known as Pacific Pines Condominiums (the "Project') to
be owned by the Authority, which Project is to be located at 1720 S. El Camino Real, Encinitas,
California; and
WHEREAS, said loan is to be executed pursuant to a Loan Agreement by and
between the Authority and Southwest Community Bank (the 'Bank"), in a principal amount not
to exceed $2,000,000 (the "Loan"); and
WHEREAS,the Authority has adopted Resolution No. 2003-57 on August 27, 2003
(the "Inducement Resolution")which established the intent of the City to issue bonds to reimburse
the City for the acquisition of the Project; and
WHEREAS, all acts, conditions and things required by the Act, and by all other
laws of the State of California, to exist, to have happened and to have been performed precedent
to and in connection with the execution and delivery of the aforesaid loan exist, have happened,
and have been performed in regular and due time, form and manner as required by law, and the
Authority is now duly authorized and empowered,pursuant to each and every requirement of law,
to issue such revenue bonds for the purpose, in the manner and upon the terms herein provided;
and
WHEREAS, there has been presented to this meeting supporting
documentation to the Loan in the form of a promissory note, deed of trust and assignment of rents,
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iand financing statements, whereby the Bank will secure its lien on payments to be made by the Authority;
NOW, THEREFORE,BE IT RESOLVED,DETERMINED AND ORDERED BY
THE HOUSING AUTHORITY OF THE CITY OF ENCINITAS AS FOLLOWS:
1. Section Recitals. The above recitals, and each of them, are true and
correct.
Section 2. Transfer of Project. The Authority hereby approves the acquisition of
the Project and accepts the transfer of the project from the City.
Section 3. Loan Agreement. The form of the Loan Agreement (the "Loan
Agreement")by and between the Authority and the Bank, whereby the proceeds of the Bonds are
to be loaned to the Authority for the purpose of financing the Project is hereby approved and the
President or the Executive Director of the Authority is, and each of them are, hereby authorized
and directed, for and in the name of the Authority to execute the Loan Agreement in substantially
the form hereby approved, with such changes therein as the officer executing the same may
approve, such approval to be conclusively evidenced by the execution and delivery thereof.
(i) Section 4. Executive Director Authaized to Ectabli h Final Terms of Sale
of Bonds. The Executive Director of the Authority,based on such advice of staff as he may dean
necessary, is authorized and directed to act on behalf of the Authority to establish; and determine
the final principal amount of the Loan, which amount shall not exceed $2,000;000; the interest
rates on the Loan, provided that in the event of a variable rate loan, the maximum interest rate
which may be paid shall not exceed 12% per annum; and such other matters as may relate to the
final terms and provisions for the Loan as may be consistent with the Loan Agreement.
Section 5. Other Acts. The officers and staff of the Authority are hereby
authorized and directed,jointly and severally, to do any and all things, to execute and deliver any
and all documents, including but not limited to, a deed of trust and assignment of rents, a
promissory note, financing statements or any other document requested by the Bank which is
deemed necessary to effectuate the purposes of this Resolution, and any such actions previously
taken by such officers are hereby ratified and confirmed.
Section 6. Special Counsel. The law firm of Best Best & Krieger LLP is hereby
retained as Special Counsel on the terms set forth in its proposal letter on file with the Authority.
Section 7. Effective Date. This Resolution shall take effect immediately upon
adoption.
PASSED, APPROVED AND ADOPTED this 17th day of December, 2003.
M AYES:
RVPUB\KAB\663880
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NOES:
ABSENT:
President of the Board of Directors
ATTEST:
Secretary of the Board of Directors
RVPUMAM663880