PURPOSE

The purpose of this report is to provide information to the Burbank City Council (City Council) and Burbank Redevelopment Agency Board (Agency Board) to consider agreements that will restructure the City�s and Agency Board�s financing to the Burbank Housing Corporation (BHC) for the residential properties owned and/or leased and operated by BHC as affordable rental housing in the City�s Focus Neighborhoods. 

BACKGROUND

Since 1997, the City of Burbank (City) has implemented a pro-active approach to neighborhood revitalization in partnership with the Burbank Housing Corporation.  The City and Agency Board have extended funding to BHC to assist in the acquisition and rehabilitation of distressed residential properties as a strategy for upgrading neighborhoods in decline.  By investing resources to improve the housing stock, provide affordable housing opportunities, and develop neighborhood-based Family Resource Centers, BHC has improved the quality of life for Burbank residents in the Elmwood, Verdugo-Lake, Golden State, and Peyton-Grismer Focus Neighborhoods.  Most recently, the Agency Board has also identified the Lake-Alameda Focus Neighborhood for such revitalization efforts.

Affordable Housing Properties

BHC currently operates or is in process of rehabilitating residential properties containing over 200 rental-housing units within the City�s Focus Neighborhoods.  Each of these properties contains housing units that are affordable to lower and moderate-income households.  The table below shows the addresses and number of housing units currently being operated or rehabilitated by BHC within the City�s Focus Neighborhoods. 

Family Resource Centers

In addition to the affordable housing properties, BHC operates four Family Resource Centers within the City's Focus Neighborhoods.  The Elmwood, Verdugo, Golden State, and Peyton-Grismer Family Resource Centers integrate community-serving uses into the affordable housing properties operated by BHC.  The centers are professionally operated and provide after-school homework assistance and mentoring programs for youth in the Focus Neighborhoods and include other community building programming such as English as a Second Language (ESL), parenting, and household finance management classes.  Two of the Family Resource Centers, Golden State and Peyton-Grismer, became operational within the past month.

Childcare Centers

BHC also owns and manages operations of the Burbank Housing Corporation Childcare Center (BHC Childcare Center) in the Golden State Focus Neighborhood.  The BHC Childcare Center provides 92 spaces of accredited childcare services and is operated under contract with Knowledge Learning, a nationally recognized childcare provider.  A portion of the childcare spaces is subsidized and provides more affordable rates to lower and moderate-income households.  It is anticipated that BHC will also manage operations of the new Buena Vista Family Childcare Center, which is currently under construciton and anticipated to open in January 2007.

City and Agency Board Financing Assistance to BHC

Historically, the Agency Board has provided financing to BHC to acquire and rehabilitate the affordable housing properties and develop the Family Resource Centers that serve households who reside in the properties.  Generally, the Agency Board�s financing has been project specific and predicated upon the minimum amount of public assistance warranted to ensure that the revenues generated from each property are sufficient to operate the property and fund reserves.  However, this financing structure does not support BHC�s growing operational needs as they continue to take on new projects and initiate revitalization efforts in the Lake-Alameda Focus Neighborhood.      

BHC's Future Goals

As stated above, since 1977, BHC has expanded their services to the Burbank community to include: management of affordable residential properties that contain over 200 housing units; operation of four Family Resource Centers within the City's Focus Neighborhoods; and operation of the BHC Childcare Center.

BHC's future goals inlcude:

• Increasing their inventory of affordable housing units in Burbank from 200 to 400 units by 2011;

• Expanding affordable housing projects into the Lake Alameda Focus Neighborhood;

• Maintaining operation of existing affordable housing units, Family Resource Centers and Childcare Center; and

• Initiating operations of Buena Vista Family Childcare Center.

These goals will require greater organizational capacity of BHC.  The intent of the debt restructuring actions outlined in this report is to provide BHC with the financial flexibility and resources that will enable BHC to attain their service goals to the Burbank community. 

ANALYSIS

BHC�s Operating Expenses

There are costs associated with operating the affordable housing properties as well as the Family Resource Centers and Children�s Center.  BHC also incurs administrative costs associated with their own operations (e.g. salaries, etc.).  Historically, BHC has funded these costs with revenues generated by the non-project specific income derived from the affordable housing properties.  Until this year, BHC has successfully managed the affordable housing properties, operated the Elmwood and Verdugo Family Resource Centers and BHC Childcare Center, and paid their administrative costs with revenues generated by the affordable housing properties.

In 2006, however, BHC began to incur new expenses resulting from the operations of two new Family Resource Centers in the Golden State and Peyton-Grismer Focus Neighborhoods.  BHC�s budget for operating the Golden State and Peyton-Grismer Family Resource Centers exceeds $103,000 annually.  In addition, as stated above, it is anticipated that BHC will manage operations of the Buena Vista Family Childcare Center at an estimated cost of $65,000 annually.  BHC also intends to hire additional project management staff to increase their capacity to acquire and rehabilitate affordable housing units.^[[1]]  BHC�s estimated cost to hire one additional project manager is $54,500.  Combined, these additional costs exceed $220,000 annually. 

The table below summarizes BHC�s estimated annual operating expenses, including the additional costs of operating the Golden State and Peyton-Grismer Family Resource Centers, Buena Vista Childcare Center, and hiring of additional project management staff to increase their capacity.  

BHC's estimated operating expenses are approximately $1,696,000.  These operating expenses include, operating costs for all of the affordable housing properties, including annual debt service payments for public and private loans; operating costs of four Family Resource Centers, including the new Golden State and Peyton-Grismer centers; operating costs of four Family Resource Centers, including the new Golden State and Peyton-Grismer centers; operating costs of the BHC Childcare Center and Buena Vista Childcare Center; and BHC's administrative expenses, including hiring additional project management staff in 2006.

BHC's Operating Revenues 

Each of the affordable housing properties are subject to agreements between the Agency Board and BHC that require most of the housing units to be occupied by lower and moderate income households at affordable rents.  The rents generated by the affordable housing properties provide a revenue stream for BHC to maintain its operations.  The revenues generated by the affordable housing properties account for over 90% of BHC�s total estimated revenue.  A Community Housing Development Organization (CHDO) operating subsidy grant provided by the City accounts for the remainder of BHC�s estimated revenue in 2006. 

BHC�s estimated revenues are summarized in the table on the following page.   

BHC's Cash Flow

BHC's estimated operating revenues of $1,554,000 are not sufficient to meet BHC's estimated operating expenses of $1,696,000.  As shown in the table below, BHC faces a potential funding shortfall of $142,000.

Debt Restructuring Proposal

To overcome BHC�s potential funding shortfall and provide a financial resource to assist BHC in attaining its goals for serving the community, staff is recommending that the City and Agency Board restructure their financing to BHC for the affordable housing properties.  The following proposed restructuring actions will increase cash flow available to BHC for their operations and provide a consistent financing and repayment structure for all of the City�s and Agency Board�s financing to BHC for the current and future affordable housing properties.

The proposed financial restructuring actions are summarized below.    

1.      Provide a Loan to BHC to Payoff Private Debt

Currently, the Agency Board�s financing structure requires that BHC hold private debt on several affordable housing properties.  The purpose of the private debt was to limit the amount of Agency Board assistance for a particular project.  BHC must make debt service payments on these private loans.  The properties requiring private debt and the current balances and annual payment amounts are summarized in the table on the following page. 

The table shows that BHC incurs annual debt service in the amount of $131,700 for repayment of the private loans.  Staff is proposing to provide a loan to BHC in the amount $1.76 million to repay the above debts and a $100,000 childcare loan provided by the City.  The proposed Agency Board loan will be secured by all the affordable housing properties and repayable through the residual receipts generated by those properties.   Provision of the loan will reduce BHC�s annual debt service and provide BHC with approximately $131,700 annually in residual income that may be used for their operations. 

2.      Convert Certain Agency Board Loans to Residual Receipts

Certain Agency Board loans require BHC to make fixed annual payments to the Agency Board.  The table below shows the properties and specific annual payment amounts required of BHC.   

Staff is proposing to restructure these loans to residual receipts.  This action will allow BHC to retain an additional $31,900 annually for their operations, prior to making an annual residual receipts payment to the Agency Board.

Staff is also proposing to convert the Peyton-Grismer loan agreement to 100% Residual Receipts.  Currently, the Peyton-Grismer agreement requires BHC to obtain private financing in the amount $2.3 million at project stabilization to repay a portion of the Agency Board�s rehabilitation loan for the project.  The estimated debt service on private financing of $2.3 million, assuming a 30-year mortgage term at 7.5% interest, is approximately $193,000 annually.  By restructuring the Agency Board�s loan to residual receipts, BHC would not be required to obtain the private financing on the properties and would therefore not incur the debt service payable on such a loan. (See Exhibit A for copies of existing Agreements, Promissory Notes, and Deeds of Trust between the City and Agency and BHC.) 

3.      Convert all City HOME and CDBG Loans to Forgivable Loans

The City has extended financing to BHC for specific properties using federal HOME Investment Partnership (HOME) and Community Development Block Grant (CDBG) funds.  These loans total approximately $3.6 million.  Of that amount, approximately $1.2 million is forgivable at the end the respective loans� terms.  The remaining $2.4 million is repayable through residual receipts generated by the respective properties.  This action will convert all HOME and CDBG loans to forgivable loans and result in all future residual receipts payments being credited to the Agency Board�s loans on the residential properties.  Staff has published a proposed amendment to the City�s 2000-2003 Consolidated Plan as necessary to convert the above loans.

4.      Allow BHC to Benefit from the Property Tax Exemptions for Affordable Housing

Currently, BHC benefits from the property tax exemption on all properties except for one located at 1721 Elliot Drive.  This action would allow BHC to apply for the property tax exemption for 1721 Elliot Drive and thereby save BHC an estimated $4,500 annually in property taxes beginning in 2008.  BHC would also be able to apply for the property tax exemption on all future projects.

5.      Provide a Consistent Repayment Structure for all of the Agency Board�s Loans to BHC

Currently, the repayment structure for the Agency Board�s loans to BHC is project specific and varies with each property acquisition.  Each property acquisition has its own repayment terms that require BHC to make separate residual receipts payments to the Agency for each respective property.  In addition, the loan repayment terms for some of the properties do not allow BHC to pay for their operating expenses prior to making payments to the Agency Board.  As a result, not all of the properties currently contribute towards all of BHC�s operations.  

This action would provide a consistent financing and repayment structure for all of the Agency Board�s loans to BHC.  BHC would be able to collect revenues combined from all the affordable housing properties to pay for their operating expenses and fund reserves prior to making one annual residual receipt payment to the Agency Board for all of their loans.  This consistent financing structure would also be used for future property acquisitions.

6.      Administrative Controls

The restructured financing will build in administrative controls ensuring that the revenues generated by the affordable housing properties are used only for BHC�s operations and community services in Burbank.  BHC will amend their Articles of Incorporation to specify that revenues generated by the affordable housing properties may only be used for BHC operations, such as property acquisitions for affordable housing and operation of the Family Resource Centers and Childcare Centers within Burbank.  In addition, BHC will prepare annual budgets and year-end reconciliation statements as well as annual audit statements and reports for determining residual receipts payments to the Agency.^[[2]]

7.      Provide BHC with a 15% Developer Fee on all Future Acquisition and Rehabilitation Projects.

This action provides a long-term solution to assist BHC to increase their capacity in the future.  The proposed 15% Developer Fee paid to BHC will be used to continue their ongoing operations as well as to expand their future operations.  Similar to their use of revenues generated by the affordable housing properties, BHC will amend their Articles of Incorporation to also specify that developer fees may only be used for BHC operations and community services, such as property acquisition for affordable housing and operation of the Family Resource Centers and Childcare Centers within Burbank.  (See Exhibit B for proposed Agreements, Promissory Notes and Deeds of Trust between the City and Agency and BHC.)

Benefits of Proposed Restructuring Actions to BHC

The immediate benefit to BHC of the proposed debt restructuring actions is a decrease in annual debt service costs by approximately $163,600.  These annual savings result from the proposals for the Agency Board to provide a loan to BHC to payoff its existing private debt and restructure certain Agency Board loans to residual receipts.  The estimated savings of $163,600 from these two actions offsets BHC�s estimated shortfall of $142,000 in 2006 and provides sufficient revenue for BHC to maintain their operations at current levels and hire additional project management staff to enhance their capacity to acquire and operate additional affordable housing units.

BHC will also benefit from the proposal to restructure the Peyton-Grismer and 2321 Elliot loan agreements.  Currently, the Peyton-Grismer agreement requires that BHC obtain private financing in the amount of $2.3 million to repay a portion of the Agency Board�s loan to the project.  By restructuring the Agency Board�s loan to residual receipts, BHC would not be required to obtain a private mortgage loan on the properties and would therefore not incur debt service on such a mortgage.  In addition, allowing BHC to benefit from the property tax exemption for the affordable housing units at 1721 Elliot will save BHC an estimated $4,500 annually in property taxes.

Based on an analysis of BHC�s future revenues and operating expenses for the current affordable housing properties, it is anticipated that the proposed debt restructuring actions would provide BHC with sufficient revenues to sustain their operations through 2019.  Beyond that time, the provision of a Developer Fee for future projects combined with a consistent financing structure that will support BHC�s operations prior to payment of residual receipts to the Agency Board will enable BHC to increase their capacity to provide affordable housing and other community services to Burbank residents. 

ENVIRONMENTAL REVIEW

The Agency, acting as the lead agency pursuant to California Environmental Quality Act (CEQA), has determined that the proposed restructuring of the City�s and Agency�s financing to BHC is exempt under CEQA guidelines section 15061(b)(3) pertaining to projects that have no potential of causing a significant effect on the environment.

FISCAL IMPACT

The fiscal impact to the Agency Board of the proposed debt restructuring actions is $1,764,500.  These funds will be provided to BHC in the form of a residual receipt loan to be used to repay several private loans held by BHC as well as a childcare loan owed by BHC to the City.

There are currently sufficient funds in the Low & Moderate Income Housing Unappropriated Fund Balance for these activities.  A budget amendment appropriation is necessary to reallocate $1,764,000 from the Low & Moderate Income Housing Unappropriated Fund Balance Account 305.ND000.30004.0000 to the Focus Neighborhood Account 305.CD23A.70005.0000.13057      

RECOMMENDATION

Staff recommends that the Agency Board adopt the attached resolutions approving agreements that will modify the terms of loans with the Burbank Housing Corporation and a $1,764,000 budget amendment to the fiscal year 2005-2006 budget.

Staff recommends that the City Council adopt the attached resolutions approving agreements that will modify the terms of loans with the Burbank Housing Corporation.

EXHIBITS

Exhibit A          Copies of existing Agreements, Promissory Notes and Deeds of Trust between the City and Agency and BHC   

Exhibit B          Proposed Agreements, Promissory Notes and Deeds of Trust between the City and Agency and BHC

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