PURPOSE

The purpose of this report is to provide information to the City Council and Redevelopment Agency Board to consider approval of a subordination agreement as requested by the Developer, United Cerebral Palsy (UCP), on behalf of its lender:  State Department of Housing and Community Development (HCD), which administers the Multifamily Housing Program (MHP). A MHP loan has been awarded to UCP for Casa Providencia, an independent living facility located at 600 South San Fernando Boulevard, conditional on the aforementioned agreement.

BACKGROUND

On May 9, 2000, City Council and Agency Board approved entitlements and executed a Disposition and Development Agreement (DDA) for the construction of an 18-unit independent living facility restricted to very low-income, disabled households, now known as Casa Providencia.  The development includes four two-bedroom units (inclusive of one manager�s unit) and 14 one-bedroom units.  Prior to project approval, the Agency acquired the .4 acre site at 600 S. San Fernando Boulevard and ultimately conveyed the site at no cost to UCP for the development of the project (the reuse value of the property).

As part of the 2000 project approvals, a specific funding plan was approved and included a variety of funding sources:  Federal Affordable Housing Program (AHP) grant proceeds; Federal Department of Housing and Urban Development (HUD) Section 811 grant funds; developer equity funds; City HOME funds; and Agency Affordable Housing funds.  The 2000 documents acknowledged the highly competitive nature of the Federal Section 811 grant funding process and allowed for a subsequent consideration/approval process should this specific funding not be granted.    

On May 8, 2001, the City Council and Agency Board approved the First Amendment to the DDA that authorized UCP to apply for a second round of Section 811 funding (the first application submitted by UCP was not approved by HUD as the grant administrators inadvertently overlooked the site control documents in UCP's application).  After a second application, UCP received an award of Section 811 funds.  Under the Section 811 program, HUD advances funds to nonprofit organizations to develop and construct rental housing with supportive services for very low-income persons with disabilities, achieved through a double subsidy from HUD.  From a development standpoint, the nonprofit sponsor receives a capital advance to finance new construction of rental housing, funds that are interest free and not repaid if the housing remains available to these special needs household for at least 40 years.  In addition, the program provides annual operating subsidies to bridge the gap between the rental income and the project�s operating expenses.  In doing so, this allows UCP to accept very low-income households without affecting the financial feasibility of the project.

On September 16, 2003, the City Council and Agency Board approved a Second Amendment to the DDA approving an additional $151,544 in HOME Funds to the project to meet a financial gap that was not covered by the Section 811 Loan ($2,148,100), other fundraising efforts, and UCP�s own equity in the project.  With the additional $151,544, the total City and Agency contribution to the project was $1,461,544 ($560,000 in the land write-down and $901,544 in City HOME funds used to defray Agency assemblage costs including relocation payments, abatement and demolition).

In 2004, UCP was awarded $1,314,166 in State Multifamily Housing Program (MHP) loan funds though Proposition 46, the Housing and Emergency Shelter Trust Fund Act which was approved by California voters in 2002.  Prop. 46 made available $910 million for rental housing aimed for low-income seniors, disabled persons and families with children.  The award of Proposition 46 funding replaced the Federal AHP funds as originally envisioned.  HCD administers the MHP and requires the subordination of affordability covenants, if any have been placed on the project.

Casa Providencia was completed in March of 2006.  All 18 units are occupied and UCP maintains a waiting list.

ANALYSIS

State MHP loan funds are awarded as permanent financing for projects that meet the requirements of an MHP Supportive Housing Development such as Casa Providencia.  As a condition to closing escrow (September 2004), the UCP Foundation of Los Angeles and Ventura Counties advanced funds (in the amount of $785,340) to the project (Burbank Accessible Apartment Corporation) subject to repayment from State MHP loan proceeds upon development construction completion.  That advance, along with the Section 811 funds was the evidence of financing as required by the approved City and Agency Agreements. 

With the project complete, a Certificate of Completion by the City and Agency was recorded in August 2006.  In late May 2007, staff was informed by UCP that escrow on the State MHP loan funds (term of 55 years, bearing 3% simple interest) was scheduled to close in late June (later amended to July 31, 2007).  As previously mentioned, HCD requires the subordination of the City�s/Agency�s affordability covenants as provided for in the proposed Subordination Agreement (Exhibit A).  In addition, HCD requires the City and Agency to consent to certain documents as required by HCD�s funding program, including a deed of trust, a rider to the deed of trust, the HCD regulatory agreement, the promissory note, and escrow instructions (collectively attached as Exhibit B).  Funding of the State MHP loan will allow UCP to repay the advance as stated earlier; cover fundraising originally anticipated but not received; and cover UCP�s equity contribution to the project.  UCP contends (and staff agrees) that UCP�s equity contribution could be better utilized to cover costs associated with programming for its residents.  The balance of the State MHP funds will be used to cover cost overruns of the project of more than $400,000 as identified by UCP.

The 2004 State MHP loan funds, which were awarded by the HCD, directly to UCP, require subordination of the City�s and Agency�s affordability requirements.  Therefore, should the developer not continue to make its loan commitments, HCD could call the developer in default and become owner of the project. In turn, HCD could begin charging market rental rates, although this is considered very unlikely.  Furthermore, as explained below, there are mechanisms to ensure the long term affordability covenants. Section 311.6 of the DDA and Second Implementation Agreement requires the City and Agency to make the affordability covenants set forth in the Agreements and the Regulatory Agreement, junior and subordinate to the deeds of trust and other documents required in connection with the construction and permanent financing for the project, as to all HUD Capital Advance Documents, and as to other financing which has been approved by the Agency Executive Director as long as the City and Agency find that a subordination agreement contains written commitments which are �...reasonably designed to protect the investment of the City and Agency in the event of a default, such as any of the following:  (a) right to cure a default on the loan prior to foreclosure; (b) a right of City/Agency to negotiate with the lender after notice of default from the lender and prior to foreclosure; (c) an agreement that if prior to foreclosure of the loan, City/Agency takes title to the property and cures the default on the loan, the lender will not exercise any right it may have to accelerate the loan by reason of the transfer of title to City/Agency; and (d) a right to reacquire the property from the Developer after a material default on the loan.�   Although this section only requires any of the above protections, the proposed subordination agreement provides all four of these protections to the Agency and City.   

FISCAL IMPACT

There is no fiscal impact associated with the approval of the proposed subordination agreement.  However, should the City Council and Agency Board not approve the subordination agreement, UCP will be forced to raise $1,314,166 that would otherwise be funded by the State MHP loan.  That funding plan may possibly include,  a new request from UCP for additional funding assistance from the City and/or Agency.  Additionally, while there are no immediate financial impacts associated with the approval of the proposed subordination agreement, should UCP default on its MHP loan, the City and Agency could elect to cure that default by reimbursing the State MHP funds, which could total a maximum of $1.3 million.  However, if such a default were to occur, the City Council and Redevelopment Agency Board would have the opportunity at that time to consider the additional investment to cure the default as a separate and future action.  The approval of the subject subordination agreement does not commit any additional future City and/or Agency funding, whatsoever.      

RECOMMENDATION

Staff recommends the City Council and Agency Board adopt the resolutions approving the subordination agreement as requested by the developer, UCP on behalf of the State Department of Housing and Community Development and as required for the dispersment of a State of California Multifamily Housing Program loan in the amount of $1,314,166.

LIST OF EXHIBITS

Exhibit A � Subordination Agreement

Exhibit B � HCD�s Required MHP Documents