PURPOSE

The purpose of this memorandum is to provide the City Council and the Redevelopment Agency with information to authorize several agreements aimed at restructuring debt on Burbank Housing Corporation owned sites at 237, 257 and 241-243 West Verdugo Avenue, and 220 West Tujunga Avenue (Properties) in the Lake-Verdugo Focus Neighborhood. 

BACKGROUND

The City and Agency have extended funding to the Burbank Housing Corporation to assist in the acquisition and rehabilitation of troubled properties as a strategy for upgrading neighborhoods in decline.   In several instances, the Burbank Housing Corporation secured primary financing from a private lender, Washington Mutual Bank, and turned to the City for gap financing to reduce mortgage costs and fund rehabilitation.  City financing was predicated upon the minimum amount of public assistance warranted to ensure that the revenues from each project, reduced when providing affordable rents, were sufficient to operate the project and fund reserves.  However, this approach to funding projects could not, given the small scale of projects, support Burbank Housing Corporation�s growing operational needs as it continued to take on new projects or its operation of the activity center in the Lake-Verdugo area.

In the Elmwood and Peyton-Grismer Focus Neighborhoods, these additional operational costs are accommodated because the projects are substantially larger (the Peyton-Grismer project is to be 70 units when completed and Elmwood is 65 units) and because Corporation and activity center operational costs were included as part of each project�s budget.

Tonight�s action is to consider several steps that restructure Burbank Housing Corporation�s debt on properties it owns in the Lake-Verdugo Focus Neighborhood.  This action is consistent with several housing objectives and programs adopted by the Agency and City Council as recommended by the Blue Ribbon Task Force on Affordable Housing and as later reiterated at the July 2003 study session on an affordable housing strategy. 

q       Objective: Sustain and Strengthen Neighborhoods

q       Program:  Continue acquisition/rehabilitation activities in focus neighborhoods

Increasing the Burbank Housing Corporation�s operational budget is intended to support staff growth to continue acquiring and operating more projects.  To this end, Agency staff is currently working with the Burbank Housing Corporation to refine a five-year work plan, which outlines the Burbank Housing Corporation�s short and longer-range goals. 

q       Objective: Create community in conjunction with housing

q       Program:  Integrate community-serving uses with housing development

When possible, the Agency is to incorporate community-serving uses within new and existing residential developments that address the needs of the larger neighborhood.  The revenue from the Properties is insufficient to fund adequately the Lake-Verdugo activity center. Increasing Burbank Housing Corporation�s operational budget by reducing debt on these properties will fully fund the activity center�s operations. 

ANALYSIS

The Agency received a proposal from the Burbank Housing Corporation requesting assistance in restructuring debt on several properties in the Lake-Verdugo area (Exhibit A).  The Burbank Housing Corporation is seeking Agency assistance in reducing debt payments thereby generating sufficient cash flow to pay the Corporation�s administrative expenses and the operating costs of the activity center.  Because the 65-unit Elmwood and the 70-unit (after rehabilitation) Peyton-Grismer projects were each assembled at one time, funding was structured to support Burbank Housing Corporation�s staff and to fund services and operational costs at the activity centers within those focus neighborhoods.  Conversely, properties purchased in the Lake-Verdugo Focus Neighborhood, occurred incrementally, one small project at a time.   Consequently, current cash flow is adequate for the Burbank Housing Corporation to meet its debt service obligations, but insufficient to fund the Verdugo Activity Center or the Corporation�s ongoing administrative costs.  Financing the conventional debt on the Verdugo-Lake Properties is described in the Burbank Housing Corporation proposal as funding the �gap� in revenue caused by the Properties.  Up to now, this gap has been bridged by the Elmwood and future Peyton-Grismer project budgets that have been stretched to support operating and personnel costs incurred at the Verdugo-Lake Activity Center, as well as additional administrative costs for the Properties.  However, these other projects cannot continue to fund the shortfall without compromising their operating budgets.  These administrative expenditures include the Burbank Housing Corporation�s personnel costs include the Executive Director, a Program Assistant, and hourly employees at the different activity centers along with contracted services for the Achievement Center Director now asked to oversee all the activity centers, a part-time accountant, property management services, and a construction manager.

q     First Trust Deed Obligations

The Burbank Housing Corporation submitted a proposal requesting Agency assistance in providing $99,000 in annual unencumbered cash flow as an annual allocation for administrative expenses ($50,000) and for activity center operations ($49,000).  This would leave approximately $41,000 for fulfilling debt service obligations.

The outstanding first trust deed loan balances and annual debt service payments for the three conventionally financed properties are summarized below along with an amortized loan held by the Agency on 241 West Verdugo Avenue:

Each of the conventional loans includes a prepayment penalty clause that nullifies most means to reduce these annual mortgage payments[1]; buying down a portion of the loan principal, for instance, is precluded because the prepayment penalty would still occur. 

To reach the Burbank Housing Corporation goal of reducing debt service yearly to $41,000, an additional $65,000 in annual conventional loan payments is required ($106,000 debt payment per year less $41,000 maximum debt service payment goal).   The $65,000 debt reduction goal would be reduced to $56,500 by converting the Agency�s $165,080 amortized loan on 241 West Verdugo Avenue into a residual receipts loan (repaid over 55 years with a simple interest accruing at three percent annually).

q     Financial Assistance Options

Several options viewed as most cost efficient were outlined by Keyser Marston Associates (Exhibit B) to realize annual cost savings of $56,500.

1.      No Refinancing/Agency Funds Annual Cash Flow Shortfall

This strategy would keep the current conventional loans in place and the Agency would fund annually the $56,500 cash flow shortfall. At some later date, the loans may be refinanced with the remaining prepayment penalty repaid.  This approach ignores that interest rates are at an historic 40-year low, with future cost savings limited to the debt service obligation related to the prepayment penalty of $15,700 yearly.  Keyser Marston Associates notes that, while this option requires no significant initial outlay of funds, it has the highest net cost of $796,000 in present value terms ($1 million in nominal terms) of any option analyzed.

2.      257 West Verdugo and 220 West Tujunga Loans are Refinanced

The Agency repays the conventional loans for 257 West Verdugo and 220 West Tujunga plus the prepayment penalties for both properties but maintains the $409,250 loan obligation for 237 West Verdugo.  This approach also allows for a $4,020 annual payment on the Agency�s $165,080 loan.  

Keyser Marston Associates noted that this is the least costly refinancing option to the Agency ($697,000).

3.      Agency Becomes the Project Lender

This technique would have the Agency payoff the three loans and prepayment penalties.  In return, the Agency would receive $41,000 annually in debt service payments, which would equate to $578,000 over 25 years at present value.   This option results in the lowest net cost to the Agency of $677,200, but requires a substantial initial cash outlay.

4.      All Three Loans are Refinanced

The Agency (a) payoff the three conventional loans, then (b) have the Burbank Housing Corporation take out new primary financing at a market rate 30-year fixed loan at 6.82 percent, with the remaining balance carried back by the Agency in a new loan agreement  (Exhibit C) repaid through residual receipts

(a)   Conventional Loan Payoff

The following table points out that the Agency would advance $1,255,200, inclusive of $200,230 in prepayment penalties, to retire the three private loans.  

* Rounded down to the nearest ten

(b) Financing

The Burbank Housing Corporation would then finance the three properties with a new conventional rate loan estimated at $523,000.   This new loan amount assumes a 30-year fixed rate loan at a competitive interest rate, currently 6.82 percent.

The net cost to the Agency would be $732,200, which is the amount of the Agency payoff of the conventional loans of $1,255,200 minus the new conventional loan incurred by the Burbank Housing Corporation of an estimated $523,000.  The new Agency loan would be repaid through residual receipts.[2]

q     Summary of Options

The following table summarizes the relative of each option to the Agency:

Keyser Marston Associates noted that:

• Option1, �No Refinancing,� had the highest net cost but did not require advancing funds to the Properties.

• Option 2, �Two Loans Refinanced,� and Option 4, �Full Refinancing� have the same risk, through Option 2 is less costly.

• Option 3, �Agency as Lender,� has the lowest net cost but necessitates a substantial advance of funds and requires the Agency to accept the risk of the Properties� cash flow being insufficient to meet debt service payments.

• Option 4, �Full Refinancing� has the same risk as Option 2 with a marginal higher cost to the Agency.

q     Proposed Actions

Agency staff is recommending Option 4, whereby the Agency and City are asked to take the several actions affecting 237, 257 and 241-243 West Verdugo Avenue, and 220 West Tujunga Avenue.

1. The Agency adopts Option 4, �Full Refinancing� described above to retire the three Washington Mutual loans. While marginally more costly than Option 2, this approach removes the last of three above market interest rates loans and funds the full amount of administrative expenses outlined in the proposal.  Using Low and Moderate-Income Housing Funds, the Agency would enter into a loan agreement with the Burbank Housing Corporation extending Agency financing to the Burbank Housing Corporation to retire the three Washington Mutual loans in the form of a note secured by a trust deed recorded against the properties.

2. The City and the Agency are to amend several promissory notes with the Burbank Housing Corporation for the purpose of rewriting repayment terms and conditions of operation; and

3. The City and the Agency replace the existing regulatory agreements for each property with a master regulatory agreement recorded on the four Lake-Verdugo properties.

q       Amended City Promissory Notes

The Agency bridged the gap between the achievable conventional loan on each property using the City�s HOME Investment Partnerships Act (HOME) Program or Community Development Block Grant (CDBG) funds subordinated to the bank loan.  Certain loan terms were revised as properties were purchased over time, creating different standards recorded on the Properties.   Since entering into the agreements for the Properties, new terms have emerged, such as revisions to property management fees and to capital replacement reserves.  As amended, the City�s promissory notes (and the Agency�s promissory note on 241-243 West Verdugo Avenue) (Exhibit D) would be altered, so that the notes would have the following common salient terms:

The four City notes and the Agency note would be amended to conform repayment terms (see exhibit below) and allow the Burbank Housing Corporation to retain fifty percent of each property�s net profits defined as the net cash flow after payment of operating expenses and debt service on any amortized loan. This is consistent with the Agency�s recent practice of assisting the Burbank Housing Corporation to develop sufficient funding to operate new activities within focus neighborhoods and to increase administrative capacity to continue taking on new projects. Operating expenses are inclusive of actual cash outlays to operate the Properties, such as maintenance and utility costs.  In addition, the Burbank Housing Corporation is to maintain a capital replacement reserve capitalized at $300 per unit per year, a property management fee of $35 per unit per month and an operating reserve capitalized at two percent of effective gross rent.  Any remaining balance, principal plus three percent simple interest would be due and payable on April 1, 2060.

q       Master Regulatory Agreement

The City and Agency have proposed supplanting the individual regulatory agreements on each of the four projects and record a regulatory agreement (Exhibit E) tying the Properties under one set of terms, conditions and covenants. Housing operations of the Properties will extend into perpetuity, that is, the useful life of the land use controls, but not less than 55 years.

The salient conditions to the existing agreements remain the same, except for discrete changes noted above.  Following is a recapitulation of the key conditions in the Affordable Housing Agreements that will remain intact.

�      Income and Affordability Requirements

Affordability and income covenants would be recorded to ensure that the Properties are affordable to income eligible households with rents that meet affordable rents under Redevelopment Law or Federal HOME regulations.  The maximum monthly rental amount for the restricted residential units within the Properties would be established by the Agency on an annual basis by written notice to the Burbank Housing Corporation, upon publication of annual median income limits by the United States Department of Housing and Urban Development.  Occupancy for the Properties will be mixed-income.  The Burbank Housing Corporation is to restrict occupancy of its 30 apartment units that will float in each building with occupancy and rent levels as follows: 

�      Property Maintenance

The Burbank Housing Corporation would maintain the Properties in accordance with all applicable local codes, rehabilitation standards, ordinances and zoning ordinances and at a standard of maintenance commensurate to similar housing units within Burbank.   To guard against overcrowding, an occupancy standard of two persons per bedroom plus one additional person is allowed per bedroom (e.g., a three-bedroom unit has a maximum occupancy of seven persons).

The Regulatory Agreement would provide for periodic inspections and would allow the Agency to abate any violation not corrected by the Burbank Housing Corporation and attach a lien upon the affected property or assess the Burbank Housing Corporation. The Agency has authority to require replacement of a property manager due to poor performance and to approve another property manager or property management company.

�      Approval of Sale, Transfer or Assignment

Affordability would extend in perpetuity (the useful life of the land use controls imposed on the properties, but not less than 55 years) and all of the terms, covenants and conditions are binding upon the Burbank Housing Corporation and any �permitted� successors and assigns.   The properties may not be sold, transferred, conveyed, encumbered to secure financing, assignment or lease without the prior written approval of the Agency, except for these permitted transfers: (a) the Agency subordinates its loan to accommodate financing or (b) the Properties are sold, transferred or assigned and the Agency�s restrictions related to housing operations (income, affordability, occupancy, and maintenance) are continued.   Approval of sales, transfers or assignments would be restricted to only those proposed assignees or transferees demonstrating comparable operational experience and capability, who would be required to assume the obligations of the Burbank Housing Corporation under the Agreement and would be considered a community housing development organization as defined under Federal HOME regulations.

FISCAL IMPACT

There will be no direct fiscal impact to the City General Fund.  A budget amendment is required to reallocate $448,025 from the Low and Moderate-Income Housing Fund Unappropriated Fund Balance Account 305.ND000.30004.0000 into the Focus Neighborhoods Account 305. CD23A.70005.0000.13057. This action will result in a total allocation of $1,255,200, of which the Burbank Housing Corporation will repay an estimated $523,000 at the time of loan closing and repay the balance over time from the Properties� residual receipts.

RECOMMENDATION

Staff recommends that: (1) the Agency Board adopt the attached resolutions approving the new Regulatory Agreement, amending the current Agency Promissory Notes, a Loan Agreement with the Burbank Housing Corporation; and approving a $448,025 budget amendment to the Fiscal 2003-04 budget; and that (2) the City Council adopt the attached resolution approving the new Regulatory Agreement and amending the current City and Agency Promissory Notes. 

EXHIBITS

A         Burbank Housing Corporation Proposal 

B         Keyser Marston and Associates Analysis

C         Loan Agreement

D         Amended Promissory Notes

E         Regulatory Agreement

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