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Item 24.2 - Owner Participation Agreement with Poway Land Inc ®AGENDA REPORT SUMMARY • Via -wee TO: Honorable Chairmen and Members of the Redevelopment Agency • 6 " n4 ne. co yam FROM: James L. Bowersox, Executive Director INITIATED BY: John D. Fitch, Assistant Executive Director Warren H. Shafer, Director of Redevelopment Service Pamela R. Colby, Redevelopment Project Administrator DATE: September 5, 1995 SUBJECT: Authorize Executive Director to Execute a Subordination Agreement in Connection with Permanent Financing Documents Pursuant to the Owner Participation Agreement with Poway Land, Inc. ABSTRACT The Redevelopment Agency entered an Owner Participation Agreement (OPA) with Poway Land, Inc. for the development of Haley Ranch Estates. The terms of the OPA require Poway Land to secure permanent project financing. The Redevelopment Agency must approve all liens attached to the project, hence Agency approval of permanent financing is required. The Agency will be required to subordinate its affordability covenants in order for Poway Land to secure permanent financing. Approval of the attached resolution makes the findings required by law and authorizes the Executive Director to execute any documents necessary for approval of permanent financing subject to approval as to form by Agency Special Counsel . ENVIRONMENTAL REVIEW This item is not subject to CEQA review. FISCAL IMPACT There is no direct fiscal impact resulting from this action. Costs associated with permanent financing are contemplated by the OPA and are one cost component of the Agency's acquisition price for Haley Ranch Estates. ADDITIONAL PUBLIC NOTIFICATION AND CORRESPONDENCE A copy of this report was sent to Poway Land, Inc. RECOMMENDATION It is recommended that the Redevelopment Agency Board approve the attached resolution making requisite findings regarding the subordination of affordability covenants and authorizing the Executive Director, with the approval as to form of Agency Special Legal Counsel , to execute documents necessary for Agency approval of permanent financing. ACTION Adopted Resolution No. R-95-23; approved staff recommendation subject to principal not exeeding $4.32 million. 4-0 with Boardmember Callery absent. La:6 d.r__.; Marie Lofton, Deputy Secretary SEP 5 1995 ITEM 24 . 2 1 of 6 ,AGENDA REPORT CITY OF POW A Y -. TO: Honorable Chairmen and Members of the Redevelopment Agency FROM: James L. Bowersox, Executive Director INITIATED BY: John D. Fitch, Assistant Executive Directo~~ ~ Warren H. Shafer, Director of Redevelopment ervices~~ Pamela R. Colby, Redevelopment Project Administrator~. DATE: September 5, 1995 SUBJECT: Authorize Executive Director to Execute a Subordination Agreement in Connection with Permanent Financing Documents Pursuant to the Owner Participation Agreement with Poway Land, Inc. BACKGROUND The Redevelopment Agency has an executed an Owner Participation Agreement (OPA) with Poway Land, Inc. for the development of Haley Ranch Estates. The amount of the Agency's financial assistance under the amended OPA totals $6,471,599. Under the OPA and the Lease-Option Agreement entered into pursuant to the.OPA, the Agency has a Master Lease for the property. The Agency has also placed affordability covenants on all 65 dwelling units. The OPA and the Lease-Option Agreement grant the Agency an option which requires the Agency to purchase the property within ten years from the issuance of the Certificate of Completion (December 2004). One of the provisions of the OPA is that Poway Land must secure Redevelopment Agency approval for any liens placed on the property, including those associated with project financing. In addition, the Lease-Option Agreement provides that the Agency will subordinate the lien of the Master Lease and Option to such permanent financing, subject to the Agency's reasonable consent and approval of all relevant documents. The Redevelopment Agency previously approved and subordinated to a construction loan with a principal amount of $4,320,000. The Certificate of Completion for the project was issued by the Agency and recorded by the County Recorder on December 23, 1994. Poway Land has since been pursuing permanent financing options and has requested that the Agency approve a permanent loan with American Savings Bank and subordinate the Lease and the affordability covenants to such loan. ACTION: - SEP 5 1995 ITEM 14 .. 2 of 6 _ . 2 -- - . - Agenda Report September 5, 1995 Page 3 . . FINDINGS Poway Land has advised the Redevelopment Agency that it has secured a conditional commitment from American Savings Bank for a permanent loan to partially take out the construction lender, Imperial Savings Bank. Staff and Agency Special Legal Counsel have been negotiating with representatives of Poway Land and American Savings to establish mutually satisfactory loan terms and documents. Most issues have been resolved, and the actual loan documents are being drafted as of this writing. The principal amount of the proposed permanent loan from American Savings Bank is $4,320,000. The term would be 10 years, with a variable interest rate starting at 7.679%, with a cap of 12.679%. The loan would be an interest paying loan only, with the full amount of the principal due in a balloon payment at the end of the loan term. Approval of and subordination to such amount is recommended in order to stabilize the project and prevent further default and potential foreclosure under the construction loan. In order to safeguard the Agency's financial investment, Master Lease and affordability covenants and as condition of subordination to the higher loan amount, Agency Special Legal Counsel has advised the Agency to make rent payments, per the Lease-Option Agreement, directly to American Savings Bank. The second requirement would be that the Agency receive a Deed of Trust on the property securing the performance of Poway Land under the OPA, Lease-Option Agreement and Subordination Agreement which would be junior to the American Savings Bank Deed of Trust and would give the Agency the rights of a junior lien-holder in the event of default. These two provisions would decrease the likelihood of loan default, and would help the Agency to cure any loan default. Agency Special Legal Counsel has advised that the addition of these two provisions would provide additional security and enhance the Agency's position. Another key point is that American Savings Bank has indicated that it will require the Redevelopment Agency to subordinate its affordability covenants on the property. This is not an unusual lender requirement, and has effectively become an industry norm for lending on affordable housing projects. The potential "worst-case" effect of this requirement is that should Poway Land default on the loan, and the Agency opt not to cure the default, the project could potentially be sold without the restrictions of the affordability covenants. In order to subordinate the affordability covenants to the permanent loan, the Agency must find that appropriate financing is not otherwise available for the project. Poway Land has been working for some time to secure financing for the project. With the tightening regulation of the lending industry and financing availability, this process has not been a simple one. Competitive project financing is not available for Haley without a subordination of the affordability covenants. Were it to be available, the increased risk to the lender would cause financing - SEP 5 ms ITEM 24". . << 3 of 6 Agenda Report September 5, 1995 Page 4 " costs to increase which would increase overall project costs. This would result in an increase of the price the Agency will ultimately pay to purchase the project. Because of the timing requirements of loan closings, staff is recommending that, with the approval as to form by Agency Special Legal Counsel, the Executive Director be authorized to execute any documents which may be necessary for the Agency's approval of the permanent loan being offered by American Savings Bank. Approval of the attached resolution would grant this authority to the Executive Director and makes the requisite findings for the Agency to subordinate the affordability covenants pursuant to California Redevelopment Law. ENVIRONMENTAL REVIEW This item is not subject to CEQA review. FISCAL IMPACT There is no direct fiscal impact resulting from this action. Costs associated with permanent financing are contemplated by the OPA and will be one cost component of the Agency's acquisition of Haley Ranch Estates. ADDITIONAL PUBLIC NOTIFICATION AND CORRESPONDENCE A copy of this report was sent to Poway Land, Inc. RECOMMENDATION It is recommended that the Redevelopment Agency Board approve the attached resolution making requisite findings regarding the subordination of affordability covenants and authorizing the Executive Director, with the approval as to form of Agency Special Legal Counsel, to execute documents necessary for Agency approval of permanent financing. Attachment: Redevelopment Agency Resolution. , SEP 5 1995 ITEM 24 ., 4 of 6 . 2 ..- - . . - RESOLUTION NO. R-95- A RESOLUTION OF THE POWAY REDEVELOPMENT AGENCY APPROVING PERMANENT . FINANCING AND MAKING CERTAIN FINDINGS IN REGARD TO THE SUBORDINATION OF THE COVENANTS AND RESTRICTIONS RELATED TO THE OWNER PARTICIPATION AGREEMENT BY AND BETWEEN THE POWAY REDEVELOPMENT AGENCY AND POWAY LAND, INC. AND AUTHORIZING THE EXECUTIVE DIRECTOR TO EXECUTE ANY REQUIRED DOCUMENTATION WHEREAS, the Poway Redevelopment Agency (the "Agency") entered into that certain Owner Participation Agreement with poway Land, Inc. ("Poway Land"), dated June 22, 1989 ("the OPA") which was subsequently amended on April 30, 1991, which, among other things, requires Poway Land to construct a mobile home park for low and moderate income households (the "Improvements") on the property which is the subject of the OPA (the "Site") and which provides for the Agency's financial assistance to Poway Land for such construction; and WHEREAS, in accordance with the terms of the OPA, the Agency and Poway Land entered into that certain Lease-Option Agreement dated January 25, 1991 (the "Lease-Opt i on Agreement") whereby the Agency acqui red a master I ease (the "Lease") on the Site and whereby the Agency has been granted an option which requires the Agency to purchase the Site within ten years of the issuance of the Certificate of Completion eVidencing Poway Land's satisfactory construction of the Improvements (the "Option"); and WHEREAS, pursuant to the terms of the OPA that certain Declaration of Condit ions, Covenants and Restri ct ions dated January 25, 1991 was recorded against the Site with the San Diego County Recorder as Document No. 1991-0087385 (the "CC&R's") thereby restricting the use of the Site to the provision of housing affordable to persons of low and moderate income; and WHEREAS, under the terms of the OPA, prior to the expiration of the term of the Option, the Agency's prior written approval is required before any liens are imposed against the Site for the purpose of securing loans of funds to be used for financing or refinancing the acquisition of or the construction of the Improvements on the Site; and WHEREAS, under the Lease-Opt i on Agreement, the Agency has agreed to subordinate the Lease and the Option to a construction loan and refinancing, subject to the Agency's reasonable consent and approval of all relevant documents; and WHEREAS, the Agency has previously approved and subordinated to a construction loan in the principal amount of Four Million Three Hundred Twenty Thousand Dollars ($4,320,000); and WHEREAS, Poway Land has requested that the Agency approve a loan to Poway Land from American Savings Bank in the principal amount of Four Million Three Hundred Twenty Thousand Dollars ($4,320,000) (the "Loan") in order to partially take out the construction lender; and - WHEREAS, as a condition of the provision of the Loan, American Savings Bank is requiring the subordination of the Lease, the OPA and the CC&R's; and . SEP 5 1995 ITEM 24" . 5 of 6 Attachment 1 . , 00- ------- --------------- Resolution No. R-95- Page 2 WHEREAS, Section 33334.14 of the Community Redevelopment Law provides, in . part, that affordability covenants of an Agency may be subordinated" . . . where the agency makes a finding that an economically feasible alternative method of financing, refinancing, or assisting the units or parcels on substantially comparable terms and conditions, but without subordination, is not reasonably available, and where the agency obtains written commitments reasonably designed to protect the agency's investment in the event of default. . ."; and WHEREAS, based upon material present to the Agency, there is not an economically feasible alternative method of financing available on substantially comparable terms; and WHEREAS, in consideration of and as a condition precedent to both the Agency subordinating the lease and the subordination of the CC&R's to the Loan, the Agency will be granted the rights of a junior lien holder on the Site and the Agency shall make the payments due under the lease directly to American Savings Bank in partial satisfaction of Poway Land's obligation thus providing the Agency with reasonable protection in the event of default. NOW, THEREFORE, the Poway Redevelopment Agency does hereby resolve, order and determine as follows: Section 1. The Agency finds and determines that an economically feasible alternative method of financing, refinancing, or assisting the units or parcels on substantially comparable terms and conditions, but without subordination, is not reasonably available. Section 2. The Agency approves the Loan and authorizes and directs the Executive Director to execute, subject to approval by Agency Special Legal Counsel, such agreements or other instruments as may be necessary or convenient to effectuate the subordination of the CC&R's and the Lease. PASSED, APPROVED AND ADOPTED by the Redevelopment Agency at a regular meeting thereof on this 5th day of September 1995. Don Higginson, Chairman ATTEST: Marjorie K. Wahlsten, Secretary SEP 5 1995 ITEM 24:' 2 6 of 6