March 28, 2006

SUBJECT: Consider Request from Emergency Housing Consortium LifeBuilders (EHC) to Amend the Loan Terms of Community Development Block Grant (CDBG) and City Housing Fund Loans on 183 Acalanes Drive.

REPORT IN BRIEF

Approval is requested to amend the Community Development Block Grant (CDBG) and City Housing Fund loan terms for the Eight Trees Apartments located at 183 Acalanes Drive.  In September 2002, Council approved funding in the amount of $1,500,000 for Emergency Housing Consortium LifeBuilders (EHC), a non-profit housing services agency to finance the purchase of the property with Community Development Block Grant (CDBG), HOME and Sunnyvale Housing Funds.  

A $350,000 bridge loan was provided from the Housing Fund with a term of fifteen (15) months at zero percent interest, repayment due on April 2004.  The CDBG loan for $400,000 was deferred for one (1) year.  Monthly payments were to begin on January 1, 2004.  The remaining loans have deferred terms for twenty and thirty years.  EHC had anticipated that funding from the County would be available to repay the bridge loan, but EHC’s two requests for funding have been denied by the County.  The agency also anticipated receiving Project-Based Section 8 certificates from the Housing Authority that would subsidize the cash flow of the project.  However, the Housing Authority has limited the use of Section 8 Project-Based certificates to new construction projects only.  EHC has not been able to meet its debt obligations to the City.  Staff is recommending that the City modify the loan terms for the two loans funded by CDBG and Housing Fund that will allow for repayment by EHC.

BACKGROUND

EHC has been providing supportive housing services to homeless families for the past twenty years.  EHC has acquired, rehabilitated and operated shelters, transitional housing and permanent housing for homeless and formerly homeless people throughout Santa Clara County.   In recent years, the agency has successfully completed a 95-unit Single Room Occupancy project, a 250-bed Shelter, and a 26-family Transitional Housing Program. The agency owns 7 apartment buildings, 4 houses, a 95-unit SRO, a 26-family apartment complex, and a 250-bed shelter facility.  Currently, EHC is developing a site in San Jose that will provide shelter, transitional housing and a drop-in facility for homeless youth.  In addition, the agency leases and manages two National Guard Armory seasonal shelters, one in Sunnyvale and the other in Gilroy. Services include: shelter, case management, goal assessment, life skill development, job skill development, clothing and other basic needs supplies, workshops and access to medical care. 

In September 2002, Council approved $400,000 of CDBG funds, $185,000 of HOME funds and $915,000 from the Housing Sub-fund of which $350,000 was for bridge financing, totaling $1,500,000 for the acquisition of 183 Acalanes Drive, Sunnyvale, a 24-unit rental housing complex.  The remainder of the purchase was financed through a $2.5 million seller carry-back financing.  The purpose was to provide apartments that are affordable to very low-income families whose annual gross incomes are at or below 30 percent of median income for Santa Clara County; these apartments will be permanently affordable for very low-income families for the next forty years. 

The loan terms approved for the acquisition in December 2002 are as follows:

Community Development Block Grant - $400,000

Amortized loan to be repaid in 21 years, at 5% interest.  Payments during the first year of the loan are deferred.  Payment amount to be negotiated and payments to begin on January 1, 2004 based on net operating income.

HOME (CHDO Set-aside) Funds - $185,000

Deferred for the first 21 years, then fully amortized and repaid during the next 10 years at 5% interest

Housing Fund - $915,000

A) Bridge financing of $350,000 at no interest, to be repaid to the Housing Fund in 15 months from the close of escrow, all due and payable on April 1, 2004.  

B) A deferred loan for 30 years of $565,000 at 5% interest with full repayment at the end of the loan term.

For the past 18 months, EHC and the City have been in discussion about the repayment.  EHC has encountered unforeseeable circumstances which have not allowed them to meet their debt obligations to the City.  The bridge loan from the City was intended to allow EHC to move forward with the property acquisition and then seek and obtain permanent takeout financing from the County and other jurisdictions during their traditional funding cycles.  It was anticipated that $350,000 in HOME funds would be provided by the County of Santa Clara Office of Affordable Housing to replace the bridge financing. 

Staff contacted County staff at that time, and the response from County staff was favorable towards the project.  However, EHC applied for HOME funds from the County in 2004 and 2005 and their requests were denied.  The denial was due to a revised view by County staff to limit their support of projects to those located within the Urban County.  Therefore, the 183 Acalanes project would no longer be eligible for County funding.  EHC will continue to be in contact with the County of Santa Clara Office of Affordable Housing regarding the availability of other funding sources to repay the loan.

At the time EHC acquired the site, EHC anticipated that Project-Based Section 8 Certificates would be available, and that this revenue would provide rent subsidies for the entire project.  In April 2003, a Project-Based Section 8 Notice of Funding Availability (NOFA) was released.  However, the NOFA only permitted applications from new construction projects.  EHC advocated for a modification to the NOFA that would enable existing projects to apply.  The Housing Authority declined to modify the NOFA.  Since April 2003, the Section 8 program in Santa Clara County has been fully subscribed and the Housing Authority has indicated that it will make very few vouchers, if any, available.  Given the current situation with Section 8, it is highly unlikely that the project will receive a Project-Based Section 8 allocation.  The cash flow from the increased income provided by the Section 8 vouchers would have been available to the agency for payment of the bridge loan from net income while servicing the on-going project debt.   

EXISTING POLICY

The Consolidated Plan places a priority on maintaining and increasing the stock of affordable rental housing for families.  The City’s Housing and Community Revitalization Sub-Element contains a number of goals and policies related to affordable housing in the community. 

Goal E: Maintain and increase housing units affordable to households of all income levels and ages.

E.2.g Acquire land and assist in development/redevelopment of housing through partnerships with regional agencies, nonprofit housing developers and private sector developers.

Goal F: Improve Housing conditions for people with special needs.

F.1.c Assist the development of new housing for families graduating from transitional housing programs.

DISCUSSION

EHC purchased 183 Acalanes with the expectation that it would be able to obtain a deferred loan from the County of Santa Clara for repayment of the City’s bridge loan of $350,000.  EHC staff calculated the project pro forma and cash flow analysis with the expectation that the project would be successful in obtaining project-based Section 8 vouchers, thereby greatly enhancing the income stream of the project.  At the time it was purchased,   the rental market was at a high and rents were increasing.  The downturn in the rental market has also affected low-income units.  EHC is finding that available units remain vacant longer and lease for lower amounts than projected.  Because of the unavailability of project-based Section 8 vouchers and the change in economic conditions, the property is currently just breaking even in terms of income to operational costs.  While EHC is currently able to service their long-term debt obligations, there is no excess cash flow to begin payments on the bridge financing.

FISCAL IMPACT

There are no financial impacts to the City’s General Fund.  Although there are no impacts to the General fund, delayed payment does have a minimal impact to the CDBG and Housing Funds (assuming 5% simple interest the Housing Fund would lose $17,500 annually).  There are no impacts to any projects supported by these funds.  When payment is made, it will provide $350,000 back to the Housing fund which currently has a balance of $6.1 million.

Conclusion

As previously stated, had EHC received HOME funding from the County of Santa Clara Office of Affordable Housing, the funding would have repaid the City’s bridge financing.  The Section 8 allocation from the Housing Authority would have allowed the agency to use its cash flow from the increased income to begin making payments on the bridge loan earlier. 

The Section 8 allocation would have also assisted many very low-income families with affordable housing at 183 Acalanes who have left the area due to high housing costs.   The unavailability of Project-Based Section 8 vouchers and the change in economic conditions has impacted the agency resulting in limited rents and decreased cash flow, as well as having vacant units.

The restructure of the loans will ensure the financial viability of the project.  EHC is committed to the proposed repayment terms.  Staff recommends restructuring both loans to allow EHC to begin repayment of these loans for the maximum amount that they can accommodate while they seek other funding sources; the alternative to not restructure the loans would be to foreclose on a 24-unit affordable housing project.  With its established community partnerships and collaborations, the agency will continue to pursue other funding sources.

PUBLIC CONTACT

Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page, and the availability of the report in the Library and the City Clerk’s Office.

ALTERNATIVES

1. a)  Approve amended loan terms for the Housing Fund loan.  Continue $350,000 bridge loan at 0% interest through July 1, 2006 with repayment of $25,000 on July 1, 2006 and finance $325,000 at 3% simple interest for ten (10) years beginning July 2, 2006.  EHC will make semi-annual payments of $16,775.  

b)  Approve amended loan terms for CDBG loan.  Continue $400,000 loan at 5% simple interest through July 1, 2006.  EHC will make semi-annual payments of $10,500 beginning January 1, 2007.

2. Do not approve the amendments to the loan terms for Emergency Housing Consortium LifeBuilders (EHC).

3. Direct staff to negotiate a different financial package to address the problem. 

RECOMMENDATION

Staff recommends Alternative 1.

Staff reviewed the audited financial statements of the agency and determined that the agency’s cash flow from net operating income is not sufficient to begin payment as originally agreed to.  The proposed loan terms can be afforded by the agency through private fund-raising efforts.  This will enhance the financial viability of the project and ensure the long-term operation of the project allowing EHC to meet its debt obligation. 

EHC is committing itself to the above repayment terms and will pursue the following repayment sources:  private lender for the initial payment; continue annual fundraising for the annual payments; pursue moving tenants with Section 8 vouchers from an existing EHC housing site to the Acalanes project; and continue to pursue other public and private funding sources. 

EHC has managed the Eight Trees apartment complex since December 2002.  The property has been well maintained, continues to fit into the neighborhood, and no community issues have been discussed with staff.

The project continues to be innovative in that it is affordable housing tied to support services in a non-shelter setting.  Support services are provided on-site, thereby increasing the effectiveness and reducing the delivery time associated with skill development.  EHC continues to partner with Sunnyvale Community Services and other local services to ensure that residents at the site have local resources available to assist them.