The City of Garden Grove is a participating jurisdiction with the United States Department of Housing and Urban Development (“HUD”); the City has received federal HOME Program funds to carry out multi-year housing strategies through acquisition, rehabilitation, and construction of housing for persons and families of Very Low and Low Income.  Under the HOME Program, the City is required to spend funds timely and reserve a certain part of HOME Program funds for projects carried out by a Community Housing Development Organization (CHDO) to develop, sponsor or own affordable housing.

Mariman & Co. (“Mariman”) has entered into a Purchase and Sale Agreement to acquire the existing Sycamore Court housing development, which is a 78-unit complex comprised of six, two-story buildings located at 10632 Bolsa Avenue in the City (“Properties”).  Mariman is a co-general partner of a developer limited partnership, 10632 Bolsa Avenue, LP (“Developer”), of which AOF/Golden State Community Development Corp., a nonprofit corporation, is the managing general partner and a qualified CHDO.  Developer intends to acquire the Properties from Mariman, then own, substantially rehabilitate, manage, maintain and operate Sycamore Court as an affordable housing project for Very Low and Low Income tenant households for a 55-year affordability period (“Project”).

City and Developer representatives and their respective counsels have negotiated the terms of the HOME Investment Partnership Affordable Housing and Loan Agreement (Sycamore Court Housing Project) (“HOME Agreement”) under which the City will provide to the Developer a $1.2M subordinate loan of HOME funds (“City Loan”) as a part of the Developer’s financing to undertake, complete and operate the Project.  The HOME Agreement and Attachment Nos. 1 to 18 include the business and legal terms of the transaction between the City and Developer, including a Promissory Note, Deed of Trust, Regulatory Agreement, Completion Guaranty, Scope of Rehabilitation, Schedule of Performance and related exhibits, which are presented for City Council consideration and approval by Resolution.

In consideration for the City Loan, a Regulatory Agreement with affordable housing, replacement housing, property management, maintenance and other covenants will be recorded against the Properties with a 55-year Affordability Period.  The City Loan is structured as a residual receipts loan in an original principal amount of $1,200,000 that will accrue 3% simple interest, and will be evidenced by a Promissory Note and secured by the Deed of Trust.  Developer will make annual interest-only payments of up to $36,000 paid solely from up to 75% of the below-the-line, residual cash flow (“Residual Receipts”) from operation of the Project.  The term of the City Loan is 16 years; the Promissory Note matures and is due in full in September 2033 when Developer must pay off the loan, principal and interest, without regard to Residual Receipts.

Summarized below and explained in this report are the salient provisions of the HOME Agreement:

• The Properties are currently owned and vested in a cooperative association, Garden Grove Manor, Inc. (“Seller”) and all units will be sold for a purchase price of $13,210,000 to Mariman under the Purchase and Sale Agreement, as amended and extended, which will be assigned to Developer at Close of Escrow.
• Developer will cause substantial rehabilitation of the Project for a total cost estimated at $3,938,250 or $50,490/per unit.  Attachment No. 5, Scope of Rehabilitation, describes the scope of work on the Housing Units and common areas, both interior and exterior, and includes a Schedule of Values with details, breakdown and estimate of costs for the construction work including subcontracts.
• Income qualified current residents are eligible to remain tenants at the Project at an Affordable Rent as well as receive temporary relocation assistance while applicable Housing Units are being rehabilitated in phases, with all relocation costs the responsibility of and paid for by the Developer under the HOME Agreement and the Relocation Plan approved on May 9 by the City Council.
• A federal layering analysis was performed for the Project by the City’s federal programs consultant, Duane Solomon, which evidences and supports the subsidy to Developer of $1.2M HOME Funds for the Project that has total development costs of $23,071,771.
• An economic analysis of the Developer’s proforma, budget and all financing sources for the Project was completed by the City’s economic/housing consultant, Keyser Marston Associates, which also supports the City subsidy to the Project.
• After completing the Rehabilitation, all 77 Housing Units will be occupied by qualified Very Low Income and Low Income tenant households; there is one non-rent restricted on-site manager’s unit.  Initial re-occupancy will be by current residents in most instances and thereafter re-tenanting and operations will be managed by Developer and its professional property management company in compliance with a Tenant Selection Plan, Management Plan, and other provisions of the HOME Agreement and Regulatory Agreement.

In December 2016, California Tax Credit Allocation Committee (“TCAC”) awarded Developer an allocation of 4% Tax Credits and the California Debt Limit Allocation Committee (“CDLAC”) awarded Developer a bond allocation, from which the California Public Financing Authority (“CalPFA”) will issue multifamily housing mortgage revenue bonds in an aggregate amount of $14,400,000 (“Bonds”).  The City Council, as the local government agency where the Project is located, held two separate Public Hearings in May 2016 and May 2017 in compliance with the Tax Equity and Fiscal Responsibility Act (“TEFRA”), Section 147(f) of the Internal Revenue Code of 1986, as amended, as required in order for the interest on the Bonds to be tax-exempt.  The Tax Credit Investor, Pacific Premier Bank, will invest $6,119,500 of equity into the Project and receive that amount of federal Tax Credits.  The Bonds will be purchased by Jones Lang LaSalle Multifamily, LLC (“JLL”), as the Senior Lender, which funds will be converted into a FannieMae loan issued by JLL to the Developer.  FannieMae and JLL have required that the City’s HOME Agreement, Regulatory Agreement, Promissory Note, Deed of Trust and related instruments all be subordinated to the JLL Senior Loan documents by a Subordination Agreement recorded against the Properties.

Developer has also secured the renewal of a Section 8 housing assistance payment contract (“HAP”) with HUD for 31 of the 78 units under which income-eligible tenant households will pay 30% of actual household income toward rent and the Developer will receive from HUD payment of the difference between that amount and federal fair market rent, which funds serve as additional financial assistance to operation of the Project. The City Loan proceeds, along with Tax Credit equity, the Bonds/Senior Loan proceeds and the HAP proceeds are all sources of permanent, senior financing and ongoing cash invested in the Project, from acquisition, through completion of the Rehabilitation and ongoing ownership and operation. The City’s investment in the Project through the City Loan will cause all 77 Housing Units to qualify as long-term affordable housing for Very Low and Lower income households (one manager’s unit will not be rent-restricted). Under the HOME Agreement and Regulatory Agreement, all 77 Housing Units will be income and rent restricted for 55-years for occupancy by Very Low Income and Low Income tenant households; and, of the 77 units:  (i) seven will be covenanted as HOME Units under the HOME Program during a 15-year HOME Compliance Period; (ii) four will qualify as Very Low Income replacement housing and satisfy the remaining obligations under the Limon Judgment; and (iii) the remaining 73 units will also qualify and are being reserved and banked as affordable replacement housing in the event the City (or the Housing Authority or affiliated entities) may be required under federal or state laws to provide replacement housing in the future.

In connection with the HOME Agreement, the City prepared an environmental assessment in accordance with the National Environmental Policy Act (“NEPA”) and determined that the Project qualifies for a categorical exclusion thereunder, including 24 CFR 58.35, and meets one or more categorical exemptions under the California Environmental Quality Act and implementing regulations (“CEQA”), which findings are included in the City Council Resolution.  If the Resolution is adopted, then promptly after approval City staff will cause a Notice of Exemption to be posted at the County Clerk in compliance with CEQA. The City’s investment in the Project is in the public interest and will increase the number of affordable housing and replacement housing units in the City, and too will carry out the goals and objectives of the City’s 2014-2021 HCD-certified Housing Element of its General Plan.

It is recommended that the City Council:

• Adopt the attached Resolution that makes findings under NEPA and CEQA, approves the HOME Agreement, and authorizes the City Manager, legal counsel and staff to implement the HOME Agreement and Project, including issuance of warrants.

By:  Nate Robbins, Sr. Program Specialist