118-70106-002                                                                       Agenda Item No. 4 ( d )

November 20, 2006                                                                 Meeting of December 5, 2006

MEMORANDUM

TO:                  Agency Commissioners

FROM:            Marcia Rosen, Executive Director

SUBJECT:       Authorizing a Tax Increment Loan Agreement with Tenderloin Neighborhood Development Corporation, a California Nonprofit Public Benefit Corporation, in an amount not to exceed $7,064,831 for the acquisition and rehabilitation of approximately 80 very low income rental units, plus two managers’ units, located at 249 Eddy Street, and 161-165 Turk Street, as part of the Agency’s Affordable Housing Preservation Program; Citywide Tax Increment Housing Program.

EXECUTIVE SUMMARY

Tenderloin Neighborhood Development Corporation (“TNDC”) is proposing to acquire and rehabilitate two buildings that are approximately one block apart as an affordable housing preservation project.  The buildings are located at 161-165 Turk Street and 249 Eddy Street (the “Properties”) and are currently owned by a single entity, the for-profit Aspen Tenderloin Apartment Company (the “Owner”).  The 165 Turk Street property is a 6-story apartment building with 22 studios and 5 one-bedroom units, with of the one bedroom units set aside for a resident manager.  The property located at 249 Eddy Street has 55 studio apartments, with one unit set aside for a resident maintenance staff person, in a 7-story building for a combined total of 82 units.

The Properties have the benefit of project-based HUD Section 8 rental assistance contracts for all the units and could potentially convert to market rate housing upon the term of the existing loan.    The rental assistance contracts are scheduled to terminate in 2010.  The tenant populations are comprised of mostly low-income senior citizens and disabled persons. 

The State of California Housing Finance Agency (“CHFA”), the existing lender, has committed to provide approximately $2,400,000 for acquisition and $10,200,000 for construction phase.  CHFA’s permanent loan is expected to be approximately $3,400,000.

TNDC is requesting a total loan of $7,064,831, of which $5,564,831 will fund the acquisition and $1,500,000 will fund predevelopment expenses.  Upon closing the CHFA construction loan, TNDC will repay a portion of the acquisition loan by giving the Agency fee title to the land.  The Agency will then enter into a ground lease with the to be established limited partnership.   TNDC will apply for 9% Low Income Housing Tax Credits (“Tax Credits”) within the next two years to generate tax credit equity to help provide a portion of the permanent financing for the project.  Upon permanent loan closing, TNDC would repay the Agency $2,526,342 from the tax credit equity payment.  This amount will include repayment of $1,500,000 predevelopment loan.

Staff recommends authorizing a Tax Increment Loan Agreement in an amount not to exceed $7,064,831 with Tenderloin Neighborhood Development Corporation, a California Nonprofit Public Benefit Corporation, and all ancillary documents, for the acquisition and rehabilitation of approximately 80 very low income rental units, plus two managers' units, located at 249 Eddy Street, Block 0339, Lot 15A, and 161-165 Turk Street, Block 0343, Lot 017 Affordable Housing Preservation Program; Citywide Tax Increment Housing Program.

DISCUSSION

Background

The Properties are located at 161-165 Turk Street and 249 Eddy Street and are currently owned by a single entity.  The 165 Turk Street property is a 6-story apartment building with 22 studios and 5 one-bedroom units, with of the one bedroom units set aside for a resident manager.  The property located at 249 Eddy Street has 55 studio apartments, with one unit set aside for a resident maintenance staff person, in a 7-story building for a combined total of 82 units.  The Properties currently have a Section 8 contract that will expire in 2010.  CHFA currently has an existing loan on the Properties that will be fully repaid by 2014, at which time the affordability restrictions on the properties would terminate.

The Owner acquired the buildings in 1982 and recently decided to sell this and other properties in their portfolio. TNDC became aware that the Owner was interested in selling the Properties.  TNDC made an offer based on past experience participating in the Agency’s Affordable Housing Preservation Program.   The Owner allowed TNDC to perform initial building inspections and provided access to financial audits, tenant rent rolls, and existing loan agreements.  TNDC prepared preliminary financial projections based on these initial analyses to confirm that the Project can feasibly leverage various state and local financing sources.

Representatives of the Owner expressed an interest in preserving the affordability rent levels over the long-term. On September 8, 2006, TNDC formally entered into a Purchase and Sale Agreement (“PSA”) with Aspen Tenderloin Apartments Company to acquire 55 studio apartments at 249 Eddy Street and 22 studios and 5 one-bedroom apartments at 161-165 Turk Street for an acquisition price of $7,500,000.  This acquisition price of $616.33 per square feet is supported by an appraisal prepared by Joseph J. Blake and Associates, Inc. dated July 7, 2006.  The value was certified on August 30, 2006 by Carneghi-Blum & Partners under a contract with Agency.  TNDC obtained preliminary site control upon posting a $50,000 deposit in escrow.  The term of the Feasibility Contingency Period was 21 business days and terminated on October 9, 2006.  Currently, TNDC has until December 20, 2006 to obtain financing commitments from the Agency and CHFA and to get preliminary approval from HUD to extend the Section 8 HAP Contract to a 20 year term.  During this period, TNDC will also obtain the required consents to assign and assume existing agreements with CHFA and HUD pertaining to the property.  Site acquisition is expected on or before January 9, 2007.

During the feasibility inspection period, TNDC staff conducted preliminary inspections to identify possible physical issues and to assess the project’s financial feasibility.  The requested $1,500,000 in predevelopment funds would enable TNDC to provide a more thorough investigation of physical and environmental issues, hire engineers and construction consultants to assist with evaluating the required rehabilitation work scope, perform additional testing and inspection (including a thorough structural, mechanical, plumbing, code compliance, elevator and environmental analyses), hire an architect and commence design work, and allow TNDC to continue working with the financial and legal consultants necessary to refine the financing plan for the acquisition and rehabilitation of the Properties.

Preliminary Proposed Scope of Work

The buildings were substantially rehabilitated in 1983 and generally appear to be in good condition.  However, preliminary investigations have revealed that modernization and upgrades are needed to extend the life of the project.  Interior upgrades include the addition of a supportive offices workspace and improvements to the community space.  Exterior work includes paint and roofing repair / replacement.  Accessibility improvements and finishes are planned for all units. 

Funding Request

Interim sources of financing for the Properties include the CHFA and Agency tax increment loan funds.  The Agency’s initial subsidy would be $7,094,831, of which $5,564,831 will be used for acquisition and $1,500,000 for predevelopment costs.  At construction loan closing, the Agency would accept title to the land, valued at $3,728,571, as repayment for a portion of the Agency loan and would execute a ground lease with the limited partnership created to utilize the low income housing tax credits.  At permanent loan closing, the Agency loan will be paid down with $2,526,342 in low income tax credit equity.  This repayment will include the $1,500,000 predevelopment loan that would be used to retain consultants to refine the scope of work.  The remaining portion of the Agency’s loan, $809,918, will remain in the project as permanent financing and will be repaid by residual receipts from operations.  The project is expected to receive approximately $10.2 million in tax credit equity.

CHFA, the existing lender, has verbally committed to refinance their existing loan and provide an acquisition loan of $2,400,000 and a construction loan of $10,200,000.  Approximately $3,400,000 would remain as a permanent loan to the Properties.  Written confirmation is expected from CHFA by December 11, 2006.  Approximately $405,000 is anticipated from the Affordable Housing Program of the Federal Home Loan Bank in the form of permanent loan.

The Citywide Affordable Housing Loan Committee reviewed this request on November 3, 2006 and recommended the Commission’s approval.

Future Commission Actions

Should the Commission authorize the recommended action, staff anticipates returning to the Commission in 2008 for authorization to enter into a Ground Lease as part of the repayment of the Agency acquisition loan.

Community Review

TNDC held a resident meeting on November 2, 2006 to discuss the proposed transfer of ownership.  Many residents had concerns about how the change would impact them and the ability of TNDC to respond to their needs.  Many residents were especially concerned about the anticipated loss of their renters’ rebate for which they will no longer be eligible once the Properties become exempt from property taxes.  TNDC acknowledged the loss of the renters’ rebate and its impact on many residents, however, the benefits of new ownership by TNDC include ensuring that the Section 8 contracts which limit rent payments to 30% of income remain in place, the buildings will be improved, and the Properties will remain affordable in perpetuity for current and future residents.  TNDC agreed to increase services by providing a full-time social worker to assist residents in connecting into the existing network of services within the surrounding community. Tenant involvement would also be facilitated through the establishment of a resident advisory council with third-party assistance from St. Anthony’s Foundation.   TNDC will hold a second resident meeting prior to the Commission meeting.

Conclusion

The proposed Affordable Housing Preservation Project, if approved, would preserve 82 units of housing currently at high risk of converting to market rate housing.  The conversion pressures are imminent since the rental assistance contract is scheduled to expire in 2010 and the restrictions pursuant to the CHFA financing would disappear upon loan pay-off in 2014.  The senior residents who currently rely on the Properties as a source of very low income housing would be at risk of displacement and forced to find replacement housing.  The Site’s central location, which is easily accessible to mass transportation, and various important services, makes it an ideal location for residents. 

COMPLIANCE WITH AGENCY PURCHASING POLICY:

This is an unsolicited request for funds.  Upon favorable Commission consideration, TNDC would continue to work with Romulus Asenloo, Compliance Specialist, to ensure that all activities are in compliance with Agency Purchasing Policies and Procedures.

(Originated by Michele Davis, Development Specialist)

Marcia Rosen

Executive Director

Attachment:      Aspen Properties Loan Evaluation

                        Approved November 3, 2006

Attachment:  Resolution No. 158-2006