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CC 2017-10-24_09h Successor Agency_Subordination Agreement_Courtland_Arroyo LP MEMORANDUM TO: CITY COUNCIL/BOARD OF DIRECTORS TO THE SUCCESSOR AGENCY TO THE DISSOLVED REDEVELOPMENT AGENCY OF THE CITY OF ARROYO GRANDE FROM: DEBBIE MALICOAT, DIRECTOR OF ADMINISTRATIVE SERVICES SUBJECT: CONSIDERATION OF SUBORDINATION AGREEMENT BETWEEN THE CITY AND COURTLAND-ARROYO GRANDE, L.P. DATE: OCTOBER 24, 2017 SUMMARY OF ACTION: Agreeing to allow the City’s financial interests to be a lower priority than the lender’s deed of trust will allow the project owners to refinance their loan at lower interest costs. IMPACT ON FINANCIAL AND PERSONNEL RESOURCES: No financial impact is projected. The City’s ultimate interest position in the property is unchanged; the City has previously entered into a subordination agreement with the original lender. Minimal future staff time is projected to accomplish this action. RECOMMENDATION: It is recommended the City Council/Board: Approve and authorize the City Manager/Executive Director to execute a Subordination Agreement between the City and Courtland-Arroyo Grande, L.P. to facilitate refinancing of the project by the owners. BACKGROUND: Courtland-Arroyo Grande, L.P. developed and owns the property near Courtland and Grand where the Cortina D’Arroyo affordable housing project was built. The development was constructed through the use of affordable housing loans and credits, in addition to conventional financing. In 2004, the City agreed to subordinate a loan that was made to the developer as well as other regulatory or affordability covenants (Attachment 1). This means that the City agreed to allow the conventional financing, which was through Wells Fargo Bank at the time, to have a higher priority for repayment than the City’s loan. The City’s loan was subsequently sold to Meta Housing, and no Item 9.h. - Page 1 CONSIDERATION OF SUBORDINATION AGREEMENT BETWEEN THE CITY AND COURTLAND-ARROYO GRANDE, L.P. OCTOBER 24, 2017 PAGE 2 longer exists, however the affordability covenants on the project are still enforceable and recorded on the property title. The City received notification from the Courtland-Arroyo Grande, L.P. (“Partnership”) that they wanted to refinance their loan and requested the City’s participation in continuing to subordinate the affordability covenants under the new loan. ANALYSIS OF ISSUES: The Partnership is looking to refinance the subject property with a new permanent loan using a Housing and Urban Development (HUD) insured mortgage. The lender will be RED Capital. HUD has a requirement that all other financing and regulatory agreements be subordinate to their First Trust Deed. The document (Attachment 2) provides for the same subordinate position with the new loan. The City’s overall position and priority remains unchanged from where it is today. The current loan is due in a few years, at which time the Partnership would be obligated to refinance and work with the City on a subordination agreement at that time. However, given the current low interest rate environment, the Partnership has elected to accelerate the refinancing, which accounts for the current request. The refinancing will not affect any tax credits or operations in any way. The Community Development and Administrative Services Departments are supportive of this request as it provides for the continuation of affordable housing in the community and ensures that the City’s interests are maintained as they are today. ALTERNATIVES: The following alternatives are provided for the Council’s consideration: 1. Approve the attached Subordination Agreement and authorize the City Manager/Executive Director to execute the document 2. Do not approve the Subordination Agreement 3. Provide further direction to staff ADVANTAGES: The attached subordination agreement will allow the project owners to refinance their project at a lower interest cost, while maintaining the City’s interests in the property as they currently exist. DISADVANTAGES: No disadvantages are identified. ENVIRONMENTAL REVIEW: This item is exempt from CEQA per CEQA Guidelines Section 15061(b)(3). Item 9.h. - Page 2 CONSIDERATION OF SUBORDINATION AGREEMENT BETWEEN THE CITY AND COURTLAND-ARROYO GRANDE, L.P. OCTOBER 24, 2017 PAGE 3 PUBLIC NOTIFICATION AND COMMENTS: The Agenda was posted at City Hall and on the City’s website in accordance with Government Code Section 54954.2. Attachment: 1. Subordination Agreement recorded November 9, 2004 Item 9.h. - Page 3 Recording Requested by: ______________________ ) ______________________ ) ) When Recorded Return to: ) ) ______________________ ) ______________________ ) ______________________ ) ) ) __________________________________________________________________ (Space above for Recorder’s Use.) Subordination Agreement This Subordination Agreement is made as of ______________, 2017, by COURTLAND- ARROYO GRANDE, L.P., a California limited partnership (“Borrower”), the CITY OF ARROYO GRANDE, a municipal corporation (“City”) and the Successor Agency to the dissolved Arroyo Grande Redevelopment Agency (“Agency”). WHEREAS, Borrower has obtained financing from RED MORTGAGE CAPITAL, LLC, a Delaware limited liability company (“Lender”) for the benefit of the project known as [Arroyo Grande Apartments] (“Project”), which loan is secured by a Multifamily Deed of Trust, Assignment of Rents and Security Agreement (“Security Instrument”) dated as of _____________, and recorded in the Recorder’s Office of San Luis Obispo County, California (“Records”) on _____________ as Document Number ______________, and is insured by the United States Department of Housing and Urban Development (“HUD”); WHEREAS, Borrower has received approval for the Project from the Agency, which Agency and City has required certain restrictions be recorded against the Project; and WHEREAS, Borrower entered into with the City and the Agency with respect to the Project, as more particularly described in Exhibit A attached hereto, (a) that certain Second Amended and Restated Affordable Housing Agreement dated as of September 14, 2004 (the “AHA”) and (b) that certain Regulatory Agreement dated as of November 3, 2004 and recorded in the Records on November 9, 2004 as Document Number 2004-098502 (the “Regulatory Agreement”). The AHA and Regulatory Agreement are collectively referred to herein as the “Restrictive Covenants”); WHEREAS, HUD requires as a condition of its insuring Lender’s financing to the Project, that the lien and covenants of the Restrictive Covenants be subordinated to the lien, covenants, and enforcement of the Security Instrument; and WHEREAS, the Agency and the City have agreed to subordinate the Restrictive Covenants to the lien of the Mortgage Loan in accordance with the terms of this Subordination Agreement. Item 9.h. - Page 4 NOW, THEREFORE, in consideration of the foregoing and for other consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: (a) In the event of any conflict between any provision contained elsewhere in the Restrictive Covenants and any provision contained in this Subordination Agreement, the provision contained in this Subordination Agreement shall govern and be controlling in all respects as set forth more fully herein. (b) The following terms shall have the following definitions: "Code" means the Internal Revenue Code of 1986, as amended. "HUD" means the United States Department of Housing and Urban Development. "HUD Regulatory Agreement" means the Regulatory Agreement between Borrower and HUD with respect to the Project, as the same may be supplemented, amended or modified from time to time. “Lender” means Red Mortgage Capital, LLC, a Delaware limited liability company, its successors and assigns. “Mortgage Loan” means the mortgage loan made by Lender to the Borrower pursuant to the Mortgage Loan Documents with respect to the Project. “Mortgage Loan Documents” means the Security Instrument, the HUD Regulatory Agreement and all other documents required by HUD or Lender in connection with the Mortgage Loan. “National Housing Act” means the National Housing Act of 1934, as amended. “Program Obligations” has the meaning set forth in the Security Instrument. “Residual Receipts” has the meaning specified in the HUD Regulatory Agreement. “Security Instrument” means the mortgage or deed of trust from Borrower in favor of Lender, as the same may be supplemented, amended or modified. “Surplus Cash” has the meaning specified in the HUD Regulatory Agreement. (c) Notwithstanding anything in the Restrictive Covenants to the contrary, except the requirements in 26 U.S.C. 42(h)(6)(E)(ii), to the extent applicable, the provisions hereof are expressly subordinate to (i) the Mortgage Loan Documents, including without limitation, the Security Instrument, and (ii) Program Obligations (the Mortgage Loan Documents and Program Obligations are collectively referred to herein as the “HUD Requirements”). Borrower covenants that it will not take or permit any action that would result in a violation of the Code, HUD Requirements or Restrictive Covenants. In the event of any conflict between the provisions of the Restrictive Covenants and the provisions of the HUD Requirements, HUD shall be and remains entitled to enforce the HUD Requirements. Notwithstanding the foregoing, nothing herein limits the Agency’s or City’s ability to enforce the terms of the Restrictive Covenants, provided such terms do not conflict with statutory provisions of the National Housing Act or the regulations related thereto. The Borrower represents and warrants that to the best of Item 9.h. - Page 5 Borrower’s knowledge the Restrictive Covenants impose no terms or requirements that conflict with the National Housing Act and related regulations. (d) In accordance with 26 U.S.C. 42(h)(6)(E)(i)(1), in the event of foreclosure (or deed in lieu of foreclosure), the Restrictive Covenants (including without limitation, any and all land use covenants and/or restrictions contained herein) shall automatically terminate, with the exception of the Post-Foreclosure Restrictions described in Section (e) below and the requirements in 26 U.S.C. 42(h)(6)(E)(ii), or as otherwise approved by HUD. (e) Notwithstanding paragraph (d), in the event of a foreclosure of Lender's interest under the Security Instrument or delivery by the Borrower of a deed in lieu, the restrictions requiring the use of the Improvements as senior housing set forth in Section 5.2.7 of the AHA and Article II, Section 2 of the Regulatory Agreement (“Senior Covenants”) shall continue to apply to the Project. The Senior Covenants shall remain superior to the Mortgage Loan Documents. (e) Borrower, City and the Agency acknowledge that Borrower’s failure to comply with the covenants provided in the Restrictive Covenants does not and shall not serve as a basis for default under the HUD Requirements, unless a default also arises under the HUD Requirements. (f) In enforcing the Restrictive Covenants, neither the Agency nor the City will file any claim against the Project, the Mortgage Loan proceeds, any reserve or deposit required by HUD in connection with the Security Instrument or HUD Regulatory Agreement, or the rents or other income from the property other than a claim against: i. Available surplus cash, if the Borrower is a for-profit entity; ii. Available distributions of surplus cash and residual receipts authorized for release by HUD, if the Borrower is a limited distribution entity; or iii. Available residual receipts authorized by HUD, if the Borrower is a non-profit entity. (g) For so long as the Mortgage Loan is outstanding, Borrower, City and Agency shall not further amend the Restrictive Covenants, with the exception of clerical errors or administrative correction of non-substantive matters, without HUD’s prior written consent. (h) Subject to the HUD Regulatory Agreement, the Agency and the City may require the Borrower to indemnify and hold the Agency and the City harmless from all loss, cost, damage and expense arising from any claim or proceeding instituted against Agency relating to the subordination and covenants set forth in the Restrictive Covenants, provided, however, that Borrower’s obligation to indemnify and hold the Agency and the City harmless shall be limited to available surplus cash and/or residual receipts of the Borrower. (i) Notwithstanding anything to the contrary contained herein, it is not the intent of any of the parties hereto to cause a recapture of the Low Income Housing Tax Credits or any portion thereof related to any potential conflicts between the HUD Requirements and the Restrictive Covenants. Borrower represents and warrants that to the best of Borrower’s Item 9.h. - Page 6 knowledge the HUD Requirements impose no requirements which may be inconsistent with full compliance with the Restrictive Covenants. The acknowledged purpose of the HUD Requirements is to articulate requirements imposed by HUD, consistent with its governing statutes, and the acknowledged purpose of the Restrictive Covenants is to articulate requirements imposed by Section 42 of the Code. In the event an apparent conflict between the HUD Requirements and the Restrictive Covenant arises, the parties and HUD will work in good faith to determine which federally imposed requirement is controlling. It is the primary responsibility of the Borrower, with advice of counsel, to determine that it will be able to comply with the HUD Requirements and its obligations under the Restrictive Covenants. [SIGNATURES FOLLOW ON THE NEXT PAGE] Item 9.h. - Page 7 BORROWER: COURTLAND-ARROYO GRANDE, L.P. a California limited partnership By: Foundation for Affordable Housing, Inc. a California corporation its General Partner By: __________________________ Thomas E. Willard President By: MFPA, Inc. a California corporation its General Partner By: __________________________ Sean Clark Vice-President A notary public or other officer completing this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and not the truthfulness, accuracy, or validity of that document. State of California County of San Luis Obispo ) ) ) On ____________________, before me, ____________________, notary public, personally appeared ______________________, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies) and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct. WITNESS my hand and official seal. (Notary Signature) (Seal) Item 9.h. - Page 8 AGENCY: SUCCESSOR AGENCY TO THE DISSOLVED ARROYO GRANDE REDEVELOPMENT AGENCY By: __________________________ James A. Bergman Executive Director A notary public or other officer completing this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and not the truthfulness, accuracy, or validity of that document. State of California County of San Luis Obispo ) ) ) On ____________________, before me, ____________________, notary public, personally appeared ______________________, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies) and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct. WITNESS my hand and official seal. (Notary Signature) (Seal) Item 9.h. - Page 9 CITY: CITY OF ARROYO GRANDE, a municipal corporation By: __________________________ James A. Bergman City Manager A notary public or other officer completing this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and not the truthfulness, accuracy, or validity of that document. State of California County of San Luis Obispo ) ) ) On ____________________, before me, ____________________, notary public, personally appeared ______________________, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies) and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct. WITNESS my hand and official seal. (Notary Signature) (Seal) Item 9.h. - Page 10 Exhibit A Legal Description Real property in the City of Arroyo Grande, County of San Luis Obispo, State of California, described as follows: PARCEL 1: PARCEL 1 AS SHOWN ON CERTIFICATE OF COMPLIANCE FOR LOT LINE ADJUSTMENT, AS EVIDENCED BY DOCUMENT RECORDED NOVEMBER 27, 2002 AS INSTRUMENT NO. 2002-104331 OF OFFICIAL RECORDS, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS : ALL OF THAT REAL PROPERTY DESCRIBED IN THE DEED FROM PHILLIPS-SMITH INVESTMENT COMPANY TO ROBERT H. NEWDOLL AND MERILEE PECK NEWDOLL RECORDED APRIL 5, 1990 IN VOLUME 3484 OF OFFICIAL RECORDS AT PAGE 59 IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. EXCEPTING THEREFROM THE SOUTHERLY 231.84 FEET, AS MEASURED ALONG THE EASTERLY AND WESTERLY SIDELINES OF THE PROPERTY DESCRIBED AS PARCEL 2 IN SAID DEED. PARCEL 2: EASEMENTS FOR SEWER, WATER LINES, STORM DRAINS, UTILITY MAINTENANCE, RETAINING WALL AND CONSTRUCTION AS SET FORTH IN THAT CERTAIN DECLARATION OF DEVELOPMENT COVENANTS, CONDITIONS AND RESTRICTIONS AND GRANT OF EASEMENTS RECORDED DECEMBER 8, 2002 AS INSTRUMENT NO. 2002-107107, AS AMENDED BY FIRST AMENDMENT THERETO RECORDED FEBRUARY 2, 2003 AS INSTRUMENT NO. 2003-016695, BOTH OF OFFICIAL RECORDS. APN: 077-071-029 Item 9.h. - Page 11 ATTACHMENT 1 Item 9.h. - Page 12 Item 9.h. - Page 13 Item 9.h. - Page 14 Item 9.h. - Page 15 Item 9.h. - Page 16 Item 9.h. - Page 17 Item 9.h. - Page 18 Item 9.h. - Page 19 Item 9.h. - Page 20 Item 9.h. - Page 21 Item 9.h. - Page 22 Item 9.h. - Page 23 Item 9.h. - Page 24 Item 9.h. - Page 25 Item 9.h. - Page 26