REPORT. For the Agenda of May 20, 2005

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1 REPORT DATE ISSUED: May 13, 2005 ITEM 104 REPORT NO.: SUBJECT: HCR05-47 For the Agenda of May 20, 2005 Final Authorization to Issue Multifamily Housing Revenue Bonds for Fairbanks Ridge Apartments (Council District 1) SUMMARY Issue: Should the Housing Commission recommend that the Housing Authority take the final step to issue tax-exempt multifamily housing revenue bonds to finance the acquisition and construction by Chelsea Investment Corporation of Fairbanks Ridge Apartments, in the Black Mountain Ranch Planning sub-area of the North City Future Urbanizing Area (NCFUA)? Recommendation: That the Housing Commission recommend Housing Authority authorization of the issuance of tax-exempt multifamily housing revenue bonds in an amount not to exceed $30,000,000 for the acquisition and construction of the 204-unit Fairbanks Ridge Apartments by Chelsea Investment Corporation and its affiliate, CIC Fairbanks, L.P., in the North Village at Black Mountain Ranch. Fiscal Impact: The issuance and sale of the bonds will not financially obligate the City, the Housing Authority or the Housing Commission because security for the repayment of the bonds will be limited to specific private revenue sources. All costs of the financing, including compensation for staff efforts in preparing the bonds, will be borne by the developer. The Housing Commission's origination fee as well as the annual administrative fee under the financing will be up to $69,000 (0.23 percent of the bond amount). Housing Affordability Impact: Because the development is being financed by bonds, tax credits, and State Multifamily Housing Program (MHP) funds, very deep affordability can be achieved. The project will restrict 34% of the apartments for occupancy by families earning between 25% and 35% of Area Median Income (AMI) (between $17,250 and $24,150 for a family of four) and 66% of the apartments for families earning no greater than 60% AMI ($41,400 for a family of four). The affordability restrictions will remain in place for 55 years. The restricted rents would also apply if Section 8 tenants occupy the units.

2 For the Housing Commission Agenda of May 20, 2005 Issuance of Multifamily Housing Revenue Bonds for Fairbanks Ridge Apartments Page 2 Environmental Impact: The City of San Diego as lead agency under the California Environmental Quality Act (CEQA) has reviewed and considered an EIR, LDR file no dated 7/28/98 and addendum, LDR file no dated 11/27/01, covering this activity. Adopted by resolution Nos. R and R Further, the environmental staff of the City of Stan Diego has issued a Notice of Exemption under the applicable provisions of CEQA for this action. Previous Related Action: On February 25, 2005, HCR05-19, the Housing Commission approved the project s financing team (Bond Counsel and Financial Advisor) and recommended the following actions, which were approved by the Housing Authority and City Council on March 15, 2005: Housing Authority Bond inducement resolution number 1262 declaring the Housing Authority s Official Intent to issue up to $37,000,000 in tax-exempt bonds; City Council resolution R approving the Housing Authority s issuance of tax-exempt bonds. BACKGROUND On March 18, 2005, the Housing Authority, on behalf of the developer, submitted an application to the California Debt Limit Allocation Committee (CDLAC) for a bond allocation in the amount of $30,000,000 for the Fairbanks Ridge Apartments. On May 18, 2005, CDLAC awarded the requested bond allocation to the project. The project s bond allocation will automatically revert to CDLAC unless the bonds are issued by August 16, A general description of the Housing Commission s Multifamily Bond Program and actions that must be taken by the Housing Authority and by the City Council to initiate and finalize the proposed financing are described in Attachment 1. DISCUSSION The Developer The applicant and developer for the proposed project is Chelsea Investment Corporation (Chelsea), which is headquartered in Encinitas. Mr. James Schmid is President and 100% shareholder of the corporation. Formed in 1986, Chelsea is involved in the acquisition, development, and management of multifamily housing projects in California and Arizona. Chelsea currently manages 17 apartment communities, including 1,514 multifamily units located in San Luis, Arizona and in San Diego, Carlsbad, Chula Vista, and in six Imperial

3 For the Housing Commission Agenda of May 20, 2005 Issuance of Multifamily Housing Revenue Bonds for Fairbanks Ridge Apartments Page 3 Valley communities. In addition to the proposed project, Chelsea and its affiliates own, have developed, or are now developing 35 apartment projects comprising a total of 4,299 units located in Southern California and Arizona. The Developer's Statement for Public Disclosure and audited financials are included as Attachment 2. Chelsea, through its 100% owned affiliate, CIC Fairbanks, L.P. will act as co-general partner in a limited partnership to be formed to own and operate the project. Pacific Southwest Community Development Corporation, an experienced California nonprofit public benefit corporation with which Chelsea has partnered on several projects, will serve as the managing general partner. An organizational profile is included as Attachment 3. The Richmond Group is expected to be the limited general partner. The San Diego Housing Commission and Housing Authority have worked successfully with Chelsea over the past several years to issue a total of $29,752,000 in multifamily housing revenue bonds for six developments totaling 445 units: Project Name Council District Year Bonds Issued Bond Amount # Of Units Regency Centre $4,100, Torrey Highlands $4,780, Villa Andalucia $2,231, Villa Glen $2,048, Windwood Village $6,768, Rancho del Norte $9,825, The Project Fairbanks Ridge is a new construction project that will provide a total of 204 units. The development will be located in the northern portion of Black Mountain Ranch (Subarea I) at the intersection of Paseo del Sur and Babcock Street. The location map is included as Attachment 4. The development of Fairbanks Ridge will partially fulfill the affordable housing requirements for the master planned community of the North Village at Black Mountain Ranch. At build-out, the North Village project will include 2,314 market rate dwelling units, 469 affordable units, and a mixture of commercial, employment, and public services. Fairbanks Ridge will include 13 three-story residential buildings, a community facility of approximately 3,200 square feet, two tot lots, a basketball court, and a swimming pool. The 13 residential buildings will consist of 48 one-bedroom, one-bath apartments; 72 twobedroom, two-bath apartments; and 84 three-bedroom, two-bath apartments. The project will restrict approximately 34% of the units to households earning between 25% and 35% AMI and 66% of the units to households earning no greater than 60% AMI. The restricted rents for the

4 For the Housing Commission Agenda of May 20, 2005 Issuance of Multifamily Housing Revenue Bonds for Fairbanks Ridge Apartments Page 4 project will also apply if Section 8 tenants occupy the units. The Regulatory Agreement that determines the level of affordability for the project will be in existence for 55 years. Rent and Income restrictions for the project are outlined in the chart below: Type Square Footage AMI Number of Units Restricted Rent (Net of utility allowance) Market Rate Monthly Savings per unit 1 Bedroom % AMI 4 $294 $1,049 $755 1 Bedroom % AMI 6 $359 $1,049 $690 1 Bedroom % AMI 6 $423 $1,049 $626 1 Bedroom % AMI 32 $747 $1,049 $302 2 Bedroom % AMI 6 $352 $1,369 $1,017 2 Bedroom % AMI 11 $430 $1,369 $939 2 Bedroom % AMI 8 $507 $1,369 $862 2 Bedroom % AMI 47 $895 $1,369 $474 3 Bedroom 1,125 25% AMI 10 $386 $1,557 $1,171 3 Bedroom 1,125 30% AMI 10 $472 $1,557 $1,085 3 Bedroom 1,125 35% AMI 8 $558 $1,557 $999 3 Bedroom 1,125 60% AMI 56* $990 $1,557 $567 Total: 204 N/A N/A $9,487 Total Annual Savings $1,541,868 * Includes one manager s unit Financing Structure The total development cost is approximately $58,200,000; sources of funds include the taxexempt bonds, tax credits, California Multifamily Housing Program (MHP), master developer contribution, and deferred developer fee. Up to $30 million in bonds will be issued for the project. Approximately $17 million of the estimated bond amount will be paid off at conversion to permanent financing, resulting in a permanent bond of approximately $13 million. The large amount of bonds to be retired at conversion to permanent financing is due to the fact that approximately $22 million in tax credit equity and MHP loan proceeds only become available at conversion. The bonds will be sold through a private placement with US Bank. As part of proposed financing, US Bank will be required to sign an investor letter certifying that they are a sophisticated investor and understand the risk associated with the purchase of the bonds. The transfer of the bonds by US Bank or any subsequent bondholder will be restricted to transferees who would take all of the bonds (to maintain ownership by a single bondholder), and who would represent to the Authority and the Commission that they are sophisticated investors, are buying for investment and not for resale, and have made due investigation of the

5 For the Housing Commission Agenda of May 20, 2005 Issuance of Multifamily Housing Revenue Bonds for Fairbanks Ridge Apartments Page 5 information they would deem material in connection with the purchase of the bonds. Finally, US Bank must agree that should a mortgage default occur, there would not be a bond default. The project has a total development cost of approximately $58,200,000. In addition to the bonds, the project will be funded from the following permanent sources: tax credit equity investments ($19,100,000) a low-interest loan from the State of California s Multifamily Housing Program ($10,000,000), deferred developer fees ($1,000,000), and a contribution from the master developer ($15,300,000) as partial fulfillment of its obligations to provide affordable housing in the NCFUA. Sources and uses of the funds are shown in Exhibit A of Attachment 5. Public Disclosure and Bond Authorization Because the bonds are being sold through a private placement, an official statement will not be used. In addition, the bonds will not be subject to continuing disclosure requirements nor will they be credit enhanced or rated. However, it is necessary for members of the Housing Authority to disclose any knowledge, not available to the general public, about the viability of the project. As part of its authorizing resolution, the Housing Authority will be asked to approve a Trust Indenture, Loan Agreement, Regulatory Agreement and any other document as may be necessary or advisable in consultation with General Counsel to the Authority and Bond Counsel to document the transaction. At the time of docketing, all bond documents in substantially final form will be presented to members of the Housing Authority. The bonds will be issued pursuant to a Trust Indenture between the Housing Authority and the trustee. The Trustee holds the funds and other collateral pledged under the Trust Indenture to secure payment of the bonds based upon instructions contained in the Trust Indenture. Under the terms of the Loan Agreement, the Housing Authority will loan the proceeds of the bonds to the borrower in order to build the project. The Loan Agreement sets out the terms of repayment and the security for the loan. The Housing Authority assigns its rights to receive repayments under the loan to the Trustee. The Regulatory Agreement will be recorded against the property in order to ensure the longterm use of the project as affordable housing. The Regulatory Agreement will also ensure that the project complies with all applicable federal and state laws. The issuance of bonds will not constitute a debt or liability of the Housing Authority, the City, or the Housing Commission. Neither the faith and credit nor the taxing power of the City or the Authority would be pledged to the payment of the bonds because security for bond payments is limited to the value of the property and its revenue sources. The developer is

6 For the Housing Commission Agenda of May 20, 2005 Issuance of Multifamily Housing Revenue Bonds for Fairbanks Ridge Apartments Page 6 responsible for the payment of all costs under the financing, including the Housing Commission's annual administrative fee. Staff has been working with CSG Advisors, Inc., the Housing Commission s Financial Advisor, to perform due diligence concerning the proposed financing and to formulate a recommendation for the Housing Authority. After evaluating the terms of the proposed financing and the public benefits to be achieved, it is the Financial Advisor s recommendation that the bond issuance for the project be authorized. The Financial Advisor s analysis and recommendation to proceed is included as Attachment 5. Staff is also working with the City s Disclosure Practices Working Group to assure that the issuance of Housing Authority bonds is in conformance with the City s requirements. ALTERNATIVE Do not recommend approval of the TEFRA resolution. If the recommended actions are not taken, the project will not be able to benefit from tax-exempt below-market financing. Respectfully submitted, Approved by, Cissy Fisher Director of Housing Finance & Development Elizabeth C. Morris President & Chief Executive Officer ATTACHMENTS: 1. Description of Multifamily Bond Program 2. Developer Disclosure and Financial Statements* 3. Profile of Nonprofit Managing General Partner 4. Project Location Map 5. Financial Advisor s Letter *Distribution of this attachment is limited. A copy is available for review at the Housing Commission s 1625 Newton Avenue office and the office of the City Clerk, 2 nd floor, 202 C Street. G:\hfshare\Reports\Bond Reports\Fairbanks Final Authorization.doc

7 Attachment One HOUSING COMMISSION MULTIFAMILY HOUSING REVENUE BOND PROGRAM Summary General Description: The multifamily housing bond program provides below-market financing (based on bond interest being exempt from income tax) for developers willing to set aside a percentage of project units as affordable housing. Multifamily housing revenue bonds are also known as private activity bonds bonds because the projects are owned by private entities, often including nonprofit sponsors and for-profit investors. Bond Issuer: Housing Authority of the City of San Diego. There is no direct legal liability to the City, the Housing Authority or the Housing Commission in connection with the issuance or repayment of bonds; there is no pledge of the City s or the Housing Authority s faith, credit or taxing power. The bonds do not constitute a general obligation of the issuer because security for repayment of the bonds is limited to specific private revenue sources, such as project revenues. The developer is responsible for the payment of costs of issuance and all other costs under each financing. Affordability: Minimum requirement is that at least 20% of the units are affordable at 50% of Area Median Income (AMI). Alternatively, a minimum of 10% of the units may be affordable at 50% AMI with an additional 30% of the units affordable at 60% AMI. The Housing Commission requires that the affordability restriction be in place for a minimum of 15 years. In practice, projects financed by multifamily housing bonds are affordable for a minimum of 30 years. Bonds may also be combined with other financing sources to create deeper affordability and longer terms of restriction. Rating: Generally AAA or its equivalent with a minimum rating of A or, under conditions that meet IRS and Housing Commission requirements, bonds may be unrated for private placement with institutional investors (typically, large banks). Additional security is normally achieved through the provision of outside credit support ( credit enhancement ) by participating financial institutions that underwrite the project loans and guarantee the repayment of the bonds. The credit rating on the bonds reflects the credit quality of the credit enhancement provider. Approval Process: Inducement Resolution: The bond process is initiated when the issuer (Housing Authority) adopts an Inducement Resolution to establish the date from which project costs may be reimbursable from bond proceeds (if bonds are later issued) and to authorize staff to work with financing team to perform a due diligence process. The Inducement Resolution does not represent any commitment by the Housing Commission, Housing Authority, or the developer to proceed with the financing. TEFRA Hearing and Resolution (Tax Equity and Fiscal Responsibility Act of 1982): To assure that projects making use of tax-exempt financing meet appropriate governmental purposes and provide reasonable public benefits, IRS Code requires that a public hearing be held and that the issuance of bonds be approved by representatives of the governmental unit with jurisdiction over the area in which the project is located (City Council). This process does not make the City financially or legally liable for the bonds or for the project.

8 [Note: It is uncommon for the members of the City Council to be asked to take two actions at this stage in the bond process---one in their capacity as the City Council (TEFRA hearing and resolution) and another as the Housing Authority (bond inducement). Were the issuer (Housing Authority) a more remote entity, the TEFRA hearing and resolution would be the only opportunity for local elected officials to weigh in on the project.] Application for Bond Allocation: The issuance of these private activity bonds (bonds for projects owned by private developers, including projects with nonprofit sponsors and for-profit investors) requires an allocation of bond issuing authority from the State of California. To apply for an allocation, an application approved by the Housing Authority and supported by an adopted inducement resolution and by proof of credit enhancement (or bond rating) must be filed with the California Debt Limit Allocation Committee (CDLAC). In addition, evidence of a TEFRA hearing and approval must be submitted prior to the CDLAC meeting. Final Bond Approval: The Housing Authority retains absolute discretion over the issuance of bonds through adoption of a final resolution authorizing the issuance. Prior to final consideration of the proposed bond issuance, the project must comply with all applicable financing, affordability, and legal requirements and undergo all required planning procedures/reviews by local planning groups, etc. Funding and Bond Administration: All monies are held and accounted for by a third party trustee. The trustee disburses proceeds from bond sales to the developer in order to acquire and/or construct the housing project. Rental income used to make bond payments is collected from the developer by the trustee and disbursed to bond holders. If rents are insufficient to make bond payments, the trustee obtains funds from the credit enhancement provider. No monies are transferred through the Housing Commission or Housing Authority, and the trustee has no standing to ask the issuer for funds. Bond Disclosure: The offering document (typically a Preliminary Offering Statement or bond placement memorandum) discloses relevant information regarding the project, the developer, and the credit enhancement provider. Since the Housing Authority is not responsible, in any way, for bond repayment, there are no financial statements or summaries about the Housing Authority or the City that are included as part of the offering document. The offering document includes a paragraph that states that the Housing Authority is a legal entity with the authority to issue multifamily housing bonds and that the Housing Commission acts on the behalf of the Housing Authority to issue the bonds. The offering document also includes a paragraph that details that there is no pending or threatened litigation that would affect the validity of the bonds or curtail the ability of the Housing Authority to issue bonds. This is the extent of the disclosure required of the Housing Authority, Housing Commission, or the City. However, it is the obligation of members of the Housing Authority to disclose any material facts known about the project, not available to the general public, which might have an impact on the viability of the project. F: Bond Program*Summary*Mar200

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