CADA Board of Directors August 3, 2017 Special Board Meeting AGENDA ITEM 2 EAST END GATEWAY SITE 1 APPROVAL OF SALE OF THE EVIVA MIDTOWN PROJECT

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1 August 1, 2017 TO: SUBJECT: CADA Board of Directors August 3, 2017 Special Board Meeting AGENDA ITEM 2 EAST END GATEWAY SITE 1 APPROVAL OF SALE OF THE EVIVA MIDTOWN PROJECT CONTACT PERSON: Marc de la Vergne, Deputy Executive Director RECOMMENDED ACTION Staff recommends that the Board adopt a resolution authorizing The Warren, LLC ( Developer ) to sell the Eviva project to Fountains Eviva, LLC and RLD Eviva, LLC and authorizing the Executive Director to enter into an Agreement to Complete Post-Disposition and Development Obligations and a Parking Lease Agreement with Fountains Eviva and RLD Eviva. BACKGROUND On March 26, 2010, CADA and East End Gateway One, LLC (Developer) entered into a Disposition and Development Agreement (DDA), followed by a Revised and Restated DDA in 2012, and seven amendments between 2012 and During that time, East End Gateway One, LLC was replaced by The Warren, LLC, which remains the project developer. Construction of the project began in 2014 and after delays due to the demise of the modular units subcontractor and the need to significantly redesign the project, work resumed in In September 2016, Tricorp Hearn Construction completed construction of the project and received a Certificate of Occupancy from the City of Sacramento, allowing on-site leasing activities to commence. On September 23, 2016 the Developer requested that CADA modify the terms of the Revised and Restated DDA so that it would be able to sell the project earlier than allowed by the DDA. It explained that the present moment, when the supply of new Class A multi-story apartment complexes in Sacramento is highly limited and investor interest in downtown real estate is high, offers the best opportunity in the foreseeable future to sell the project at a favorable price in order to recoup $9.9 million in project cost overruns and earn a profit. Following removal of the leasing trailer from the CADA parking lot adjacent to the Eviva building, completion of repairs to the lot, and execution of a parking covenant by the Developer in November 2016 allowing for limited CADA tenant parking in the Eviva garage, the Executive Director issued CADA s Certificate of Substantial Completion on December 6, 2016.

2 On January 27, 2017, the Board approved a resolution authorizing the Developer to begin marketing the project for sale on the condition that its marketing materials and term sheet for a sale include the conditions set forth in the resolution and with the understanding that CADA Board approval would be required prior to a sale. The resolution is included as Attachment 1. On July 8, 2017, the Developer notified CADA that it had received a $53 million offer from Fountains Apartments, Ltd., a division of Sequoia Equities, to purchase Eviva Midtown. The proposed buyers are Fountains Eviva, LLC and RLD Eviva, special purpose entity Sequoia is creating to purchase the property. Through Denton Kelly, a partner in The Warren, LLC, and Sequoia has requested a special meeting of the Board to review and approve the sale, which is proposed to close escrow on or about September 10. ANALYSIS The January 2017 Board resolution states that CADA will consider the Developer s proposed sale of the Eviva property provided that its marketing materials and terms of sale reflect six conditions: 1. At a minimum, the purchase must be financially beneficial to CADA. 2. The sale should result in a 100% buyout of existing debt and equity investors. 3. Tax increment will be distributed to a new buyer under a new agreement between CADA and purchaser. The annual rebate payments shall be equal to the amount of real property taxes paid by the Developer for the Property each year, less any County administration fees, up to a maximum amount of $300,000 annually, until the sum of $3,000,000 is reached, in accordance with the terms of the Revised and Restated DDA. 4. During the term of the CADA agreement with the purchaser, the purchaser must provide high-quality maintenance of the project. If it does not, CADA will have the right to curtail tax increment payments until defects are cured. 5. All remaining unmet DDA requirements must be incorporated in a term sheet between buyer and seller to be incorporated into a covenant to be recorded against title contemporaneously with the sale. 6. The purchaser must be approved by Authority in accordance with Section of the DDA (as added by the Fourth Amendment to DDA), which approval shall not be unreasonably withheld. Separately, the DDA requires that CADA approve any loan associated with the sale of the Eviva property. That requirement is further discussed later in this staff report in the section titled Purchase. Financially Beneficial Impact to CADA The purchase price is $53 million. The project needed to sell for approximately $41 million to enable the Developer to recoup its $9.9 million in development cost overruns and break even. To be financially beneficial to CADA as required by the January 2017 Board resolution the transaction must yield more property tax increment revenue to CADA than it would receive if the project were not sold. In the current environment, property sales in the CADA Capitol Area and in the R Street Area are resulting in increased tax appraisals, so it is fair to assume that the sale will result in greater tax revenues than CADA would otherwise receive. To date, CADA has received no tax increment from the Eviva project.

3 Assuming the County appraises the property at $53 million, this would result in an annual property tax payment to CADA of $503,000, after deducting the County administrative fees of approximately $26,500. After payment of $300,000 in tax increment subsidy to the buyer, as required under the Agreement to Complete Post-DDA Obligations discussed below, the remaining $203,500 will be sufficient to pay CADA s $73,260 annual debt service to DGS for the property purchase from the State and the $107,616 annual cost to subsidize 24 market-rate CADA apartments to a belowmarket rate, leaving net tax increment revenues of $22, Since the current CADA budget makes the conservative assumption that CADA will not receive any tax increment proceeds in excess of the $300,000 required to meet its tax increment obligation to the project, this sale would result in nearly $200,000 more in tax increment revenues each year than what the budget currently anticipates. Starting in Year 11 after tax increment begins to flow to CADA, once CADA s tax increment payments to the buyer reach $3,000,000 and cease, once CADA s land loan payments to DGS cease and after deducting the 20% affordable housing set-aside of $129,000, CADA s net annual property tax revenues will be $482,000 per year. They will reach $577,000 per year in Year 20. Total net TI proceeds to CADA over the first 10 years will be approximately $600,000. Buyout of Investors and Lenders. The January 2017 Board resolution stated that CADA would require 100% payoff of project lenders and investors. The purpose behind the requirement was to ensure that following the purchase no investors or lenders would remain to make any claims on property tax increment to be generated by the project. Subsequently, CADA s counsel has determined that no entities except the buyer would have any such claim. As a consequence, tax increment is not at risk for a claim by a third party. As staff has related to the Board previously, there have been claims by Tricorp Construction, the general contractor, and LDA, the project architect, against The Warren, LLC arising out of fee disputes. Tricorp and LDA placed liens on the property. Tricorp recently settled its claim with The Warren, LLC and removed its lien. According to The Warren, LLC s counsel, the Developer is bonding around the LDA lien, which means that it will purchase a bond that will cover the amount of the lien in the event a settlement cannot be reached. CADA s Counsel has advised that as a result, the closing will not be affected and title will not be clouded. Although CADA is still currently a party to the lawsuit filed by LDA against The Warren, LLC, CADA has not been served with the lawsuit and The Warren, LLC, has agreed to indemnify and defend CADA in the lawsuit. The bond will ensure that The Warren, LLC has enough funds to pay the amounts allegedly owed to LDA through the lawsuit or settlement. Post-DDA Agreement The January 27 Board resolution stated that tax increment would be distributed to a new buyer under a new agreement between CADA and the purchaser which would replace the Revised and Restated Disposition and Development Agreement with The Warren, LLC. The resolution also stated that the Agreement would incorporate any unfulfilled DDA requirements which would be incorporated into a covenant entered into between the Developer and the buyer and recorded against title for the property. These and other pertinent items have been incorporated into an agreement between CADA and the buyer. The agreement, entitled Agreement to Complete Post- Disposition and Development Obligations, is included with this staff report as Attachment 2. 1 By law, CADA must set aside 20% of the gross Tax Increment revenues it collects and use them exclusively for the provision of below-market rate housing. In this instance, 20% of gross TI is $106,000. A small additional amount of CADA funding will be needed to subsidize 24 CADA apartments to below-market rents, bringing the total required to $107,616.

4 After discussions with the buyer and its counsel, CADA s counsel has recommended that the DDA remain in place and that the Agreement to Complete function as a further amendment to the DDA, in effect serving as an eighth and final amendment to the DDA. The Agreement addresses tax increment assistance, parking, signage, storm water planter maintenance and general maintenance of the property, as follows: 1. Tax Increment Assistance Assistance Amount. As in the Disposition and Development Agreement with The Warren, LLC, the Agreement commits CADA to provide the buyer with $3 million in financial assistance in the form of annual tax rebate payments. The Developer believed that a sale would not be possible without the Assistance Amount continuing to flow to the project over 10 years, consistent with the approach taken in the DDA. The annual rebate payments will equal the amount of property taxes paid by buyer for the Property each year, less any County of Sacramento administration fees, up to a maximum amount of $300,000 annually, until the sum of $3 million is reached. CADA will make the annual payment to buyer within fifteen days of its receipt of the payment from the County Assessor for that tax year (estimated to be June 1 st of each year). Early Sale and Gross Rent Trigger. The Developer s September 23, 2016 request for permission to sell the project asked CADA to consider two changes to the Revised and Restated Disposition and Development Agreement, one that would allow the Eviva project to be sold sooner than two years following CADA s issuance of the Certificate of Substantial Completion without triggering a CADA suspension of the Developer s tax increment subsidy ( Assistance Amount ) and a second that would remove a term that allows CADA to cease providing its Assistance Amount to the project in the event the project generates gross income of more than $3.5 million per year. As noted in the January 2017 staff report, CADA incorporated those provisions into the DDA to ensure that the project would not be sold prior to full lease-up of retail, residential and parking components and to ensure that the Developer would not realize an excessive profit. The Developer requested these DDA amendments in order to attract buyers and effect a sale. The January 2017 Board resolution authorized the Developer to market the project subject to certain conditions, including that CADA would waive these provisions in a future agreement with a buyer. Accordingly, the Agreement does not include these provisions. Project Sale. If the buyer sells, conveys, or transfers the property, the Assistance Amount and the Agreement will automatically terminate. If the buyer is a corporation, limited liability company, partnership or joint venture, any change in the ownership, control or interest in buyer will be deemed to be a transfer of the Property. This provision does not apply to the sale of individual condominiums. Condominium Sales. If the project is converted into a condominium project, then upon the sale of each condominium, the Assistance Amount owed to the buyer will be reduced by the amount of the net sales proceeds from each sale. Tax Appeals. The buyer must not appeal any property or other tax assessed on the property without CADA s prior written consent. 2. Project Agreements Recorded Agreements. Under the Agreement, the buyer acknowledges and agrees to comply with the covenants and agreements that have been recorded against the Property, including the Covenant and Agreement for Parking Spaces, dated December 22, 2016, and the Signage Agreement dated August 25, These agreements are in place to ensure

5 that signage that is placed on the building conforms to stated CADA guidelines and that the CADA surface parking spaces that were lost to the construction of Eviva s tranformers are replaced within the Eviva garage and provided to CADA at its prevailing surface parking rental rates in perpetuity. The Agreement provides that a default under the parking covenant constitutes a default under this agreement and that CADA will have the right to curtail tax increment payments until the default is cured. Stormwater Drainage Maintenance Agreement. Prior to close of escrow on the buyer's purchase of the property, the buyer agrees to execute the Stormwater Drainage Maintenance Agreement, if it has not already been signed by The Warren, LLC before then, to be deposited into escrow and recorded against the Property at close of escrow. The Executive Director previously signed a stormwater planter maintenance agreement with the Warren, LLC, prior to construction of Eviva Midtown, but because the planters were redesigned as part of a location shift from 16 th Street to N Street, the maintenance requirements changed considerably and became simpler, requiring an updated agreement now, before the property changes hands. Staff is not seeking approval to execute this document since the the Board previously authorized the Executive Director to enter into a maintenance agreement. The stormwater agreement is included as an exhibit to the Agreement to Complete Post-DDA Requirements. Parking Lease Agreement. The Warren, LLC will be signing a CADA Parking Lease Agreement with CADA for the lease of a single space in its surface parking lot adjacent to the property for the benefit of the Project's retail tenant(s). The effective date of the lease will be August 7. Upon close of escrow, the Parking Lease will be assigned by The Warren, LLC to the buyer in a form reasonably approved by Authority, under which the buyer will assume all obligations of the Parking Lease. The space is a small space which is not suitable for use by CADA s residential or commercial tenants or its maintenance vehicles, but is attractive to Eviva s commercial tenant, Jimmy John s. Since the lease is not the typical CADA one-year lease, but is for a term of 10 years, with an option to extend for 5 years, staff is seeking Board authorization for the Executive Director to execute the lease. The Parking Lease Agreement is included as an exhibit to the Agreement to Complete Post-DDA Requirements. 3. Maintenance of the Property The Resolution states that during the term of the CADA agreement with the purchaser, the purchaser must provide high-quality maintenance of the project. This requirement underscores CADA s commitment to a project that will continue to be well-maintained, present an attractive face to the neighborhood, and reflect well on CADA. The Agreement states that if the purchaser does not properly maintain the property, CADA will have the right to curtail tax increment assistance payments until defects are cured. Approval of the Purchaser The January resolution states that the purchaser must be approved by Authority in accordance with Section of the DDA. The Developer must acquire Authority s prior written consent to the conveyance, which consent shall not be unreasonably withheld after review of the following information, and any other information reasonably required by Authority: (1) operating agreements, resolutions, and other relevant documents related to

6 the new ownership entity, and (2) evidence from the new ownership entity of both strong financial ability and strong management and development experience necessary to successfully operate, manage, and maintain the Project. Ownership Entities The entities purchasing the Eviva property and borrowing funds to make the purchase are Fountains Eviva, LLC and RLD Eviva, LLC. Both the Fountains Eviva LLC and RLD Eviva, LLC would hold ownership as Tenants in Common. Tenancy in Common is a form of ownership where there are multiple entities that own a property. Fountains Eviva will hold a 90% ownership interest and RLD Eviva will hold a 10% interest. RLD Eviva is a passive investor that has invested in other Sequoia properties for over 20 years. The sole member of Fountains Eviva, LLC is Fountains Apartments, Ltd, of which Sequoia Equities XLI LLC is General Partner, with a 1% interest. The general partner s three members are Mark Carter, R. Ken Coit and Patrick Reilly. Mark Carter is Sequoia s President and CEO, R. Ken Coit is Sequioa s President/Broker Dealer and Pat Reilly is Sequoia s Director of Acquisitions. These three individuals serve as general partners of Sequoia s affiliated partnerships, of which Fountains Apartments is one example. Each property Sequoia owns is owned by a separate affiliated partnership set up for the purpose. Fountains Eviva LLC also has various Class A limited partners, which own a 99% interest in Fountains Apartments, Ltd; a Class B preferred equity partner Sequoia Equities XVII, LLC; and a Class C preferred equity partner, Coit Financial Group II, LLC. This structure is illustrated in the organization chart in Attachment 3. Representatives of Fountains Eviva will attend the Board meeting and will be available to answer questions about this structure. The biographies of the general partners are included in Attachment 4, which is the Sequoia brochure. Loan and CADA Loan Approval The property purchase price is $53 million. Fountains Eviva, LLC and RLD Eviva, LLC are purchasing the property with a Fannie Mae loan through Walker Dunlop. Fannie Mae is Sequoia s biggest lender. The loan and down payment amounts are as follows: Purchase Price: $53,000,000 Loan Amount $34,450,000 * Down Payment $18,550,000 Down Payment Sources: Fountains Eviva LLC $16,695,000 (90%) RLD Eviva LLC $1,855,000 (10%) $18,550,000 *This is a current proposed loan amount, and is subject to change based on property income changes, and loan interest rate changes, until the loan is locked. As noted earlier, the DDA requires CADA to approve any loan associated with the purchase of the Eviva project. Accordingly, the Board resolution associated with this staff report states that the Board is conditioning its approval of the sale on receipt of documents from the buyer demonstrating that it has secured a loan for the sale. Buyers Financial Capacity The buyers - Fountains Eviva, LLC and RLD Eviva, LLC - will be newly-formed entities, to be created shortly, and therefore do not have their own historical financial reports. Sequoia provided financial

7 statements to CADA s counsel, for staff review, for the Sequoia portfolio as a whole. They provided information for 2015, 2016 and 2017 year to date. For all three years, the results of operations reflect significant, positive net operating income, before debt service. After accounting for debt service, property income remains strongly positive. Management/Ownership Experience As the Sequoia brochure indicates, Sequoia was established in 1986 as a multifamily investment management company. Currently, it has 350 employees. It provides in-house acquisition, asset and property management, marketing, reporting and construction services to investors. Since it was created, Sequoia has acquired and managed over 14,000 apartment units and currently is managing approximately 12,000 units in 49 properties in California, Nevada Washington and Oregon. Sequoia describes its portfolio as consisting of market rate workforce rental housing and college student housing. The company has apartment buildings in approximately 19 locations throughout California. Most of Sequoia s holdings are in the unit range. Below is a list of Sacramento-area properties managed by Sequoia and which comprise a portion of the Sequoia portfolio under the General Partners' Management. Iron Point at Prairie Oaks 1550 Iron Point Rd Folsom, CA Units: 280 Reserve at Capital Center Apartment Homes 3466 Data Drive Rancho Cordova, CA Units: 240 Hidden Lake Condominium Rentals 7551 Greenhaven Drive Sacramento, CA Units: 272 The Artisan 8282 Calvine Rd Sacramento, CA Units: 264 Deer Valley Apartment Homes 1801 Eureka Road Roseville, CA Units: 262 Venu at Galleria Condominium Rentals 301 Gibson Drive Roseville, CA Units: 247 Under contract to purchase Wolf Ranch Condominiums Apartments Homes 7200 Jacinto Ave Sacramento, CA 95823

8 Units: 160 According to Sequoia representatives, the company has been trying to buy in Portland, Sacramento, and Bay Area downtowns for a number of years. It is attracted to vibrant and growing downtowns with good walkability and attractive demographics. Sequoia is attracted to renters who prefer more of an urban neighborhood feel, affording them the ability to walk to stores, shops, and cultural amenities, along with enjoying the benefits of rapid transit options and proximity to employment. In Sacramento, Sequoia s experience has been that it has not been easy to get into the downtown market and purchase a multistory product, so the Eviva building is a welcome addition to its portfolio. It will be exchanging another property to acquire Eviva Midtown. All of Sequoia s apartment communities are managed and maintained in-house, with the exception of 10 properties where there was a qualified management team already in place when it purchased them. Fountains Eviva LLC will be the entity controlling all property services. The General Partner of Fountains Eviva is Mark Carter. Sequoia operates an internal training program that continually trains and retrains property management/maintenance staff. Sequoia employs a tracking system to monitor maintenance and other property management metrics and to identify the speed with which issues are addressed and, if issues are not fixed fast enough, to help staff to determine why. According to Sequoia, staff are incentivized to provide quick turn-around on issues and to provide superior customer service. Sequoia owns several mixed-use buildings? According to Sequoia, its downtown Portland property has ground floor retail, with 7-9 tenant spaces which the company currently is the process of leasing up. In downtown Seattle, Sequoia is considering one of its properties for retail. Sequoia s Glendale and Monrovia, California, properties each has a retail component. Sequoia has not yet selected a broker for Eviva Midtown. POLICY ISSUES The Disposition and Development Agreement between CADA and the Developer requires CADA Board approval of any proposed sale. The January 2017 Board resolution set forth the Board s conditions of approval. The Developer and the proposed buyer have met the conditions of approval. Accordingly, staff is recommending the Board adopt a resolution approving the sale and authorizing the Executive Director to enter into an Agreement to Complete Post-Disposition and Development with Fountains Eviva, LLC and RLD Eviva, LLC. The tentative date for close of escrow is September 10. STRATEGIC PLAN Approving the proposed resolution would advance the following Strategic Plan goals: Develop Complex Infill, and promote Urban development leadership. FINANCIAL IMPACT The projected sale s financial impact to CADA is discussed in the section entitled Financially Beneficial Impact to CADA. ENVIRONMENTAL REVIEW The project s environmental impacts have been studied previously and the project s scope is not being changed by this action.

9 CONTRACT AWARD CONSIDERATIONS The proposed action is not subject to the provisions of the CADA Contract Policy. Attachments: 1. CADA Resolution January Agreement to Complete Post-Disposition and Development Obligations 3. Buyer/Borrower Organization Chart 4. Sequoia Equities Brochure