COUNTY OF SAN MATEO

Inter-Departmental Correspondence

Department of Housing

 

DATE:

December 11, 2007

BOARD MEETING DATE:

December 18, 2007

SPECIAL NOTICE/HEARING

None

VOTE REQUIRED

Majority

 

TO:

Honorable Board of Supervisors

FROM:

Duane Bay, Director, Department of Housing

SUBJECT:

Approval of a Supplemental Indenture of Trust, and Authorization of its Execution and Delivery and Other Actions in Connection with the Pacific Oaks Apartments

 

Recommendation

Adopt a Resolution:

 

1.

Approving a Supplemental Indenture of Trust, and.

 

2.

Authorizing the Director of the Department of Housing to Execute and Deliver and Perform Other Actions in Connection with the Pacific Oaks Apartments

 

Vision Alignment

Commitment: Offer a full range of housing choices.
Goal 9:
Housing exists for people at all income levels and for all generations of families.

 

The action contributes to this commitment and goal by helping to retain the affordability of 104 apartments for seniors.

 

Performance Measures:

Measure

FY 2005-06
Actual

FY 2006-07
Target

Number of County-supported affordable housing units completed and occupied

158

200

 
 

Background

In accordance with the Section 142(d) of Internal Revenue Code for the issuance of private activity bonds for public purposes such as affordable housing, local governmental jurisdictions may issue these bonds, which are tax-exempt to the bond buyer. Because purchasers of these bonds are not taxed on the interest income, they accept a lower interest rate on the bond and the result, in the case of multifamily housing bonds, is lower interest costs for the housing developer. In return for a loan with a favorable interest rate, the developer is required to provide housing affordable to low- and very low-income households. An affordability covenant or restriction is recorded on the land to cover at least 33% of the units.

To control how much foregone taxable income can be generated, the tax code imposes a cap on the volume of tax-exempt bonds that can be issued. States are given statutory authority to issue a certain amount of private activity bonds in accordance with their population size. States may transfer issuance authority to counties. In the case of the County of San Mateo, the subject housing bonds were issued in accordance with state statute that gives authority to counties to incur such indebtedness (Chapter 7 of part 5 of Division 31 of the California Health and Safety Code). These private activity bonds have no fiscal impact on the balance sheets of the issuing jurisdictions, which merely act as the conduit for the pass-through of the bonds.

Developers typically apply to the bond issuer for an allocation for their project. Key parties to the transaction include the trustee and the credit enhancer. The trustee makes the loan to the developer, and the credit enhancer guarantees bond repayment to the bondholder from loan repayments. The bond indenture is the document that governs the terms and conditions of the bond issuance.

In 1987, the County issued multifamily housing revenue bonds totaling $5,550,000 to assist in the development of Pacific Oaks Apartments,104 units of senior housing in Pacifica (“Project”). BRIDGE Housing Corporation (“BRIDGE”) was the developer through the limited partnership, Pacific Oaks Associates. The trustee was Seattle-First National Bank, since succeeded by U.S. Bank. The credit enhancer is Wells Fargo, which, along with the owner, Pacific Oaks Associates, is now requesting the County to amend the bond indenture to reflect current business standards and practices.

Discussion

As originally written, the indenture only allows for bond redemption, that is, for the bonds to be paid off, in the event of a loan default. The requested modification would allow the added option of bond repurchase when there is a default. This latter situation would allow the credit enhancer to buy back the bonds and for the trustee/bank to negotiate a loan workout with the borrower, in this case, BRIDGE, to restructure the loan terms. Otherwise, in the event of default, the credit enhancer would have to pay off the bondholders and require the trustee to foreclose on the loan, thereby eliminating the affordability restrictions recorded on the land. The repurchase option could better preserve the affordability restrictions for the 10 years remaining on the 30-year affordability term on the Project.

As a conduit for the housing bonds, the County does not track repayments as there is no fiscal liability to the County. However, the County does monitor the Project for long-term affordability. The amended indenture would encourage distressed parties to resort to measures other than foreclosure for non-payment, and keep intact the affordability restrictions.

Given the rash of recent home foreclosures, it should be noted that the loan under this indenture is not at risk of foreclosure. The debt is a seasoned loan in which much equity has accrued to the borrower, and as such, these kinds of borrowers tend to be vigilant in making timely loan payments. Also this project receives substantial Section 8 rental assistance, which greatly helps with the project’s cash flow operations. Almost 50% of the units benefit from Section 8 – there are 48 project-based tenants plus 2 voucher holders out of a total of 104 units.

County Counsel has reviewed and approved the First Supplemental Indenture of Trust and Resolution as to form. Counsel for the credit enhancer, Wells Fargo, has provided a legal opinion letter that bondholder approval is not required for the amendment.

A complete electronic copy of this report and all referenced resolutions and agreements are available online and a complete paper version is available for review in the Clerk of the Board’s office.

 

Fiscal Impact

No Net County Cost is incurred in this transaction.