To: HONORABLE MAYOR AND From: Scott P. Johnson
CITY COUNCIL Leslye Corsiglia
Subject: FAIRWAY GLEN Date: December 10, 2003
Council District: 4
SNI Area: N/A
Adoption of a resolution of the City Council:
(1) approving the delivery of a new credit facility for the Multifamily Housing Revenue Bonds (Fairway Glen Apartments Project) Issue A of 1985 (the “Bonds”);
(2) approving the extension of maturity of the Bonds;
(3) approving the remarketing of the Bonds;
(4) approving in substantially final form the First Supplement to Indenture, Second Amended and Restated Indenture of Trust, Financing Agreement, Second Amendment to Regulatory Agreement, and Assignment and Intercreditor Agreement; and
(5) authorizing the City Manager, Director of Finance, Deputy Director of Finance, Debt & Risk Management and Director of Housing to execute and, as appropriate, to negotiate, execute and deliver these documents and other related documents as necessary.
On November 18, 1985, the City issued $10,100,000 Multifamily Housing Revenue Bonds (Fairway Glen Apartments Project) Issue A of 1985 (the “Bonds”) to finance the construction of a 144-unit multifamily apartment development known as the Fairway Glen Apartments (the “Development”) located on 448 Toyon Avenue in the City. The Development, consisting of 60 One Bedroom and 84 Two Bedroom units in 12 two and three-story buildings, was completed in 1986 and reached stabilized occupancy shortly thereafter. Twentynine of the units, or 20% of the total units in the Development, are currently reserved for tenants with incomes not exceeding 80% of the area median income.
The Bonds were issued under an Indenture of Trust, dated as of November 1, 1985 (the “Indenture”) between the City and Seattle-First National Bank, as trustee (the “Original Trustee”). The proceeds of the Bonds were loaned to Toyon Road San Jose Partners, L.P, a California limited partnership (the “Borrower”) with Greenbriar Development Company as the general partner (the “General Partner”), under a Loan Agreement between the City, the Original Trustee and the Borrower (the “Loan Agreement”) for the purpose of constructing the Project. The General Partner was succeeded by Bay Development Partners, Inc., a related entity, in March 1994.
The Bonds were initially placed directly with Wells Fargo Bank (“Wells Fargo”) on an unrated, fixed-rate basis, with a maturity date of November 1, 2007.
On March 1, 1994, pursuant to Resolutions No. 65120 and 65121, the City Council approved amendments to the Indenture and Loan Agreement to allow the Bonds to be remarketed as variable rate demand bonds with credit enhancement and liquidity support provided by Financial Guaranty Insurance Corporation (“FGIC”) and FGIC Securities Purchase, Inc., respectively. In exchange for facilitating these modifications, the City obtained an origination fee, an increased annual bond administrative fee and lengthened affordability requirements from November 1, 2007 to the later of July 1, 2015 or the maturity of the Bonds (including refunding bonds), as reflected in a First Amendment to Regulatory Agreement among the Borrower, the City and the Original Trustee.
The Bonds, under the FGIC credit enhancement structure, were rated Aaa/VMIG-1 by Moody’s and AAA/A-1+ by Standard & Poor’s and were initially remarketed on March 17, 1994. The term of the FGIC credit enhancement expires at the end of March 2004 and the term of the liquidity facility expires at the end of February 2004.
The Indenture, as amended in March 1994, and with certain proposed amendments described herein, permits the substitution of credit enhancement for the Bonds and would provide for a longer final maturity. The Borrower has obtained a commitment from Fannie Mae to secure the Bonds with its credit facility through November 15, 2017 (the “Fannie Mae Credit Facility”).
The Borrower has requested the City’s assistance in substituting the Fannie Mae Credit Facility for the Bonds. The ratings on the Bonds will remain “Aaa/VMIG-1” from Moody’s; there will be no a rating from Standard & Poor’s. In exchange, the City will obtain an additional upfront reissuance fee and deeper and longer affordability requirements.
In addition to the Development, the Borrower has requested similar credit enhancement modifications to the bond financed Foxchase Drive Apartments Project located in the City and in connection with projects that were bond financed by the Cities of Mountain View and Hayward and the Santa Clara Housing Authority.
Because the maturity of the Bonds will be extended, it is necessary to hold a TEFRA hearing to provide interested individuals or parties the opportunity to comment on any matters related to the Bonds, including the nature and location of the Development. The TEFRA hearing is being noticed for Friday, January 9, 2004 before the Director of Finance pursuant to Municipal Code Section 5.06.430.
This portion of the report is divided into several sections to address the items in staff's recommendation to proceed with the credit enhancement substitution and remarketing of the Bonds. These sections include: description of the Bond financing structure, the credit substitution and remarketing process, the documents to be approved by the City Council, the financing team participants, and the financing schedule.
Bond Financing Structure
Overview of Multifamily Bond Financing
As a brief summary, multifamily housing revenue bonds are issued to finance the development by private developers of certain rental apartment developments. The City issues the bonds and then loans the proceeds to the developer/borrower. The bonds are typically issued as tax-exempt securities. For the bonds to qualify for tax-exemption, generally, one of two restrictions must apply: either (1) at least 20 percent of the units in the housing development must be reserved for occupancy by individuals and families of very-low income (50% of area median income) or (2) at least 40 percent of the units must be reserved for occupancy by individuals and families of low income (60% of area median income).
Because the Bonds were issued before August 1986, they are currently subject to a much less strict standard for federal tax purposes: at least 20 percent of the units in the housing development must be reserved for occupancy by individuals and families with incomes not exceeding 80% of area median income at rents not exceeding fair market Section 8 rents for new construction. In connection with the proposed credit facility substitution, the Borrower agreed to restrict at least 20 percent of the units in the Development for occupancy by families of very-low income (50% of area median income) – at maximum rent levels not exceeding 30% of applicable income limits as determined by HUD for Santa Clara County. The Borrower will phase in these restrictions over a five year period to avoid displacement of existing tenants as follows: during the first three years, as units currently rented to families at 80% of area median income become vacated, and during the following two years, if necessary, as any unit becomes available.
The advantage of tax-exempt bonds to developers is a below-market interest rate on the construction and permanent loans. The Bonds are limited obligations of the City, payable solely from the repayment of the loan to the Borrower and from the credit enhancement.
Structure of the Bonds
For the Project, the bond structure consists of a single series of bonds in the amount of $10,100,000 of which $9,580,000 is outstanding. The Bonds provided for the construction and permanent financing of the Development. Fannie Mae, by providing its Credit Facility for the Bonds, will serve, in effect, as a new permanent lender for the Development. The Bonds will continue to be remarketed as variable rate demand bonds. RBC Dain Rauscher Inc. (the “Remarketing Agent”) will reset the interest rate on the Bonds on a weekly basis. The maturity of the Bonds will be extended from November 1, 2007 to November 15, 2017.
Bond Remarketing and Credit Substitution Process
The Fannie Mae Credit Facility will attach to the Bonds with the extended maturity without the need for the City to issue new bonds. To achieve this result, the Indenture will be amended to require the U.S. Bank National Association as successor trustee under the Indenture (the “Trustee”) to send notices to the Bondholders that a mandatory purchase of their Bonds will occur as a result of a credit substitution. The Bondholders will be required to tender to the Remarketing Agent the Bonds secured by the FGIC credit enhancement and, on the same date, the Remarketing Agent will remarket the Bonds backed by the Fannie Mae Credit Facility to new Bondholders. Remarketing the Bonds with the Fannie Mae Credit Facility and the extended maturity is more cost effective to the Borrower over issuing new Bonds or refunding Bonds.
There is no practical impact to the City between remarketing the Bonds and issuing new bonds to refund the Bonds. In either case, for purposes of Federal Tax Law, there is a “reissuance.” In addition, there is need for new documentation to describe the restructured transaction.
The Bonds will be remarketed with a Remarketing Circular like the remarketing of the Bonds in March 1994. The City is not a party to the Remarketing Circular.
Bond Financing Documents
Several financing documents require Council approval to proceed with the delivery of the Fannie Mae Credit Facility and the remarketing of the Bonds. These documents are described below. Copies of these documents, in substantially final form, will be available in the City Clerk’s Office on or about January 5, 2004.
First Supplemental Indenture. The First Supplemental Indenture (the “Supplemental Indenture”) is between the City and U.S. Bank National Association, as the successor trustee (the “Trustee”) to Seattle-First National Bank (the “Original Trustee”), as succeeded by First Trust of California, National Association and First Trust National Association. The Supplemental Indenture supplements and amends the Indenture of Trust dated as of November 1, 1985 between the City and the Original Trustee as amended and restated by the Amended and Restated Indenture of Trust dated as of March 17, 1994, between the City and the First Trust of California, N.A., as initial successor to the Original Trustee (collectively, the “Indenture”). This document is executed by the Director of Finance, or other authorized officers on behalf of the City. The amendments in the Supplemental Indenture incorporate a mandatory tender provision on the date that the substitute credit facility or substitute liquidity facility is anticipated – requiring the existing Bondholders to surrender their Bonds for purchase on the date that Fannie Mae Credit Facility replaces the existing FGIC credit enhancement.
Second Amended and Restated Indenture of Trust. The Second Amended and Restated Indenture of Trust (the “Restated Indenture”) is between the City and the Trustee, and amends and restates the Indenture, as supplemented and amended by the Supplemental Indenture. This document is executed by the Director of Finance, or other authorized officers on behalf of the City. The primary purpose of restating the Indenture is to incorporate provisions relating to the Fannie Mae credit enhancement. Pursuant to the Restated Indenture, the Trustee is given the authority to receive, hold, invest and disburse the Bond proceeds and other funds established under the Indenture; to authenticate the Bonds; to apply and disburse payments to Bond Owners; and to pursue remedies on behalf of the Bond Owners. The Restated Indenture sets forth the guidelines for the administration, investment and treatment of investment earnings generated by each fund and account. The Restated Indenture obligates the Borrower to compensate the Trustee for services rendered under the Restated Indenture.
Financing Agreement. This Agreement (the “Financing Agreement”) is among the City, the Trustee and the Borrower. This document is executed by the Director of Finance or other authorized officer on behalf of the City. The Financing Agreement replaces the Amended and Restated Loan Agreement, dated March 17, 1994, between the Borrower and the City, provides for the loan of the Bond proceeds to the Borrower for the construction of the Development and for the repayment of such loan by the Borrower. The rights and interest of the City in receiving payments under the Financing Agreement and enforcing the receipt of such payments under the Financing Agreement have been assigned to the Trustee (for the benefit of the Bondholders) under the Restated Indenture; however, certain reserved rights have been retained by the City, such as the City’s right to indemnification.
Second Amendment to Regulatory Agreement. This agreement (the “Regulatory Agreement Amendment”) is among the City, the Trustee and the Borrower. The Regulatory Agreement Amendment amends that certain Regulatory Agreement and Declaration of Restrictive Covenants dated as of November 1, 1985 (the “Regulatory Agreement”) between the City, the Original Trustee and the Borrower, as amended by the First Amendment to Regulatory Agreement, dated March 17, 1994. This document is executed by the Director of Housing or Director of Finance, or other authorized officers on behalf of the City. The Regulatory Agreement Amendment amends certain definitions contained in the Regulatory Agreement to conform such definitions to the Fannie Mae credit enhancement structure, to include the more restrictive affordability requirements and to provide for the five year phase-in of the new affordability requirements.
Assignment and Intercreditor Agreement. This agreement (the “Intercreditor Agreement”) is among the City, the Trustee and Fannie Mae. The City will assign most of its rights under the Bond Documents to Fannie Mae under the provisions of the Intercreditor Agreement. In addition, the Intercreditor Agreement controls the relationship of the mortgages of the Trustee and Fannie Mae that are recorded against the Project and the City’s rights under the Regulatory Agreement. The Intercreditor Agreement will provide that the City and the Trustee may not foreclose on the Project without the consent of Fannie Mae, so long as Fannie Mae is making payments to the Trustee for the Borrower’s loan under the Financing Agreement.
The financing team participants consist of:
· City’s financial advisor: Ross Financial
· Remarketing Agent: RBC Dain Rauscher Inc.
· Bond counsel: Jones Hall, A Professional Law Corporation
· Trustee: U.S. Bank National Association
All costs of the City, the financial advisor, remarketing agent (including its counsel), bond counsel and the Trustee will be paid for by the Borrower.
The current proposed schedule is as follows:
Send out Notice of Amendment to Bondholders January 14, 2004
Close Credit Substitution February 25, 2004
The method of notifying the community of the City’s intent to issue tax-exempt private activity bonds is for the City Council to hold a Tax Equity and Fiscal Responsibility Act (TEFRA) Hearing. The TEFRA Hearing is scheduled for January 9, 2004 by the Director of Finance. The public hearing notice is to be published in the San Jose Post Records on or about December 18, 2003.
This report has been prepared by the Finance Department in coordination with the Housing Department and the City Attorney’s Office.
All costs, including compensation for the financing team participants (financial advisor, underwriter, trustee and bond counsel), will be paid by the Borrower. This action is consistent with the Mayor’s Budget Strategy adopted by the City Council on February 4, 2003, under both General Principles and Economic Recovery. The Bonds remain tax-exempt obligations secured by a mortgage loan that will be credit enhanced by Fannie Mae rather than credit enhancement from FGIC. The cost of the Fannie Mae credit enhancement is provided at the expense of the Borrower. No payment of the Bonds will be paid from or guaranteed through the general taxing power of the City or any other City asset. The City will (1) receive an up-front fee of $47,900 in connection with the remarketing of the Bonds and (2) will continue to receive an annual fee of $23,950 under the Financing Agreement and a fee equal to 0.05% of the outstanding par amount of the Bonds (currently $4,790 per year). These fees compensate the City for the staff work involved in the remarketing of the Bonds and monitoring of the Bonds and Regulatory Agreement.
SCOTT P. JOHNSON LESLYE CORSIGLIA
Director, Finance Department Director, Housing Department