OFFICE OF THE CITY AUDITOR
Roland E. Smith, CPA
City Auditor
(510) 238-3378
FAX: (510) 238-7640
TDD: (510) 839-6451
February 4, 2003
MS. JANE BRUNNER, CHAIRPERSON
COMMUNITY AND ECONOMIC DEVELOPMENT COMMITTEE
CITY OF OAKLAND, CALIFORNIA
CHAIRPERSON BRUNNER AND MEMBERS OF THE COMMITTEE
SUBJECT: AGENCY AND CITY RESOLUTIONS APPROVING A SECOND AMENDMENT OF THE DISPOSITION AND DEVELOPMENT AGREEMENT BETWEEN THE REDEVELOPMENT AGENCY AND A. F. EVANS DEVELOPMENT, INC., FOR THE HOUSEWIVES MARKET RESIDENTIAL DEVELOPMENT PROJECT TO MODIFY THE TERMS OF THE $1,947,060 AGENCY FINANCING
PURPOSE AND SCOPE
In accordance with the Measure H Charter Amendment, which was passed
by the voters at the General
Election of November 5, 1996, we have made an impartial financial analysis
of the accompanying Agenda Report and Draft Resolutions. The purpose of
our analysis was to determine whether the borrower will be able to repay
the proposed loan.
SUMMARY
The Office of the City Auditor has previously issued reports dated February 5, 2002 and March 26, 2002 regarding the Housewives Market Residential Development Project.
There are two phases to the project. In Phase I the developer (A. F. Evans Development, Inc.) will acquire land from the Agency and build 116 condominium units, and under Phase II will acquire additional land from the Agency and build 58 units. Under the previously approved Disposition and Development Agreement (Agreement), the Agency's loan is in second security position to Citibank, is secured by the land that the Agency sells to the developer in Phase I, and will be repaid from the sales of condominiums in Phase I. The proposed resolutions will modify the previously approved Agreement in order to meet Fannie Mae requirements.
FISCAL IMPACT
The proposed changes to the Agreement would not alter the previously approved loan amount, interest rate or terms of repayment. However, Fannie Mae will replace the Agency in second security position, and the developer will remain in position behind the Agency. Moreover, the Agency's loan will no longer be secured by the property. Instead, A.F. Evans Company, Inc., the developer's parent company, will provide a corporate guaranty of the loan. In addition, the developer will pledge its $1.15 million investment and $2.15 million in estimated profit to repay the Agency's loan.
The following table shows the security positions and amounts invested by the parties for Phase I under the proposed revisions to the Agreement:
|
|
Position |
Amount |
Percent |
|
Citibank |
1 |
$24,200,000 |
76.0 |
|
Fannie Mae |
2 |
$ 4,550,000 |
14.3 |
|
Redev. Agency |
3 |
$ 1,950,000 |
6.1 |
|
Developer |
4 |
$ 1,150,000 |
3.6 |
|
$31,850,000 |
100.00 |
|
ADVANTAGES AND DISADVANTAGES
Although the proposed changes to the Agreement increase the Agency's risk, staff has negotiated guaranties from the developer and its parent company that are intended to offset the risk.
The advantages of the proposed changes are:
If sales prices for condominiums were to fall, there might not be enough funds generated by the project for the developer to repay the loan from sales of units in Phase I.
The Agency will no longer have to rely solely on the value of the property to secure its loan. Instead, A.F. Evans Company, Inc., the parent company of the developer, will provide a corporate guaranty of the loan.
If Phase II of the project is not developed, the Agency will be repaid from Phase I unit sales and/or other A.F. Evans Company, Inc. sources no later than three years from date of conveyance of Phase I.
The developer will not receive any of its investment or profits until the Agency's loan is repaid.
The disadvantages of restructuring the loan are:
This will place Fannie Mae ahead of the Agency in line for repayment from unit sale proceeds from Phase I.
Under the proposed amendment to the Agreement, the Agency's loan would no longer be secured by the property.
CONCLUSION AND RECOMMENDATION
We believe that the proposed resolution will benefit the City of Oakland, and that the Agency has taken steps to safeguard the City's interest in the project. However, we recommend that the Council approve the proposed resolutions only after considering the advantages and disadvantages as stated in this report.
Prepared by:
Jack McGinity, CPA
Issued by:
Roland E. Smith, CPA
City Auditor
January 22, 2003