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HomeMy WebLinkAboutR-2002-073 Request for HUD Project Amendment / re: Commercial Loan FundRESOLUTION NO. R-2002- 73 A RESOLUTION authorizing the City Manager to execute and submit a project amendment request to the U.S. Department of Housing and Urban Development (HUD) Economic Development Initiative grant program for the Yakima Commercial Development Loan Fund. WHEREAS, the City of Yakima has been awarded a $1 million Economic Development Initiative (EDI) grant from the U.S. Department of Housing and Urban Development (HUD); and WHEREAS, the grant award from HUD is conditioned upon submittal of a $4 million application to the HUD Section 108 loan guarantee program; and WHEREAS, the EDI grant was awarded for expansion of the Yakima Mall and the rehabilitation of the Great Western Building; and WHEREAS, the rehabilitation of the Great Western Building has been determined to be not economically feasible; and WHEREAS, HUD has recommended that EDI and 108 funds be converted to a use that provides more flexibility and opportunity for development; and WHEREAS, the City has worked with the National Development Council in developing a project and preparing an amendment request; and WHEREAS, the modified project, the Yakima Commercial Development Loan Fund, will meet the same eligibility requirements as the original project; and WHEREAS, economic development is a priority for the City of Yakima, and the City intends to approach economic development on an inclusive, comprehensive basis which involves public, private and community-based efforts to achieve new investment and redevelopment in the City; and WHEREAS, portions of the City of Yakima have been designated a federal Renewal Community, by HUD, providing numerous federal tax incentives and priority for federal funding; and WHEREAS, under Section 108 of the Housing and Community Development Act of 1974, federal loans are available for the purposed of funding property rehabilitation for economic development activities that will create new and stable jobs for low and moderate -income residents; and WHEREAS, the Yakima Commercial Development Loan Fund will leverage over $3 million in private investment and create 145 new full time equivalent jobs, at least 51 percent of which shall either be filled or made available to low and moderate income persons as defined in the Community Development Block Grant regulations; and BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF YAKIMA: The City Manager is hereby authorized and directed to execute and submit a request for amendment application, including all understandings and assurances contained therein, for financing from HUD's Economic Development Initiative grant program in the amount of $1,000,000, for the Yakima Commercial Development Loan Fund. The City Manager is hereby designated as the official representative of the City to act in connection with that funding application and is authorized to take such additional actions as may be necessary and prudent to complete the application process. ADOPTED BY THE CITY COUNCIL this 18th_ day of June, 2002. ATTEST: City Clerk ary Place, Mayor Amendment Summary The following EDI program amends the City of Yakima's EDI application by substituting a commercial loan fund for the previously proposed project. It is the City of Yakima's belief that the fund will meet or exceed the benefit level in each of the EDI categories anticipated from the previous project. • It will leverage the same Section 108 funding and the same or more private or non- federal funding. • It will result in the same or better ratio of EDI and Section 108 funding per job created or retained. • Its use will directly benefit the City of Yakima's Renewal Community. This area also includes the neighborhood of the original project. • It is well thought out and will have the added benefit of being able to fund projects immediately. The City of Yakima is ready to submit a Section 108 application and several projects have expressed interest in using the program as soon as this amendment is approved. • It will comply with HUD's proposed underwriting standards. • It will leverage private funding from private lender institutions. In all aspects the City of Yakima is confident that this amendment will enhance HUD's goals for the EDI program, while directly meeting specific needs in the City of Yakima's recently designated Renewal Community. Amended Statement of Intent to Submit a Section 108 Application The City of Yakima will submit to the United States Department of Housing and Urban Development an application for assistance under the Section 108 loan guarantee program immediately following approval of this amendment to its Economic Development Initiative application. This amended request for EDI assistance remains in the amount of $1,000,000 as originally funded. The companion Section 108 loan fund request will also remain constant at $4,000,000. The Section 108 funds will be used along with the EDI assistance to establish an economic development loan fund for use exclusively in Yakima's Renewal Community neighborhoods. Project Description If this amendment is accepted, the EDI funds along with the Section 108 proceeds and private funding will establish a loan fund for use exclusively within the City of Yakima's Renewal Community. The Nature and Extent of the Problem Since the original Economic Development Initiative application was submitted, the City of Yakima has lost several key retail business within the Renewal Community area. These include Nordstrom, the Bon Marche Department Store, the J. C. Penney Co., and Mervyns Department Store. These losses will result in a significant reduction in the City of Yakima's annual sales tax revenue, and, more importantly, well over 500 jobs have and will be lost, as these retail businesses leave Yakima. The string of closures has made it difficult to develop the project originally proposed with the City's EDI/108 application. EDI / 108 / CDBG FUNDING ELIGIBILITY Because the amended application is for a loan fund and not just a single project the City of Yakima anticipates approving uses under 24 CFR §570.208(a)(1)(2)(3)(4)(b)(1)(2)&(3). It is anticipated that many of the individual loans originated under the fund will be eligible under 24CFR §570.703(i) — economic development activities. These projects will meet the public benefit test either under §570.209(b)(3)(i)(A) or §570.209(b)(3)(i)(B). Because each separate project will create its own public benefit, specific jobs counts or numbers of low- and moderate - income persons benefiting cannot be established in advance of the specific projects. What can be stated is that the fund will only participate in projects that meet the requirements of the regulations on public benefit. REQUEST FOR LOAN GUARANTEE ASSISTANCE Brief Description of Section 108 Activity A Section 108 loan guarantee application in the amount of $4,000,000 will be immediately submitted upon approval of this EDI amendment. Its purpose will be to assist in the financing of developments within the City of Yakima's Renewal Community. Staff at the City of Yakima will underwrite each of these projects. Immediately upon approval of this amendment, the companion Section 108 loan request will be submitted. Project Description The City of Yakima has suffered from a lack of funding for commercial projects and the commercial portion of housing projects. The State of Washington's constitution prohibits the lending of other than federal funds to private projects. Economic development, even the creation of jobs for low-income persons, is prohibited under the courts' interpretations of the States' constitution. Federal funding is exempt form this constitutional prohibition. The City of Portland, Oregon's successful use of a loan fund mechanism coupled with EDI funding has demonstrated to the City of Yakima that such a fund can work for projects. It is this model that Yakima is following with this amendment to establish a loan fund with $4,000,000 of Section 108 and $1,000,000 of EDI funding. The program will benefit the City's Renewal Community projects. The EDI funds will be used to lower the interest cost of individual Section 108 loans and, as needed, for establishment of a loan loss reserve. RATING FACTOR #1 CAPACITY OF THE APPLICANT AND RELEVANT ORGANIZATIONAL EXPERIENCE The City of Yakima has significant prior finance and development experience. It has successfully administered HUD CDBG and HOME funds. It has received and implemented two HOPE 3 grants. In addition to federal initiatives, the staff of the City's Department of Community and Economic Development has applied for and used State of Washington Housing Trust Funds, Federal Home Loan Bank funds, Section 312 loan funds, Washington State Development funds, Urban Homesteading Program funds, and Federal Jobs Bill funds. This expertise will greatly assist in managing the loan fund. Fund Administration Experience The City of Yakima manages a CDBG Entitlement Program totaling $1.5 million on an annual basis. The City's Department of Finance has received the Distinguished Budget Presentation Award from the Government Finance Officers Associations for eleven consecutive years. This management expertise confirms Yakima's ability to ensure compliance with required CDBG regulations in addition to the necessary environmental reviews needed for loan and grant disbursement. The City's CED staff will be responsible for the management of the loan fund as well as underwriting loans. This criterion has not changed since the original application. RATING FACTOR #2 DISTRESS/EXTENT OF THE PROBLEM The community to be served by the project is included within the HUD designated Renewal Community. This area contains census tracts and blocks groups, when taken in the aggregate, that have more than 43 percent of their population at or below in poverty level. The lowest percentage poverty for any one census tract within this area is over 38 percent. The percentage of low-income households in the four census tracts that comprise the area, range from 66 percent to 80 percent. The lowest unemployment rate in these census tracts is over 15 percent; while the highest is nearly 24 percent. U.S. Census reports that 30 percent of the adults with the target area have no more than a 9th grade education. Again these factors have not changed from the original application. What has changed though is the level of retail divestment that the City has experienced since the submission of the original EDI request. That request was to support a small hotel and retail development connected to the downtown retail mall. Since the EDI submission the City of Yakima has lost 4 large retail anchor stores at or adjacent to its downtown retail mall. The decline of the Yakima Mall as the City's and the region's retail center will produce an unprecedented loss in both jobs and tax base to an already economically distressed city. RATING FACTOR #3 SOUNDNESS OF APPROACH 1. Proposed use of EDI and Section 108 funding The City of Yakima will use the EDI Grant funds to lower the interest cost of Section 108 loans as well as where appropriate serve as a funded loan loss reserve on individual projects. The fund will lower the financing cost, accelerate project development and lessen developmental risk. The result will be an increase in economic activity in the City of Yakima's Renewal Community Area. The Section 108 funding will be for both construction and permanent financing on projects. The benefit of the Section 108 loan is in both its rate and in the flexibility of its terms. While the Section 108 rate provides some subsidy it is only with the EDI grant that many project's become feasible. These two programs working together strengthen projects and provide the security required by private sector investors to undertake these projects. The major goals of the program are • To revitalize the Renewal Community, • to create opportunities for businesses development and expansion, • to create employment opportunity for low-income residents, and • to further demonstrate the viability of the inner-city market for healthy business. The total numbers of full-time jobs to be created are estimated to be in excess of 145, the majority of which will go to low-income residents. 2. The extent to which the plan is logical, feasible and likely to achieve it's stated purposes. The loan fund will be similar to the City of Portland's successful Section 108/ EDI loan fund. That fund was designed by the National Development Council (NDC), who helps Portland implement it. The City of Yakima also contracts with the National Development Council. NDC will assist the implementation of the City of Yakima's EDI loan fund. In the past two years of the City of Yakima has experienced a dramatic loss of retail business establishments. Stores vacating the once vital downtown core include Nordstrom, Penney, Mervyns, and the Bon Marche department stores. In addition to these key retail businesses, many smaller retail establishments dependent on locations adjacent to these "anchor" stores have left. The City of Yakima will use the EDI / Section 108 loan fund as a business initiative tool to reverse this out migration of businesses. In implementing the program the City will link loans within the fund with the many tax initiatives available through the Renewal Community designation. In this way the City will be able to maximize the impact of both programs and best promote the revitalization of the Renewal Community area. Since deciding to pursue the concept of a loan fund linked to the Renewal Community, the City has seen an increase in business development interest. 3. Project Management The City of Yakima's, Department of Community and Economic Development will administer the fund. It will underwrite all loans and will use the National Development Council (NDC) to advise on project feasibility. NDC has more than a 35 -year track record of assisting local governments structure and implement economic development and housing projects. In underwriting loans the City of Yakima will use the following underwriting standards. Underwriting Standards for City of Yakima EDI / Section 108 Loan Fund 1. National Objective All loans shall meet a national objective as specified in 24 CFR §570.208. No loan shall be approved without verification of compliance with the national objective requirements, specified in 24 CFR 570.208, by the Washington State Office of the United States Department of Housing and Urban Development. 2. Public Benefit All loans approved under the National Objective of 24 CFR §570.203 shall comply with the public benefit standards of 24 CFR §570.209(b). No loan shall be approved without verification of compliance with the public benefit standards as specified in 24 CFR §570.209(b) by the Washington State Office of the United States Department of Housing and Urban Development. 3. Financial Underwriting A. Real Estate Loans Real Estate Loan shall be evaluated based on: Ability to Repay Collateral Development Team Capacity and Experience Developer Commitment Character of the Developer Ability to Repay Projects to be funded will have at least a 1.1 Debt Coverage ratio. If the project includes more than a small percentage of its rental income from start-up or financially weak tenants than a higher debt coverage ratio shall be required. Collateral Projects to be funded shall have a loan to value ratio of not grater than 80 percent. This value must be supported by an appraisal prior to funding. If greater than an 80 percent loan to value ratio is proposed, outside collateral sufficient to provide a 80 percent loan to value shall be required. Development Team Capacity and Experience Projects funded shall have a development team that both has the capacity and experience to complete the project as demonstrated by past projects and financial strength. Developer Commitment Developer commitment can take many forms. While each project is likely to be different the forms of developer commitment that can be expected include: adequate equity, guarantees of completion, guarantees to fund shortfalls or guarantees of minimum cash flow. Character Projects to be funded should have developers with good credit history, demonstrate integrity quality references. B. Business Loans Business Loan shall be evaluated based on: Ability to Repay Collateral Guarantees Financial Strength Management Experience Character of the Principals. Ability to Repay All businesses funded with the program shall have existing cash flow (profits after tax, plus deprecation, plus excess officers income, plus rent savings if applicable) sufficient to repay the loan. Projections must be supported by strong evidence that they will materialize. Collateral All business loans must be supported by collateral. Real Estate must be supported by an appraisal and will be generally accepted up to 80 percent of its value. Machinery and equipment depending on its nature will be accepted from 40 percent to 60 percent of its fair market value. Accounts receivable and inventory will normally be used to secure operating debt and will generally not be taken as collateral. Outside collateral such as a personal residence shall be valued up to 90 percent of its fair market value. Guarantees 8 All principals with 20 percent or more or a controlling interest, if less than 20 percent, shall provide personal guarantees. Financial Strength Three years of financial statements on the business plus a personal financial statement on all principals of the business shall be analyzed to determine if the company is well run and has the ability to manage its accounts and pay its obligations. Management Experience The management must have experience in the business or in a similar business, be able to demonstrate an ability to manage and have the depth in management to withstand unforeseen events. Character of the Principals The personal financial statements and credit history of the principals must demonstrate honesty and trustworthiness. 4. Extent to which the project addresses those needs identified in rating factor 2 The primary community benefits are: the creation of jobs. By amending the original EDI application to create a loan fund the City of Yakima anticipates that it can create at least 145 full time jobs, the majority of which will be filled by low- and moderate -income persons, persons living within the Renewal Community and individuals moving from welfare to work. The City of Yakima will use the Renewal Community Tax credits to target Renewal Community residents in filling these newly created jobs. 5. Renewal Community Provisions The City of Yakima will work with new and existing business within the RC area to coordinate the use of the tax Initiatives within the Renewal Community designation with the amended EDI / Section 108 loan fund. These tax Initiatives include: the Renewal Community Tax Credit, the Work Opportunity Tax Credit, the Welfare to Work Wage Tax Credit, Increased Section 179 Deduction, the Commercial Revitalization Deduction and the Zero percent Capital Gain on Renewal Community Assets. By careful coordination of these tools the City of Yakima anticipates greater community benefit from the creation of this loan fund than it projected in the original application. RATING FACTOR #4 LEVERAGING RESOURCES / FINANCIAL NEED 9 SUB -FACTOR 1 LEVERAGE OF SECTION 108 FUNDS This amendment will not change the level of EDI funding which was $1,000,000 in the original approved application nor will it change the leverage of $4,000,000 in Section 108 funds. The ratio of $4 of Section 108 funding for every $1 of EDI will therefore remain the same. These funds will in turn leverage additional private capital. SUB -FACTOR 2 FINANCIAL FEASIBILITY Please refer to Rating Factor 2 above. The City of Yakima will follow the underwriting guidelines outlined in 24 CFR §570.209. These are detailed in Rating Factor 2 and have been successfully used in Section 108 loan funds in Portland, Seattle and Tacoma. The National Development Council (NDC) has assisted the City in preparing this loan fund, and presently provides technical assistance through a consultant agreement with the city. NDC has over 35 years of experience in economic development lending, including a key role in the establishment of the Section 108 program as an economic development tool. No loan will be considered without first determining the project's: ability to repay, its sufficiency of collateral, the development teams capacity and experience, the owner's or developer's level of commitment and quality of their character. SUB -FACTOR 3 LEVERAGE OF OTHER FINANCIAL RESOURCES The original EDI application estimated that a total of $3,135,000 in combined private debt and new owner equity would be leveraged by the $1,000,000 in EDI and $4,000,000 of Section 108 funds. With the amendment to that application the City of Yakima will pledge to equal or exceed that level of leverage of private resources. RATING FACTOR #5 COMPREHENSIVENESS AND COORDINATION Coordinated Approach to Proposed Activities 10 The City of Yakima was recently designated a Renewal Community (RC). The RC designation affords the City of Yakima an array of tax Initiative tools to foster economic revitalization. The approval of this amendment and the establishment of an Economic Development Initiative / Section 108 loan fund will create a powerful additional Initiative to help the City of Yakima address it revitalization needs. The EDI / Section 108 loan fund will be integrated with the required Tax Initiative Utilization Plan (TIUP) within the Renewal Community. In developing its TIUP, the City of Yakima has established linkages with the Yakima Valley Visitors and Convention Bureau, the Yakima Downtown Association (YDA), the Tri -Valley Private Industry Council, Yakima Valley Opportunities Industrialization Center, New Vision — Yakima County Development Association, local tax attorneys, CPA firms and the areas commercial lending institutions. Through these associations and partnerships the City will best be able to market and structure both the loan fund and the supporting tax Initiative tools to create a seamless economic development system. Assisting the City of Yakima in structuring loans will be the National Development Council. NDC is one of the oldest and most respected economic development organizations in the nation. Nationally, as well as, locally NDC has been instrumental in assisting cities establish and implement Section 108 loan programs. The comprehensive approach to economic development and the level of coordination with private citizens, community organizations, and local and national groups has increased with the City of Yakima's designation as a Renewal Community. While the economic distress experienced by the City since the original EDI grant was awarded has increased, so has the City's capacity to address the problems. With the approval of this amendment and the establishment of the EDI / Section 108 loan fund the City of Yakima will have the resources to help address its economic downturn. ITEM TITLE: SUBMITTED BY: CONTACT: BUSINESS OF THE CITY COUNCIL YAKIMA, WASHINGTON AGENDA STATEMENT Item No. (0 For Meeting Of: June 18, 2002 Consideration of a resolution authorizing the City Manager to execute and submit a request for project amendment to the U.S. Department of Housing and Urban Development (HUD) Economic Development Initiative (EDI) grant program to establish a Commercial Loan Fund. illiam Cook, Director, Community and Economic Development Michael Morales, Grant Officer, 575-6113 SUMMARY EXPLANATION: After consultation with HUD headquarters in Washington, DC, and discussions with the Council Economic Development Committee, staff is recommending that the EDI/108 award be amended to establish a commercial loan fund to provide more flexibility in using the funds. This conversion would allow developers to apply for funds for multiple smaller projects, and provide more opportunities to leverage business development with our Renewal Community designation. The cities of Portland and Seattle have each faced similar challenges in implementing their EDI/108 awards, and were successful in amending their awards to capitalize commercial loan funds when the initial development plans were not realized. The City of Yakima received its award in November 1998 for the Great Western Building Redevelopment Project and Yakima Mall Expansion. CONTINUED ON NEXT PAGE Resolution X Ordinance Contract Other: Funding Source: U.S. Department of Housing and Urban Development ti Approval for Submittal: - � L City Manager STAFF RECOMMENDATION: Staff recommends approval with: Option A $250,000 minimum project size or Option B -- $500,000 minimum project size BOARD RECOMMENDATION: Council Economic Development Committee recommends approval with Council to set minimum project size. COUNCIL ACTION: Resolution adopted; accepting Option A. RESOLUTION NO. R-2002-73 1 Staff, with the assistance of the National Development Council, prepared and presented the outline of the commercial loan program to the Council Economic Development Committee on April 30, 2002. The committee endorsed the loan program and directed staff to bring the proposal before the council for approval, with further discussion requested before the council on the minimum loan amounts ($250,000 vs. $500,000). Upon Council approval, the EDI amendment will be submitted to HUD for review and approval. Following approval of the amendment, a separate application for Section 108 loan assistance will be prepared and submitted for underwriting by HUD. Although the attached EDI application highlights a relationship between the City and NDC to review and underwrite loan applications, the City's current contract with NDC ends on July 31, 2002. Prior to that date, staff will present options for Council consideration to provide the necessary technical assistance needed to underwrite and manage this proposed loan portfolio. Attached is the proposed EDI amendment request, a description of the commercial loan fund and a Council Resolution authorizing the City Manager to submit this amendment request. 2 Yakima City Council Subcommittee Meeting Council" Economic Development Committee Tuesday, April 30, 2002, City Manager's Conference Room 9:00 a.m. Present Council Member Paul George Council Member Bernie Sims Council Member John Puccinelli Dick Zais John Finke, NDC Director Bill Cook Grant Writer M. Morales Manager Bill Cobabe Glenn Rice Joe Morrier Lynne Kittelson Dave McFadden Luz Gutierrez I. Update on Economic Development Initiative Guidelines Cook explained the purpose of this item was to review proposed guidelines to rewrite the EDI grant application. He commented that HUD had informed Dick Zais in March that a plan should be developed within 60 days. Cook commented that HUD has required that plans be drawn within 5 years of final amend date which would be January 2004. He recommended it be turned into a revolving loan and package it so more projects can come in to take advantage of the loan. John Finke prepared the draft guidelines provided in the packet for Seattle and Portland, which have already been accepted by HUD. John Finke recommended only 2 or 3 loans out of this program that would still provide the same impact as the original EDI. If Council selects to restructure the loan it needs to create the same or similar public benefit and the same or more jobs as the original application. This group discussed how these funds could be used with the Renewal Community. Cook commented that the City would still borrow the $4 million with the rate set by HUD either fixed or variable for a 20 -year period plus a $1 million grant. Morrier proposed using the money to purchase the Yakima Mall Parking Garage similar to what Spokane had done. Cook explained that the Spokane monies for the garage were tied to other funding sources. Finke question how Morrier's proposal would meet the requirement to retain jobs as HUD has to be fairly certain that the jobs would be lost in some form. There has to be a public notice that jobs will be lost. The City of Yakima's 108 can be used anywhere within the City but the EDI was approved based on a set of competitive criteria. One of those criteria's had to do with the social benefit of the designated neighborhood. The new application will have to show how it meets the original application goals. HUD will re -rank the application based on the original competition criteria before they will allow the amendment. McFadden informed the group that projects in Census tracks 03 and 07 might also meet the criteria of the original application. Finke commented that it is important to get the most flexibility while preserving the dollars. Discussion continued on what size the minimum project size should be. Finke commented that the inefficiency of the 108 penalizes the small loan. Puccinelli expressed support for raising the minimum loan to $500K. Sims was opposed to this, as he believes the fund's goal is to help local business. Cook offered to do a pro and con analysis and bring back to the Council. The committee directed staff to prepare the amended EDI for Council with a discussion of loan minimum to be discussed with the full Council. II. Renewal Community Discussion Cook commented that the community revitalization deduction seems to be the most viable program and this particular incentive could motivate investment. This particular program involves the City in the selection process within a cap of $12 million in deduction per year over 8 years (2002 — 2009). Finke commented that this program requires someone who is making money involving the property owner not a lessee. If they have a big tax liability it would be a big advantage to Yakima. The risk of this program is that larger firms may gobble it up. McFadden stated he has a project with a $2 million deduction and the people he is talking with do not see any limit on this program. He suggested there should be 3 things in place before reviewing projects, 1) State identified the City as a Revitalization Agency to make selection, 2) Guidelines in place, and 3) Strategic plan for the Renewal Community. Morales indicated he needed to put the strategic plan together and he plans to use the criteria for the empowerment zone. McFadden announced the dates of the workshops as May 7 and May 16"' and both workshops are full. He indicated there would be other workshops as warranted. His proposal is to train the trainer, staff, Council and CPA firms and have YPAC videotape for broadcast and training tool. Sims questioned what role the Council played and Finke commented that the City decides who gets it. Cobabe commented that there are federal regulations that there be some conditions on the project such as jobs and the project meet strategic plan. Cook went through the three points for policy discussion on the handout. He questioned if the City wanted to focus some of it on specific criteria with a plan to free up funds if it doesn't happen. Finke cautioned not to give it away to projects that would happen anyway. It was suggested that the first 90 days of the application cycle should be for larger projects. Finke commented there are still questions about this program that needs to be answered at the federal level. There should be more information within the next 90 days. Dick Zais questioned about equipment not being eligible. Finke mentioned that this particular issue was being discussed at HUD. He felt it would come down to whether it is real property. Cook to get clarification on these issues at the Renewal Conference in May. McFadden cautioned that zoning of the land for the project should be able to accommodate a broad mix of projects. Zais commented that the City is moving forward on this program to help the business community understand it and take advantage of the incentive.