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HomeMy WebLinkAbout07/19/2011 06 2011 CDBG Annual Action Plan Amendment; Section 108; Set Final Public Meeting Date 0 BUSINESS OF THE CITY COUNCIL YAKIMA, WASHINGTON AGENDA STATEMENT Item No. For Meeting of July 19, 2011 ITEM TITLE: Public Hearing to consider an amendment to the 2011 CDBG Annual Action Plan to include $1,800,000 of Section 108 loan funding for economic development and infrastructure and setting August 2, 2011, as the date for a final Public Meeting. SUBMITTED BY: Michael Morales, Interim City Manager CONTACT PERSON: Michael Morales, 575 -6040 SUMMARY EXPLANATION: Attached is the draft of the Section 108 Loan Program application that the City Council must approve prior to submittal to the U.S. Department of Housing and Urban Development (HUD). The $1,800,000 million application will be used to establish an Economic Development Loan Fund (EDLF). Prior to submittal, the City Council must also hold two public meetings to approve an amendment to the 2011 CDBG Annual Action Plan. Part of the CDBG program authorized by Congress is known as the Section 108 Loan Program. This program authorizes cities to make funds borrowed from the US Treasury available to CDBG eligible activities, including economic development and infrastructure. Security for such loans come from three sources: 1) by real and personal property pledged as collateral by the business and its owners; 2) by personal guarantees of the borrower(s); and 3) As a last resort, 0 the annual CDBG Entitlement funds received by the city. The City can authorize loans for up to 5 times the annual allocation. Based upon the 2010 allocation, the city is eligible for $1,800,000. Staff is recommending that the city apply for this amount now because the 2011 allocation will be reduced 16.5 %, which will reduce our eligibility to $750,000. The 2011 allocation will not take effect until HUD contract documents are delivered to the city and executed. The Public Hearing will allow citizen comments on the proposed amendments to the City's 2011 Annual Action Plan. With Council approval, a final Public Meeting will be held at the City Council business meeting on August 2, 2011, at 7:00 p.m. Resolution Ordinance Contract Other (Specify) Funding Source HOME APPROVED FOR SUBMITTAL: -t'd -1 .. G lea r City Manager STAFF RECOMMENDATION: Hold Public Hearing and set August 2, 2011, as the date for the final Public Meeting. BOARD /COMMISSION /COMMITTEE RECOMMENDATION: Recommended for full Council consideration by the Council's Neighborhood Development Committee and Economic Development Committee 0 COUNCIL ACTION: a1,R CITY OF YAKIMA APPLICATION FOR LOAN GUARANTEE FROM U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT FOR AN 0 ECONOMIC AND COMMUNITY DEVELOPMENT LOAN FUND IN THE AMOUNT. OF $1,800,000 JULY 2011 0 ECONOMIC DEVELOPMENT LOAN FUND YAKIMA, WASHINGTON Project Description The purpose of this Section 108 application is to assist with economic and community development activities in the City of Yakima. The guaranteed loan funds will be used to create a loan pool targeted to projects that will have positive economic and community development benefits within Yakima's former federally designated Renewal Community. Individual projects will be evaluated by City of Yakima's staff, as well as by consultant experts in financial underwriting. The City has identified two projects that will likely make use of this fund. The first of these is the conversion of an existing vacant downtown property into a boutique hotel containing approximately 35 rooms. The second is for public infrastructure in association with a low income home ownership project supported with NSP funding. Section 108 Submission Requirements A. Community Development Objectives The Section 108 loan fund will result in lending for economic and community, development in Yakima. In doing so the loan fund will further the City of Yakima's Economic Development Goals as listed in the City's 2010 — 2014 Consolidated Plan. Within the Consolidated Plan's Economic Goals and Policies under Goal 4.1 are 5 key policies all of which are applicable. Policies 4.1.1 The City will demonstrate its commitment to long -term economic growth by promoting a diverse economic base, providing opportunity for all residents. Growth that helps raise the average annual wage rate of community residents and preserves the environmental quality and livability of the community is viable growth and will improve the lifestyle of residents. 4.1.2 Economic growth will be supported by master planned and mixed use developments in existing nodes (such as downtown) and redevelopment opportunities (such as the Boise Cascade lumber sawmill site, race track, etc.). 4.1.3 Stimulate economic development that will diversify and strengthen economic activity and provide primary and secondary job opportunities for local residents. 4.1.4 Encourage redevelopment of key properties in the City through use of local, State and federal funding opportunities and public /private partnerships to strengthen revitalization. 4.1.5 Create a long -term development program for the downtown business core. Stated in the Strategic Plan is the expectation that the City of Yakima will directly assist businesses and development projects with state and federal loan tools. B. Description of how the Proposal meets one of the Criteria in 24 CFR 570.200(a)(2) - National Objectives. Section 570.200(a)(2) lists the National Objectives that must be met by all Community Development Block Grants and therefore Section 108 projects. This section requires that all funded activities meet one of three national objectives. These objectives are: 1) benefit to low and moderate income families; 2) aid in the prevention or elimination of slums or blight; and 3) meeting other community development needs having a particular urgency because existing conditions pose a serious and immediate threat to the health or welfare of the community where other financial resources are not .available. Section 570.208 defines the criteria under which an activity may meet the requirements of Section 570.200(a)(2). Each project funded through the Section 108 loan fund will meet one of the National Objectives listed in Section 570.200(a)(2) as detailed in Section 570.208. The City of Yakima's Section 108 loan fund will create jobs for low and moderate income persons, provide services to low income areas, provide infrastructure to create housing opportunities for low income individuals and/or eliminate conditions of blight as defined in Section 570.208. • 2 • ECONOMIC DEVELOPMENT LOAN FUND YAKIMA, WASHINGTON 411 C. Community Development Block Grant Eligibility In addition to furthering National Objectives, all Section 108 loans must also meet the eligibility requirements of the Community Development Block Grant program. All activities funded through the City of Yakima's Section 108 loan fund will meet the program eligibility requirements as set forth in Sections 570.201,.202,.203 or .204. • The two projects currently identified meet the eligibility requirements of Section 570.203(b) and 570.201(c) Under 24 CFR 570.203 (b) the City can provide assistance to private for - profit business, including, but not limited to, grants, loans, loan guarantees, interest supplements, technical assistance, and other forms of support, for any activity where the assistance is appropriate to carry out an economic development project, excluding those described as ineligible in Section 570.207(a). In addition, all activities funded under Section 570.203 must meet the guidelines provided in Section 570.209 (Guidelines for evaluation and selecting economic development projects). Under 570.201(c) the City can undertake public facilities and improvements through: "Acquisition, construction, reconstruction, rehabilitation or installation of public facilities and improvements, except as provided in Section 570.207(a). Section 570.207(a) excludes: buildings or portions thereof, used for the general conduct of government, general governmental expenses and political activities. None of the projects to be assisted with Section 108 proceeds will include buildings used for the general conduct of government, general governmental expenses, nor for political activity. Section 570.209 Guidelines Guidelines and Objectives for Evaluating Project Costs and Financial Requirements. 410 All activities eligible under Section 570.203 must meet the requirements of Section 570.209. This section outlines guidelines for ensuring that a proposed project carries out an economic development objective in an appropriate manner. These guidelines under 570.209(a) are not mandatory but serve as a framework for financially underwriting economic development projects. In evaluating proposed projects eligible under Section 570.203 and to be funded from the Section 108 Economic and Community Development Loan Fund the City of Yakima will use the following criteria. Project Management The City of Yakima, Department of Community and Economic Development (DCED) will administer the fund. DCED will underwrite all loans and will use the National Development Council (NDC) to advise on project feasibility. NDC has a more than 40 -year track record of assisting local governments in structuring and implementing economic development and housing projects. Underwriting Standards for City of Yakima EDI / Section 108 Loan Fund 1. NationalObiective 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. Eligibility ® In addition to meeting one of the program's National Objectives all projects assisted through the loan fund must fall within one of the eligible activities listed in 570.703. 3 ECONOMIC DEVELOPMENT LOAN FUND YAKIMA, WASHINGTON 3. Guidelines for evaluating and selecting economic development projects For all activities eligible under 570.703(i), economic development activities, the project will be required to meet the guidelines listed under 570.209: Guidelines for evaluating and selecting economic development projects. 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. 4. Financial Underwriting In loan underwriting the City shall adhere to the following criteria. a. Real Estate Loans Real Estate Loans 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 projected debt coverage ratio. If the project includes more than a small percentage of its rental income from start- up or financially weak tenants then a higher debt coverage ratio shall be required. Collateral Projects to be funded should have a loan to value ratio of not greater 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 an 80 percent loan to value shall be required. In certain cases outside guarantees may suffice for additional collateral. Development Team Capacity and Experience Projects funded shall have a development team that has both 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 histories, demonstrated integrity, and quality references. • 4 ECONOMIC DEVELOPMENT LOAN FUND YAKIMA, WASHINGTON b. Business Loans Business Loans 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 depreciation, 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 personal residences, shall be 411 valued up to 80" percent of their fair market value net of existing debt. Guarantees 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 transitions. Character of the Principals The personal financial statements and credit history of the principals must demonstrate honesty and trustworthiness. D. Eligibility under 24 CFR 570.703 ® Each of the projects to be assisted with Section 108 guaranteed loan funds and Economic Development Incentive grant funds must meet one of the eligibility requirements listed in 24 CFR 570.703. The initial two projects detailed in this application are eligible under 570.703(i), - economic development activities 5 ECONOMIC DEVELOPMENT LOAN FUND YAKIMA, WASHINGTON eligible under Section 570.203 and Section 570.703(0 and (1), - Site preparation, including construction, reconstruction, or installation of public and other site improvement, utilities, or facilities (other than buildings) or — acquisition, construction, reconstruction, rehabilitation, or installation of public facilities (except for buildings for the general conduct of government), public streets, sidewalks, and other site improvements and public utilities. Other projects to be funded under the program may also qualify under 5 70.703 (a)(b)(c)(d)(e)(O(h) &(I). c. Substitution of CDBG funds for Private Sources. City staff assisted by consultants will review all projects to insure that each loan minimizes the use of CDBG funds. It is in the City of Yakima's self interest to insure that there be no substitution of CDBG funding for non - federal funding. Given the limited availability of federal funds, the city staff will work diligently to maximize the use of private, non - federal funding in all projects. All projects will be reviewed to insure that private sources of financing have been maximized and that the rate of return on equity is reasonable and within general standards. E. A Description of the Pledge of CDBG Guarantee The City of Yakima understands that if the participants in this Section 108 loan fund fail to make timely payments and the City of Yakima therefore fails to make a required payment on its notes, HUD will deduct that payment from the City of Yakima's CDBG Letter of Credit and in accepting this loan guarantee, the City of Yakima has pledged its CDBG funds and all other applicable grants as security for the guarantee. (Please refer to Attachment A - Certifications.) F. Schedule for Repayment of the Loan In requesting approval of this loan guarantee fund the City of Yakima is requesting a commitment for a 20- year term. Please use the following principal repayment schedule. Year Principal Repayment August 2012 $ 0 August 2013 $ 59,000 August 2014 $ 62,000 August 2015 $ 65,000 August 2016 $ 68,000 August 2017 $ 71,000 August 2018 $ 75,000 August 2019 $ 79,000 August 2020 $ 83,000 August 2021 $ 87,000 August 2022 $ 91,000 August 2023 $ 96,000 August 2024 - • $ 101,000 August 2025 $ 106,000 August 2026 $ 111,000 August 2027 $ 117,000 August 2028 $ 123,000 August 2029 $ 129,000 August 2030 $ 135,000 August 2031 $ 142,000 6 ECONOMIC DEVELOPMENT LOAN FUND YAKIMA, WASHINGTON ® G. Certifications The City of Yakima will comply with all certification required under 570.704 Please see Attachment A - Certifications. 7