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HomeMy WebLinkAboutAttachment No. 1 ExplanationAttachment No. 1 Explanation- HUD Section 108 Loan Partial Defeasance Interest Payments for FY2011-12 In 2003, the City of National City secured a loan of $6.9 million dollars from the U.S. Department of Housing and Urban Development ("HUD") to construct a fire station facility on the northwest corner of 16th Street and D Ave in National City ("Fire Station 34"). The HUD Section 108 guaranteed loan program ("HUD 108 Loan") allows the City to pledge Community Development Block Grant ("CDBG") entitlement funds for repayment of the loan. CDBG funds are appropriated to the City by HUD on an annual basis. Historically, the CDBG entitlement funds have been pledged to pay for Section 108 loan payments since it is an eligible use of funds. HUD 108 Loan payments are also guaranteed through the entitlement funds to the City in the case of default. From the repayments of CDBG loans to low-income homebuyers and homeowners over several years, the City accumulated program income of $2,070,000 from which $1,750,000.00 was allocated to prepay the HUD Section 108 loan in Fiscal Year 2008-2009. When the money was allocated by the City, it was intended to have the funds applied directly to regularly scheduled payments of approximately $550,000 a year, in principal and interest until the funds are depleted. Essentially, this would create a "payment" holiday for the Section 108 loan and allow entitlement funds to be used for other CDBG eligible activities. However, the HUD 108 Loan has a 10-year term during which the Section 108 loan cannot be prepaid so that payment plan could not proceed as intended. The term ends on August 1, 2013. However, because the CDBG program has expenditure rules that preclude program income funds from remaining in City custody, the action had to move forward nonetheless. The City set up a partial defeasance escrow with the HUD 108 loan trustee in order to avoid losing the funds which otherwise would have reverted back to HUD. A loan defeasance is a process in which funds are held in escrow by an agent in order to guarantee payments at future date, including the guarantee of interest payments and other accruals associated with the bonds that funded the loan. The instructions for a partial defeasance were executed by the City's financial consultant, Public Financial Management, Inc. The HUD Section 108 loan agreement with HUD noted that any funds used to defease the HUD Section 108 loan would have to be held as State and Local Government Securities ("SLGS") instead of cash. The SLGS were purchased for the City in the total amount of $1,094,028 of which $889,667.00 were to be applied for principal and partial interest payments due on 8/1/2011 through 8/1/2013 as illustrated under Item No. 7 of Attachment No.2 to this staff report ("Memorandum"). As noted under Item No. 6 of the Memorandum, the partial defeasance provided that the principal and part of the accrued interest be paid. A defeasance could not be structured to pay the full principal and interest of bonds. The City would have to encumber CDBG entitlement funds or other funds to pay $632,153.75 of interest in five equal installments of $126,430.75 in FY2012, 2013, 2014. As noted in Item No. 8 of Attachment No. 2 ("Memorandum"), $204,361.00 of SLGS (securities) were reserved in the partial defeasance escrow to pay down the outstanding principal from Fiscal Year 2014-15 through Fiscal Year 2022-23 by $210,000.00 that includes interest accrued on the Securities purchased to cover the full principal reduction. The Resolution requests that the SLGS (securities) allocated under Item No.8 of the Memorandum are to be redeemed at fair value to make part of the interest payments due by the City in FY2011-12. This Resolution would approve the allocation of funds necessary to make the interest payments due under Item No. 9 of the Memorandum for Fiscal Year 2011-2012. Instead of allocating CDBG entitlement funds to make the interest payments due by the City to the Section 108 loan in FY2011-2012, the City will use funds set -aside under Item No. 8 (currently valued at $204,361.00) of the Memorandum and $48,500.50 in unspent funds from the Christmas in July Housing Rehabilitation Program to make the interest payments due from the City in FY2011.The City will ask the Escrow Agent to void the escrow instructions under Item No.8, 9,10 of the Memorandum at the time the bonds are redeemed and that the original loan amortization schedule for the loan be reinstated effective August 1, 2014. In FY2013 and FY2014, the City will need to allocate $252,861.50 each year from the annual CDBG entitlement award from HUD or from another source of City funds. In the interim, in order to expedite the payment due to the loan trustee on July 25, 2011, the City will have to commit $77,930.25 from the General Fund Contingency Reserve. The Reserve funds will be replenished immediately after receiving the cash proceeds from the redeemed SLGS (securities).