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Approve Commitment to Resubordinate Loans for Cornerstone Apartments November 20, 2018 Page 3 While the proposed resyndication of the Cornerstone Apartments will result in additional debt being in a senior position to the City's Loans, the recapitalization will preserve the improvements which is the source of the City's repayment. The physical needs assessment confirms that the existing property cash flow cannot support the future long term capital needs, necessitating this rehabilitation. Any cash flow currently received may be negatively impacted if these long term capital needs are not addressed. As of the end of FY 2017-18, the outstanding principal and interest balance of the City Loans was $9,039,410.21. This includes a current principal balance of $6,792,940.43 and $2,246,469.78 in accumulated interest (Exhibit 4). The source of the loans include the former Low and Moderate Income Housing Funds (Tax Increment "TI"), HOME Investment Partnerships Program funds (HOME), and Tax Increment/California Housing Finance Agency (TI/CHFA) funds. As mentioned previously, the City Loans are already in a subordinate position to a senior loan and therefore this request is to resubordinate the existing loans to the new financing. The City and Housing Authority loan documents prohibit the distribution of any sales proceeds to the general partner before the City Loans are repaid. In adherence to this requirement, Jamboree will not be receiving any sale proceeds from the resyndication and recapitalization transaction. As proposed, Jamboree will make a $500,000 payment on the City Loans when the Project financing closes. These funds will be used to reduce the accumulated interest obligation on the City Loans. As such, the total principal and interest balance of the City Loans to be resubordinated will be approximately $8,539,410.21, with the final amount determined at the close of financing (e.g. up to no more than $8.7 million). Keyser Marston Associates, Inc., (KMA) the City's financial consultant, has evaluated the proposed transaction in an analysis that is presented in Exhibit 5. KMA recommends the City and Housing Authority to subordinate the City Loans up to a maximum of $8.7 million in Bonds. The approval of the commitment to resubordinate the City Loans to an amount not to exceed $8.7 million in Bonds will increase the amount to which the City Loans are subordinated by approximately $4.75 million. This will extend the repayment of the City Loans by increasing the debt service payments on the senior lien, which will reduce the cash flow available for annual debt service payments on the City Loans. Specifically, this means that the City and Housing Authority will not be repaid in the same time period as originally agreed upon, and therefore the affordable housing funds from the repayment of those loans will not become available to the City until a later date. Based on projections, the City and Housing Authority does not anticipate receiving any additional residual receipt payments until Year 22, which is projected to be in FY 2040-41. This is only an estimate and is subject to change. Nonetheless, the City Loans are interest bearing, and as a result, the total debt service payments on the City Loans will exceed the amount that was originally anticipated. Although the City Loans will be resubordinated, the proposed rehabilitation cost will extend the useful life of the Project and will enhance the quality of life for the residents who live at the Project. It is important to note that without the proposed rehabilitation, the Project can be anticipated to continue to decline and diminish the quality of this affordable housing asset. The only resource from which to fund the repairs and maintenance costs will be the Project's cash • I .