REPORT TO THE CITY COUNCIL
March 23, 2017
FROM: MICHAEL LIMA, Finance Director/City Controller
Finance Department
BY: PHILLIP L. HARDCASTLE, Principal Accountant - Debt Administration
Finance Department
SUBJECT
Title
Actions pertaining to Unwinding Of The Prior New Market Tax Credit transaction By Dissolving The Investment Fund And Repaying The Fresno Joint Powers Financing Authority's Loan To The Investment Fund:
1. RESOLUTION - Approving the unwinding of a New Market Tax Credit Transaction by authorizing the City Manager to (1) execute a Member Interest Purchase Agreement; (2) execute a confirmation and reaffirmation of Qalicb Guaranty; (3) dissolve FBB Investment Fund, LLC., and (4) distribute the assets of the FBB Investment Fund to the Fresno Joint Powers Financing Authority in exchange for cancellation of the loan made by the Fresno Joint Powers Financing Authority to the investment fund; and
2. RESOLUTION - Consenting to the redemption of FBB Investment Fund, LLC's interest in Clearinghouse NMTC (Sub-18), LLC., and accepting the assignment of FBB Investment Fund's assets as repayment of Joint Powers Financing Authority loan to FBB Investment Fund
Body
RECOMMENDATION
Staff recommends Council approval of the unwinding of the New Market Tax Credit transaction by authorizing the execution of the Member Interest Purchase Agreement and authorizing the City Manager, or designee to execute all necessary documents, subject to City Attorney approval as to form.
EXECUTIVE SUMMARY
In 2010, the City agreed to participate in a transaction utilizing New Market Tax Credits to facilitate the refinance of the former site of the Metropolitan Museum, commonly referred to as the Fresno Bee Building. As part of the New Market Tax Credit transaction, several entities were created to participate in the transaction. A new 501(c)(3) non-profit corporation, the City of Fresno Cultural Arts Properties (COFCAP), was created to own and lease the Fresno Bee Building. An investment fund, FBB Investment Fund, LLC., (the Investment Fund), was created to act as the vehicle for raising investment equity and loan funds to invest in a community development entity that had access to New Market Tax Credits. A community development entity, Clearinghouse NTMC (Sub-18), (Clearinghouse Sub-CDE) was created to contribute the New Market Tax Credits to the transaction.
To implement the New Market Tax Credit transaction the Investment Fund borrowed $12,690,500 from the Fresno Joint Powers Finance Authority and raised $4,309,500 from a U.S. Bank, affiliated investment entity that ultimately became the sole member of the Investment Fund. The Investment Fund used the proceeds of the loan and equity investment to purchase an equity interest in Clearinghouse Sub-CDE. Clearinghouse Sub-CDE used $16,660,000 of the equity investment to make a loan to COFCAP to purchase and manage the Fresno Bee Building property. COFCAP promised to use and manage the property in accordance with the New Market Target Credit rules for the 7 year New Market Target Credit compliance period, which expires on March 30, 2017.
To induce the US Bank investor to participate in the transaction, the City agreed to purchase the investor's interest in the Investment Fund at the option of the investor following the expiration of the compliance period for the amount of $1,000. The investor has now exercised its option to have the City purchase its interest in the Investment Fund, resulting in the City becoming the sole member of the Investment Fund. Prior to the City's purchase of the investor's interest, the CDE intends to redeem the Investment Fund's interest in the CDE by assigning the COFCAP promissory notes and COFCAP deed of trust to the Investment Fund in exchange for the Investment Fund's interest in the CDE. Once the assignment of the promissory notes and deed of trust takes place and the City becomes the sole member of the Investment Fund, the City may cause the Investment Fund to assign the promissory notes and deed of trust to the Fresno Joint Powers Financing Authority in full payment of the Fresno Joint Powers Financing Authority loan to the Investment Fund.
BACKGROUND
On July 15, 2009, the City transferred approximately $15.2 million to United Savings Bank on behalf of the Metropolitan Museum. In March 2010 the City agreed to participate in a New Market Tax Credit transaction to be able to infuse additional funds into the repurposing of the Fresno Bee Building and reduce the City's financial obligation related to the project. To accomplish this task, the City facilitated a loan by the Fresno Joint Powers Financing Authority to the Investment Fund in the amount of $12,690,500 to be used by the Investment Fund along with equity to purchase an interest in the CDE for the eventual loaning of the funds to COFCAP. COFCAP used the CDE loan to purchase the Fresno Bee property from the City for $16,600,000. The City agreed to guaranty COFCAP's compliance with the New Market Tax Credit rules and to purchase the investor's interest, if requested by the investor, following the expiration of the New Market Tax Credit compliance period. The City also agreed to master lease the property from COFCAP with the City lease payments made by the City used to make payments on the CDE loan to COFCAP.
UNWINDING THE TRANSACTION.
The New Market Tax Credit compliance period is scheduled to be completed on March 30, 2017. The U.S. Bank investment entity and the CDE now wish to exit the transaction. The CDE has opted to redeem the Investment Fund's interest in the CDE by assigning the COFCAP promissory notes and COFCAP deed of trust to the Investment Fund in exchange for the Investment Fund's interest in the CDE. As a lender that has a collateral interest in the Investment Fund's interest in the CDE, the Fresno Joint Powers Financing Authority must consent to the redemption of the Investment Fund's interest in the CDE. In conjunction with the redemption of the Investment Fund's interest in the CDE, the Investment Fund has requested that the City reaffirm its guaranty of its unconditional guaranty of New Market Tax Credits by executing a Confirmation and Reaffirmation of Unconditional Guaranty of New Market Tax Credits. Following the redemption of the Investment Fund's interest in the CDE, the City will purchase the investor's interest as the sole member of the Investment Fund by entering into the Membership Interest Purchase Agreement. By purchasing the investor's interest in the investment fund, the City will become the sole member and manager of the Investment Fund. At the City's election and with the consent of the Fresno Joint Powers Financing Authority, the City may prepay in full the Fresno Joint Powers Financing Authority loan to the Investment Fund by assigning the COFCAP promissory notes and deed of trust to the Fresno Joint Powers Financing Authority Following the repayment of the Fresno Joint Powers Financing Authority loan, the City may terminate the Investment Fund.
ENVIRONMENTAL FINDINGS
By the definition provided in the California Environmental Quality Act Guidelines Section 15378 this hearing does not qualify as a “project” and is therefore exempt from the California Environmental Quality Act requirements.
LOCAL PREFERENCE
Local preference was considered because this hearing does not include a bid or award of a construction or services contract.
FISCAL IMPACT
The purchase price to be paid by the City for the investor's interest in the Investment Fund will be $1,000. A $25,000 exit fee will be paid to Clearinghouse by COFCAP which has a separate bank account (not City funds). With the assignment of the COFCAP loan to the Fresno Joint Powers Financing Authority, the Fresno Joint Powers Financing Authority will be able to negotiate with COFCAP over the ultimate disposition of the Fresno Bee property, the repayment of the COFCAP loan and the cancellation of the City master lease for the property.
Attachments:
Council Resolution
JPFA Resolution
Membership Interest Purchase Agreement
Confirmation and Reaffirmation of Unconditional Guaranty of New Market Tax Credits
Fresno Joint Powers Financing Authority Consent to Transaction