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12-30-1998 - Approving a Subordination & "Standstill" Agreement - The Lakes Offices at West CovinaCity of W at Covina Memorandum, A G TO: City Council and the City Manager ITEM NO. V DATE December 30, 1998 FROM: Redevelopment Agency Staff ® PRINTED ON RECYCLED PAPER SUBJECT: Approving a Subordination and "Standstill" Agreement — The Lakes Offices at West Covina SUMMARY: The City Council shall consider the approval of a Subordination and "Standstill" Agreement relating to the Indemnification Agreement between the City and West Covina Lakes Associates (WCLA), which is necessary for Watt to finalize permanent financing for The Lakes office project. BACKGROUND: On December 15, 1998, at the request of West Covina Lakes. Associates, the City Council approved two documents relating to their proposal to seek permanent financing for The Lakes office buildings. The documents include the Lessor Estoppel Certificate and the Notice of Exercise of Option to Extend Term of Lease. Shortly following the City Council action on this matter, staff was notified by WCLA that the lender for the permanent loan is requiring that the City also approve a Subordination and "Standstill" Agreement between WCLA and the City. DISCUSSION: Watt has submitted a memorandum outlining the reasons that the City needs to approve a Subordination and "Standstill" Agreement in order to effectuate permanent financing of The Lakes office buildings (see attached memorandum dated December 29, 1998). The Subordination and "Standstill" Agreement essentially requires the City to subordinate to the new loan on the Lakes as well as agreeing to a "standstill" provision in which the City will not seek legal remedies against WCLA under the current Indemnification Agreement for a period of six -months, in the event of WCLA's default. To mitigate the City's exposure in executing a "standstill" provision, WCLA has agreed to provide a deposit to the City in the amount of $150,000 to be used for debt service payment on the parking structures bonds, in the event of a default by WCLA on the bonds. Agency counsel has reviewed WCLA's memorandum and the Subordination and "Standstill" Agreement and is of the opinion that the City is in an improved position by accepting WCLA's proposal (see attached opinion memorandum from Jon Goetz, Agency counsel). Based on the attached memorandum and counsel opinion, staff believes this request is reasonable and in the best interest of the Agency and the City. The Agency will benefit by receiving a $40,000 payment fiom WCLA by facilitating this financing plan on or before December 31, 1998 and the City will benefit by having instant access to $150,000 to pay for approximately 7 months of debt service, should WCLA default. In addition, the City will continue to enhance its business relations with a local property owner. RECOMMENDATION: It is recommended that the City Council approve the Subordination and "Standstill" Agreement between the City and West Covina Lakes Associates and authorize the Mayor or his designee to execute the necessary document thereto. Attachments: Memorandum from Jackson, DeMarco & Peckenpaugh Memorandum from Stradling, Yocca, Carlson & Rauth Iak717rEdoc DE.-29-98 13:40 From:STRADLING YOCCA 6 7147254100 T-144 P.02/03 Job-443 •.r��uiv LC1•II#�(.L1 949 '782 0597 TW8=00005#92351 P-02/03 JACXSON, DeMARtC®& pEC1KENPAU'GH MEMORANDUM To: Chris Chung, Redevelopment Agency of the City of West Covina FROM: Andrew C. Schutz, Esq. DATE: December 29, 1998 Fnx No: 27641 _ CLi eNT: West Covina Lakes Associates Suar$crr Lakes amce Project: Background of lender request for additional agreement on the City Indemnification Agreement At the time the Lakes $7,750,000 parking structure bonds were issued, the City received an Indemnification Agreement from the developer, Went Covina Lakes Associates ("'WCLA''), providing that WCLA would indemnify the City for its losses arising out of the issuance of the perking bonds, including losses from the $7,750,000 letter of credit obtained by the City as security for the parking bonds. The new lender on the Lakes requires that all obligations of WCLA, whether unsecured or secured, be subordinate to the new lean on the Lakes. In addition, the leader requires a "standstill agreement" covering all of WCLA's obligations. A standstill agreement is an agreement that the City will not sue on the Indemnification Agreement while the leadcr's loan is in place. . . At the time of WCLA's recent request to the Redevelopment Agency, it was mistakenly believed that the City Indemnification Agreement had not been signed by WCLA, but by ann affiliate of WCLA, Watt Investment Properties, As a result the lender did not request either a subordination or a standstill agree-mc t with respect to the Indemnification Agreement and the request to the Redevelopment Agency covered only the Agency liens on the project. The Agency liens acre: (a) the trust deed securing the deferred land purchase price, (b) the lien securing the repayment of the property tax increment received by WCLA, and (c) the lien securing the 10% cash flow participation. As to those Redevelopment Agency interests, the agency agreed to subordinate all to the new loan on the Lakes project, and also to give a standstill agreement with respect to the trust deed securing the land purchase price and the lien securing the property tax increment.' -1- i.1DOC"('S24312764 t 10001MEM0103 A7a(Mf)1 DEC-29-SS 13:40 From:STRADLING YOCCA 6 i 7147254100 T-144 P.03/03 Job-443 Chas Chung December 29, 1999 Page 2 The lender is now requesting that the City also subordinate its interest under the Indemnifieation Agreement to the new loan and give a standstill agreement for the Indemnification .Agreement_ WCLA has proposed that the City, ewer into alimited standstill V,reement which provides that the aty's agreement not to bring st*.it on the Indrmmificatio:, Agreement terminates six months after the City gives written notice; to the lender that WCLA has defaulted in making payments under theparking S150,000 in cash with the City as security fotes igations to Make bleaCL a ill deposit PY The Tndemnification Agreement covers the City for defaults in. bond The bond payments are made by WCLA under the parking sublease between W payments_ and the City as landlord. With the $150,000 deposit, the City will have © ready source as tenant, making bond payments if WCLA misses a payment on the parking r payments are approximately $19,000 per month. The $l 50 000 representslovcr sseven monthse. Payments on the bonds. If WCT,A defaults in making the parking sublease payments, the City may giwe written notice to the lender starting the six month period for the termination of the agreement. If WCLA or the lender have not cued standstill any parking sublease payment defaults wiLtlin that six month period, the City standstill obligation will terminate and it may exercise all Of its rights under the indemnity, Meanwhile, the City can be assured that there will be no default under the parking bonds by making payments from the $1 S0,000 deposit, It is WCLA's strong belief 'bat the City is in a ]A= Position under the advanced by WCLA. The City will have $150,000 in intmediat available funds top protect it from any default by WCLA. The City currently only has a su claim if WCLA defaults. It may take some time to collect on the surety bond, and the parking a bonds may go into default while the City is attempting to collect on the surety bond. Further, the City is not giving up any significant rights by a the Indemnification Agreement for 6 months because the Indemnifi;cat; �smg not ar sue on duplicates the obligation WCLA already has to the City under the Parkin � largely defaults under the P g sublease, If WCLA parking sublease, the City can sue WCLA fir the nia amount of the bond obligation as a result of the parking sublease default, without any "standstill" restriction_ This is an urgent mquirernent because the lender's co=4itrnent expires at 12:00 p-m. on December 31, 1998_ A copy of the cornmitment letter is attached. -2- t!kD0C.4Mc9M3%764 hoOMMEMOW30702.01 ** Tnrw PRGF.az ** DEC. 30.1998 10:36AM P 5 FROM WADSWORTH ASSOCIATES LLC PHONE NO. : 310 314 2406 December 22, 1998 M ia. in+fle and Overwi2hr Mau James R. Wadsworth Wadsworth Associates LLC 2710 Ocean Park Boulevard, 01010 Santa Monica, CA 90405 Re, The Lakes at West Covina BCC Loan No. IdS.0298-362 Gentlemen: We are pleased to inform you that your loan request has been approved in tl:.e maximum principal amount of S12,700,000, at an interest -rate -estimated to be the greater of (a) 315 basis points over the S 5/9% coupon May 2008, 10 year Treasuries, or (6) a minimum interest rate of S.M.46 as determined at the time of rate luck This approval rer=ins subject to the tenT* and conditions set forth in the Loan Application ("Application") dated August 14, 1998, to Belgravia Capital Corporation., and execution of such other documentation as we may, in our sole and absolute discretion, require. This approval is further conditioned upon there be no adverse changes in the borrower, the property, or the income generated thereon. The documents evidencing and securing the Loan shall include, but not be limited to, the substantive provisions ACE forth in fie Application as modified by Exhibit "A" attached. The approval is also subject to receipt and lender's approval of all the requested closing items, in addition i to but not limited to the Additional Closing Items set forth in Exhibit "B" attached, [[ac�knowledge If the foregoing is in accordance with your undersmading of our agreement, plenw)v:bmit the Structuring Advisory Fee of 1 % (S 127,000) of the Gross Loon AmouptioEheMadefti-et Notwithstanding the foregoing and as a convenience to the Borrower, an initial amount ($20,000) shall be payable within two (2) business days and the retraining: balance (S 107,000) shall be earned and payable at loan closing, The Strucauing Advisory Fee 'Wiring Instructions are described in Exhibit "C", The Closing Date will be the date the loan is actually funded, which shall occur on or before December 31. 1998, the ("Outside Closing Date"). If the loan is not closed by the Outside Closing Date, this Loan Approval shall expire and be of no Farther force or effect In the event the) loan does not close, Lender. shall refimd any unused portions of the Structuring Advisory Pee and Good Faith Deposit, loss any out-of- 7 4--c-a-r—cl-o-okingforward cket expenses incurred by Lender. ease be advised that the above referenced Structuring Advisory Fee Is fully earned as of the date of the - closing of the loan. to closing this transaction for you in a risnely moaner. Sincerely, FIN By: By: cc: David Blitz 3fficcr Page 1 of 5 -1 shall be earned and payable at closing r FROM : WADSWORTH ASSOCIATES LLC DEC.30.1999 10:37AM P 6 PHONE NO. : 310 314 2406 By: WEST COVINA LAKES ASSOCIATES, LLC., a California Limited Liability Company By: WTP/Lakes Associates, a California limited partnership Bits managing member By: _ W/Brentridge, Inc., a California corporation Its sole general partner IZs! Date; By; ce Pres dent Page 2 of 5 FROM : WADSWORTH ASSOCIATES LLC� DEC.30. 199e 10:35AM. P 2 PHONE NO. : 310 314 2406 Ayproval is based upon the flume and subject to the condit=w set: forth in the Loan Application (-Appllcadon'� dated August la. 1998, with the following corrections: ■ The Requ *tad Loan Amount is reduced ftom $13,000,000 to $12,700,000, • The In=cst Rate has been changed to the greater of (a) a margin of 315 basis points over the 5 5/8% coupon May 2008 10-year US Treasury, or (b) an 8% minimum Interest Rate. ■ The ongoing Reserve fbr Releaein$ Costs has been increased from $1.00 per square foot to S 1.50 per square foot (5258,190) per aunun� or $21,516 per month. ■ tender will hold back $150,000 at closing and institute a cash flow swoop at the beginning of the loan, tern for the Reserve for Releasing Costs, Borrower Will be required to give to Leadar all cosh flow f om the first month to make up the S150,000 balance. Upon reaehio,g a $300,000 balance, the Reserve for Releasing Costs itnVound will retum to the aft=entiomxd rate of S21,516 per monib. ■ -Borrowing entity shalt be a two-lovel, single -purpose entity with an independent director. ■ header shall structure the loan whit a lock box in the event of default Leader shall impound tht Redovolopment Agency's anticipated annual Equity Iuterest of 10%. Page 3 of 5 DEC.30.199e 10:35AM P 3 FROM : WRDSWORTH ASSOCIATES LLC� ONE NO. : 310 314 2406 The Loan is approved subject to; 1_ bender receipt and approval of a final MAY appraisal containing a cost approach. 2. Lender to receive a saWactory subordination ofborrowa property tvanagement and asset managemrat fees. 3. A first priority deed of trust/assignment on the Parking Sublease sad Parking Operating Agreement. 4. An estoppel fkom the City and Redevelopment Agency relating to thn Parking Leases and Subleases and Perking Operating Agreement. 5. An assignment of the Boa-ower's Option to Purchase the Parking Lois and an estoppel relating to same from the Redevelopment Agency. 6. An estoppel certitieate from the Agency with regard to the ongoing obligeufons under the DDA. 7. Subordination agreement from the Agency relating to the liens aeeured for the Agency assistance. S. Subordination of Agency's right of first refusal witb xnpect to the saJ a of the Property. 9. An estoppel ccrzifinste from all patties to the REA, including the A.gcncy and RREBF Funds Entity (we also need a fully executed copy of the REA). 10. An cau ffel certificate from the hUstae with respect to the parking 9tzurture bonds. 11. Extensicin of par)dag subleases to at least 10 years beyond the end of the loan tents. 12. Comfort on failure to obtain bored opinion on prior trawfor of the Property. 13. Assurance that Bos mwa is not responsible for the Indemnification Agreement and Guaranty in connection with the parking bonds_ Page 4 of 5 FROM WADSWORTH ASSOCIATES LLC� DEC.30. 1999 10:36AM P 4 PHONE NO. : 310 314 2406 • FIN®VA Realty Capital 19900 Mac ARTHUR BLVD., STE_ 1100 1RVINE. CA 92612 Name of Bank: WELLS FARGO BANK 2030 MAN STREET IRVINE, CA 92614 ABA Routing #: 121000248 - For Account: Belgravia Capital Corporation 19900 MacArthur Boulevard State 1100 Irvine, CA 92612 Account #: 4660-029596 Reference: The Lakes at West Covina BCC Loan No. MS-0298-362 page 5 of 6 STRADLING YOCCA CARLSON & KAUTH MEMORANDUM TO: Chris Chung FILE NO: 22740.0005 FROM: Jon E. Goetz DATE: December 29, 1998 RE: Watt Request for Subordination and "Standstill" Agreement re City Indemnity Agreement I have reviewed Andy Schutz's memorandum regarding the background of Watt's request for an additional agreement with respect to the Indemnification Agreement between the City and West Covina Lakes Associates, and find it to be an accurate summary of the proposal. Specifically, Tom Clark and I agreed that the City should have better security by holding the $150,000 deposit in a City account, in exchange for giving up the right to sue WCLA under the Indemnification Agreement for a six month period. It should also be noted that the City is not giving up its other remedies under Watt's proposal, which include collecting under the existing surety bond, suing WCLA Associates on the Sublease, or suing W & B Builders, Inc. on the Guaranty in favor of the City. I think it is important that you be aware of the following additional information as well: 1. I discussed the proposal with Courtney Jones of Jones Hall, bond counsel for the Lakes parking structure bond transaction. After review of the bond transcript, she said that the Watt proposal has no effect upon the outstanding bonds and is permissible under the bond documents. .2. Watt has proposed that the amount of the surety bond be reduced by $150,000 after the $150,000 in cash is deposited with the City. However, this part of the proposal does not appear in either the current draft of the proposed Subordination Agreement or Andy's memo, and Andy indicated that Watt would close the loan prior to getting the surety bond amount reduced. They would like to work with the City to accomplish this after the loan closing, and the City Council would need to authorize this to occur. 3. I have reviewed the proposed Subordination Agreement and may have a few comments, but I find it to be generally in line with the format of the Agency Subordination 629859.1\22740.0005 Re: Watt Request for Ardination and "Standstill" Agreement reiity Indemnity Agrement December 29, 1998 Page Two Agreement which we have been negotiating with Watt and the lender. The Subordination Agreement calls for a separate agreement between Watt and the City regarding the City's rights and obligations with respect to the 315.0,000, which has not been provided as of this time. Andy indicates that the agreement would provide for the $150,000 to be treated as if it were a security deposit for the sublease. 4. The Watt proposal requires that the City's rights under the Indemnification Agreement be subordinated to the new loan. Because the Indemnification Agreement is not a lien on the land, or secured by a lien on the land, the subordination of the Indemnification Agreement to the loan should have no effect on the City's rights in the event of a foreclosure by the,lender. It should not have any effect on the City's rights in the event of bankruptcy either, because the City's unsecured claim would be junior to the secured claim of the lender. cc: Tom Clark Andy Schutz 629859.1\22740.0005