Event:2015/10/20 Buy the Building

Conference Call re: Buying the Omni - 20 October 2015

Attendees

• Brief introductions
  • Laura Turiano (Omni)
  • Jenny Ryan (Omni)
  • Yar (Omni - muted)
  • Jesse Palmer (Omni's lawyer)
  • Rick Lewis (Bay Area Community Land Trust)
  • Broccoli (Brassica, probably more the Mustard Foundation)

Agenda

• Have Jesse and Rick briefly expain the Land Trust model to clarify if it addresses his concerns
  • Explain the main elements of a ground lease
• Both Broccoli and Rick have expressed the same concern about being "the bad guy" in the event that Omni can't meet it's obligations to the loan or the lease and action must be taken. Give Jesse a chance to respond
  • Discuss options for structuring the loan and purchase, options for the ground lease, that could minimize these concerns
• Other concerns/needs in relation to the purchase.
• Next steps

Notes

• Broccoli: My general interest is to have more permanently affordable both housing and work spaces for non-profits. We've been talking for a while about helping support an and bridging the gap so the Omni can own the building outright, and lead to it eventually existing debt-free.
  • The idea we are comfortable with is a 10 year note at about 5% secured with the property and being able to pre-pay with no penalty (in fact encouraged). This ran into some problems - the cost of paying down in 10 years might not be sustainable; how would it be secured if something goes bad, and I'm hated for kicking FNB out of its cool space; we need someway to make sure this thing in the long term stays working for the political and public service purpose it intends
  • they've bene creative bringing in the land trust. i dont' quite understand how that works in urban environments vs rural. how would that play out? when we purchased our mustard apartments, i think i understand how all the parts interplay. maybe not the subject of this call but i'd love a cup of coffee.
  • Doesn't fully understand the land trust model in the context of urban properties
  • jesse: rural & urban are similar. marin agricultural land trust takes on easements, takes over development rights. basically stops land owner from doing unpermitted things. in urban context, you split ownership. land trust owns land, improvements (building) owned by nonprofit. ground lease between trust & nonprofit - analogous to conservation lease. provisions in lease enforceable to make sure nonprofit does what it's supposed to do.
  • skeletal idea of what lease might say. want a 3rd party looking over omni's shoulder. for instance, agreeing there should be no future debt beyond purchasing the building. or only up to a certain amount or for certain purposes
  • It could be that all the parites agree that the property should remain as debt free as possible into the future and a specific mechanism for acheiving that can be written in to the lease. (eg no debt ever, or only can borrow if certian parties agree, etc)
  • also, meeting objective 501c3 standards. we are preparing to apply for that.
  • land trust needs authority to step in, and sufficiently objective standards that everyone agrees on & can get behind. grounds that are difficult to argue with. nonprofits can do good things but as a lawyer i'm trained to see everything that could go wrong. sometimes a small group of people can take over and not do what it was intended for. space just used for storage, etc.
  • Need to establish objective criteria: eg; how many events are happening, how many member collectives are active - indicators of vitality
  • you could look at it as being the bad guy, but also provides a lot of incentive for omni to stay active & vital. way of measuring that there's people who care enough about what's happening there that they're willing to be involved financially. people with strongest incentive not to violate, are groups at the omni.
  • broccoli: thank you, that's very helpful. if relationship for paying off note goes through BACLT ... so mustard lends money to BACLT, and baclt is the bwahahaha landlord?
  • jesse: usually the loan is to the nonprofit, however the land trust (having part of the real estate interest) will sign document saying if theres a nonpayment of the loan then they'd be able to foreclose on both interests - improvements & ground. lease isn't for market value, just an amount to enable monitoring. loan goes to omni. security interest would be against both of the properties.
  • b: doesn't sound, at least during the course of the loan, that there'd be much value (from mustard's pov) to having baclt involved? we're still bad guys?
  • rick: in a normal rel, the land trust is the buffer between lender and borrower. lender has big stick (foreclosure), trust is mediator. want to be notified so we can intervene in any way prior to the big stick. wouldn't say no value. depends on exact circumstances. some mention of omni having seat on baclt board and vice versa. some potential. but in typical lease we require to review financial reports, annual budget so we know funds are set aside. to pay off 10 year loan, there's a need for high payments, but also adequate reserves for repairs, etc. we play different role than lender, unless lender intends to be deeply involved in monitoring operations for that 10 years
  • jesse: lender is just interested in "are the payments made or not?" but the trust is interested in all those other matters. so the value of trust is so lender doesn't have to worry about minutiae
  • broccoli: if mustard were to loan money to baclt secured on idk whatever assets you got, that loan would be earmarked for getting omni off the ground, then baclt has all the incentive to try to get omni to continue to pay and if it doesn't then it's got an issue but mustard would not be the one foreclosing on omni or anybody else. it'd just be a loan to the land trust.
  • rick: the only way would be to secure the loan against the property. land trust model does not allow leveraging debt against properties we currently own. too risky, wouldn't consider, makes no sense. omni's worth far more than you're offering in a loan, it's the only security that makes sense. board would never take unsecured loan. but then baclt would own entire property, pure landlords, and we don't want that much responsibility, neither would omni. we do master leases in residential properties. but we're talking about loan in omni's name with shared responsibilities for operations. baclt board wouldn't want to be pure landlords of omni
  • jesse: if main goal is for b to be in a position where they don't pay and someone else is the bad guy ... i'l ltry and think of some other scenarios but ... if they're not paying it's a problem for omni and omni needs to deal with it, rather than find some other party. omni can raise the money to pay.
  • b: if mustard would basically be landlord, it's done this before, got 5 bldgs that it owns ... well, helped fund. owned by nonprofits. just deals with it and makes sure entities using properties pay whatever rent is which tends to be pretty nominal. sounds like there'd be very little difference except land trust would help with minutiae and in long term, have full rights to property because there'd be no lein on it based on loan. i don't understand, why not just use one of the other nonprofits during the course of the loan and negotiate with omni as to what happens afterwards? again, don't want to be bad guy, want to set us on a coaurse that'd be terrific. so maybe land trust would have this ofrm of restriction on it?
  • b: so we've got this outstanding loan, and once it's paid off we trigger going into a different mode, as opposed to putting land trust into ... ???
  • jesse: so you'd make loan to...?
  • b: if we're gona have risk of omni not paying over months or years ... idk these groups are gonna try as much as they can with as little money as they can. every nonprofit does that. but if mustard is gonna take that role ... it sounds like baclt is not up for taking that, which is understandable ... then if mustard's gonna take that risk, then take it ofr real. might as well just take it all until the loan's paid off
  • j: are you saying you'd just buy the property?
  • b: i don't see any reason to not do that
  • j: i think ... laura & jenny you'd have to think about that. from my pov right now john owns it. if we can get somebody else to own it, that's gonna be progress [laughter] serious, we have an option with another year and ahalf. under this scenario maybe we'd have an option agreement with broccoli's group and if you make all these payments over this period then the option agreement would be much less. i mean the amount is essentially what's gone into the property. more beneficial
  • b: it's not my favorite. i'd like an arm's length thing where baclt .... but rick said "we don't do that". but idea of owning property where we might play bad guy doesn't feel great
  • j: i dont care, i think it's beneficial for everyone to buy it from john, but say mustard buys it, there's bad guy potential if omni can't keep itself together and you own it, then what's your remedy there?
  • b: i think hope was that baclt would try and fulfill that goal and help solve these other issues but we haven't gotten there yet. at least it's clear. thank you. baclt can't play that role.
  • j: maybe therre's some other np that can other than mustard. just need to find someone willing
  • r: seems painted black and white as if lt brings in no additional value there. clearly we'd not get in if we didn't have significant interest in preserving this. anytime we're involved in loan, split or not, we want to be notified immiedately about missed payments. sounds like mustard has direct experience helping nonprofits buy buildings. maybe as much as us. maybe interested in helping make sure foreclosre never happens. that's our mission too. nationally we primiarily do residential. foreclosre rate on our propoerties was much less than nationwide. we can intervene and impose budgets with higher rents if necessary to make sure reserves are set aside so taxes etc are always paid. yes, inhernet risk as jesse said. we're asked to cosign, which is risky for us, so high incentive for us, but way more than "we don't want risk", it's we don't want to get involved if we're not committed to creating affordable space for nonprofits.
  • b: thanks i'm all for these structures. credit unions better than banks. coming up with $1M isn't a problem, easy to do. problem is length of loan, how to deal if it's not being repaid.
  • l: helpful to talk through that scenario?
  • b: yes but fwiu with or without baclt, onus is on lender to work with borrower such that if they default, we'd foreclose and take control of property in whole or in part. kick everybody out or say ok part of it's just gonna be rented out differently to somebody else. that's my idea of if how things go wrong. does that sound right?
  • j: i mean if they don't pay and you have security then you can foreclose. i don't think they usually start renting it, usually it gets sold. if they're in default they might still have equity. if it gets sold the additional equity goes to borrower.
  • b: that's right if there's a note. but if mustard owns outright then it's more of a landlord-renter env vs a homeowner/mortgage env
  • j: that's if you buy the building and lease it back to them, that'd be lease to own. i like that, new idea i kinda like but from your perspective that has a higher level of involvement from you
  • b: absolutely, that's what i hoped to avoid. you've been involved in these things much longer than i have. i think of old union/worker housing in brooklyn, all sorts of great ideas 100 yreas ago, now all owned by condos, individuals. look for anecdotes. if these things tried to be owned by nonprofits controlled by tenants, and then they sold out, now there's bankers in there. i've seen this with hospitals, schools, some exec just says "i could use that $1M". so when i structured apts, i put ownership in separate np dedicated to serving np interests vs say IA which doesn't own any of the building so future exec has no incentive to give up building because no pot of gold at the end of that. i saw baclt as plyaing that role, custodian, independent of what omni evolves into. so if not in short term it might be them in longer term, or some other np in whatever political thing they want to set up. make sense?
  • j: yes but any np can get corrupted and they all have to be run by somebody. you're worried about A so you transfer concern to nonprofit B... that's what land trust model tries to work out. so both nps would have to go bad at the same time in the same way, and they're run by different people. hard to foresee future twists & turns. some people are out for own gain but you need robust checks & balances. best that can be done. I think, the best way to guard against short-term or self-interested thinking within one non-profit is to have it intertwined with another non-profit that's run by different people.
  • b: Sounds relevant in either circumstance. The parties that have planned this--Laura, Jenny, yar--who is that? (Matt)
  • l: For me personally, and I think everyone else would agree, having the building owned by anyone besides John--such as in terms with a lender, etc--really is one of our priorities. He is very attached to the building and certainly concerned in how Omni Commons can best serve its use and preservation. Having an entity like the land trust involved -- high likelihood of paying off any loan. Land trust is our "mafia knee-capper" if you know what I mean ;) -- serving as a shelter between any lender(s) and the Omni Commons community -- there's an enforcer.
  • jenny: excited for a more collaborative model of sustaining a property with a community-driven mission... to have someone from omni on BACLT's board and vice versa creates possibility for longitudinal work to create affordable housing and public space in oak
  • matt: important to enter into a diff relationsip btw the owners of the building and the community. ....need for organization in oakland run by and for neighbors... community possibility for long-term infrastructure and to support other efforts against dispossession and displacement... so much work cut out for us to baically support each other in an increasingly difficult world... cornerstone to do this work. not just tenants, but very connected to groups doing public service and creative work... exciting opportunity more than a <something>
  • b: What is the cost to the property for having the land trust involved?
  • r: What Jesse said at very beginning -- it's going to depend on how the roles are defined in the ground lease. The intent is to cover the costs of providing oversight and monitoring of the project. We really have not looked at that, we don't have the ability to subsidize, so we really try to come up with as detailed an outline of what our role will be. It's not something I've thought about at all, so I can't give a ballpark number. Not excessive, and it's negotiable.
  • b: less-than or more-than $1000 / mo.
  • r: I'm a former general contractor. I am forever reluctant to give a ballpark, I haven't looked at the project from that perspective. I would guess that typically it would cost < $1,000 / mo. I would certainly hope that it would be less than a thousand dollars, but we haven't really heard from Omni what they would want us to be doing. Implicit in the model: review budget, review financial support, provide certain amount of "skills enhancement" (not exactly training -- more about gearing existent skills toward their own model). We generally write into an annual budget, some amount of money to do this. Our goal is always: "each one, teach one" [matt: woohoo!], that someone who learns one year, that they play a role in updating a person the next year.
  • r: issue of "bad guy" status -- not sure if that's not in our court. length of term of the loan - how does that look?
  • l: if we can find another $300K or something, and borrow less over 10 years, that would be more doable
• m: [ uff... I need a microphone... ] -- we did budgets based on current, future, and no taxes. Loan repayments meet / near-match
• b: we've gotten welfar exemption on all of our buildings, but has taken forever and cost a fortune in lawyer fees
• yar: may have indicated we're less able to pay than we are. grace period was just to mitigate having to pay double during the escrow period. big hump to get over rigt now is te psycology of renting vs. monthly expenses going toward ownership. lot easier for us to raise money if it was clear money was going directly toward ownership.
• l: any other concerns, or how are we going to follow up?
• b: would love to see omni continue forever being used for good. don't have mechanisms for getting over the two particular issues i came in wit
• l: 1) not wanting to be the bad guy, 2) ?
• b: long-term loan is something i'd like to avoid. if i can help you get over a hump, that's the goal
  • l: not interested in 30-year loan, maybe borrowing some amount that would offset the monthly payments.
• r: may be a middle ground between 10- and 30-year loan
• jesse: not sure where 5% came from, maybe an adjustable rate linked to wat current average rates are. ways to avoid foreclosure for awhile. really trying to have the land trust involved so we never arrive at that risk of foreclosure. not a black and white of bad guy vs not, but a lot of grey to work with.
• r: currently working with 2 different commercial lenders offering an initial rate of 4% with rate adjustment after 5 years at whatever current rates were (capped at 2% increase). variety of ways of trying to make loan payments more affordable but getting a fair return on your investment
• Here's a mortgage calculation spreadsheet with mortgage payments for 5/10/15 year loans: https://docs.google.com/spreadsheets/d/1Gi3OL1M2NiBccLy1vqKfWh-BP4hdtzlaP-rKuF8DdKE/edit?usp=sharing
  • Helps visualize the relative potential cost-savings of three variables: loan term, interest rate, and principal.
• l: way to move forward would be Omni to come up wit another proposal and some options that would take both of our interests into account and send to broccoli?
• b: y'all have been fabulous, don't want to string you along, you're putting a lot of time into this that you don't have. addressing those two issues would help a lot. articulating long-term cost of involving BACLT and their role they'd be compensated for would also be helpful.
• matt: what's the annual budget for BACLT?
• rick: for the coming year it's going to have grown significantly, as we added 2 new housing projects this year. last year's was about $40K. we have a single staffer now, looking at possibility of taking on another part-time staff.
  • b: that's amazing
    • l: rick lucky enough to live in a housing coop, so expenses low
• r: as we .... more training, most has been volunteer funded by a small grant. developing next year's budget now, somewhere btw $60-70K. We own 3 properties w/ 19 units... most work comes through training and education. Sig. amount of income through membership fees & donations, small grants, small # of gov't contracts, subcontracting work (w/ eg; SF Land Trust), next year w/ Oakland CLT. diverse base of funding coming increasingly from project work. in addition to omni, 3 additional housing projects in the pipeline for 2015/16. growing org trying to make our projects pay for the amt of work we put into them.
• jesse: have omni come up with a proposal to send your way. important to clearly outline the issues and potential solutions for you to sit with and think on before coming to a decision.
• matt: definitely looking for other donors, please send us any references :) personally more than willing to work on that.
• yar: 1 thing - bad guy scenario highly unlikely. there are no bad guys here!

Thank you! -broccoli (love this notes system)

oh, brassica has its big celebration tomorrow night-- pls come! -- Matt: Will be there ;) \o/