South County Housing narrowly avoids foreclosure

Dennis Lalor, CEO of South County Housing, stands on the wraparound porch of a 1,415 square-foot townhouse in Forest Park in Gilroy in this April 2008 file photo.

The City of Morgan Hill will continue to try to help a longtime affordable home developer whose most recent local project is underwater and suffering from the shockwaves of last decade’s housing crash.

South County Housing has been forced to sell the remaining unbuilt residential lots on the Madrone Plaza residential project, near the intersection of Cochrane Road and Butterfield Boulevard, due to these financial difficulties, according to City staff.

The nonprofit developer whose specialty is affordable housing is ready to sell the property to MDM Investments. But before the sale could proceed, South County Housing needed the City of Morgan Hill to release the collateral for a $2 million loan the former redevelopment agency provided to the project in 2007, according to City staff.

The City Council approved the release of collateral at its Dec. 19 meeting.

If the City had declined to do that by Jan. 3, the project’s primary lender – Wells Fargo – would have foreclosed on the property, which consists of 17 undeveloped lots, according to South County Housing President Dennis Lalor.

South County Housing already defaulted once on the $34.1 million Wells Fargo loan after paying down more than $23 million to the bank, according to a letter from the bank to City staff. The bank later agreed to modify the loan, which was issued in 2007, and foreclosure was avoided – but only temporarily.

Now, there is no more room for further loan modifications, after South County Housing has repeatedly failed to meet the new terms of the loan, according to City staff and the developer. That’s why South County Housing’s best financial choice at this point is to sell the property.

But in the same City Council decision, they also voted to continue to hold South County Housing responsible for the $2 million RDA loan, which was funded by state housing funds.

Part of the discussion about the complicated dilemma at the Council meeting centered around whether the loan should be forgiven outright. Councilmembers were conflicted on the loss of $2 million that could be used for other affordable housing efforts in Morgan Hill, and the impact of the ongoing debt on South County Housing’s ability to continue to survive as a key developer of affordable homes in the future.

South County Housing has built hundreds of homes in more than 30 projects in Morgan Hill and Gilroy over the last 30 years, according to its website. The developer has worked with the Morgan Hill RDA on most of the projects it has built in the City.

The Council ultimately voted 4-1 in favor of keeping the developer on the hook for the loan, with an amendment keeping the terms, schedule and perhaps even the repayment amount open for renegotiated in the future. Mayor Steve Tate was opposed, as he thought the $2 million should be forgiven altogether.

“I’m afraid if we do this…it’s a death knell (to South County Housing),” Tate said. “I put the value of our partnership with South County Housing above that.”

The schedule for the repayment of the $2 million loan is already uncertain, as the Council’s decision requires repayment only “in the event their finances improve in the future,” according to City staff. The Wells Fargo loan takes precedence over the City’s loan.

“I also don’t want to lose sight of the long-standing relationship that South County Housing has had with the City of Morgan Hill, but we do have a responsibility to our citizens,” added Councilmember Rich Constantine. “Two million dollars is not a small sum of money. We just can’t tell our citizens we’re just going to forgive it when everyone else is struggling (too).”

The Madrone Plaza project is a combination market rate and affordable housing development. It was planned as a 95-unit project, with townhomes and single family homes. The project consists of 69 affordable and 24 market rate homes, plus one model home that is not for sale.

Seventeen of the planned market rate homes have not been built, and that’s the undeveloped property to be sold to MDM Investments for $2.1 million.

Almost all of the affordable homes have been sold to individual owners.

City staff said the housing crash that started in 2008 resulted in about a $50,000 to $100,000 decline in value for each affordable home, and a $100,000 to $200,000 loss for each market rate unit.

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