OCII approves $14 million loan and air-rights lease for Mercy Housing’s Block 6 affordable project; parking for affordable units reduced

The Commission on Community Investment and Infrastructure on April 15 authorized a $14,000,000 loan to Mercy Housing California 62 LP to support construction of 69 affordable housing units (plus a manager’s unit) on Transbay Block 6 and approved terms for an air rights lease tied to that development.

Elizabeth Colomello, OCII development specialist, summarized the project program and financing. The Block 6 affordable component will include 56 one‑bedroom and 14 two‑bedroom units along with about 2,000 square feet of retail on the Folsom and Beale corner. As required by the disposition and development agreement, OCII will hold an air‑rights parcel above the shared garage and enter a 75‑year air rights lease with Mercy, with a 24‑year option.

Colomello told commissioners the developer requested modifications after investor underwriting by National Equity Fund (NEF) and a reduced San Francisco area median income (AMI) figure reduced the project’s permanent-debt capacity. To address the gap and meet the investor’s "true debt" test, staff recommended and loan committee approved two changes: (1) allow OCII loan repayment ahead of the residual air-rights lease payment in the surplus-cash waterfall and (2) permit a master lease of the retail space that can be pledged to underwriters to strengthen permanent financing. The loan committee also authorized staff to reduce the loan interest rate (nominally set at 3%) down to 0% if necessary to meet investor requirements while preserving affordability commitments.

On parking, staff explained that the affordable component’s parking allocation was reduced from an initial 38 spaces to 13 to reduce project cost; Golub (the market-rate developer on adjacent Block 6) has offered to fund construction of additional market-rate spaces (25 spaces at roughly $60,000 per space) so the overall parking count for the broader project is unchanged. OCII’s loan committee required that if Affordable Housing Program (AHP) funds are eventually awarded to the project, the affordable parking count be restored up to the originally approved amount; staff also authorized up to 8 spaces for the affordable component if AHP funds are not secured and the financing gap requires further adjustment.

Commissioners pressed Mercy and staff on Mercy’s track record, the equity investor’s requirements, the area’s transit-rich context, options for residents to rent other parking, and SBE (Small Business Enterprise) participation. Mercy and OCII compliance staff said the project is near 50% SBE participation on construction and about 43% SBE on consultants to date and that strategies remain to increase MBE/WBE involvement. Staff said the loan will be funded by an affordable housing fee paid by Golub and that OCII expects Block 6 construction to begin in May 2014.

The commission approved the loan and lease authorization by roll-call vote, 4–1 (one commissioner absent).