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Attachment 7

Mayor's Office of Housing and Community Development


City and County of San Francisco
Edwin M. Lee
Mayor

Olson Lee
Director

September 20, 2013


Michael E. Johnson
Fillmore Development Commercial, LLC
c/o UrbanCore
1320 Fillmore Street
San Francisco, CA 94115
Re:

Loan Agreement entered into as of August 29, 2005, by and between the. City and County
of San Francisco ("City") and Fillmore Development Commercial, LLC ("Borrower"), as
amended by the First Amendment to Loan Agreement and Promissory Note dated as of
December 8, 2010 (the "Loan Agreement"), for a loan in the original principal amount of
Five Million Five Hundred Thousand Dollars (the "Loan")

Dear Mr. Johnson:


This letter responds to the August 13, 2013, financial restructuring proposal from Borrower and
its investors, Fillmore Jazz Club ("FJC") and SN Fillmore, associated with the commercial space at the
Fillmore Heritage Center at 1310 Fillmore Street. The proposal asks the City, acting through the Mayor's
Office of Housing and Community Development, to do three primary things: (1) spend an additional
$240,000 in Community Development Block Grant ("CDBG") funds on the commercial space in the form
of a 12-month rent reduction to a new tenant ("Newco") and an existing tenant ("1300 on Fillmore"), (2)
agree to a 15-year repayment plan (interest-free) on $967,389 in delinquent payments that Borrower owes
on the Loan, and (3) agree to a second repayment plan on $379,661 in delinquent payments that Borrower
was supposed to pay in full in August 2013 as part of the 2010 First Amendment to the Loan Agreement.
In total, Borrower owes the City's CDBG program $1,347,050 in delinquent loan payments as of August
22, 2013.
Given the City's commitment to the Fillmore Heritage Center and desire to see the Fillmore
Street commercial corridor thrive, my office has held off foreclosing on its secured loan for more than
two years while waiting for Borrower to put forth a viable plan to restructure the project's finances.
Despite this lengthy grace period, Borrower and FJC have not put forth a realistic proposal that meets the
City's minimum requirements as a secured lender to the Borrower. Specifically, the proposal is not
acceptable to the City because it:
1. Asks the City, a secured lender, to be subordinate to a junior lender to the project ("SN
Fillmore"). At the start of the project, SN Fillmore agreed to subordinate its loan to the
City's Loan as part of the City's consent to the SN Fillmore financing. However, the
Borrower's proposal repays the SN Fillmore loan before the City's Loan. The City cannot
invest additional scarce CDBG grant dollars into the commercial space and further delay
payments on the City's Loan to the benefit of a subordinate lender.

1 South Van Ness Avenue Fifth Floor, San Francisco, CA 94103


Phone: (415) 701-5500 Fax: (415) 701-5501 TDD: (415) 701-5503 www.sfgov.org/moh

Fillmore Development Commercial, Page 2

2. Presents no timely repayment of the $1.35 million in delinquent loan payments and assumes
an interest-free repayment plan. The City cannot accept a 15-year repayment schedule at a
0% interest rate and considers such a proposal tantamount to a gift of public funds to the
Borrower's investors.
3. Does not present a repayment plan for the $187,510 (plus interest and penalties) in unpaid
property taxes that the Borrower owes the City's Treasurer and Tax Collector under the
Borrower's ground lease with the successor agency to the former redevelopment agency. The
tax liability does not appear to be incorporated into the Borrower's financial proposal. In
addition, the Borrower's financial proposal assumes a 35% reduction in annual property tax
payments without an explanation for this reduction.
The City would be willing to consider a proposal with the following terms: (1) no additional City
investment to the project through rent reductions or otherwise, (2) a timely repayment plan for the unpaid
property taxes, (3) accurate budgeting of the project's annual tax obligation, and (4) a timely repayment
plan for the portion of the $1.35 million in delinquent loan payments that are attributable to the space
currently occupied by Yoshi's San Francisco (the "Current Tenant"), similar to the Current Tenant's other
secured lenders, such as California Bank and Trust. In discussions with my staff, my understanding is
that the Borrower, FJC, and SN Fillmore have rejected these terms.
As you are aware, the City took out a $5.5 million loan from the federal government at a 5.54%
interest rate, with a fixed, non-negotiable payment schedule through 2025. Because the City has no
ability to renegotiate this federal loan, our office cannot provide more favorable loan terms to the
Borrower or agree to subordinate its Loan. Since the Loan's inception, FDC has never performed on its
payment obligation or met its tax obligation, putting the project in greater financial peril. Despite a court
order requiring the Current Tenant to pay rent, the Borrower (who has been collecting the Current
Tenant's rent payments) has not made timely loan payments to the City.
My office's goal was to support the Western Addition neighborhood, not provide an ongoing
subsidy to the benefit of short-term investors. Please let us know by September 27 should you have a
proposal which meets each of the City's four terms outlined above. If we do not receive a proposal from
you by that date, we will address Borrower's current loan default per the terms of the existing Loan
Agreement.

Sincerely,

Olson Lee
Director

Cc:

Tiffany Bohee, Executive Director, Office of Community Investment and Infrastructure


Tracie Reynolds, Manager, Real Estate and Development Services, Office of Community
Investment and Infrustructure
London Breed, Supervisor, District 5