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<br /> <br /> <br /> <br /> 2 <br />Financing Strategy – Cash Loan <br />As an alternative to i ssuing housing bonds, the City could choose to simply make a cash loan to <br />Westwood Village. The loan would in effect b ecome an investment. From an investment <br />standpoint, a few concerns are raised, including: <br /> <br />1) All of the City’s existing investments are federally guaranteed or insured against the <br />loss of principle. A cash loan to a town ho me association would not carry this type of <br />protection. However, the assessment would become a lien against the property; and <br />would be collected just like ad valorum taxes which are not subordinate debt. <br /> <br />Historically, the City has restri cted its investments to no more than a 10-year period. In all <br />likelihood, the town home association would be looking for a payback period of either 15 or <br />20 years. One of the benefits and advantages of the HIA is a longer term than traditional <br />financing. Typical home equity financing is 7 years. Based upon a $1 million total project <br />amount that would be split evenly between al l of the 47 units, the following illustrates bank <br />financing compared to HIA financing. <br /> <br />Financing Bank HIA HIA HIA <br />Term 7 10 15 20 <br />Interest 7.59 6.5 6.5 6.5 <br />Monthly Payment $341$246.64$188.57 $160.90 <br />Annual Payment $4,094$2,959.68$2,262.84 $1,930.80 <br />Annual Saving $1,134.32$1,831.16 $2,163.20 <br /> <br />2) The longer the term of the investment, the gr eater the risk that th e City could receive <br />a better return on their investment from other traditional sources instead of having the <br />funds tied to the HIA loan. During the time this money is loaned-out, the City could <br />potentially miss out on other investment oppor tunities that might produce even higher <br />rates of return. However, with a HIA fundi ng, the payback of the loan comes back to <br />the City in three different ways. <br />. <br />1. Early pay-off – not all of the owners will want to finance the improvements <br />through this method and will pay off the a ssessment immediately. It is estimated <br />that approximately 20% of the homeowners will payoff the assessment <br />immediately. In addition, there is not re striction for early pay-off at anytime. <br />2. Evenly Amortized - the HIA funding is structured to be amorti zed evenly over <br />the life of the district. Therefore, both principal and interest are being paid back <br />evenly each year and as the investme nt becomes seasoned, it becomes more <br />secure. <br />3. Payoff when a unit is resold - when a home is sold, whatever assessment <br />remains will be paid off. If the average sales turnove r in Roseville is 8% then <br />each year 8% of the remaining assessment would be fully paid off. <br /> <br />3) The City’s cash reserves, while strong, cannot sustain repeated loans of this size. The <br />City could make a loan to Westwood Village , but it may come at the expense of a <br />future need that may prove to be a higher priority. The Council should be cautious in <br />making financial decisions of this magnitude in a vacuum. The Council is advised to <br />consider whether this investment will addr ess a top priority, or even a top housing <br />priority.