San Francisco Redevelopment Agency


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108-00309-002                                                                                             Agenda Item No. 4 ( a )

Meeting of January 13, 2009

 

MEMORANDUM

 

TO:                 Agency Commissioners

 

FROM:           Fred Blackwell

Executive Director

 

SUBJECT:    Authorizing a First Amendment to the Amended and Restated Loan Agreement with Agonafer Shiferaw, a sole proprietor, doing business as Rasselas Jazz Club, to increase the Agency Tenant Improvement Loan by $251,000 to Reimburse the Owner for Incurred Tenant Improvement Cost, for a Total Aggregate Amount Not to Exceed $1,256,000 and to Defer the Loan Repayment for Two Years, All Related to the Costs Associated with Establishing a Jazz Club/Restaurant at 1534-40 Fillmore Street; Western Addition

 

EXECUTIVE SUMMARY

 

In 1997, the Agency entered into a loan agreement (the “Agreement”) with Mr. Agonafer Shiferaw for $737,000 to pay for tenant improvements (TIs) for Rasselas Jazz Club and Restaurant (“Rasselas”) at 1534-40 Fillmore Street (the “Property”) in the Fillmore Jazz Preservation District (the “Jazz District”) in the Western Addition.  Rasselas opened for business in October 1999.  In 2000, the loan amount was increased to $1,005,000 to fund additional TIs.  In June 2004, the Agreement was amended and restated to incorporate new repayment schedule and to allow private-lender financing of Mr. Shiferaw’s acquisition of the Property.  Mr. Shiferaw acquired the Property, and the Agency loan was subordinated to the private acquisition loan. 

 

Recently,Mr. Shiferaw informed the Agency that Rasselas’ revenue has declined because of business competition and the current economic climate.  He indicated that these are making it increasingly difficult for him to continue to run Rasselas without financial infusion and loan restructuring.  He sought and received some financial infusion from Sequoia Capital Mortgage who refinanced the loan he used to acquire the Property.  He used part of the loan proceeds to pay off some of the past due bills that Rasselas’ operation cash flow did not cover.  To improve Rasselas’ operations to weather the current economic climate, Mr. Shiferaw is asking the Agency for a loan increase and a two-year suspension of loan repayment.

 

Staff has reviewed Mr. Shiferaw’s request and discussed what steps he is taking to improve Rasselas’ operations.  The review includes analyses of Rasselas’s financial operation statements for 2008 and its projections for 2009.  A summary of the analyses are provide and explained fully in the Discussion Section of this Memorandum.  In light of the current economic conditions, the steps Mr. Shiferaw is taking to improve Rasselas’ operations, and the recent amendment to the Fillmore Jazz Reservation District Revolving Loan Program (the “Amended Loan Program”), staff proposes that the requested loan increase be subject to the following:

 

  • The outstanding loan principal of $1,027,081 would increase by $251,000 to $1,278,081. 

 

  • Interest will not accrue for five (5) years from the first amendment execution date and thereafter will accrue at 3.25% simple interest, no compounding.

 

  • The accrued unpaid interest on the existing loan (approximately $6,000) is to be waived.

 

  • Monthly loan repayment of $4,470 will start on January 1, 2011 and continue thereafter until the end of the loan term, 2017.  The loan is due and payable by the end of 2017. 

 

  • The first disbursement from the additional loan will be limited to 50% ($125,500) to reimburse incurred tenant improvement costs, and the remainder, $125,500 will be disbursed for incurred tenant improvement costs subject to providing required documentations and/or meeting operating benchmarks set by Agency-approved restaurant consultant or Agency staff.

 

  • Mr. Shiferaw is required to work with Agency-approved restaurant consultant who will set operation benchmarks for Rasselas with the aim of improving its operations, grow its revenue, and help it succeed.

 

  • Mr. Shiferaw is required to provide to the Agency quarterly business operation reports for Rasselas for the next 24 months showing operating revenues, expenses, and profit (or loss) and the steps being taken to further improve its operations.

 

  • The loan increase will be secured under the existing security instruments of the existing loan agreement, and a notice of additional loan under a deed of trust will be recorded for the new loan increase.

 

  • The disbursement of the loan increase is subject to the Board of Supervisors’ approval of the Agency’s budget amendment that the Commission adopted by Resolution No. 145-2008 on December 9, 2008 to reprogram funds for the Western Addition Redevelopment Project Area A-2 budget.

 

Staff believes the above conditions are reasonable and necessary to ensure that Rasselas not only survive the current crisis, but thrive and contribute to making the District, which is in the infancy of its rebirth, a success.  The restructuring were presented to the Western Addition A-2 Citizens’ Advisory Committee (“WACAC”) at its meeting on November 13, 2008, and it offered its support.

 

Staff recommends authorizing the proposed First Amendment to the Amended and Restated Loan Agreement.

 

BACKGROUND

 

In December 1997, the Agency entered into the Agreement with Mr. Shiferaw for $737,000 to pay for TIs for Rasselas.  Mr. Shiferaw used the Agency loan along with $200,000 of its own funds to cover the $937,000 in TI cost in establishing the Rasselas Jazz Club in the District.  Rasselas opened for business in October 1999.  Due to installation of additional improvements, the total TI cost increased by $568,000 to $1,505,000 in 2000.  To fund cost, the Agency loan was increased by $268,000 to $1,005,000 and Mr. Shiferaw increased his equity investment by $300,000 to $500,000.  In June 2004, the Agreement was amended and restated to incorporate new repayment schedule and to allow private-lender financing of Mr. Shiferaw’s acquisition of the Property.  Mr. Shiferaw acquired the Property with a $1 million private loan and the Agency loan was subordinated to the acquisition loan.  In sum, Mr. Shiferaw invested a total of 1.5 million in equity and debt in Rasselas. 

 

Mr. Shiferaw has not missed any loan repayment to the Agency, except for a brief period this year, which it has since brought current.  He recently received a refinancing loan of $1.3 million from Sequoia Capital Mortgage to replace the loan he used to acquire the property housing its club and fund past due operating expenses.  Because of business competition and the current economic climate, he reported that Rasselas’ revenue has declined prompting him to ask the Agency to restructure his loan to reduce debt-service burden and preserve cash flow for Rasselas’ operations.

 

In December 2008, the Commission approved an amended Fillmore Jazz Preservation District Revolving Loan Program (the “Amended Loan Program”) to provide loans up to certain amounts to attract new businesses and to strengthen existing businesses in the District.  The Amended Loan Program allows the Agency to consider restructuring loans made to borrowers who need such restructuring to strengthen their business operations and to safeguard the Agency’s investments related to the loans.  The Commission requires the Agency to undertake a due diligence review of the loan to be restructured to determine how the restructuring, which may include an increase to loan amounts, would impact the viability of the business funded with the loan and what steps the business is taking to improve its operations. 

 

DISCUSSION

 

In light of the above, staff reviewed Rasselas’ past performance and the steps Mr. Shiferaw is taking to improve Rasselas’ operations.  Staff analyzed Rasselas’ monthly profit and loss statements for January through November 2008 and its expected performance from December 2008 through December 2009.  As shown on Table No. 1 below, Rasselas’ year-end projections for 2008 show $607,264 in gross revenues and $698,382 in operating expenses, resulting in a deficit of ($91,118) for the year.  Mr. Shiferaw anticipates the fourth quarter 2008 deficit to be about $14,625 given the steps he is taking to improve its operations.

 

 

Table No. 1:  Rasselas - 2008 Operation Statement

 

 

First Quarter 2008

Second Quarter 2008

Third Quarter

2008

Fourth Quarter

2008

 

Total

Revenues

$147,365

$130,534

$148,983

$180,382

$607,264

Expenses and Taxes

$182,789

$166,723

$183,113

$165,757

$698,382

Profit or (Loss)*

($35,424)

($36,189)

($34,130)

($14,625)

($91,118)

Note:  A Loss indicates a deficit.

Mr. Shiferaw attributed his projected 2008 operation deficit to increased business competition and the current economic climate.  He also cited the lack of ongoing promotion of the District. 

 

Steps Mr. Shiferaw is taking to improve its operations

Mr. Shiferaw is taking steps to streamline Rasselas operations and increase its sales and profit as follow:

 

  • Increase Revenue – Provide for multiple daily shows; reprogramming the floor area of its premises to make room for revenue-enhancing activities; promote events; and introduce entertainment tickets and fees. 

 

  • Reduce Expenses - Streamline operations to reduce cost; become more cost conscious; and tie cost to benchmarks.

 

  • Increase Appeal to broader Audience - Expand/refine music offerings.

 

  • Marketing/Promotions – Increase marketing efforts to generate more attendance.

 

Agency staff has been in discussions in recent weeks with Mr. Shiferaw about the above steps.  Mr. Shiferaw is now taking the above steps but indicated that he needs additional funds to realize positive results.  With additional Agency funding, he plans to take all of the above-noted steps to increase revenue.  He is projecting for 2009 a profit of approximately $91,752 based on total revenue of $1,008,000 and total expenses of $916,248.  As shown on Table No. 2 below, no deficit is anticipated from second quarter of 2009, and quarterly profit is expected to steadily increase thereafter. 

 

 

Table No. 2:  Rasselas - 2009 Pro Forma Operation Statement

 

 

First Quarter 2009

Second Quarter 2009

Third Quarter 2009

  Fourth Quarter

2009

 

            Total

Revenues

$205,000

$256,000

$251,000

$296,000

$1,008,000

Expenses and Taxes

$221,039

$225,909

$220,665

$248,635

$916,248

Profit or (Loss)*

($16,039)

$30,091

$30,335

$47,365

$91,752

Note:  A Loss indicates a deficit.

 

 

The basic terms of the existing amended and restated loan agreement

The $1.005 million loan carries a compounding interest rate of 3.5% per year with $4,834.33 monthly repayment based on a 30-year amortization.  The loan has a 20-year term, and since it was originated in 1997, it is due and payable in December 2017 with a balloon payment.  It is secured with a recorded trust deed which has been subordinated to a private lender’s loan.  Rassales is requesting the loan be restructured to ease debt-service burden. It is also requesting an additional loan as noted earlier.

 

 

The basic terms of the proposed first amendment to the amended and restated loan agreement

 

Under the proposed first amendment, all of the terms of the existing loan would remain the same except as stated in the Executive Summary Section of this Memorandum.

 

The basic terms of the loan before and after restructuring are shown on Table No. 3 below.

 

 

Table No. 3:  The Basic Terms of the Restructured Loans for Rasselas

 

 

Terms

Loan Terms

Before Restructuring

Loan Terms

After Restructuring

Date of Loan Agreement

June 15, 2004

January 13, 2009

Loan Amount

$1,005,000

(Paid down to $1,027,081)

  $1,278,081

Repayment

Start Date

 

 July 1, 2006

 

January 1, 2011

Loan Term

20 Years

20 Years

Maturity Date

January 31, 2017

December 17, 2017

Interest Rate

3.5% 

compounding annually

3.25%

Simple Interest, no compounding

Interest Accrual Deferral

2 years

5 years

Monthly Payment

$4,834.33

$4,470

 

Community Input

This item is part of the proposed restructuring of WA-A2 loans presented to the Western Addition A-2 Citizens’ Advisory Committee (“WACAC”) at its meeting on November 13, 2008.  The WACAC supported this proposal.

 

California Environmental Quality Act

Agency authorization of the proposed first amendment to the amended and restated loan agreement with Mr. Shiferaw for tenant improvements will stabilize the operation of an existing business and it is exempt from the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines Section 15061(b)(3).  The provision of the loan increase would facilitate the continued operation of the Rasselas business, such that the business can remain viable and provide needs services and employments.  Approval of the first amendment to the amended and restated loan agreement would not lead to any significant physical effects on the environment.

 

Originated by

Ricky Tijani, Senior Development Specialist

 

 

 

                                                                        Fred Blackwell

Executive Director

 

cc:        Supervisor Ross Mirkarimi

RESOLUTION NO. 9-2009

 

 

 

Authorizing a First Amendment to the Amended and Restated Loan Agreement with Agonafer Shiferaw, a sole proprietor, doing business as Rasselas Jazz Club, to increase the AGENCY TENANT IMPROVEMENT loan by $251,000 TO REIMBURSE THE OWNER FOR INCURRED TENANT IMPROVEMENT COST, for a total aggregate amount not to exceed $1,256,000 and to defer the loan repayment for TWO years, all related to the costs associated with establishing a jazz club/restaurant at 1534-40 Fillmore Street; Western Addition

 

BASIS FOR RESOLUTION

 

  1. On December 17, 1997, by Resolution No. 102-97, the Commission approved a Loan Agreement (the “Loan Agreement”) with Mr. Agonafer Shiferaw (the “Owner”) for $737,000 to pay for tenant improvements (TIs) for Rasselas Jazz Club and Restaurant (“Rasselas”) at 1534-40 Fillmore Street (the “Property”) in the Fillmore Jazz Preservation District (the “Jazz District”) in the Western Addition Redevelopment Project Area A-2.  Rasselas opened for business in October 1999. 

 

  1. On January 13, 2000, by Resolution No. 5-2000, the Commission approved a First Amendment to the Loan Agreement that extended the date for the first loan repayment from January 15, 2000 to January 15, 2001. 

 

  1. On November 28, 2000, by Resolution No. 235-2000, the Commission approved a Second Amendment to the Loan Agreement that increased the amount of the loan by $268,000 for a total principal amount of $1,005,000 and restructured the loan’s repayment terms.  Mr. Shiferaw used the funds from the Agency loan along with his own funds to cover the TIs in establishing the Rasselas Jazz Club and Restaurant in the Jazz District. 

 

  1. On June 15, 2004, by Resolution No. 83-2004, the Commission approved an Amended and Restated Loan Agreement with Mr. Shiferaw to incorporate a new repayment schedule and to allow private-lender financing of Mr. Shiferaw’s acquisition of the Property.  Mr. Shiferaw acquired the Property and the Agency loan was subordinated to the acquisition loan. 

 

  1. Mr. Shiferaw has not missed any loan repayments to the Agency, except for a brief period this year, which it has since brought current.  He recently received a refinancing loan of $1.3 million from Sequoia Capital Mortgage to replace the loan he used to acquire the Property housing its club and fund past due operating expenses.  Because of business competition and the current economic climate, he reported that Rasselas’ revenue has declined prompting him to ask the Agency to restructure his loan to reduce debt-service burden and preserve cash flow for Rasselas’ operations.

 

  1. On December 9, 2008, by Resolution No. 146-2008, the Commission approved an amended Fillmore Jazz Preservation District Revolving Loan Program (the “Amended Loan Program”) to increase the maximum loan amounts for non-forgivable façade improvement loans, tenant improvement loans and business assistance loans and add certain provisions that allow for existing and new loans to be restructured on an as needed basis, upon a showing of good cause.  The Amended Loan Program allows the Agency to consider restructuring loans made to borrowers who need such restructuring to strengthen their business operations and to safeguard the Agency’s investments related to the loans.  The Commission requires Agency staff to undertake a due diligence review of the loan to be restructured to determine how the restructuring (which may include an increase to loan amounts) would impact the viability of the business funded and what steps the business is taking to improve its operations. 
  2. In following the Commission’s direction, Agency staff analyzed Rasselas’ 2008 performance and the steps it is taking to improve its operations.  Staff analyzed Rasselas’ monthly profit and loss statements for January through November 2008 and its expected performance from December 2008 through December 2009.  Rasselas’ year-end projections for 2008 show $607,264 in gross revenues and $698,382 in operating expenses, resulting in a deficit of ($91,118) for the year.  Mr. Shiferaw anticipates the fourth quarter 2008 deficit to be about $14,625 given the steps he is taking to improve its operations.  Mr. Shiferaw attributed his projected 2008 operation deficit to increased business competition and the current economic climate.  He also cited the lack of ongoing promotion of the Jazz District. 
  3. Agency staff has held discussions in recent weeks with Mr. Shiferaw about the steps he is taking to control operating expenses and increase revenues and profit.  Mr. Shiferaw is streamlining Rasselas’ operations and controlling its operation costs to increase its revenues by improving its marketing efforts, launching new events, programs, and promotions.  Based on these steps and in light of the current economic climate, he is projecting for 2009 a profit of approximately $91,752 based on total revenues of $1,008,000 and total expenses of $916,248. 
  4. The existing Agency/Mr. Shiferaw Amended and Restated Loan Agreement includes a compounding interest rate of 3.5% per year with a monthly loan repayment of $4,834.33 based on a 30-year amortization.  The loan has a 20-year term, and since it was originated in 1997, it is due and payable in December 2017 with a balloon payment.  It is secured with recorded trust deed which has been subordinated to a private lender’s loan. 

 

  1. Under the proposed First Amendment to the Amended and Restated Loan Agreement (the “First Amendment”), all of the above terms would remain the same except for the following:

 

  • The outstanding loan balance of $1,027,081 would increase by $251,000 to $1,278,081.

 

  • Interest will not accrue for five (5) years from the First Amendment execution date and thereafter to accrue at 3.25% simple interest, no compounding.

 

  • The accrued unpaid interest on the existing loan (approximately $6,000) is to be waived.

 

  • Monthly loan repayment of $4,470 will start on January 1, 2011 and continue thereafter until the end of the loan term, 2017.  The loan is due and payable by the end of 2017. 

 

  • The first disbursement from the additional loan will be limited to 50% ($125,500) to reimburse incurred tenant improvement costs, and the remainder, $125,500, will be disbursed to reimburse tenant improvement costs subject to providing required documentations and/or meeting operating benchmarks set by an Agency-approved restaurant consultant or Agency staff.

 

  • Mr. Shiferaw is required to work with an Agency-approved restaurant consultant who will set operation benchmarks for Rasselas with the aim of improving its operations, grow its revenues, and help it succeed.

 

  • Mr. Shiferaw is required to provide to the Agency quarterly business operation reports for Rasselas for the next 24 months showing operating revenues, expenses, and profit (or loss) and the steps being taken to further improve its operations.

 

  • The loan increase will be secured under the existing security instruments of the existing loan agreement, and a notice of additional loan under a deed of trust will be recorded for the new loan increase.

 

  1. The disbursement of the loan increase is subject to the Board of Supervisors’ approval of the Agency’s budget amendment that the Commission adopted by Resolution No. 145-2008 on December 9, 2008 to reprogram funds for the Western Addition Redevelopment Project Area A-2 budget.

 

  1. with Mr. Shiferaw for tenant improvements will stabilize the operation of an existing business and it is exempt from the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines Section 15061(b)(3).  The provision of the loan increase would facilitate the continued operation of the Rasselas business, such that the business can remain viable and provide needs, services, and employments.  Approval of the First Amendment would not lead to any significant physical effects on the environment.

 

  1. Agency staff recommends approval of the First Amendment with Mr. Shiferaw to modify the terms the Amended and Restated Loan Agreement and increase the loan amount as described herein.

 

 

RESOLUTION

 

ACCORDINGLY, IT IS RESOLVED by the Redevelopment Agency of the City and County of San Francisco that the Executive Director is authorized to (1) execute a First Amendment to the Amended and Restated Loan Agreement with Agonafer Shiferaw, a sole proprietor, doing business as Rasselas Jazz Club, to increase the Agency Tenant Improvement Loan by $251,000 to reimburse the Owner for incurred tenant improvement cost, for a total aggregate amount not to exceed $1,256,000 and to defer the loan repayment for two years, all related to the tenant improvement cost associated with establishing a jazz club/restaurant at 1534-40 Fillmore Street in the Western Addition; and (2) any and all ancillary documents necessary to consummate this transaction substantially in the form lodged with the Agency General Counsel.

 

 

APPROVED AS TO FORM:

 

 

 

                                                _

James B. Morales

Agency General Counsel


 

108-00409-002                                                                                             Agenda Item No. 4 ( b )

                                                                                                             Meeting of January 13, 2009

 

MEMORANDUM

 

TO:                 Agency Commissioners

 

FROM:           Fred Blackwell

                        Executive Director

 

SUBJECT:    Authorizing a First Amendment to the Amended and Restated Tenant Improvement Loan Agreement with Sheba Lounge, LLC, a California limited liability company, to consolidate its tenant improvement, façade improvement, and business assistance loans into one combined loan in the amount of $295,000; to increase the consolidated loan amount by $90,000 for additional tenant improvements, for a total aggregate amount not to exceed $385,000; to defer the repayment of the consolidated loan for two years; to nullify the loan documents related to two of the three consolidated loans; and to forgive $95,000 of the consolidated loan upon fulfillment of certain terms and conditions; all associated with Sheba Lounge, a restaurant at 1419 Fillmore Street; Western Addition

 

 

EXECUTIVE SUMMARY

 

In April 2005, the Commission approved a façade improvement loan in the amount of $35,000, a tenant improvement loan in the amount of $90,000, and a business assistance loan in the amount of $75,000 (the “Original Loan Agreements”), under the Fillmore Jazz Preservation District Revolving Loan Program (the “Loan Program”), for a total aggregate amount of $200,000, to Sheba Lounge, LLC, a California limited liability company (“Sheba”), to establish a restaurant/music lounge (the “Restaurant”) at 1419 Fillmore Street in the Western Addition.  In December 2005, the Agency provided a separate $95,000 loan to Sheba to pay for additional tenant improvement cost related to prevailing wages (the “Prevailing Wage Loan”).  Between August 2004 and March 2006, the Mayor’s Office of Community Development (“MOCD”) provided Sheba with two loans totaling $250,000 for tenant improvements and working capital.  Sheba Lounge opened in May 2006.  In June 2007, the Original Loan Agreements were amended and restated to reduce interest rates on the three constituent loans and to suspend for one year the monthly repayments of the loans.  Repayment of the loans was set to start on June 1, 2008.

 

In May 2008, Sheba informed the Agency that the Restaurant is yet to generate enough cash flow to cover its expenses and debt obligations, including debt service to the Agency.  The two owners of Sheba, Netsanet Alemayehu and Israel Alemayehu (the “Owners”), have been drawing down on their equity investment in Sheba Lounge to pay their ongoing expenses and debt obligations, but the business is still operating at a loss.  The Owners indicated that the continuing operation loss is due to increase competition for customers, the lack of ongoing promotion of the Fillmore Jazz Preservation District (the “Jazz District”), the softening of the economy, and Fillmore Center Plaza reconstruction activities that have reduced visibility of the Restaurant’s storefront and impeded customer walk-ins.  The Owners expressed optimism at improving Sheba’s operation through a number of steps detailed in the Discussion Section of this Memorandum.  To take some of the steps, they are asking the Agency to (a) consolidate three of the existing four loans to simplify loan repayment – the combined principals of the three loans is $170,878; (b) increase the consolidated loan principal by $90,000 to a aggregate total of $260,878, (c) defer the repayment of the consolidated loan to 2011 with no interest accruing; (d) base the monthly loan repayment on 50% of profit from Sheba operations; and (e) forgive the Prevailing Wage Loan.   

 

Staff has reviewed the Owners’ request and discussed what steps they are taking to improve Sheba’s operations.  The review includes analyses of Sheba’s financial operation statements for 2008 and its projections for 2009.  A summary of the analyses are provide and explained fully in the Discussion Section of this Memorandum.  In light of the current economic conditions, the steps the Owners are taking to improve Sheba’s operations, and the recent amendment to the Amended Loan Program, staff proposes that the Owners’ request be approved subject to the following:

 

·         Increase the $170,878 loan amount of the proposed consolidated loan by $90,000 to $260,878.

 

·         Interest not to accrue for five (5) years from the first amendment execution date and thereafter to accrue at 3.25% simple interest, no compounding.

 

·         The accrued unpaid interest on the existing loans (approximately $2,776) is to be waived.

 

·         Monthly loan repayment of $1,475 will start on January 1, 2011 and continue thereafter until the end of the loan term, 2019.  The consolidated loan is due and payable by the end of 2019. 

 

·         The first disbursement from the additional loan will be limited to 50% ($45,000) to reimburse incurred tenant improvement costs, and the remainder, $45,000 will be disbursed subject to providing required documentations and/or meeting operating benchmarks set by Agency-approved restaurant consultant or Agency staff.

 

·         The Prevailing Wage Loan will be forgiven after Sheba has paid to the Agency 24 monthly repayments under the proposed consolidated loan.  If Sheba has not made the 24 monthly payments to the Agency by December 2013, then it shall use 15 % of its profit as monthly payment on the Prevailing Wage Loan until it has made 24 monthly payments on the consolidated loan. 

 

·         The Owners are required to work with Agency-approved restaurant consultant who will set operation benchmarks for Sheba with the aim of improving its operations, grow its revenue, and help it succeed.

 

·         The Owners are required to provide to the Agency quarterly business operation reports for the next 24 months showing operating revenues, expenses, and profit (or loss) and the steps being taken to further improve its operations.

 

  • The security for the consolidated loan will be limited to UCC-1 Financing Statement – a security against the fixtures, furniture and equipment of Sheba.

 

·         The disbursement of the loan increase is subject to the Board of Supervisors’ approval of the Agency’s budget amendment that the Commission adopted by Resolution No. 145-2008 on December 9, 2008 to reprogram funds for the Western Addition Redevelopment Project Area A-2 budget.

 

Staff believes the above conditions are reasonable and necessary to ensure that Sheba not only survive the current crisis, but thrive and contribute to making the District, which is in the infancy of its rebirth, a success.  The restructuring were presented to the Western Addition A-2 Citizens’ Advisory Committee (“WACAC”) at its meeting on November 13, 2008, and it offered its support.

 

Staff recommends authorizing the first amendment to the Amended and Restated Loan Agreement to incorporate the changes outlined in this Commission Memorandum.

 

BACKGROUND

 

One of the Agency’s overall goals for the Jazz District is to attract new businesses, strengthen existing businesses, and help create a viable commercial core for this neighborhood by providing retail services, jobs and a safer environment.  To help smaller businesses establish themselves and grow, Agency funds are necessary to nurture the cycle of investment and economic development.  Providing loan funds to Sheba Lounge has furthered the Agency’s economic development goals for the Jazz District.

 

Loans to Shebafrom the Agency

In April 2005, the Commission approved a façade improvement loan in the amount of $35,000, a tenant improvement loan in the amount of $90,000, and a business assistance loan in the amount of $75,000 under the Loan Program, for a total aggregate amount of $200,000, to Sheba to establish the Restaurant.  In December 2005, the Agency provided a separate $95,000 loan to Sheba to pay for additional tenant improvement cost related to prevailing wages.  Additional funding was provided MOCD and the Owners.  Sheba Lounge opened in May 2006.  In June 2007, the Original Loan Agreements were amended and restated to reduce interest rates on the three constituent loans and to suspend for one year the monthly repayments of the loans.  Repayment of the loans was set to start on June 1, 2008.

 

Loans to Sheba from the MOCD

In August 2004, MOCD provided a tenant improvement and working capital loan in the amount of $100,000 to the Owners to open Sheba.  This $100,000 loan is secured by a legal document

pledging the Owners’ personal savings and the value of the furniture, fixtures, and equipment at Sheba Lounge.

 

In March 2006, MOCD provided an additional loan of $150,000, for a total aggregate amount of $250,000, to Sheba to pay for additional working capital and construction cost overruns.  This $150,000 loan is secured by an additional legal document pledging the Owners’ personal savings.

 

At the Owners’ request, MOCD has extended the loan repayment start date.  The repayment of the smaller loan is deferred until March 1, 2009, and the repayment of the larger loan will start after the smaller loan is repaid. 

 

Prevailing Wage Loan

Sheba’s contract with for the construction of its tenant improvements did not include prevailing wages.  Therefore, in order to comply with the Agency’s contact compliance policies, Sheba’s tenant improvement loan was increased to $100,000 in December 2005 by the Agency under to cover prevailing wage costs.  The actual amount needed for prevailing wages was later determined to be $95,000.

 

Total Project Cost

In 2005, Sheba estimated its tenant improvement, equipment, and working capital needs at $780,000.  This estimate is funded with (1) $250,000 from MOCD, (2) $200,000 from the Agency, (3) $150,000 from the Fillmore Center, Sheba’s landlord, and $180,000 in equity and debt from the Owners.

 

Sheba’s loan repayments to the Agency to-date

The Owners have made monthly payments on the loans from March 1, 2006 through February 2007.  They paid a total of $43,119 to the Agency in principal and accrued interest.  The remaining loan amounts (excluding the $95,000 Prevailing Wage Loan) are summarized in the Table 1 below:

 

 

Table No. 1:  Sheba Lounge - 2008 Operation Statement

 

Original Loan Amounts

Principal paid to Date

3/1/2006  - 5/30/2007

Principal Remaining

Façade Improvement

$35,000

$5,631

$29,369

Business Assistance

$75,000

$18,473

$56,529

Tenant Improvement

$90,000

$5,018

$84,982

Total

$200,000

$29,475

$170,878

 

At the Owners’ request, the Agency suspended the repayment of the loans until June 1, 2008. 

 

 

The Owner’s current request

In May 2008, the Owners informed the Agency that the Restaurant is still operating at a deficit and requested a restructuring of its loans and a loan increase.  The Owners indicated that the continuing operation loss is due to increase competition for customers, the lack of ongoing promotion of the Jazz District, the softening of the economy, and the Fillmore Center Plaza reconstruction activities that have reduced visibility of the Restaurant’s storefront and impeded

customer walk-ins.  They also indicated that these factors have compounded Sheba’s struggle to generate sufficient income, and that they continued to fund the operation deficit hoping that with Yoshi’s opening, the proposed renewed promotion of the Jazz District, and the recent completion of the Fillmore Center Plaza would increase patronage and sales for the Restaurant.   The Owners expressed optimism at improving Sheba’s operation through a number of steps detailed in the Discussion Section of this Memorandum.  To take some of the steps, they are asking the Agency for further financial assistance discussed below.   

 

DISCUSSION

 

In light of all of the above, staff reviewed Sheba’s past performance and the steps the Owners are taking to improve Sheba’s operations.  Staff analyzed of Sheba’s performance from January through November 2008 and its expected performance from December 2008 through December 2009.  As shown on Table No. 2 below, Sheba’s year-end projections for 2008 show $407,660 in gross revenue and $430,632 in total operating expenses resulting in a deficit of ($22,972) for the year.

 

 

Table No. 2:  Sheba Lounge - 2008 Operation Statement

 

 

First Quarter 2008

Second Quarter 2008

Third Quarter

2008

Fourth Quarter

2008

 

Total

Revenues

$111,583

$87,661

$97,369

$111,047

$407,660

Expenses and Taxes

$118,071

$96,166

$102,844

$113,552

$430,632

Profit or (Loss)*

($6,488)

($8,505)

($5,475)

($2,505)

($22,972)

Note:  A Loss indicates a deficit.

 

The Owners anticipate the fourth quarter 2008 deficit to be about $2,505 given the steps they are taking to improve Sheba’s operations.

 

Steps the Owners are taking to improve its operations

The Owners are aiming to improve Sheba’s operations and increase its sales and profit as follow:

 

·         Increase Revenue – Expand entertainment offerings through more bookings and multiple performances per day to draw additional guests; hire a special event manager/promoter; utilize the recently re-vamped patio area of the premises to increase seating capacity; increase off-premises sales by expanding catering services; and extend kitchen operations to include late night services.

 

·         Reduce Expenses – Preserve operation cash flow by not leasing operation equipment; instead, use the requested Agency funds to buy the needed equipment and fixtures; streamline operations to reduce cost; become more cost conscious; and tie costs to benchmarks.

 

·         Marketing – Expand media campaign through SF Chronicle, SF Weekly, SF Bay Guardian, 7x7, along with a national print media to target food/entertainment/lifestyle editors of trade magazines; and outreach to local jazz radio stations, KKSF, KCSM, KBLX and KPOO to promote awareness about Sheba Lounge.

 

With the above-noted steps and additional Agency funds, the Owners are expecting positive results in 2009.  They are projecting for 2009 operations $34,669 in profit based on $514,483 in total revenue and $480,162 in total expenses.  As shown on Table No. 3 below, no deficit is anticipated in any of quarters of 2009. 

 

 

Table No. 3:  Sheba Lounge - 2009 Pro Forma Operation Statement

 

 

First Quarter 2009

Second Quarter 2009

Third Quarter 2009

  Fourth Quarter

2009

 

            Total

Revenues

$137,581

$122,529

$122,368

$132,353

$514,483

Expenses and Taxes

$127,851

$115,560

$111,535

$125,216

$480,162

Profit or (Loss)*

$9,730

$6,969

$10,833

$7,137

$34,669

Note:  A Loss indicates a deficit.

 

The basic terms of the existing amended and restated loan agreement

Table No. 4 below shows the basic terms of the existing four loans and the proposed consolidation of three of the loans. 

 

 

Table No. 4:  Basic Terms of the Existing Sheba Lounge Loans with the Agency

 

 

 

Terms

 

First Tenant

Improvements

 

Second Tenant Improvements

 

Façade

Improvements

 

Business

Assistance

Consolidation of Loan Nos. 2, 3, and 4

Loan Number

1

2

3

4

 

Loan Amount

$95,000

$84,982

$29,369

$56,527

$170,878

Repayment

Start Date

 

Oct. 1, 2011

 

June 1, 2008

 

Oct. 1, 2008

 

Oct. 1, 2008

 

Loan Term

10 Years

13 Years

5 Years

3.5 Years

 

Maturity Date

June 2017

June 2020

Oct. 1, 2012

Oct. 1, 2010

 

Interest Rate

3.25%

3.25%

3.25%

3.25%

 

Monthly Payment

$928.33

$655.21

$500.43

$1,493

 

 

Sheba is requesting (a) the consolidation of loans Nos. 2, 3 and 4 to ease loan servicing – the combined principals of the three loans is $170,878; (b) increase the consolidated loan principal by $90,000 to a aggregate total of $260,878, (c) defer the repayment of the consolidated loan to 2012; no interest accruing; (d) base the repayment on 50% of profit; and (e) forgive loan No. 1.

 

 

 

The basic terms of the proposed first amendment to the amended and restated loan agreement

 

Under the proposed first amendment, all of the terms of the existing loan would remain the same except as stated in the Executive Summary Section of this Memorandum.  Given the size of the Agency loans to Sheba, it is not appropriate to base the repayment of the loans on a percentage of Sheba’s income.  If a percentage of income is used, Sheba will be required to provide periodic reports and audited operation statements than necessary.  Staff believes the proposed terms and conditions are reasonable and necessary to ensure that Sheba not only survive the current crisis, but thrives. 

 

The basic terms of the Prevailing Wage Loan, Loan No. 1, and the new consolidated loan are shown on Table No. 5 below.

 

 

Table No. 5:  The Basic Terms of the Restructured Loans for Sheba Lounge

 

 

Terms

Larger Tenant

Improvements

Consolidated

Loan

Loan Number

1

2

Loan Amount

$95,000

  $260,878 ($170,878 plus $100,000)

Repayment

Start Date

 

December 17, 2025

 

December 16, 2013

Loan Term

10 Years

10 Years

Maturity Date

December 17, 2018

December 17, 2018

Interest Rate

3.25%

3.25%

Monthly Payment between 2009 and 2011

None

None

Monthly Payment between 2012 and 2014

None

$1,475

Monthly Payment between 2014 and 2019

15% of  Profit

$1.475 or $1.475 plus 15% of Profit

 

Community Input

The above items are the main subject of proposed WA-A2 loan restructuring presented to the Western Addition A-2 Citizens’ Advisory Committee (“WACAC”) at its meeting on November 13, 2008.  The WACAC supported the proposal.

 

CaliforniaEnvironmental Quality Act (“CEQA”)

Agency authorization of the proposed first amendment to the loan agreement with Sheba will consolidate three of four existing loans into one loan that increases the consolidated loan amount for additional tenant improvements and allows for repayment of the consolidated loan amount over an extended period of time, and cancel the fourth loan.  The majority of the original loan amounts and the additional loan amount are for completing tenant and façade improvements, which are activities that are alterations to an existing facility that would have no resultant significant environmental impacts and are categorically exempt from the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines Section 15301(a).  The provision of business assistance funds would not have directly caused any significant physical effect on the environment and is exempt from CEQA pursuant to CEQA Guidelines Section 15061(b)(3).  Approval of the proposed first amendment will provide extended repayment terms to the Loan Agreement in order to facilitate the continued operation of the Sheba Lounge business, such that the consolidated loan amount can be repaid over time.  This action will not

 

lead to additional changes to the environment and will not cause any significant physical effects on the environment, and is exempt from CEQA pursuant to CEQA Guidelines Section 15061(b)(3).

Originated by

Ricky Tijani, Senior Development Specialist

 

 

 

Fred Blackwell

Executive Director

 

cc:        Supervisor Ross Mirkarimi


 

 

RESOLUTION NO. 10-2009

 

                                   

 

Authorizing a First Amendment to the Amended and Restated Tenant Improvement Loan Agreement with

Sheba Lounge, LLC, a California limited liability company, to consolidate ITS tenant improvement, façade improvement, and business assistance LOANS into one combined loan IN THE amount of $295,000; to increase the consolidated loan amount by $90,000 for additional tenant improvements, for a total aggregate amount not to exceed $385,000; to defer the repayment of the consolidated loan for two years; to nullify the loan documents related to two of the three consolidated loans; and to FORGIVE $95,000 OF THE CONSOLIDATED LOAN UPON FULFILLMENT OF CERTAIN TERMS AND CONDITIONS; all associated with SHEBA LOUNGE,

a restaurant at 1419 Fillmore Street; Western Addition

 

 

BASIS FOR RESOLUTION

 

1.                  On April 19, 2005, by Resolution No. 59-2005, the Commission approved a façade improvement loan in the amount of $35,000, a tenant improvement loan in the amount of $90,000, and a business assistance loan in the amount of $75,000 (the “Original Loan Agreements”), under the Fillmore Jazz Preservation District Revolving Loan Program, for a total aggregate amount of $200,000, to Sheba Lounge, LLC, a California limited liability company (“Sheba” or “Sheba Lounge”), to establish a restaurant/music lounge (the “Restaurant”) at 1419 Fillmore Street in the Western Addition Redevelopment Project Area A-2. 

 

2.                  On December 6, 2005, by Resolution No. 203-2005, the Commission approved First Amendments to the Original Loan Agreements to provide, among other things, a separate $95,000 loan to Sheba to pay for additional tenant improvement cost related to prevailing wages (the “Prevailing Wage Loan”). 

 

3.                  Between August 2004 and March 2006, the Mayor’s Office of Community Development provided Sheba with two loans totaling $250,000 for tenant improvements (TI) and working capital.  Sheba Lounge opened in May 2006. 

 

4.                  On June 19, 2007, by Resolution No. 64-2007, the Commission approved an Amended and Restated Loan Agreement with Sheba to reduce interest rates on its four loans with the Agency and to suspend for one year the monthly repayments of three of the loans.  Repayment of the three loans was set to start on June 1, 2008.

 

5.                  In May 2008, Sheba informed the Agency that the Restaurant is yet to generate enough cash flow to cover its expenses and debt obligations, including debt service to the Agency.  The two owners of Sheba, Netsanet Alemayehu and Israel Alemayehu (the “Owners”), have been drawing down on their equity investment in Sheba Lounge to pay their ongoing expenses and debt obligations, but the business is still operating at a loss.  The Owners indicated that the continuing operation loss is due to increase competition for customers, the lack of ongoing promotion of the Fillmore Jazz Preservation District (the “Jazz District”), the softening of the economy, and Fillmore Center Plaza reconstruction activities that have reduced visibility of the Restaurant’s storefront and impeded customer walk-ins.  The Owners continued to fund the operation deficit hoping that with the opening of the nearby Yoshi’s, the renewed promotion of the Jazz District, and the recent completion of the Fillmore Center Plaza would increase patronage of their business leading to increase sales. 

 

6.                  The Owners expressed optimism at improving Sheba’s operations through a number of steps: 

 

·                     Increase Revenue – Expand entertainment offerings through more bookings and multiple performances per day to draw additional guests; hire a special event manager/promoter; utilize the recently re-vamped patio area of the premises to increase seating capacity; increase off-premises sales by expanding catering services; and extend kitchen operations to include late night services.

 

·                     Reduce Expenses – Preserve operation cash flow by not leasing operation equipment; instead, use the requested Agency funds to buy the needed equipment and fixtures; streamline operations to reduce cost; become more cost conscious; and tie costs to benchmarks.

 

·                     Marketing – Expand media campaign through SF Chronicle, SF Weekly, SF Bay Guardian, 7x7, along with a national print media to target food/entertainment/lifestyle editors of trade magazines; and outreach to local jazz radio stations, KKSF, KCSM, KBLX and KPOO to promote awareness about Sheba Lounge.

 

7.                  On December 9, 2008, by Resolution No. 146-2008, the Commission approved an amended Fillmore Jazz Preservation District Revolving Loan Program (the “Amended Loan Program”) to increase the maximum loan amounts for non-forgivable façade improvement loans, tenant improvement loans and business assistance loans and add certain provisions that allow for existing and new loans to be restructured on an as needed basis, upon a showing of good cause.  The Amended Loan Program allows the Agency to consider restructuring loans made to borrowers who need such restructuring to strengthen their business operations and to safeguard the Agency’s investments related to the loans.  The Commission requires Agency staff to undertake a due diligence review of the loan to be restructured to determine how the restructuring (which may include an increase to loan amounts) would impact the viability of the business funded and what steps the business is taking to improve its operations.   

8.                  In following the Commission’s direction to determine the viability of the borrowers’ businesses under the proposed loan restructuring, staff analyzed Sheba’s 2008 performance and the steps its taking to improve its operations.  According to records provided by Sheba based on actual data from its operations between January and October 2008, its projections for 2008 includes $407,660 in gross revenues, $430,632 in operating expenses, and a $22,972 deficit.  Sheba’s operation deficit for 2008 is due to increased business competition, inadequate marketing, and declining revenues due in large part to the current difficult economic climate that started in early 2008.

 

9.                  Agency staff has held discussions in recent weeks with Sheba about the steps it is taking to improve its operations.  Sheba is taking pragmatic steps to streamline its operations, control costs and increase revenues by expanding its entertainment offerings, hiring a special event manager/promoter; expanding its restaurant seating capacity and catering services; and increasing its marketing efforts to generate more attendance.  Based on these steps and in light of the current economic climate, Sheba is expecting a profit of about $34,669 in 2009 based on projected total revenues of $514,483 and total expenses of $480,162. 

 

10.              The existing four Agency loans to Sheba described above are each secured with a promissory note, a recorded leasehold deed of trust, a security agreement, loan guaranties, and UCC-1 Financing Statement.  Each of the loans carries a fixed interest rate of 3.25% per year that began accruing on July 1, 2008.  The combined loan repayment schedule includes a monthly repayment of $2,648.64 for July 2008 through October 1, 2011, thereafter the repayment increased to $3,576.97.  The terms of the loans vary from three and a half (3.5) years to 13 years. 

 

11.              Sheba is requesting (a) the consolidation of its Tenant Improvement, Façade Improvement and Business Assistance Loans in the combined loan amount of $295,000, all to ease its debt servicing; b) increase the consolidated loan principal by $90,000 to an aggregate total amount not to exceed $385,000, (c) defer the repayment of the consolidated loan to 2012 with no interest accruing; (d) base the monthly loan repayment on 50% of profit; (e) nullify the loan documents related to the two smaller loans being consolidated; and (f) forgive the fourth loan TI loan with a principal of $95,000. 

 

12.              Under the proposed First Amendment to the Amended and Restated Tenant Improvement Loan Agreement (the “First Amendment”), all of the above terms would remain the same except for the following:

 

·         Increase the $295,000 loan amount of the proposed consolidated loan by $90,000 to $385,000.

 

·         Interest not to accrue for five (5) years from the First Amendment execution date and thereafter to accrue at 3.25% simple interest, no compounding.

 

·         The accrued unpaid interest on the existing loans (approximately $2,776) is to be waived.

 

·         Monthly loan repayment of $1,475 will start on January 1, 2011 and continue thereafter until the end of the loan term, 2019.  The consolidated loan is due and payable by the end of 2019. 

 

·         The first disbursement from the additional loan will be limited to 50% ($45,000) to reimburse incurred tenant improvement costs, and the remainder, $45,000, will be disbursed subject to providing required documentations and/or meeting operating benchmarks set by an Agency-approved restaurant consultant or Agency staff.

 

·         The Prevailing Wage Loan will be forgiven after Sheba has paid to the Agency 24 monthly repayments under the proposed consolidated loan.  If Sheba has not made the 24 monthly payments to the Agency by December 2013, then it shall use 15% of its profit as monthly payment on the Prevailing Wage Loan until it has made 24 monthly payments on the consolidated loan. 

 

·         The Owners are required to work with an Agency-approved restaurant consultant who will set operation benchmarks for Sheba with the aim of improving its operations, grow its revenues, and help it succeed.

 

·         The Owners are required to provide to the Agency quarterly business operation reports for the next 24 months showing operating revenues, expenses, and profit (or loss) and the steps being taken to further improve its operations.

 

·         The security for the consolidated loan will be limited to UCC-1 Financing Statement – a security against the fixtures, furniture and equipment of Sheba.

 

13.              The disbursement of the loan increase is subject to the Board of Supervisors’ approval of the Agency’s budget amendment that the Commission adopted by Resolution No. 145-2008 on December 9, 2008 to reprogram funds for the Western Addition Redevelopment Project Area A-2 budget.

 

14.              Commission authorization of the proposed First Amendment with Sheba will consolidate three of four existing loans into one loan that increases the consolidated loan amount for additional tenant improvements and allows for repayment of the consolidated loan amount over an extended period of time, and cancel the fourth loan.  The majority of the original loan amounts and the additional loan amount are for completing tenant and façade improvements, which are activities that are alterations to an existing facility that would have no resultant significant environmental impacts and are categorically exempt from the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines Section 15301(a).  The provision of business assistance funds would not have directly caused any significant physical effect on the environment and is exempt from CEQA pursuant to CEQA Guidelines Section 15061(b)(3).  Approval of the proposed First Amendment will provide extended repayment terms to the loan agreement in order to facilitate the continued operation of the Sheba Lounge business, such that the consolidated loan amount can be repaid over time.  This action will not lead to additional changes to the environment and will not cause any significant physical effects on the environment, and is exempt from CEQA pursuant to CEQA Guidelines Section 15061(b)(3).

 

15.              Agency staff recommends approval of the proposed First Amendment and the increase in loan amount as described herein.

 

 

RESOLUTION

 

ACCORDINGLY, IT IS RESOLVED by the Redevelopment Agency of the City and County of San Francisco that the Executive Director is authorized to enter into a First Amendment to the Amended and Restated Tenant Improvement Loan Agreement with Sheba Lounge, LLC, a California limited liability company, to consolidate its Tenant Improvement, Façade Improvement, and Business Assistance Loans into one combined loan in the amount of $295,000; to increase the consolidated loan amount by $90,000 for additional tenant improvements, for a total aggregate amount not to exceed $385,000; to defer the repayment of the consolidated loan for two years; to nullify the loan documents related to two of the three consolidated loans; and to forgive $95,000 of the consolidated loan upon the fulfillment of certain terms and conditions; all associated with Sheba Lounge located at 1419 Fillmore Street in the Western Addition, substantially in the form lodged with the Agency General Counsel, and to enter into any and all ancillary documents or take any additional actions necessary to consummate the transaction. 

 

 

APPROVED AS TO FORM:

 

 

 

_________________________

James B. Morales

Agency General Counsel