Issue
The California Court of Appeal recently addressed issues regarding prepayment of a loan given by a city to a homeowner under an affordable housing program. (Dieckmeyer v. Redevelopment Agency of City of Huntington Beach, (118 Cal. App. 4th 1136, 2004 Daily Journal D.A.R. 6073, Cal.App. 4 Dist., May 21, 2004))
Facts
Barbara Dieckmeyer (Homeowner) purchased a condominium under an affordable housing program. The Redevelopment Agency of the City of Huntington Beach and the City of Huntington Beach (collectively referred to as “City”) helped Homeowner finance the purchase with a $23,000 loan. In exchange, Homeowner executed a promissory note, secured by a “deed of trust” that secured payment and performance of the conditions of the affordable housing agreement (e.g., restrictions requiring resale of the property to be made to low to middle income persons). The loan agreement contained a provision requiring Homeowner to pay City an “equity share,” i.e., a percentage of any profit, if the loan became due prior to the loan’s 30th anniversary. When Homeowner decided to prepay her loan, City demanded that she execute a “zero promissory note and second deed of trust” to secure payment of the equity share and performance of the affordable housing restrictions. In Homeowner’s lawsuit against City, the trial court ruled in favor of Homeowner and City appealed to the California Court of Appeal.
Appellate Court Decision
The Court of Appeal rejected City’s argument that it could require Homeowner to sign the zero note and second deed of trust, because “[t]he existing trust deed secures both the note and performance of the [affordable housing agreement].” In other words, even upon prepayment of the note, the original trust deed still requires performance of the affordable housing agreement requirements. The Court also rejected City’s argument that the equity share becomes due on prepayment. The loan agreement requires payment of an equity share if the loan becomes due and payable before the expiration of 30 years and if certain conditions occur, e.g., sale to a non-qualified buyer or breach of the loan agreement, deed of trust, or affordable housing agreement. Prepayment is not one of the conditions listed in the loan agreement that requires payment of an equity share.
The Court, however, agreed with City that Homeowner, whose income had increased since she purchased the property, had to comply with the requirement of the affordable housing agreement that she sell only to low to middle income buyers. The affordable housing agreement stated that owners who originally qualified to buy the home, but who later had an increase in income, would not be subject to the “affordability covenant.” This provision does nothing more than allow owners to keep their homes if their income increases; it does not permit such an owner to sell to persons who are not of low or moderate income status.
Thus, the Court ordered the trial court to require City to accept prepayment and cancel the note, without requiring Homeowner to pay the equity share or execute a zero note or new deed of trust. However, City is not required to reconvey the existing deed of trust upon prepayment and may hold Homeowner to performance of the requirements of the affordable housing agreement.
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