Creative Deal Structuring
GA Development Gets Critical Boost from New Issue Bond Program
By Glenn Petherick, Editor, Tax Credit Advisor, June 2010, Vol XXII
Woodbridge at Parkway Village, a new solar powered affordable senior rental development under construction neat Atlanta, Ga., embodies the twin spirits of pioneering and determination.
The 150-unit independent senior living community, located in Union City in Fulton County, is the beneficiary of one of the first multifamily bond issues closed in the country under the federal New Issue Bond Program. The deal was possible only with multiple funding sources and the persistence, creativity, and collaboration of many different parties.
“The financing for Woodbridge was the most creative structure we’ve put in place thus far for new development, “ says Lisa Lepper Nordel, Vice President of Finance at Ambling Development Partners. The for-profit Atlanta-based company is developing the project, in partnership with the Housing Authority of Fulton County.
Scheduled for completion in May 2011, Woodbridge at Parkway Village will consist of two mid-rise buildings containing one- and two-bedroom apartments for low income seniors 62 or older. All will be low-income housing tax credit (LIHTC) apartments, either public housing or tax credit units. Of the 150 units, 120 will have federal project-based rental assistance.
Projected initial monthly rents for the rental assisted units will be $729 for one-bedroom units and $840 for two-bedroom units. The remaining 30 apartments will be supported by public housing operating subsidies. The Atlanta Housing Authority, the largest housing authority in the region with flexible powers, will provide project based rent subsidies for 98 of the 120 assisted units.
The development will have a solar photovoltaic system, generating electricity for common areas and reducing utility costs, which will qualify for Georgia energy tax credits. Ambling Development is the master developer and co-general partner of the tax credit partnership for the project; other Ambling affiliates are constructing and will manage the development. The co-general partner is a subsidiary of the Housing Authority of Fulton County (HAFC).
One Challenge After Another
The original plan started simply enough. In 2000, HAFC received a federal HOPE VI grant from the U.S. Department of Housing and Urban Development (HUD) for a three-phase mixed-finance redevelopment of its aging Red Oak Townhomes public housing project in Union City. In the first phase, after demolishing the existing buildings, Ambling built at a different location a new 292-unit affordable family rental project using tax-exempt bond proceeds and 4% housing credits. Arcadia at ParkwayVillage, which opened in 2009, leased up “very, very quickly,” says Cindi Herrera, a private consultant to HAFC.
In 2008, plans began for the second phase. But there were a series of challenges, including:
• A change in the project itself. The original plan for the second phase was 153 newly built mixed income for-sale townhome units. But then the home sales market soured. “We had to step back and say, what can we do to fill the void,” said Torian R. Priestley, Vice President of Development of Ambling Development Partners. “Based on the market and location, we felt that a senior project would work well, and we subdivided the land and began developing the vision for Woodbridge at Parkway Village.” HAFC also had to return to HUD to get approval of this change in the type of replacement housing.
• Looming deadlines. HAFC had until September 30, 2009 to fully spend its HOPE VI grant, and until March 17, 2010 to expend federal stimulus funds committed to the project.
• The stumble in the tax-exempt bond and LIHTC equity markets. The original plan was to finance the project largely with housing credit equity and a standard tax-exempt multifamily bond issue. But market conditions deteriorated.
“When the market died, tax credit pricing went down and interest rates on bonds went up, so we had a financing gap,” says Herrera. “We used various methodologies trying to fill the funding gap. And what we found was the New Issue Bond Program, which made the project work.”
New Issue Bond Program
In December 2009, the Housing Authority of Union City closed on the sale of $10.12 million in taxable escrow bonds under the New Issue Bond Program (NIBP) for Woodbridge at Parkway Village. In April 2010, the authority closed on the conversion of the escrow bonds to $9.65 million in long-term tax exempt bonds, to fund a HUD insured Section 221(d)(4) loan to provide construction and long-term permanent financing for the project.
Because of the reduced interest rate on the bonds due to the NIBP (4.05%, or about 100 basis points less than under a standard tax exempt bond issue), the financing mechanism generated a fixed all-in borrowing rate of under 5%, according to John Rucker III and Sue Alley of Merchant Capital LLC, the bond underwriter. “Without this program,we would not have closed this deal,” said Rucker.
“We were able to take the permanent debt from $6.8 million to $9.6 million. That made it work,” said Herrera. Nordel said obtaining the Section 221(d)(4) loan also mitigated Ambling’s early problem of being unable to find an interested conventional construction lender for the deal.
Multiple Funding Sources
Ambling and HAFC stitched together a mosaic of multiple funding sources for the project.
In addition to the bond financed Section 221(d)(4) mortgage, these included: LIHTC equity generated by the sale of federal and Georgia state housing credits; second mortgages from HAFC capitalized by federal HOPE VI, stimulus, and replacement housing factor funds; and developer equity.
HAFC used $1.04 million in HOPE VI grant funds to purchase the land. It is leasing the land to the project for 75 years at a nominal charge, and has the right to buy the project after 15 years. Most of the project will be exempt under state law from local property taxes.
Another key to the project’s viability was that the two syndicators involved held their original pricing commitments for the housing credits even as market conditions changed. The Community Affordable Housing Equity Corporation (CAHEC), a Raleigh, N.C.-based regional nonprofit syndicator that committed in September 2008, purchased the federal housing credits for 82 cents on the dollar, closing on March 16, 2010. Stateside Capital LLC, a state equity fund, purchased the Georgia housing credits for 26 cents per credit dollar.
CAHEC was attracted to the Woodbridge project for several reasons, said Yolanda Winstead, Senior Project Development Officer. “Georgia is in our footprint. We’ve done a couple of deals in some rural markets there and wanted to do something in a more urban area.” In addition, CAHEC had long been interested in establishing a relationship with Ambling. “They are a very strong developer, they work in several states, and their footprint is similar to ours. So it was a good fit for us.”
She explained that CAHEC was able to hold its pricing for the deal because the equity for Woodbridge represented some of the last dollars from a CAHEC multi-investor fund that had already achieved its target return. The Woodbridge participants cited the cooperation and collaboration of many different parties – public and private – as instrumental to the project’s feasibility.
“We had a lot of support and collaboration from a lot of different groups to get this project all the way through,” said Priestley. “It’s one that we will always hang our hat on because of the financing structure and all of the different mechanisms it took to get this project to closing.”
Herrera said a lesson from the deal is that “you have to be creative with the financing. When the market changes, you’ve got to be out there looking at every tool that’s available…You’ve got to be very flexible, very adaptable.”