Housing Authority Uses Credits, Bonds, Vouchers In Converting Public Housing
By Caitlin Jones & A. J. Johnson
6 min read
Tax Credit Advisor, January 2009: A local housing authority in Southern California has converted one of its public housing projects to long-term affordable apartments in a preservation transaction that will renovate the property and enable the current residents to stay with enhanced services.
The transaction has utilized tax-exempt financing, low-income housing tax credits, federal housing vouchers, and other resources. It’s the first phase of a plan by the Housing Authority of the County of Santa Clara (HACSC) – already approved by the U.S. Department of Housing and Urban Development (HUD) – to dispose of and convert all of the authority’s public housing units.
Rincon Gardens, located near San Jose, opened in 1981 and was the first public housing project built by HACSC. The three-story building for seniors contains 200 units: 190 one-bedroom and 10 two-bedroom units.
HACSC official Richard Warren said Rincon Gardens is in a “very nice neighborhood,” adjacent to a park. The region, not surprisingly, is an expensive housing market.
In the recent $41 million transaction, HACSC transferred title to Rincon Gardens – the building only – to a tax credit partnership for a sales price of $16,170,000, the property’s appraised value. The partnership entered into a long-term ground lease of the land from the authority. The general partner of the partnership is a tax-exempt affiliate of the HACSC that is also serving as developer to renovate the property.
Rehabilitation of Rincon Gardens has begun; Warren said it should be finished by November 2009. He noted residents are remaining during the rehabilitation, moving temporarily to vacant units within the building while their apartment is renovated.
Response to Conditions
The transaction had its impetus a while back.
Like other public housing authorities, HACSC annually receives annual capital funds from HUD in an amount smaller than its actual needs to modernize, renovate, and maintain its existing public housing units. It has also received decreasing amounts of annual operating subsidies for its public housing portfolio.
“A number of years ago,” said Warren, “we discovered serious physical problems with Rincon [Gardens] that needed to be corrected. And the cost to correct those was way more than HUD would ever fund.” Major capital needs included $14 million for siding and roofing repairs, and $5 million in other work.
Warren said the authority’s other 355 public housing units also had physical issues. “So we realized,” he said, “that if we were going to maintain this portfolio of low-income housing, we had to find some alternative ways to come up with the money to correct the problem.”
Warren said the authority decided to start with Rincon Gardens since it needed the most work. Yet, in addition to figuring out how to raise the dollars to pay for renovations, he said the authority wanted to find a way to enable the current public housing residents – very low-income with an average age in the low- to mid-80s – to be able to afford to remain after the rehabilitation.
To renovate Rincon Gardens while enabling the residents to stay on, the authority utilized its own staff and retained outside professionals to develop and execute a plan and transaction.
“We looked at [the] mix of challenges and opportunities and came up with a strategy that had five key points,” said Eric Olson, of CSG Advisors, Inc., the financial advisor to HACSC. These five points, he said, were to: convert Rincon Gardens to HUD project-based vouchers and keep the tenants in place; to use tax-exempt bonds and 4% housing credits to fund the bulk of the transaction costs; to make repairs to the property; to add energy efficiency improvements to reduce operating costs; and to enhance resident services.
HACSC submitted an application to HUD to “dispose” of all 555 of its public housing units, including Rincon Gardens, receiving approval in September 2007. Warren said HUD later approved a request for 555 Section 8 project-based vouchers.
The project-based vouchers assigned to Rincon Gardens as part of the transaction are under a 15-year contract, made possible by the recent Housing and Economic Recovery Act’s extension of the maximum project-based voucher contract term to 15 years from 10 (see p. 22 for article on rule addressing recent voucher program changes).
Aided by the vouchers, Rincon Gardens residents continue to pay only 30% of their income for rent, rather than the higher LIHTC gross rent levels. Warren said a package of enhanced resident services will be fully in place by the time renovation of Rincon Gardens is completed. He said resident services will be paid for from the project’s operating budget and other sources.
Funding Sources
The authority applied for and received allocations of authority to issue tax-exempt private activity bonds and 4% housing credits for the project, and subsequently issued the bonds.
Funding sources for the transaction included about $13 million in equity generated by the sale of the housing credits to an affiliate of PNC Bank. Credits will be claimed for both acquisition and rehabilitation costs.
In addition, Washington Mutual provided construction financing, and purchased the bonds that will fund $17 million in permanent debt, broken into one 30-year loan at 5.33% and a smaller 15-year loan at 5.02%.
Warren and Santa Rosa, CA attorney Richard Power, a partner with the law firm of Carle, Mackie, Power & Ross LLP who served as tax credit counsel, indicated most of the purchase price of the land was financed by the authority. Power said the 30-year, roughly $15 million takeback note has an interest rate of about 4.5%.
Warren said the authority’s ground lease to the partnership of the land beneath Rincon Gardens will enable the authority to retain long-term control over the property, and calls for the payment of “nominal” rent. He said the authority has the right to buy the property at the end of the tax credit compliance period. In California, the minimum extended use period is 55 years.
The authority is scheduled to receive a developer’s fee of $1.4 million. Warren said the authority has a development operation, construction management operation, and a for-profit property management arm that manages about 95% of the authority’s properties, and has already developed a number of LIHTC projects. HACSC’s housing portfolio includes more than 16,000 voucher units.
Power noted several challenging tax issues arose that had to be resolved in structuring the Rincon Gardens transaction, in order to maximize the housing credits received. He said the issues had to do with dealing with the federal tax law original issue discount rules, raised by the takeback financing and the relationship between the buyer and the seller.
Washington, DC attorney Rod Solomon, a partner in the law firm of Hawkins Delafield & Wood LLP who served as HUD counsel to the authority, said the disposition application was unusual in that the authority proposed to dispose of all of its public housing units, not just some. Accordingly, he said the authority had to make a compelling argument to HUD that its proposal would benefit the authority, the residents, and the community.
Warren said the authority is moving forward with plans to convert and renovate the authority’s remaining 355 public housing units in similar transactions using housing credits, bonds, and vouchers. He hoped title to the properties will be transferred in August 2009, with work beginning afterwards.
