At a 2004 meeting, San Jose city officials and consulting attorneys were mulling how to pay for 13 planned developments that would provide 2,000 units of affordable housing. Then Julie Cooper, the city's deputy director of finance, posed a question: Why couldn't the San Jose Redevelopment Agency issue tax-exempt bonds, instead of the traditional taxable ones, to borrow the funds needed to lend to the developers? It was one of those eureka moments.
"It was an obvious question that no one had really discussed," says Gisele Rainer, one of the attorneys at the meeting. "To do it [the financing] on a non-taxable basis, you had to get an allocation of debt limit. We reviewed the guidelines and determined the reason that they had not been able to do this was because the procedures that were in effect did not permit multi-project allocations."
At that time, California had a program that permitted lending the proceeds of special tax-exempt bonds to developers for single projects, but localities didn't fit into that private-activity program. Rainer and Bruce Serchuk, partners in the San Francisco office of Nixon Peabody, a law firm advising the city on finance issues, thought the state might be open to permitting localities to participate. "The California Debt Limit Allocation puts a priority on low-income housing," Rainer says, and the state program hadn't used all its capacity.
Persuading and Polling
Having a plan to tap the state's excess tax-exempt bonding capacity was one thing. Having one that was a priority for the state was another. Again, San Jose stepped into a good situation. "In California, multifamily affordable housing is the highest priority they have at the state level," says Peter J. Ross, one of the city's financial advisers and principal of Ross Financial in San Francisco. "They were looking at additional ways [to] put their allocation to use."
The San Jose group paid a visit to Laurie Weir, executive director of the California Debt Limit Allocation Committee in Sacramento. She saw promise in San Jose's plan, which would have the redevelopment agency issuing tax-exempt bonds for affordable housing. "We were looking at what would be excellent ways to open up new opportunities to use bond volume cap [amount of tax-exempt bonds] for private activity, and we thought that a housing set-aside program would be a public benefit-driven program," she says.
Before approving the plan, Weir wanted city officials to show that other communities would also be interested in tax-exempt bonds for multi-project, affordable housing. So, city officials and advisers polled directors of several redevelopment agencies in the state. They reported to Weir that there was indeed interest in issuing such tax-exempt bonds.
"My committee members could very clearly see that there was a public benefit that was going to be realized by awarding this $66 million to the San Jose-area redevelopment group," she says. The findings made it clear that there would be more affordable housing units, that they'd be available longer, and "that it was going to really strengthen the affordable housing program in the City of San Jose," she recalls.
The committee was convinced, and the only hurdle remaining was to draft guidelines and procedures for a brandnew state program, called the Redevelopment Agency Housing Bond Program. Weir took the lead, and San Jose provided its input. "Once the new procedures were in place, we did the deal," Rainer says.
San Jose planned to complete the 2,000 affordable units regardless of whether tax-exempt bonds were involved, by using its regular line of credit. "We have a line of credit where we fund projects as they come up," Cooper says. "As we've gotten close to our line-of-credit amount, which is $50 million, we take that amount out with debt."
Originally the city intended to use taxable bonds to fund the project. "It would have raised the cost of borrowing and lowered the number of loans that would have been made," Rainer says.
Using tax-exempt bonds instead of the line of credit helped San Jose stretch its dollars further. "The interest costs would be a third higher at taxable rates versus tax-exempt rates," says David Baum, CFO for the San Jose Redevelopment Agency.
That savings will present real value to people in the San Jose area. "Now we can borrow at tax-exempt rates and fund an additional 120 units," Cooper says.
Other cities in California are following San Jose's lead, and some think the program could even serve as a template for towns outside of California. Already, the Oakland Redevelopment Agency is using tax-exempt bonds to build a property. Like San Jose, Oakland possesses the staffing to issue the bonds directly.
"San Jose was perfect for this because they understand the tax implications of the loans they make," says Ross, the financial adviser. "They had the willingness and manpower to work through the tax issues to make sure they had a critical mass of loans [to developers of affordable housing] that would qualify. For them, it is worth their while to jump through the hoops needed to comply with the tax regulations."
But that wouldn't be the same for smaller towns without the manpower or the critical mass of units to build. "With one-off [single] deals, it's hard to do," Ross says. "You need to have your staff in place and an ongoing housing program."
California wants to help out these smaller communities through a conduit agency called the California Statewide Community Development Authority, which issues bonds on behalf of local agencies. "If cities and counties don't want to issue their own bonds, they can go to CSCDA and make a pledge of a portion of their housing set-aside [funds each community has for the development of affordable housing projects] to back the loan," Weir says. "It's a way of streamlining the process and making it available to medium- and small-sized cities and counties that may not have staff on hand to issue bonds."
While it looks like both the big cities and small towns in California will soon be able to go the CSCDA to issue tax-exempt bonds for affordable housing, the program may have even broader applications, according to Ethan Handleman, an associate for Recap Advisors, a Boston-based company that provides financial services related to the recapitalization and preservation of affordable housing. "[This approach] could be used elsewhere, provided that the local redevelopment or other agencies are already required to fund affordable housing, there are redevelopment projects combining affordable housing and other types of development, and there is an available bond cap that the state is willing to allocate," he says.
If this is indeed the case, communities across the country may have yet another tool in their arsenal to produce desperately needed affordable housing.
Middletown Tarragon in Manhattan bought the Northgate Apartment Homes in Middletown, R.I., from Northgate Associates in Manhattan for almost $30 million. The 179-unit property, built between 1971 and 1973, has 19 buildings with mature landscaping, a swimming pool, a tennis court, and one-, two-, and three-bedroom units. Marcus & Millichap Real Estate Investment Brokerage Co., based in Encino, Calif., brokered the sale.
Veritas Real Estate Investments in Los Angeles used $5 million of equity financing from TMC America, based in Irvine, Calif., to buy the 45-unit Rossmore Apartments in Los Angeles and the 26-unit Fulton Apartments in Sherman Oaks, Calif. Veritas plans to renovate both properties and convert them to condos.
Loma Real Property Investments in Torrance, Calif., bought Desert Meadowlark Apartments in Phoenix from Sepic Real Estate Holdings in Mesa, Ariz., for $1.8 million. The property, which was built in 1964, contains 45 apartment units totaling 29,250 square feet. Cushman and Wakefield of Arizona's Southwest Apartment Group negotiated the sale transaction.
LeCesse Development in Altamonte Springs, Fla., acquired GrandeVille on Saxon apartments in Orange City, Fla., a property that it developed as a joint venture with Euro American Advisors in Tampa, Fla. The 316-unit Class A apartment property was completed in April 2005. Wachovia Bank's Orlando office provided financing.
Millbrook Associates of Oak Harbor, Wash., bought Millbrook Townhomes in Vancouver, Wash., from Leslie W. and Karen L. Fullerton of Portland, Ore. Millbrook purchased the 20-unit apartment community for $2.1 million. The Portland, Ore., office of Hendricks & Partners negotiated the sale.
Colony Realty Partners of Boston bought San Valiente, a 604-unit, luxury, gated community in Phoenix from BlackRock of Florham Park, N,J., for $66.72 million. San Valiente, which was built by Mark Taylor in 1998 and 1999, was 94 percent occupied at the time of the sale. CB Richard Ellis' Phoenix office negotiated the sale.
Broadway Florida Properties bought the 240-unit Lakeview Club Apartments, a gated community in Apopka, Fla., from Lakeview Club. The seven-year-old apartments, which include 11 buildings, a clubhouse, a fitness center, an indoor basketball court, and a swimming pool and spa, cost $27.7 million. Cushman & Wakefield's Florida Apartment Brokerage Services Division brokered the sale.
Ancira Realty Corp. of Kansas City, Mo., bought Plaza West in Kansas City from Prime Properties Investments in Lees Summit, Mo., for $875,000. Ancira plans to overhaul the 17-unit apartment community and convert it to condos. The Kansas City office of Hendricks and Partners negotiated the sale.
–Listings compiled by Les Shaver