The saga of Starrett City has finally reached a conclusion, and it’s a happy ending for all those involved.
Wells Fargo has originated a $531.4 million refinancing loan for the massive affordable housing complex in Brooklyn, N.Y., through Freddie Mac’s Capital Markets Execution program. The loan is the largest single-asset affordable housing loan in Freddie Mac’s history, and allows the owners to pull out a substantial sum of equity while agreeing to keep the complex affordable for the next 30 years.
In a twist of fate, Alan Wiener, managing director of Wells Fargo Multifamily Capital, oversaw the transaction. Wiener was instrumental in getting Sec. 8 subsidies for the complex when he was director of HUD’s New York office in 1979. “So now we come full circle, and it’s only right,” says Weiner, who worked for about six months on the refinancing. “There were a few bumps in the road in trying to get this deal done, but we got there. The owners refinanced, and the preservation aspect of it is really the most important, I think.”
The new 10-year loan paid off an existing $215 million mortgage, and featured a 5.77 percent interest rate and a debt service coverage ratio of 1.25x. As part of the refinancing, the owners agreed to set aside $40 million for capital improvements and another undisclosed amount of reserves for long-term capital improvements, and sign a 30-year commitment to keep it in the Mitchell-Lama housing subsidy program. Signed into law in 1955 in New York, the program was designed to promote the development and building of affordable housing, both rental and co-operatively owned, for middle-income residents.
The loan consisted of two phases: a $389 million obligation supported by the property’s NOI (equal to 65 percent of the property’s value), and another $143 million obligation supported solely by the Interest Reduction Payments (IRPs) under HUD’s Sec. 236 program.
Long and Winding Road
“Bumps in the road” is an understatement when it comes to the recent history of Starrett City. Located in Brooklyn, N.Y., the 46-building, 5,881-unit complex sits on 140 acres and is the nation’s largest federally-assisted property. Starrett City has its own power plant, as well as a commercial center, several schools, parks, and community centers. Sixty percent of the residents receive Sec. 8 assistance, and the rest are either under HUD’s Sec. 236 or New York’s Mitchell-Lama programs.
In 2007, the owners had a deal in place to sell the complex to Clipper Equity for $1.3 billion. In announcing the deal, Clipper stated its intention to take the property out of Mitchell-Lama and move to market-rate rents. Protests then rang out, with Mayor Bloomberg, Sen. Charles Schumer, and state Attorney General Andrew Cuomo all vowing to block the sale. With the help of then-HUD Secretary Alphonso Jackson, the transaction was clipped.
CAS Financial Advisory Services started working with the owners, Starrett City Associates, after the Clipper Equity deal fell apart. CAS negotiated with four different government agencies on a memorandum of understanding that the complex would stay affordable through a subsequent sale. The owners then attempted to sell the complex to an affordable housing owner, but after a couple of rounds of bidding and after the capital markets fell apart, the owners took it off the block in February 2009.
A cash-out refinancing then seemed like the best way for the owners to realize some economic benefit after maintaining the property for 35 years, while keeping it affordable. Problem was, under Mitchell-Lama, a property couldn’t have more debt on it than “the original project cost” from back in the early 1970s, when it was built.
So, legislation was introduced and signed into law over the summer specifically allowing Starrett City to refinance for more than original project cost. Another area of complexity regarded the IRPs: HUD allows IRPs to be kept in preservation deals, but it had never done so for a cash-out refinancing before. The commercial center also had to be separated from the regulated complex at large for the refinancing, and some undeveloped land was extracted out of the use agreement.
“There were so many pieces to it that had to be brought together at the same time, right in the middle of a very challenging credit environment,” says Todd Trehubenko, president of Boston-based CAS Financial Advisory Services. “We stayed in Mitchell-Lama, we retained the IRP subsidies, we signed a number of different affordability covenants, and my clients were able to take out a lot of equity based on the state legislation. It made a lot of sense for the owner, for government, and it’s a home run for the residents.”