Case Study

Using General Revenue Bonds to Support Workforce Housing

7 min read

Developers can partner with Public Housing Authorities (PHA) issuing General Revenue bonds to achieve workforce housing solutions that are superior to using traditional real estate finance, according to Sam Adams, managing director of capital markets at KeyBanc Capital Markets (KBCM), which issues such bonds.

“We’ve been fortunate enough to focus on a number of the largest and more sophisticated PHAs in the country. The largest PHAs are large governments and large real estate developers, combining the best of both worlds,” he tells Tax Credit Advisor after a presentation on the topic to the National Housing & Rehabilitation Association.

KBCM has worked with PHAs to secure a credit rating by Standard and Poor’s Corp. (S&P), which he says focuses on credit ratings for PHAs.

“With a credit rating, PHAs are able to go out directly to the capital markets, similarly to other government entities, particularly other revenue-based entities, like a sewer system or water system. More and more people are understanding how much affordable housing acts as a utility,” he says.

“They provide a General Revenue Pledge,” meaning they are willing to make up for any project debt service shortfalls from their revenue streams. “Which is a substantial credit enhancement,” Adams says. “Our base of municipal investors values that very highly.”

“Why would a housing authority do this?” Adams asks rhetorically. “Because it is an almost different set of options and rules available to a housing authority. Namely, interest rates and leverage points. When KBCM worked with the Housing Authority of the City of El Paso (HACEP), it was able to buy two properties at 100 percent debt. At the time of issuance, HACEP borrowed money at nearly the ten-year Treasury mark.”

In effect, HACEP buys market-rate units and repurposes some of them into affordable and workforce housing.

A pool is one of the amenities at the Magnolia, where KeyBanc Capital Markets partnered with the Columbus (Ohio) Metropolitan Housing Authority.

A Powerful Tool
Adams stresses, “It is a pretty powerful tool for larger housing authorities that operate in a lot of the metro areas that need affordable housing in volume cap states.”

Credit ratings KBCM looks for “are at least an A, but typically an A+,” he says. The A+ “is where you begin to move to separate yourself from more traditional real estate financings.” The A ratings, he says, are evaluated on a case-by-case basis.

Does using the bonds achieve a cheaper cost of funds?

“Yes,” Adams says. “For instance, we did one with Columbus (Ohio) Metropolitan Housing Authority called Sinclair Apartments. It was a new construction four percent tax credit project. They got Private Activity Bonds (PAB) the same way anyone else would, there’s no workaround for PABs here, but instead of going to a bank or a lender, they went directly to the capital markets with their A+ rating, and they were able to receive a current interest rate that was about 100 basis points below the rest of the market.”

Housing authorities can achieve some profitability on the deals if they are efficient.

In today’s capital markets, housing authorities can also raise low-cost, fixed-rate, short-term and/or bridge debt, up to 200 to 300 basis points lower than most construction loans.

In the El Paso deal, HACEP acquired two properties, the Villas at Zaragosa and Tuscany at Mesa Hills, using the Housing Authority’s credit enhancement. The deal was for a huge 585 housing units at a total acquisition cost of $100 million. Its A+-rated General Revenue Bonds covered 100 percent of the financing, and it achieved a 4.35 percent all-in cost.

Tuscany at Mesa Hills has Income Restrictions of 50 percent at 80 percent area median income and 90 percent at 160 percent AMI, as does Villas at Zaragosa.

In addition to PHAs, Adams says he is looking into the possibility of this kind of financing for Indian Housing Authorities (IHA) on American Indian reservations, which work analogously as PHAs do.

Looking for IHA Partners
“We certainly think it’s an area for exploration,” he says, and KBCM is looking for the right partner.

KBCM is not a developer but rather a bond underwriter for the deals. Adams explains its role this way: “We do a lot of work in the Seattle area with King County Housing Authority and Seattle Housing Authority. We do the same work as if the city of Seattle decided to issue debt. In their case, that’s typically backed by a tax stream, a general obligation property tax usually. Legally, a municipal underwriter is doing the same thing. It’s similar to a water system or sewer system issuing revenue bonds. Our job is to be aware of the market and the investor base, give our clients predictable information to act on, and as they prepare a bond offering, we work with counsel to get disclosure information investors are going to want and then when they go to market our job is to drive the lowest interest rate available to those bonds.”

Is this type of financing replicable? “I’m sure our competitors could do this, but to some degree, it’s a specific avenue of business where KBCM has developed specific expertise. The entire country is not going to move to this model,” Adams says.

This kind of deal is complicated. Because it is in effect recourse debt, “it’s important for the housing authorities to have the internal personnel, controls and systems in place to not only understand what they’re doing but once they issue the bonds to make sure they are compliant.

In addition, the housing authorities are acting as both developers and lenders, so they need to evaluate the financing decision from both perspectives.”

“In effect, they are sourcing capital as the government and lending it into the project,” he points out.

There is a lot of overlap that KBCM’s investors have with Low Income Housing Tax Credit project investors, such as banks and insurers.

But largely they have municipal bond investors, “many of whom buy low-income and/or state HFA pools; we see overlap there. But a lot of the investors are housing-focused and typically have a background in the broader municipal space.”

“We have worked hard to educate the investor community about this bond type. While the credit strength is different, the structure we utilize is nearly identical in every offering, so investors see it more as an asset class than individual bond deals.”

The Basics

Sam Adams made these points in his presentation to NH&RA on working with PHAs:

    Most PHAs can issue municipal bonds like other governmental entities. The bonds’ purpose must be allowable by State guidelines and the Authority’s charter and bylaws.

    By pledging its General Revenues, larger or more sophisticated PHAs can generally attain a strong investment grade rating from S&P. This rating allows PHAs to secure funding at superior rates when compared to real estate financing. PHAs can issue debt in municipal markets with considerable utility.

    The bonds can either be Governmental Purpose Bonds or PABs, depending on the type of project. PABs have a volume cap, generally issued within the context of LIHTC financing. Governmental Purpose Bonds do NOT require a volume cap. This is relevant for moderate-income housing.

Mark Fogarty has covered housing and mortgages for more than 30 years. A former editor at National Mortgage News, he has written extensively about tax credits.