Fannie Mae M.TEB: Eastern Park

6 min read

No Subordinate Financing for San Francisco Senior Housing

Renovating affordable housing units in San Francisco isn’t very affordable. Redoing the 202 units at Eastern Park Apartments, for instance, is estimated to cost $171 million when finished in this ultra-high-cost housing market.

All the financing elements for these 201 one-bedroom units (plus one that will be turned into a manager’s office) are big. There is an $85 million tax-exempt bond from the City of Francisco, a $60 million permanent loan, $51 million in tax credits, and a $52 million seller note, paid down to $25.5 million at stabilization/conversion.

The permanent loan is in the form of an M.TEB, a Fannie Mae mortgage-backed security used as tax-exempt bond collateral to finance multifamily affordable housing. Fannie Mae’s sister agency, Freddie Mac, has a similar instrument called a tax exempt loan (TEL) and it also could easily have been used for this transaction, according to Jim Gillespie, executive vice president of multifamily lender Bellwether Enterprise, an affiliate of syndicator Enterprise Community Partners.

The GSE financing was chosen “because of the attractive long-term rate on the perm bond,” Gillespie says.

No Subordinate Finance
The net effect of the seller note was there was no subordinate finance needed for the project, Gillespie says.

“I’m seeing seller notes more frequently. You can include it in basis so you might get a boost on equity. It can eliminate or shorten the amount of subordinate financing you need from a third party,” he adds.

Since this deal is an acquisition/rehab, more than half of the huge cost of the project comes from nearly $90 million needed to acquire the property, which is in a desirable downtown location.

The units are all project-based Section 8 with a 20-year M2M HAP (mark-to-market housing assistance payments) contract that closed in May 2019. The units are all occupied by seniors aged 62 and up.

Gillespie notes the disruption in the market with the coronavirus outbreak since closing and beginning construction last December, but he is sanguine the project will be completed, despite the possibility of “social distancing” delays for interior work or building inspections since some of the tenants are remaining in the building during construction.

No Obstacle to Completion
“I see nothing getting in the way of this deal getting completed except for potential construction delays due to COVID-19,” he says. However, deals in the pipeline, but not yet completed, might be disrupted, he feels.

“On the M.TEB transaction, the bonds are cash collateralized and sold to the market during the construction period. If we closed the deal today, it would be interesting (1) where those short-term bonds would price and (2) because you have cash collateralizing during construction, what’s happened since COVID-19 in the drops in interest rates, so the reinvestment rate in cash collateral in the construction period has dropped pretty significantly.”

He continues, “I think on this transaction we don’t have any negative arbitrage, where the interest earnings on the cash is less than the interest rate on the short-term bonds. But I suspect today there is some negative arbitrage where we wouldn’t be able to earn as much on that cash as with paying debt service on those short-term bonds.”

Specifics of the deal include a 16-year term and a 35-year amortization.

Double Dose of CRA
The acquirer is an affiliate of the seller, Sequoia Living. On the tax credits, JP Morgan is the upper tier investor. “JP Morgan likes the transaction because they wanted to do both the equity, as well as the construction loan. The banks like that because they get the CRA credit for the construction lending and the equity. It gets tricky. You can’t have 100 percent of the equity and 100 percent of the debt. So here it made sense for us to do the senior loan through Fannie Mae,” says Gillespie.

As for the term, “most syndicators stop it at 15 years, co-terminus with the tax credit compliance period. We went out one year beyond the compliance period, which I think is smart. It has a negligible impact on the long-term interest rate but it gives you the flexibility to refinance your property through the 12 months following the 15-year compliance period.”

Renovations to the building will include a new computer room, meeting room, sunroom, new HVAC and solar panels, according to owner/developer Sequoia Living. “Each of the community’s 201 units will receive an updated kitchen, including new paint and appliances, lights and flooring; and 25 apartments will be fully wheelchair-accessible. Renovations are expected to be completed in 2021.”

The architect is SGPA, San Francisco.

Gillespie praised Sequoia, which has owned the units since they were built in the 1970s using HUD Section 202 financing. He said of the nonprofit, “They’re sophisticated and they know what they’re doing. It was a great team.”

Third in a Row
In addition, “This is the third Section 8 acquisition rehab this sponsor had done in recent years. We got the benefit of the prior two rehabs they did.”

He also praised the group’s relocation plan. “Some of the occupants were given a per diem if they’d go live with family and friends. Some were relocated onsite. They had it nailed down. They’d taken a few units offline so they could start construction immediately on closing. The majority were moved around onsite.”

He noted the project has a very stable tenant base, with some having been in place for 20 to 30 years. “The property is not in terrible shape today. Following the rehab it will be in extraordinary shape for a long period of time.” Located on Eddy Street, the building is 14 stories high.

Sequoia’s seller note was for 55 years at a compounding rate of 2.25 percent.

Fannie Mae touts its M.TEB as achieving a lower interest rate by combining its swift MBS execution, achieved through an established and wide investor base, with the benefits of tax-exempt bonds paired with four percent Low Income Housing Tax Credits. It offers M.TEBs in both fixed and variable options, and as taxable or tax exempt, with loan-to-values of up to 90 percent.

M.TEBs also have life-of-loan servicing, meaning no need for special servicers or master servicers.

Story Contact:
Jim Gillespie
Executive Vice President, Bellwether Enterprise, New York, NY


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.