Short Term Cash Collateralization: Estates at Shiloh

7 min read

A Structure That Works with Texas Law 

Adrian Iglesias founded Generation Housing Development in Dallas, TX in 2002 with the mission to provide affordable multifamily housing for families and seniors, “in sustainable communities that residents and city leaders can be proud to call their own.” The challenge, though, was, “like a lot of major cities, Dallas has very little vacant land.” He advocated for a comprehensive housing policy and in 2017 the city council formed a task force to address the challenge. The following year, a market study was undertaken to target locations in need of both affordable housing and economic revitalization. And in 2019, Iglesias’s company located an eight-acre site near the intersection of Shiloh and Centerville Roads within the Casa View Reinvestment Strategy Area in the northeast section of the city that met the criteria.

The site comprised 40 townhomes and a 7,500-square-foot community center with a commercial kitchen. Generation envisioned adding 224 apartment units for seniors in four three-story stone, brick and stucco-clad buildings with accessible elevators to encourage aging in place. Of the 264 resulting units, 239 would be affordable and 25 at market rate. The apartments will have an open design for maximum flexibility, Energy Star appliances and high-efficiency HVAC. There would also be an extensive garden, theater room, computer learning center, an ADA compliant swimming pool and a dog park. The Casa View area is currently in the midst of gentrification and there was deep concern that elderly lower- or fixed-income residents would be forced out. The area has also been designated an Opportunity Zone.

Iglesias reached out to the real estate investment trust (REIT) that owned the property and came to a purchase agreement. The next challenge was figuring out how to fund it. “To make these deals work,” Iglesias says, “you need everything you can get.” The development team worked closely with community leaders to ensure support and stakeholder engagement.

In its presentation to the City of Dallas Economic Development and Housing Committee, Generation states, “By utilizing financing structures, such as Low Income Housing Tax Credits, Tax-Exempt Mortgage-Backed Revenue Bonds, grants and subsidies from other federal, state and local municipalities, GHD is able to create luxury apartment communities with high-end amenities yet lease new apartment homes at an affordable rate.”

“This was the highest-scoring project in the next Community Development Block Grant (CDBG) Notice of Funding Availability (NOFA) funding round after the release of the comprehensive housing policy,” says Kyle Hines, economic development manager for the City of Dallas Office of Economic Development and assistant general manager of the Dallas Housing Finance Corporation. “We put together a combination of HUD Home Investment Partnership (HOME) and CDBG grants and general obligation bonds, which is essentially a second mortgage on the project. It also required the least amount of gap funding to get the project off the ground. We participated to issue bonds and served as the general partner, which allowed the development to avoid real estate taxes.”

Unusual Texas Law
The deal was structured as a short-term cash-collateralized tax-exempt bond, convertible to a Freddie Mac permanent tax-exempt loan. The bond issue was sized to fund at least 50 percent of the project costs with tax exempt proceeds to qualify the development for tax credits and was issued with a redemption date close to or shortly after the anticipated completion and lease-up of the development. The bond collateral consisted of open market U.S. Treasury securities, which were initially held in a project fund. The transaction was structured to allow a deposit of taxable construction loan proceeds to a collateral fund to acquire a proportionate share of Treasuries, allowing a like amount of bond proceeds to be disbursed from the project fund to pay rehab and construction costs. While the transaction was collateralized by proceeds from a taxable construction loan that would be ultimately replaced by a permanent Freddie Mac tax-exempt loan, (Freddie TEL), the structure is flexible and may also be paired with other government sponsored loans or taxable securities, such as Fannie Mae, FHA or RD loans.

For this project, RBC Capital Markets of St. Petersburg, FL underwrote a $25 million bond offering, with the Frazer Lanier Company of Montgomery, AL as co-underwriter. “This arrangement worked particularly well in Texas, where all loan proceeds must be drawn down at closing, given that Texas state law precludes typical tax-exempt private placement draw-down bonds. What we did here,” explains Helen Hough Feinberg, RBC’s managing director, “was to issue short-term cash-backed bonds to qualify the project for four percent tax credits. The financing was structured as a tax-exempt loan and was initially secured with U.S. Treasuries, with little to no negative arbitrage. In other words, the payments on the Treasury securities came close to paying full debt service on the bonds. Many times, income on the Treasuries fully pays debt service. A taxable construction loan was then originated and remained in place until conversion to the permanent Freddie TEL. Because the construction loan was taxable, it was structured on a draw-down basis rather than fully funded upfront, thereby significantly reducing the interest cost. The taxable construction loan proceeds collateralized the tax-exempt bond, allowing bond proceeds to pay the costs to build or renovate the project. The financing provided an efficient and cost-effective way to qualify the project for four percent tax credits.”

To make allowance for flexibility in an approximate 42-month construction and lease-up period and a 15-month window to convert to a permanent Freddie TEL the bond was issued with a variable rate ranging from 1.25 to 1.75 percent, adjusting semiannually.

Bank OZK, originally known as Bank of the Ozarks, provided the $30 million taxable construction loan and invested in tax credits syndicated by Monarch Private Capital, headquartered in Atlanta, GA. Bellwether Enterprise Real Estate Capital of Cleveland, OH provided a $25 million forward Freddie Mac tax-exempt loan at 3.96 percent. “The structure provided enhanced equity pricing by the bank serving in multiple roles,” Feinberg says. “The developer earned tax credits on the tax-exempt bond and taxable loan interest paid during the construction period. We’re finding that more and more banks are driven by the need for Community Reinvestment Act (CRA) credit and want to serve in multiple roles – both issuing the construction loan and purchasing the tax credits.”

Feinberg is quick to credit the participation of the Dallas Housing Finance Corporation and its willingness to act as bond issuer, servicer and co-general partner, eliminating property tax, as well as providing $4 million in HOME and CDBG funds.

Construction on the Estates at Shiloh began near the end of February and Iglesias is expecting to have the first building up and functioning by the end of 2020. During construction, the tenants of the 40 townhomes are being relocated to the master where the community center and kitchen are located. “We want this to be a gathering location for community services,” he says. “We’re offering the kitchen to Meals on Wheels and we’re looking for a solid nonprofit to come in and help us with all of the resident services we want to provide.”

Hines is gratified to have projects, like the Estates at Shiloh, in development. “From my perspective, this seems like an innovative structure that we hope to use in the future when it makes sense in the transaction.

Story Contacts:
Helen Feinberg,
Kyle Hines,
Adrian Iglesias,

Sources of Funds
Capital Sources:
Freddie Mac TEL……………………………………………….. $25,000,000
City of Dallas ……………………………………………………… $3,801,000
(Combination HOME & CDBG Funds)
City of Dallas…………………………………………………………. $199,000
(General Obligation Bond Funds)
Monarch Private Capital…………………………………….. $13,254,320
(Tax Credit Equity)
Investment Earnings ……………………………………………… $718,750
Deferred Developer Fee ……………………………………… $2,046,987
Total Development Cost:……………………………………. $45,020,057