Affordable Housing Finance

FINANCE

Tax-Exempt Bonds

Ten Fifty B Rising

AFFORDABLE HOUSING FINANCE • April/May 2009

High-rise in downtown San Diego shrugs off state bond freeze

BY JERRY ASCIERTO

Ten Fifty B will be San Diego’s first residential high-rise with a LEED silver rating.

SAN DIEGO—While many affordable housing developers in California are struggling with the state’s freeze on bond funds, at least one development is proceeding as expected. Ten Fifty B, an affordable housing development under construction in downtown San Diego, broke ground last June and should be completed by April 2010.

The high-rise was originally planned as a 22-story, 174-unit condo development by KB Home, but when it backed out of the deal, Affirmed Housing jumped in. The San Diego-based firm reconfigured the building to optimize it for affordable housing while keeping the original entitlement in place.

Affirmed Housing found a way to reduce the height of each individual floor by about 10 inches, allowing it to add another story without increasing the size of the building. And by reconfiguring the unit mix, the company was able to get 229 units, or 55 more units than KB Home originally planned. The development will also feature more than 7,000 square feet of outdoor terrace space.

Ten Fifty B will be Affirmed Housing’s first LEED-certified development, and the company expects it to receive a silver rating. Notably, the project features photovoltaic and solar thermal panels on the roof to provide on-site renewable energy for the common areas, as well as to pre-heat the boilers.

Affirmed Housing chose to use taxexempt bond financing since California’s limit on 9 percent credit awards—at the time, the maximum award was $2 million—would’ve constrained the deal’s capital stack. In all, the $91 million development received more than $34.4 million in 4 percent tax credit equity, syndicated by Boston Capital.

U.S. Bank purchased the tax-exempt bonds in order to fund a $48.5 million loan to the development during the construction and permanent phases. Under the financing structure, U.S. Bank retains the bonds as collateral together with holding a deed of trust on the property. At conversion, the bonds will be redeemed/ repaid from $48.5 million to an $8.4 million 30-year permanent loan.

But early 2009 was a tough time to be a California affordable housing developer. The state’s Pooled Money Investment Board (PMIB), which provides loans to bond-funded projects, voted in December 2008 to defer all bond expenditures indefinitely, in response to the state’s budget crisis. In effect, bond funds from the state were frozen. Developers and housing advocates hope this is a short-term problem.

Affirmed Housing was fortunate that the frozen funds didn’t have an immediate impact on Ten Fifty B. “We don’t need or expect those funds until the fourth quarter of this year, or the first quarter of next year,” says Jim Silverwood, president of Affirmed Housing Group. “We’re lucky we didn’t need them in the first quarter of this year, or we’d have a real problem.”

Mid-Peninsula Housing Coalition, a nonprofit developer located in the San Francisco Bay Area, was one of many developers caught in a bind by the PMIB’s decision. The company was banking on approximately $4 million in state bond funding to develop a 68-unit project in San Mateo, Calif., called Peninsula Station.

Mid-Peninsula was hoping to break ground in February, but the frozen bond funds threw the deal for a loop. The construction lender, Wells Fargo, wouldn’t commit financing until backup funds were found, and the project needed to start construction by March 9 or it could’ve lost its deal with the tax credit investor, Union Bank.

Luckily, the project caught two breaks. First, due to the downturn in the construction market, construction costs came down dramatically. But more important, the city of San Mateo, San Mateo County, and the Housing Endowment and Regional Trust of San Mateo County pledged bridge financing of $3.5 million during construction.

“We’re going to make it, but it’s only because our local partners—the city and county—we’re working with stepped forward and are bridging the state loan,” says Matt Franklin, Mid-Peninsula’s president.