California officials and representatives of Citi have come up with an innovative plan to restart construction lending for affordable housing projects in the state.

Under a $350 million program, Citi will be given an option to purchase general obligation bonds directly from the state, which would then provide proceeds to fund Department of Housing and Community Development (HCD) loans.

The move comes after many construction lenders have been unwilling to make loans based on an HCD loan commitment because of fears that the state money may not be a reliable source at the time of takeout.

The Citi deal provides a layer of assurance for construction lenders that funds will be available when projects are ready to receive permanent financing, said Steven Fayne, managing director at Citi Community Capital.

The option plan has never been done before, according to Fayne, who describes it as a creative solution to help affordable housing deals get moving.

The benefit for Citi is the “ability to do lending in the affordable space,” he said.

HCD administers a variety of housing programs, including the popular Multifamily Housing Program, that have been supported by Proposition 1, a $2.85 billion housing bond passed by the voters in 2006. Prior to that, voters approved Proposition 46, a $2.1 billion housing bond, in 2002.

The state loans are often funded at the time when a project has completed construction and converts to permanent financing. Construction lenders have historically been willing to make loans based on the state funds being in a project.

However, a weak bond market and a state fiscal crisis have meant that California has largely been out of the bond business. Another rub came when the state changed the way it loans funds to its departments from the Pooled Money Investment Account. In the past, money could be loaned and then replenished by selling bonds. Now, the state must first sell bonds before it will give departments money.

Lenders have become reluctant to provide construction loans to projects that had the state commitments. This froze many new construction projects in the state, said Fayne.

It left the affordable housing industry in California looking for solutions.

Citi Community Capital is within the municipal securities group of the bank, so there is a lot of interaction with the public finance bankers, which helped in developing the bond option plan, according to Fayne.

The state Treasurer’s Office and HCD then worked with the bank to craft the program.

State officials said their intent is to have funds on hand to cover the HCD loans so the option may never have to be exercised. The state may just go to the market to sell the bonds.

However, if that doesn’t happen, Citi will be there as a standby.