RALEIGH, N.C. - Greystone Affordable Housing Initiatives, based here, orchestrated a complex financial transaction to save 830 affordable housing units deemed at risk of exiting the U.S. Department of Agriculture’s (USDA’s) Rural Development Sec. 515 program. The company bundled 23 multifamily properties in rural South Carolina into a single bond issue and transferred them to new ownership, which extended the affordability restrictions for another 30 years.

“To the best of our knowledge, nothing like this has been done anywhere in the country,” said Tanya Eastwood, senior vice president at Greystone. “There have been a few smaller bond deals that pooled four or five projects here and there, but nothing of this magnitude. We started out with 30 projects and ended up closing on 23 [through 20 transactions]. It was a massive undertaking.”

Greystone provides transaction-management consulting services to affordable housing developers and owners. The company assists with the acquisition, preservation, and rehabilitation of properties, including performing due diligence, securing financing, and managing the construction process.

The South Carolina preservation initiative began in the fall of 2006, when Greystone crossed paths with Boyd Management on an unrelated matter—and talks turned to WWJ, a Boyd affiliate. Boyd, based in Columbia, S.C., is one of the largest owner/management agents of USDA Rural Development properties in the Southeast.

According to Eastwood, Greystone discovered that Boyd controlled “a slew” of Sec. 515 projects in multiple counties throughout rural South Carolina. Although the primarily garden-style communities had an average occupancy rate of 95 percent or higher, all were built in the late 1970s and early ’80s and showing their age.

“The buildings were approaching the end of their lives,” said Eastwood. “They had minimum built-up capital reserves to use for extensive rehabilitation, and there were no viable resources within the Rural Development world to do true preservation. The properties were also at the end of their restricted-use agreements; therefore, the owners were ready to sell and get out.”

Preserving the units required a highly complex $57.5 million deal involving the assumption and subordination of $23.5 million in existing Rural Development Sec. 515 debt. The South Carolina State Housing Finance and Development Authority issued $27.7 million in multifamily private-activity tax-exempt bonds, and Community Affordable Housing Equity Corp. (CAHEC) purchased 4 percent federal low-income housing tax credits (LIHTCs) to provide $16.6 million in equity. Other funding sources included $1.1 million in investment income and approximately $500,000 in deferred developer fees.

“The complexity came from all the different parties involved, with some having different or competing agendas,” explained Eastwood. “We were dealing with 23 different sellers who we had to get to the table at the same time and various deadlines [related to] tax credit cycles, bond deadlines, financing deadlines, and third-party reports with varying expiration dates. Also, Rural Development itself had not done a transaction like this, so the specifics on how to handle this particular situation was often unclear. And each state director may interpret the guidelines that they do have from the USDA national office a little differently.”

The initial bond inducement was to expire in late November. To close the transaction before the deadline, the team had to seek guidance and intervention from the USDA national office, as well as involvement from U.S. Sen. Lindsey Graham (R-S.C.), which proved instrumental in getting the deal across the finish line.

The initial permanent financing included a $14 million credit enhancement of the bonds by Fannie Mae.

However, at the last minute, Rural Development instead was able to offer $15.8 million in unallocated Sec. 515 funds as loans with better rates and terms. (Bank of America continued its commitment to post a letter of credit for enhancement to the bonds during the construction phase.) “It was basically 1 percent money, so we had no choice but to take that as the permanent financing source,” said Eastwood.

With the deal structure completely changed, the voluminous bond documents, which were in their final stages, and financial underwriting on all 23 properties had to be completely redone with less than four weeks left until closing. “To manage all that, well, the sheer volume was a challenge,” said Eastwood.

Although the deal started with about 30 properties, seven ended up being dropped for various reasons after due diligence and financial analysis were completed.

“One of the most important elements that Greystone brings to the table as a transaction manager is that we are investing in the deal from day one,” said George Baker, director of acquisitions at Greystone. “When you try to close on 30 properties, it costs a lot of money to complete appraisals, market studies, and capital- needs assessments. That is a real stumbling block for many of the current Rural Development owners. To pay the up-front financing and tax credit application costs for 23 deals is pretty significant, and most owners don’t have that kind of at-risk money lying around in their bank accounts. And chances are that, if you never close, you never recoup that cash.” Greystone invested close to $600,000 in due-diligence costs, with an exposure of more than $1.3 million if the deal did not close.

A national model

The final 23 multifamily properties are now owned by newly created LLCs, for which WWJ serves as the managing member and an affiliate of CAHEC acts as the investor member. On average, each unit will undergo $18,000 to $20,000 in rehabilitation, and all the buildings are expected to be placed in service by Dec. 31, 2008. All the units will serve households earning no more than 60 percent of the area median income.

Baker believes the initiative can serve as a valuable model for preserving other aging Rural Development properties throughout the country.

“As many inner cities experienced deterioration of their affordable housing built in the ’60s and ’70s over the past 10 years, a lot of money came into the metropolitan areas to address that. For rural housing, the problem is almost at the same volume, only the properties are more spread out,” said Baker. “There are approximately 14,000 Rural Development properties out there consisting of half a million units. Most are about 22 years of age, and many operate in excess of a 90 percent occupancy rate. Yet no one is rushing to the table with HOPE VI money or statefunded programs to address this problem. We think there’s an opportunity for deals like this to bring private parties like Fannie Mae and Bank of America together with USDA to have a major impact on preserving rural affordable housing.”