Innovations in Redevelopment Agency Credit Enhancement for Tax-Exempt Bonds at RiverTown and John Burns Gardens

In developing its John Burns Gardens and RiverTown apartment complexes in the City of Santa Clara, the Housing Authority developed and executed a unique tax-exempt bond credit enhancement structure permitting the City’s Redevelopment Agency to minimize its subordinate subsidy loan amount required for project feasibility.   Moody’s Investors Service is willing to issue an investment grade rating (“A3”) to bonds which are not secured by sources other than real estate revenues after project construction completion and leasing is completed provided prudent underwriting demonstrates that annual project revenues will be not less than 1.4 times the sum of annual debt service payments on the bonds and stabilized operating expenses.  (Standard & Poor’s Corporation offers an analogous financing option to issuers and developers).

Such underwriting standards are far more conservative than the more typical 1.15 to 1 ratio conventional lenders are willing to consider for projects where units are planned to rent at figures below market levels.  As a result, there is comparatively little incentive for developers to take advantage of this structure without modification except to access “4%” low income housing tax credits which are generally available on a non-competitive basis for projects substantially financed out of the proceeds of tax-exempt private activity bonds.

For the John Burns Gardens and RiverTown bond issues, however, Moody’s agreed to the Housing Authority's request to rate a far higher principal amount of tax-exempt bonds sized to meet a 1.15 to 1 debt coverage ratio provided a pledge of the annual dollar difference between the contrasting debt coverage standards was made by the City Redevelopment Agency, a public agency which was assessed by Moody’s to have a credit rating substantially equivalent to the Moody’s A3 rating for the housing bonds.   Under California law, Redevelopment Agencies are not required to capitalize more than a single year of any such contractual obligation.  For its part, the Housing Authority contracted with the Redevelopment Agency to reimburse the Agency in full if there was ever a draw on the Agency guarantee required to permit the timely payment of principal and/or interest to the holders of the senior bonds.  By agreeing to participate in this financing arrangement, the principal amount of the Redevelopment Agency loans to the Housing Authority affiliated limited partnerships required to permit the 200 units of affordable housing in these complexes was reduced by almost $2 million.

The Housing Authority is looking for additional opportunities to replicate this structure whenever a City has a highly rated Redevelopment Agency committed to maximizing the efficiency of use of its tax increment required under California law to be used to assist the production of affordable housing.