WASHINGTON - A mortgage loan for $14.3 million in multifamily development revenue bonds for a troubled rehabilitation project in Baltimore is in default, but bondholders are protected and will be repaid in full, the Maryland Department of Housing and Community Development said.
The mortgage loan default on the Strathdale Manor rental housing project does not automatically trigger a default of the bonds, which were issued Aug. 30, 1988.
However, the housing agency has decided to accelerate debt service on the bonds and pay full principal and accrued interest to the bondholders, said Margaret McFarland, chief counsel to the housing agency.
The agency is expected to direct the bond trustee, Maryland National Bank, to pay bondholders within the next couple of weeks by drawing upon a irrevocable direct-pay letter of credit issued by Sumitomo Bank Ltd. of New York City.
Sumitomo in turn will be reimbursed through a contract with insurers of the mortgage loan, McFarland said. The Maryland Housing Fund, part of the housing and community development agency, insured $10.7 million of the loan while Maryland National Bank secured the remaining $3.6 million. The housing fund is expected to pay the insurance claim from its operating funds and unallocated unrestricted reserves.
The bonds are subject to remarketing every 30 days and are open to tender on seven days' notice, McFarland said. Typical bondholders are money market funds, but the agency does not know exactly who the bondholders are, she said.
The bonds will mature on Feb. 1, 2020. The coupon rate, which varies monthly, is currently 3.10%.
"The bonds are really not the big issue," McFarland said. The housing agency issued a press release on Monday announcing the expected bond default because of new Securities and Exchange Commission rules requiring more disclosure by issuers of municipal securities.
"We issued the press release ... out of an excess of caution; it's really not a major event in these bonds because of the 30-day nature of the bonds and the low rate on them," McFarland said.
The project, which was acquired and developed by Strathdale Associates Limited Partnership of Maryland, has been troubled since early in the renovation process, and the loan has gone through a couple of workouts, said Jacqueline Rogers, secretary of the state housing and community development department. The 600-unit building "is in a very tough neighborhood," and occupancy is only 30% to 40%, she said.
"For a time there was a lot of crime on the property," and tenants involved with drugs were let in, Rogers said. The development was not competitive with other rental buildings in the area, which not only offered competitive rates but were more attractive and had air conditioning, unlike Strathdale Manor, she said.
The loan default "is a really big hit for us," she said.
Rogers said she is not ready to talk about whether there are lessons to be learned from the project and the points at which different decisions might have been made. "This is a very delicate time ... I think in a couple of months it might be appropriate to dig in a little bit and talk about the evolution of the loan."
Once the bondholders are paid off, the housing agency will work with the loan credit enhancers to figure out what to do next with the project, McFarland said.
