CHICAGO -- The Illinois Housing Development Authority is tackling the problem of providing affordable multifamily housing in Illinois by leveraging state money to maximize the number of units that can be built.
The authority plans to sell $62.7 million of taxable Affordable Housing Program Trust Fund Bonds on Wednesday in a deal insured by AMBAC Indemnity Corp. and underwritten by Goldman, Sachs & Co.; Bear Stearns & Co.; and CS First Boston.
Dana Bunting, a vice president at Goldman Sachs, the senior manager for the deal, said debt service on the bonds will be paid in a double-barreled approach with loan repayments and state funds earmarked for affordable housing.
The state funds come from the state's Affordable Housing Trust Fund, which was created by the Illinois General Assembly in 1989 and is funded by a state real estate transfer tax.
Last summer, state lawmakers passed legislation allowing the authority to leverage money in the trust fund through the issuance of bonds. Up to $10 million a year of the $15 million to $18 million in trust fund moneys can be used for debt service.
Gary Brandt, another vice president at Goldman, said that for the $62.7 million bond issue about $3.6 million of trust fund money will be set aside each year to cover 60% of the debt service on the bonds. The remaining 40% of annual debt service will come from the repayment of loans made to developers, he said.
This differs from traditional bond structures for multifamily housing deals that generally rely solely on loan repayments to cover debt service. The inclusion of the state trust funds gives the deal a larger revenue stream that in turn allows the authority to lower the interest rate on loans extended to developers to 3%, according to Brandt.
Pamela Lenane, the housing authority's acting director, said that through leveraging the trust fund money, the authority will be able to finance more affordable housing units.
"Taking a page from the Bulls' playbook, this is a three-peat for" the authority, Lenane said, referring to the three-time champion Chicago Bulls basketball team. "By leveraging the transfer tax. we have been able to triple the amount of affordable housing units which we would have.been able to finance with a traditional multifamily bond structure." The bond issue will finance 1,363 low- and moderate-income multifamily units in Chicago and around the state; according to; Bunting.
Jennifer Miller, the authority's manager of community development, said that federal tax credits and financing subsidies are necessary for attracting developers who will build affordable housing. The authority's program offers developers "one-stop shopping," linking low 3% first mortgage loans from the authority with 9% tax credits to provide affordable overall rents for residents, she said.
Miller said the bond issue is taxable to maximize the tax credits for developers. She said that if the deal were sold on a tax-exempt basis, the credits, which increase the developers' equity in the project, would fall to around 3%
Bunting of Goldman said the Illinois agency is the only state housing authority to offer both low interest loans and high tax credits to multifamily housing developers.
Brandt said that no bonds would be called due to the prepayment of loans for 15 years, and that the deal is structured to also disallow bond calls due to surplus funds for 10 years.
The deal is expected to earn triple-A ratings from Moody's Investors Service and Standard & Poor' s Corp. due to the insurance from AMBAC, Bunting said. Howard Pfeffer, a first vice president at AMBAC, said the insurer is comfortable with the transaction because of the authority's "tremendous track record in underwriting multifamily projects" and the security provided by the trust fund revenues.
The authority is also extending a limited general obligation pledge on the bonds. Robert Kugel, the authority's chief financial officer, said the pledge would come into play only during specific times over the life of the bonds. such as during the construcuon phase of the housing units.
The authority, which has an At GO rating from Moody's, received a GO rating of A from Standard & Poor's on Friday.
The preliminary structure for the bond sale shows $16.3 million of serial bonds with maturities from 1996 to 2008, $16.2 million of term bonds due in 2014, and $30.2 million of term bonds due in 2021.
Underwriters and authority officials said that they are hoping the deal attracts some non-traditional investors in housing bonds, such as corpo.rate pension funds and large investors who don't need tax-exempt income.
"Investors can get involved in affordable housing without the credit risk because of the insurance and the way the deal is structured," Lenane said. "This is an opportunity to do something worthwhile for the community in Chicago and in Illinois."
The authority is planning to issue $200 million to $250 million of affordable housing program trust fund bonds over the next two- to -three years, according to Lenane.
Bunting said that other state housing agencies are watching Illinois' multifamily housing program and may try to do a similar program.