LOS ANGELES -- A Los Angeles bond deal scheduled for pricing this week features cooperation between two major issuers for the benefit of redevelopment and mass transit.

Proceeds from the financing, for the Grand Central Square project, are targeted to help revitalize much of a block in the city's historic downtown core.

But unlike many previous renewal financings, the Los Angeles Community Redevelopment Agency is not the only public entity securing the bonds. An agency better known for creating a countywide transit network -- the Los Angeles County Metropolitan Transportation Authority -- also plays a key role in securing the bonds.

The Community Redevelopment Financing Authority, a city joint powers agency, will actually issue the $22.3 million of multifamily housing debt and $21.7 million of qualified redevelopment bonds.

The Yellin Company, a Los Angeles-based developer, is overseeing the project through an entity known as Grand Central Square Limited Partnership. Yellin has spent more than $34 million for property acquisition and development, but could not obtain conventional construction and permanent financing to complete the project. Such private loans have been much more difficult to arrange because of the region's real estate downturn and general economic slump.

As a result, the public agencies have stepped in to secure the bonds. The developer has no obligation whatsoever with respect to the bonds. and investors will have, no recourse against the property and revenues in the project itself.

Grand Central Square will feature numerous improvements, including rehabilitation of historic buildings; possible provision of a full-service supermarket; conversion of unused office space into apartments, and completion of a 500-space parking structure.

The redevelopment agency supports the project on grounds it ties into the city's plans for central business district renovation. The project aims to rejuvenate commercial activity in the area and to provide affordable housing.

But transportation officials also hope to reap benefits.

The transportation authority "is committed to promoting the use of mass transit and has agreed to support the project as a means of encouraging the use of mass transit and reducing traffic congestion." according to the preliminary official statement.

The transportation authority also hopes that reimbursements from net operating revenues of the project will essentially cover its debt service payments, thereby avoiding any negative budget impact.

The project lies just east of various skyscrapers and is less than one block from a subway station for the new Metro Rail Red Line. It also borders a terminus for the Angel's Flight funicular, a proposed cable railway for the downtown Bunker Hill area.

An existing cap on the redevelopment agency's annual expenditures in the central business district restricted the agency's ability to secure all the bonds. Other funding alternatives were considered, including having the public agencies provide a standby reimbursement obligation for a private letter-of-credit provider.

But those negotiations failed, and officials concluded that a more traditional pledge of public tax revenues would provide the best credit rating and marketing potential for the bonds.

"The issue's generated a lot of interest" from investors, said Edward J. De La Rosa, president of E.J. De La Rosa & Co., co-senior manager on the transaction with Merrill Lynch & Co. The deal is scheduled to be priced on Thursday.

Rating agency officials and others who are familiar with the issue said the security structure entailed a complicated analysis, largely because of the way the bonds fit into the transportation authority's existing debt structure.

Initial security for the housing bonds during construction will be supplied by an interest in tax increment revenues received by the redevelopment agency's Bunker Hill project. Rating agency officials said that security is more straightforward since it is on parity with the agency's existing $215.3 million of obligations backed by Bunker Hill tax revenues.

If certain terms are met upon completion, however, debt service will be secured by an estimated 57.67% share of the tax increment revenue. and a pledge of so-called net discretionary sales tax revenues of the transportation authority for the remaining 42.33%.

In addition, the redevelopment bonds are payable only from the transportation authority's net discretionary sales tax revenues, which in this transaction are linked to a countywide half-cent sales tax increase under Proposition A.

But that sales tax pledge for this deal "is a very different credit" than the pledge backing the transportation authority's senior lien bonds, observed Kenneth Kurtz, an assistant vice president of Moody's Investors Service.

Accordingly, "it's been an interesting and long process" to rate the bonds, Kurtz added.

The authority's pledge for the Grand Central Square bonds is subordinate to its obligation for about $1.36 billion of senior sales tax debt. The pledge for this week's deal ranks with the authority's "second tier subordinate lien obligations," which include a previous swap agreement and a bank standby purchase agreement, according to the preliminary official statement.

Recent legal changes to the authority's Proposition A master trust indenture helped clarify the authority's complicated debt structure, Kurtz said. Those changes provided a "nice hierarchical structure that is a little more orderly." even though it is still "very complex."

De La Rosa observed that investors "are quite familiar" with the authority's structure, which has been "studied many times over."

Accordingly, De La Rosa said investors seem comfortable with the notion of the second-tier pledge for the Grand Central Square deal. Furthermore, he noted that projected debt service coverage ratios remain high for the second-tier pledge, with forecasted ratios for the redevelopment bonds exceeding 2.1 times during the first six years.

Rating agencies had not issued formal ratings as of Friday, but A ratings were expected from both Moody's and Standard & Poor's Corp.

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