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Citi, New York City Housing Authority Close $900 Million Rehabilitation Deal

Published by Jennifer Hill on Saturday, May 1, 2010

Journal cover May 2010   Download PDF

After years of searching for solutions to its growing operating deficit, the New York City Housing Authority (NYCHA) in March concluded a complex, two-part mixed-finance deal with Citi Community Capital.

At the announcement of the U.S. Department of Housing and Urban Development’s (HUD’s) approval of the more than $900 million transaction, Secretary Shaun Donovan observed that the number of units the transaction will benefit is equal to the whole of Chicago’s affordable housing stock. Donovan called the day potentially “the most important day in the preservation of public housing in the nation’s history.”

A $1 Billion Problem
After World War II and through the 1970s, the state and the city of New York constructed the developments in response to the city’s substantial housing need. The state built and financed 15 properties while the city constructed and financed six. Because the buildings were not federal public housing, they were ineligible to receive federal funding.

Then in 1995, the city and state subsidies for those properties began to be eliminated, and the financial burden of maintaining the 21 properties fell to NYCHA – the largest housing authority in the U.S. Prior to the transaction’s close and for the better part of decade, NYCHA had operated the 21 public housing developments for 46,048 residents in 20,139 units without dedicated financial support from federal, state or local governments.

To support these 21 properties, NYCHA was forced to divert federal funds from its other properties. This resulted in two major problems: NYCHA’s ability to maintain its entire 180,000-unit portfolio was hindered, and the authority amassed a $1 billion cumulative operating deficit.

NYCHA’s Turn for Recovery
NYCHA’s big break to fund the 21 properties came in the form of a provision in the American Recovery and Reinvestment Act (Recovery Act) that allowed units not covered by Section 8 to qualify for federal operating funding. But there were a few caveats: first, the units had to be sold in a mixed-finance transaction to an entity controlled by NYCHA; second, upon construction the units had to meet minimum federal standards of good repair; third, state legislation had to be passed approving the sale of the developments; and fourth, NYCHA needed to act quickly to meet the Recovery Act’s March 17, 2010 deadline to obligate all funds.

To take full advantage of the one-time opportunity presented by the Recovery Act, NYCHA selected Citi Community Capital as the equity investor and lender, establishing two limited liability corporations (LLCs) and transferring units to them in an arm’s length sale. The chief goals of the transaction were to complete a much-needed rehabilitation of the 21 properties and to secure annual contribution contracts (ACCs) with HUD for as many units as possible.

“This is the biggest mixed-finance deal in the history of mixed-finance,” said Susan Wilson, director of HUD’s office of urban revitalization. Wilson noted that this deal is on a larger scale than any other mixed-finance transaction involving HUD. The second largest covered approximately 4,000 units in Puerto Rico, she said.

Dual Partnerships, Dual Purposes
Each of the 21 developments will receive much-needed repairs and upgrades through approximately $400 million in new public and private funds generated by the transaction, with $220 million of that going exclusively toward rehabilitation costs. More significantly, now that 11,743 units are under ACCs, NYCHA stands to receive approximately $65 million to $75 million a year from HUD to fund the ongoing operating deficits of the contracted units.

Richard Gerwitz, a Citi managing director, called the arrangement with NYCHA “a typical tax credit acquisition rehabilitation structure, just on a scale and with facts and circumstances never seen [before].” He added that NYCHA created a second LLC in case of a future opportunity to bring the 8,396 outstanding units under ACCs. On the basis of the developments’ respective rehabilitation costs, NYCHA separated the 13 properties that received LIHTC equity from the other eight developments, which have lesser rehabilitation needs and will be renovated using a combination of bond proceeds and Recovery Act funds.

A partnership between NYCHA and a Citi subsidiary, NYCHA Public Housing Preservation I LLC (LLC-I), involved the transfer of 14,465 units in 13 developments with a $210 million LIHTC equity contribution from Citi and $357 million in private activity bridge bonds. Citi bought the bonds directly from the New York City Housing Development Corporation (HDC), which also sold two more bond issues: a $68 million short-term issue backed by Recovery Act funds and a $24 million long-term issue backed by project revenues.

The second LLC, NYCHA Public Housing Preservation II LLC, did not involve tax credits. Instead, NYCHA partnered with an entity created by the not-for-profit New York City Housing Partnership to lock in modernization funds for the remaining 5,674 units in eight developments. Financing includes a $28 million long-term bond issue sold publicly by HDC, $31 million in Recovery Act funds and a $3 million loan from NYCHA.

HDC will issue a total of $477 million in bonds over a three-year period.

Citi secured the mortgages associated with all of the bond debt by writing letters of credit for the total amount of bonds issued. In return for its integral role in the transaction, Citi will receive LIHTCs as well as credit toward meeting its Community Reinvestment Act requirements.

A Common Goal
While the deal was still in the planning stages, NYCHA called upon HDC to help with financial modeling and soliciting investor involvement. Marc Jahr, HDC’s president, says that to a large degree the financial structure was determined by three types of legislation – the Recovery Act, legislation providing for low-income housing tax credits (LIHTCs) and a legislative requirement to use a certain percentage of tax-exempt bonds. Jahr noted that NYCHA was looking for a bank that could handle both the debt and the equity in the allotted timeframe and Citi fit the bill.

“The kind of platform we have was extremely well-suited to what was the most complicated transaction I’ve seen in my career,” said Andrew Ditton, a Citi managing director. Ditton estimates that 30 people at Citi had a hand in the transaction. He believes that one of the reasons NYCHA selected Citi was the business’s ability to immediately pull together a team that could close the transaction within the mandatory three-month window.

NYCHA and Citi called upon a host of law firms and teams of consultants to ensure the transaction’s success. “The sheer volume of people involved in turning this around in such a short period of time was remarkable,” said Stacey Stewart, a Novogradac & Company LLP principal, who provided Citi with tax consulting services. Gerwitz reports that conference calls involving 90 people were not unusual.

Sonya Kaloyanides, who spearheaded the initiative as NYCHA’s general counsel, called the approach multi-pronged and multidisciplinary. NYCHA had been seeking a legislative solution long before the appearance of the Recovery Act. “We had the opportunity presented in the Recovery Act and we seized it,” Kaloyanides said, noting that her team worked with HUD on the federal side while simultaneously shepherding the state legislation.

Although Citi now owns 99 percent of LLC-I as a limited partner, NYCHA is both the managing member and managing agent of both LLCs. Provisions in the LLCs’ regulatory and operating agreements, in the ground lease, the declarations of trust, as well as the contracts with HUD, ensure that developments remain affordable.

“What everybody heard was that we were selling public housing,” Kaloyanides said, pointing out that NYCHA made efforts to explain what the transaction would mean. NYCHA’s senior executives met regularly with resident leaders and held discussions with tenant associations to keep the residents of the affected developments informed and to quell misinformation.

Kaloyanides said during the next two years NYCHA will focus renovation efforts and funds on upgrading the exteriors of the properties, ensuring that all tenants receive the benefits of modernization. While repairs will be made to common areas rather than individual units, tenants will soon say goodbye to leaky roofs, inefficient boilers, old elevators and deteriorating facades.

“This is good, affordable housing that has been falling behind in maintenance simply due to lack of funds,” Gerwitz said. He noted that now that NYCHA has tapped into a federal funding stream for the developments, the strong affordable housing operator will be able to provide housing for an extended period of time.

“This transaction benefits more than just NYCHA,” Jahr said. “It benefits the tenants and the city as a whole.”

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