“We link the big picture to the smaller details because both are needed for success.”
New York City Housing Authority (NYCHA): Modernizing the Portfolio and Substantially Reducing Operating Deficits
CSG served as NYCHA’s financial advisor in structuring the rehabilitation and federalization of 21 projects with over 20,000 dwelling units. These developments, unlike the rest of its public housing stock, received no federal operating subsidies, and had cost NYCHA over $1 billion to subsidize.
Over a 120 day period to meet Congressional deadlines, we helped:
- solicit, select, negotiate, structure and close a $220 million tax credit equity raise;
- structure the placement of $386 million of tax-exempt bonds in three phases;
- identify critical path items and organize weekly work group and overall team calls coordinating over 90 professionals;
- obtain HUD approval for federalizing 12,000 of the units – providing NYCHA with $75 million per year of additional annual operating subsidies;
- structure over $200 million for rehabilitation; and
- create a detailed and successful implementation framework.
CSG’s after-closing implementation assistance generated over $6 million in additional value to the Authority through structural changes to save over $3 million in interest costs and obtain investor approval for higher developer fees for NYCHA.
All 21,000 units were rehabilitated on time and within budget. NYCHA has been receiving $75 million of incremental annual operating subsidies for the units. The tax credit partnership is providing NYCHA over $ 150 million for additional improvements on these and other projects.
Anaheim: Successfully Negotiating a $1.5 billion Public-Private Partnership with Disney — Without Financial Risk to the City
How does a city structure a project it wants as much as the developer without putting itself in jeopardy? The Walt Disney Company proposed a second theme park to Anaheim, asking for over $1 billion of incremental and other revenues, while putting the City in competition with Long Beach (as Disney would later do with Hong Kong and Shanghai). How could a transaction meet the City’s own improvement needs, avoid any financial risk to the City and raise ongoing revenue – in negotiating with one of the most powerful and ambitious corporations in the world?
CSG created a set of brief, specific criteria that were both fundamental and quantifiable (such as no negative impact to the General Fund during construction, net revenues to benefits other neighborhoods, enhancing the City’s Convention Center, etc.). These criteria:
- established a ‘box’ for allowing Disney to be as creative as they wanted to be, while setting outer performance limits to the impact of the deal;
- were maintained throughout 7 years of negotiations and many changes of plans and economics;
- were used by CSG, as Disney would propose each draft of agreements and terms, to provide a standardized chart showing how specific criteria would be affected;
- were eventually and publicly adopted by Disney as well as the City.
To make the criteria effective, CSG helped the City create its own detailed fiscal impact model, rather than rely on Disney’s, and structured innovative financing tools that protected the General Fund while financing $500 million of public improvements.
The project and all public improvements were successfully completed. The transaction’s terms fully protected the City through drops in tourism after 9/11 and throughout the financial crisis. Incremental revenues to the City over 15 years have almost exactly matched the City’s conservative fiscal projections. Afterwards, Disney’s negotiators indicated although they hated the criteria, it eventually saved them 2 years in negotiations. City Manager Jim Ruth stressed that they helped “the City get a deal it could live with.”
CSG has used this pioneering criteria approach with similar success for the re-use of San Francisco’s Ferry Building and redevelopment of the District of Columbia’s Southwest Waterfront.
Seattle Housing Authority: Sustainability Strategy For Ongoing Operations While Continuing to be a Major Developer
The Seattle Housing Authority, one of the first Moving to Work (MTW) agencies in the country, is widely considered a national leader, and has been an extremely active developer / general partner on a wide range of projects throughout the city. The flexibility of MTW funding helped make this success possible – but the funding of so many development projects could also bring cash for ongoing public housing operations to critically low levels. How could ongoing operations be safeguarded while continuing to be a major developer?
The specifics of this dilemma first became visible and quantifiable to the Authority when we were asked to prepare a full analysis of the authority’s finances and prepare financial benchmarks for future debt and investments. To understand the issues involved, we:
- interviewed several other PHAs SHA considered their peers (including our King County and Portland client), and compared financials and approaches to financial challenges and risks;
- helped staff quantify challenges in each of SHA’s operations in light of external changes and risks (including changes in HUD funding, utilization of Section 8, impacts of past development projects, etc.),
- prepared a detailed, systematic sustainability analysis of each major Authority activity and the Authority as a whole based on three scenarios — reasonable, conservative and more conservative,
- after buy-in across the Authority as to the fundamental risks involved, drafted financial and risk criteria for undertaking new projects; a master development revolving reserve fund to separate out reserves for development from those for regular operations; guidelines for bank lines of credit, and budgeting and funding development; and applying these criteria to very large new projects and each of SHA’s portfolios.
The approach we outlined helped the Authority establish adequate ongoing funds for each of its major activities, prudently undertake its largest redevelopment project, and increase liquidity. As follow-up work, we helped the Authority restructure bond financing of several major projects where interest rate swaps and variable rate debt were creating major losses for the Authority.
University of California: $600 Million of Liquidity for its Faculty Mortgage Portfolio
In the 1980s, we worked with staff from the UC Office of the President to establish a Mortgage Origination Program to provide attract home loans for recruiting and retaining key faculty at campuses in high-cost areas throughout California. The program – investing up to 25% of UC’s short-term investment portfolio at no reduction in return – proved enormously successful. By the early 2000’s, the portfolio was running up against this limit and needed to be recapitalized. Wall Street firms indicated the existing loans could be sold at 94 cents on the dollar – an enormous and infeasible loss. Was there a way – at no cost — to recapitalize the portfolio to make loans to new faculty members?
Teaming up with a portfolio valuation and sales entity, we helped figure out a way to turn the unique challenges of the portfolio for potential investors into advantages. We helped:
- eliminate any credit risks. The mortgages were wholly non-conforming — 90% loan-to-value mortgages with no mortgage insurance – but delinquencies were zero, since paychecks are deducted for monthly payments. UC agreed to immediately substitute another loan for any loan that became delinquent, turning the portfolio into the equivalent of a AA-rated pass-through security.
- market the unusual rate index into a benefit. The one-of-a-kind index – the University’s short-term investment portfolio – allowed investors who needed to own mortgages to effectively invest at the University’s own returns.
By structuring loan sales in this way, UC was able to sell multiple portfolios, aggregating over $600 million at a price of 100.25. This saved UC $36 million compared to Wall Street estimates and allowed the University to recapitalize this very important program.
MassHousing: Risk-Based Capital Study to Determine What it Can Sustainably Invest
In conjunction with its 2013 strategic plan, and new requests expected from the State, MassHousing needed to determine what amounts if any it could afford to invest both initially and annually in new affordable lending subsidies.
Like other state housing finance agencies, MassHousing has become over time an extremely complex, multi-faceted financial engine. It is affected in multiple ways by swaps, major swings in interest rates, prepayments and loan losses, cutbacks in federal funding, and the shift to entirely new funding models (including selling over $1 billion of loans annually).
But like virtually all other HFAs, neither agency staff nor Board – nor underwriters or rating agencies — have any effective way to see how these functions affect each other. Major program and funding decisions therefore have to be made one by one, without a comprehensive framework for looking at the cumulative impacts of decisions.
Working closely with staff, CSG:
- helped define and quantify the agency’s many activities as a series of key lines of business, each with their own key cost and revenue trends and risks;
- independently and systematically quantified risks in each major loan portfolio, compared to rating agency estimates;
- quantified key challenges and changes affecting the agency;
- outlined a consistent basis for transfers between indentures, its general fund and affordability funds — so staff and Board can see how the agency is doing;
- projected performance of each major indenture and fund – and each major operating function – under a range of sensitivity scenarios; and
- developed an overall, ongoing financial framework and key opportunities to be pursued.
The Board and staff were able to determine how much it could sustainably invest in the affordability fund and the measures for determining future investments. In addition, with our assistance, the agency is actively pursuing ways to shift more of its production onto its balance sheet and assuring adequate liquidity for rating agency tests.
Minnesota housing Finance Agency: Putting Single-Family Production on the Balance Sheet
Minnesota Housing – like almost every state housing finance agency – faces a major dilemma. With taxable Ginnie Mae and Fannie Mae yields lower than tax-exempt bond rates, it’s easy and profitable to sell new production in the secondary market. Minnesota was very concerned however that such a strategy would mean a rapidly decline in its balance sheet–and the future annual earnings, year in and year out, it will depend on for all its programs.
Working closely with staff, underwriter and bond counsel, the finance team developed a series of tools that have become industry standards. These included a best execution standard for all bond issues — the break-even speed at which a bond financing has the same or greater present value benefits to the Agency. Loans are hedged until the bond sale itself, taking any cash gains on hedge positions earlier and while letting losses be included in bond yield so the Agency can recover them. Minnesota innovated monthly pass-through bonds and has helped create and maintain an effective for them, together with using resources from its old indenture and refundings, to achieve full spread and create net zero participations over many years.
The Agency has been able to fund virtually all production on its balance sheet, with the same or greater present value benefit as loan sales, while fully hedging its pipeline. Most important, by replenishing its balance sheet it is helping secure its long-term future income.
District of Columbia: Housing Production Trust Fund
Faced with rapidly rising housing costs and major deteriorated areas, the District sought a way to regularly and significantly provide local funding for site acquisition and covering development gaps for affordable housing. After considering the general obligation bond approach CSG helped structure for San Francisco, the District with our assistance decided to dedicate 15% of its annual transfer taxes to a Housing Production Trust Fund. This mechanism has now generated over $ 400 million for affordable housing.
The second challenge was how could the District finance against such a volatile revenue source. Transfer taxes go up and down each year depending on the dollar volume of transfers and recordings. Rating agency coverage levels for similar sources elsewhere had required 3.5 or 4 times coverage for an A rating. The District, however, needed significant up-front funding to start its New Communities program, acquiring key sites in 5 neighborhoods. How could it borrow effectively?
We helped design a unique funding structure, with an additional year of liquidity to protect bondholders and a first priority lien on moneys deposited to the Trust Fund. This enabled the District to receive ‘A’ ratings from both Moody’s and Fitch with 1.5 times coverage.
CSG has helped design and implement three bond issues over a 5 year period, raising over $120 million for the New Communities program. The funding and liquidity mechanism proved successful and valuable through the vicissitudes of the financial crisis, with ratings confirmed or upgraded as a result.
District of Columbia: Anacostia Waterfront Initiative
The District developed an extraordinarily ambitious program for improving and developing 2800 acres of neglected waterfront land, with $10 billion of public and private investment over 30 years, including clean-up of a heavily polluted river, new recreational opportunities, mixed income housing and jobs. A key challenge, however, was to how fund the initial infrastructure in 5 distinct sections of the waterfront that would have to come first, before revenue-generating development. This is the great obstacle facing major, modern redevelopment efforts.
For the Deputy Mayor for Planning and Economic Development, we developed a detailed infrastructure financing plan to be able to start development in multiple sections of the Waterfront. This provided funding mechanisms for Southwest Waterfront, for The Yard to replace the Washington Navy Yard, for the new Nationals Baseball Stadium, and other key sites. A critical component was designing and implementing a $120 million bond issue backed by payments in lieu of taxes (PILOT) from the first privately owned U.S. Cabinet building for the Department of Transportation. We helped negotiate this mechanism involving the Federal GSA, the office developer, the developer of the Yard and the District.
For the Southwest Waterfront, we helped negotiate the development and financing agreements to limit the District’s financial assistance and any future risk, while funding over $200 million of public improvements. We assisted the District in the negotiations and funding for the new Stadium. Recognizing how the Stadium would catalyze development in many surrounding largely vacant blocks, we helped structure a Community Benefit District that will generate over $300 million for public libraries, schools and community improvements in the poorest neighborhoods of the District.
Both private and public development is substantially underway, with these areas creating major new opportunities within the District for each of the planned land uses, while limiting the extent of any investment by the District’s general fund.
Creating Affordable Loan Programs to Address Special Housing Challenges
Develop and implement specialized programs for our clients to meet extraordinary, urgent, and highly diverse needs following catastrophic natural disasters.
In Oklahoma after a string of devastating tornados we worked closely with our clients to develop and implement programs to rebuild and repair affected communities.
In response to a series of hurricanes in Florida we assisted our clients in developing programs targeted to disabled borrowers, first responders, and those with lost or damaged homes. These programs were subsidized with HOME, state trust funds, HFA cash, and “zero participations.” Managing these resources while preserving liquidity necessary to support the explosive growth in Florida single family production at the time, led us to propose a number of practices designed to keep the administration of the program manageable.
In the aftermath of hurricanes Katrina and Rita, we worked with our clients to structure and implement a series of initiatives designed to address the unprecedented need for repair, restoration, rehabilitation, and new construction of housing units in affected parishes. Single family funding strategies relied on traditional tax-exempt mortgage revenue bonds, taxable bonds (to serve borrowers not eligible for MRB loans and certain first responders), and tax-exempt Gulf Opportunity Zone Bonds to fund lower interest rate loans to reach certain borrowers not meeting MRB loan eligibility requirements. The effect was that highly affordable, targeted special loan programs were implemented by combining bond proceeds with issuer funds, HOME funds and moneys contributed by public benefit organizations, and home insurance subsidies were offered to eligible borrowers. We also helped design and implement a refunding to recapitalize and repair a series of heavily damaged multifamily projects.
After superstorm Sandy, CSG served as financial advisor to the NYS Governor’s Office of Storm Recovery in assessing numerous diverse proposals for a broad range of single family, community, and emergency programs and for infrastructure projects. A key feature of the work was to leverage billions of dollars of federal disaster funds with other available state, local, and private sources within strict implementation deadlines.
Complex sources of assistance funds, timely implementation, and comprehensive solutions – all hallmarks for CSG’s expertise.
Indianapolis Housing Authority (IHA): Innovative Program to Renovate Authority’s Public Housing Portfolio
IHA and its affiliate, Insight Development Corporation, sought to finance renovation for 1,321 units located in eight developments throughout the City. The agency needed to move quickly to meet obligation and expenditure deadlines associated with American Recovery and Reinvestment Act (ARRA) funds, and to take advantage of disaster credits available to the State of Indiana.
CSG was selected as the financial advisor to assist IHA with these mixed-finance developments, which include traditional Capital Funds, ARRA funds, 9% tax credits, Energy Performance Contract (EPC) financing, deferred developer fee, State funds, and other sources. CSG developed the project proformas, managed the investor solicitation process, secured disposition approvals, and prepared the required mixed-finance documentation, including Rental Term Sheets, Exhibit F, TDC, etc. CSG also prepared financing schedules related to the innovative EPC financing, which was self-financed using development fee earned by Insight to achieve greater cost savings.
CSG helped IHA/Insight successfully close financing for all eight sites within the necessary timeline, and Insight earned millions of dollars in fees and program income in connection with the financings that is being reinvested into several other affordable housing transactions in the City. The Welcome Home Initiative is now complete, and IHA was awarded NAHRO’s National Award of Merit in 2012 in recognition of the program’s accomplishments.