San Francisco Begins First Phase
of RAD Public Housing Initiative
Monday, November 23, 2015 marked the closing of the financing for the last of the 15 properties in the first phase of San Francisco’s ambitious program to revitalize its public housing properties through the U.S. Department of Housing and Urban Development’s Rental Assistance Demonstration (RAD) program. This was also the date on which ownership of the 15 properties (but not the land) officially transferred to eight owner/developer teams who are now charged with beginning rehabilitation of the 1,422 apartments by the end of 2015. A second phase of SF RAD consisting of 2,044 apartments in an additional 14 properties is scheduled to close and begin renovations in late 2016. Together the two phases of SF RAD will mean over $1 billion in net new funding resulting in approximately $750 million in improvements to outdated buildings that make up the bulk of San Francisco’s public housing. [For more on the background of the SF RAD initiative, click here.]
The SF RAD effort has required intensive collaboration, ambitious funding commitments, and innovative financing approaches from the organizations involved including HUD, the San Francisco Mayor’s Office of Housing and Community Development (SFMOH), the San Francisco Housing Authority (SFHA), the developer teams rehabilitating and managing the properties, the California Housing Partnership Corporation (CHPC) and the project’s equity investor and lender, Bank of America Merrill Lynch (BAML).
City Stretches Resources Through Innovative Financing Plan
As the scope of the long-deferred rehabilitation needed on San Francisco’s older public housing buildings emerged, it became clear that funding well beyond what RAD could provide was necessary to meet the properties’ physical and operating needs. With input from CHPC and HUD and the support of the Housing Authority, SFMOH took a number of critical steps including:
- Converting a number of the public housing buildings to voucher funding using the combined authorities of RAD and Section 18 of the United States Housing Act of 1937.
- Project-basing 1,587 new vouchers created through the RAD and Section 18 conversions, enabling the portfolio to leverage an estimated $265 million in new private debt for both phases.
- Capturing the tax credit value of the existing buildings combined with the value of the $756 million in estimated renovations, results in estimated net equity investments of approximately $750 million in federal 4% Low Income Housing Tax Credits for both phases.
- Soliciting lender and investor bids for the entire Phase I portfolio, which has already resulted in BAML committing $285 million in equity for Phase I based on outstanding pricing of $1.23 for each $1.00 of tax credits.
- Committing up to $90 million of City funds to fill the remaining gaps, with $39 million for Phase I as shown in the table below.
San Francisco is the first jurisdiction to use the portfolio approach allowed under RAD 2.0 in combination with project-based vouchers and RAD funding based on each property’s financial needs. CHPC worked extensively with SFMOH, HUD, SFHA, and the eight development teams to align funding resources with rehabilitation scopes while assembling the financing. Dave Kiddoo, Senior Housing Finance Consultant at CHPC and primary advisor and day-to-day manager of the SF RAD financing plan, commented “The process of using RAD in these new and untested ways required all parties to operate outside their comfort zones, with an immense amount of cooperation and good will needed to make the plan work. In the end, HUD demonstrated just enough flexibility to make RAD work for San Francisco while still staying within statutory and regulatory limits. SFMOH and the developer teams dealt remarkably well with the challenges of HUD regulations and processes they had never had to work with before, especially related to the financing and conversion of public housing. Tenants and advocates dealt with intense fear and anxiety about the changes but successfully negotiated workable protections with the City and the developers guaranteeing their right of return and retention of their rights more broadly. It was a great collaborative effort.”
Portfolio Approach to Selecting Investor and Lender for SF RAD Phase I
Bank of America Merrill Lynch (BAML) emerged as the successful bidder out of SFMOH’s innovative portfolio debt and equity bidding process. BAML’s highly competitive proposal included a portfolio-wide price of $1.23 per dollar of 4% federal tax credits, $20 million in subordinate forgivable debt, and a huge volume of competitively priced construction and permanent tax-exempt bond debt, with the permanent bonds subsequently purchased by Freddie Mac. Ari Beliak, Vice President of Community Development Banking at BAML, explains that SF RAD was a uniquely appealing investment for a number of reasons: “First and foremost was the immense impact that SF RAD would have on San Francisco and its residents; second was the significance of San Francisco from a business and community investment standpoint; third was that the size made it a highly efficient way to achieve a large impact; and finally the complexity made it a challenge but also a historic opportunity.”
SF RAD Portfolio Phase I Sources and Uses of Financing
Working with Tenants to Ensure Smooth Transition and Temporary Relocation
SFMOH and SFHA worked to address tenant concerns by organizing numerous tenant meetings and providing additional services. The development teams and service providers also conducted extensive on-site outreach. Each site had working groups made up of tenants, property managers, advocates, and the development team to familiarize tenants with new leases, create new house rules, share information on temporary relocation, and establish tenant governance. Ann Griffith, Senior Program Director at Enterprise Community Partners helped engage this diverse group of stakeholders in a successful process. Temporary relocation in San Francisco’s extremely tight and expensive rental market relies in part on vacant units in SF RAD Phase II buildings. SFMOH provided funding to repair these vacant units so that they would be habitable interim housing during Phase I rehabilitation. SFHA and SFMOH also launched a vigorous campaign to encourage tenants to add all resident family members to their leases, ensuring that all residents would be able to remain when new management took over.
READ ON for highlights of specific properties benefiting from SF RAD…