DALLAS — Faced with dwindling federal funds, the Housing Authority of the City of El Paso, Texas is combining private investment, tax credits and private activity bonds to rehabilitate or replace aging federal housing projects.
In the process, ownership of the properties will transfer from the federal government to a public facilities corporation under a program called the Rental Assistance Demonstration initiative that Congress authorized in 2011.
"The Rental Assistance Demonstration initiative is a game changer that will transform the way we think about public housing well into the future," said Gerald Cichon, El Paso Housing Authority chief executive. "The benefits to the City of El Paso are unprecedented, bringing $500 million in public and private investment to our city with a $1 billion local economic impact."
The authority recently closed on Phase 1 of one of the largest rental assistance rehabilitation projects in the country. The April 9 transaction also marked the largest single issuance of housing tax credits ever approved by the Texas Department of Housing and Community Affairs, officials said.
The tax credit program is funded by the U.S. Treasury Department and is overseen by the Internal Revenue Service. In February, TDHCA approved $8.4 million of credits for the El Paso project.
Under RAD, ownership of the traditional multi-family housing projects transfers to a PFC backed by private investors. HACEP continues to manage applications for the low-income housing. When the financing ends, the property reverts to HACEP's ownership, Cichon said.
"We're government and we're going to stay government," Cichon said. "But we're going to run like a private company."
Starved for funding to operate and maintain aging housing complexes, growing numbers of local housing authorities have tried to reduce their public housing stock or get out of the business altogether.
"Public housing is a failed business model," Cichon said. "This allows us to step away from a heavily regulated business model. There's a lot more freedom for us. El Paso will receive the largest influx of funds to build affordable housing units in decades."
Conventional public housing is not permitted to carry any debt, limiting options to repair or rehabilitate existing properties, according to the TDHCA. Under RAD, local housing authorities can access financing, including tax credits and private sector investment.
"I had kind of referred to it as a privatization, but it's not really a privatization," said Bill Avila, bond counsel at Bracewell & Giuliani who worked on a $125 million private activity bond issue for the authority. "It's really more of a public-private partnership."
HACEP used to expect between $11 million to $12 million in federal revenue annually for major maintenance projects such as replacing roofs or repairing elevators. Such funding has fallen to about $7 million per year, Cichon said.
"We have a $50 million shortfall in five years," Cichon said. "Over 20 years, it's $200 million."
In some cases, the housing complexes are being demolished and replaced while others are undergoing remodeling. The oldest project in HACEP's inventory, the Tays Place project built in 1941, will be replaced.
"The benefits, ranging from asbestos abatement to providing improved accessibility and modern climate control, are very real benefits to these residents," said Tim Irvine, TDHCA executive director.
Nationwide, about $26 billion of projects administered by public housing authorities are expected to use the new financial mechanism for rehabilitation.
"For too long, local housing officials tasked with preserving public housing and creating new affordable units have been constrained by tight federal budgets and tough economic conditions that made local funding scarce," Julian Castro, secretary of the U.S. Department of Housing and Urban Development, said in an April prepared statement.
"The Rental Assistance Demonstration turns that funding stalemate on its head -- allowing public housing authorities and owners of other HUD-supported properties to access private financing to rehabilitate and preserve existing affordable housing - expanding opportunity in communities like El Paso and across the nation," Castro said.
San Francisco has already trumped El Paso with a $1.4 billion RAD program that will leverage $780 million in investor equity. San Francisco Mayor Edwin M. Lee said the program will rehab 4,584 public housing units for 5,400 low-income San Franciscans.
HACEP's five-year remodeling project is expected to cost about $1 billion. HACEP is the largest public housing authority in Texas.
Phase 1 of the RAD project represents about 30% of HACEP's housing units. The first of three phases is valued at about $250 million. That cost is covered in part by $125 million of PABs that will be retired upon completion of the construction. Thus, the contractors provide up-front financing for the construction, with reimbursement from the bond proceeds, Avila said.
"You wind up with a project that has $250 million of rehab and only $60 million worth of debt," Avila said.
The first phase of the project will provide major renovations to nearly 1,600 public housing apartment units among 13 properties in El Paso. Those make up 30% of HACEP's entire ownership of housing units.
Bracewell's San Antonio partners Jane Macon and Carey Troell worked with Avila on the bond deal.
"This project will run about $1 billion," Macon said. "There's no way that HUD would be able to fund that. The private sector is basically taking on the mantle to renovate aging housing stock."
One key to the deal was bundling PABs for several complexes, rather than issuing them for each complex, Avila said. The Texas Bond Review Board apportions PABs, rationed by the IRS, to applicants throughout the state.
The issuers took advantage of a provision in state law that allows bundling of PABs after Aug. 15, Avila said.
"On a multi-family project, there's a $20 million limit," Avila said. "On Aug. 15, the collapse date, you can apply for as much as you want. So, we applied after Aug. 15."
In 2014, Texas PAB volume grew $169.2 million or 6.8% to $2.65 billion, according to the BRB. The total size of the PAB program, including 2014 volume cap and carry-forward, was $5.28 billion, an 11.9% increase from the 2013 total. As of November 15, 2014, $1.05 billion had been allocated and application requests totaled $2.8 billion, an increase of 44.2% from 2013.
Under legislation approved by the 2015 Texas Legislature, bundling of PABs will be allowed earlier in the fiscal year.
House Bill 2878 by Rep. Marisa Marques, D-El Paso, allows HACEP to aggregate more than one qualified residential rental project into a single, combined project as part of the RAD program.
HACEP has begun the arduous process of relocating about 20,000 residents from their current units to other housing around the city so that their homes can be remodeled or rebuilt. At an estimated cost of $35,000 to $80,000 per unit, contractors will eliminate asbestos, replace deteriorated ducts, switch from evaporative coolers to refrigerated air units, and install new cabinetry and Energy Star appliances.
The cost of physically moving tenants from the housing complexes ranges from $2,000 to $3,000 per family and requires close attention to detail from a staff of about 20 employees at HACEP.
"We have to move them, pack them and set them up within 12 hours," Cichon said. "They have to be able to go to bed that night, and some of these people are elderly or have disabilities."
Once the construction is complete, the residents will return.
The entire $1 billion project is expected to be completed in 2019.
Created in 1938, HACEP serves more than 40,000 El Pasoans, making it the 14th largest PHA in the United States. It provides 6,100 public housing units, 495 Section 8 New Construction units, 1,288 tax credit and non-subsidized units, and 5,600 Housing Choice Vouchers.
Since Congress approved 60,000 public housing units for RAD in fiscal year 2012, HACEP is one of the largest public housing authorities in the U.S. to take advantage of the initiative.
According to Moody's Investors Service, housing finance authority multifamily performance in 2014 was strong as loan delinquencies fell to 0.30% from the 0.50% range over the past three years. Loans in foreclosure, workout or real estate owned, have significantly increased to 0.71% from 0.48% of outstanding loans, but still remain low, analysts said.
"The low interest rate environment, high occupancy levels and tight supply should produce high valuations for multifamily properties," they added.
Since Congress approved the RAD demonstration in November of 2011, early results show it is generating significant additional capital for public and assisted housing, according to HUD. HUD has made awards to 60,000 public and assisted housing units in more than 340 different projects across the country. Through the awards, housing authorities have proposed to generate about $3 billion in capital repairs by leveraging private debt and equity.
