California markets its second deal using millionaire's tax credit
California comes to market Tuesday for the second time with its income tax revenue bond credit for a program that funds housing for homeless people with mental illnesses.
Joint bookrunners Citi and Raymond James lead a syndicate that will price $450 million in taxable social bonds from the California Health Facilities Financing Authority. Orrick is bond counsel and Nixon Peabody is disclosure counsel. Montague DeRose and Associates is municipal advisor.
The deal marks the second sale under the No Place Like Home bond legislation signed by former Gov. Jerry Brown in 2016. The state’s inaugural sale — also taxable — was for $500 million in November 2019.
Funding provided through the program is helping to fast-track projects to address what U.S. Department of Housing and Urban Development Secretary Ben Carson described as “at crisis level” in California in the agency’s annual report on homelessness.
"As we look across our nation, we see great progress, but we’re also seeing a continued increase in street homelessness along our West Coast where the cost of housing is extremely high,” Carson said.
HUD’s annual count found that 567,715 persons experienced homelessness on a single night in 2019, an increase of 14,885 people since 2018.
Homelessness increased in California by 21,306 people, or 16.4%, and roughly half of that number were people considered to be experiencing long-term chronic homelessness, according to HUD. The agency does an annual national count on a single day of people considered to be homeless. It released the results in March.
Susie Coliver, a principal with Herman Coliver Locus Architecture, designed 1064 Mission Project, a 265-unit project in San Francisco costing $160 million that the state highlighted in its online road show.
Coliver called the project one of the most challenging and stimulating she has worked on in the firm’s 40-year practice. In addition to the housing, it includes a dozen offices for on-site social service providers, a 9,000-square-foot community health clinic, offices for the 80-person staff of the San Francisco Homeless Outreach team, a 6,000-square-foot culinary training program, two interior courtyards and a privately owned public open space.
"1064 Mission has the most complex use of spaces, the largest number of clients and others who serve in the role of clients, the most diverse assortment of adjacent and nearby neighbors with an interest in what transpires on the site, and the most overlapping set of public entities and oversight agencies at both the local and state level, of any multi-use project we have ever tackled," Coliver said.
Typically such projects take five to seven years from inception to opening, but the Mission Street project will be completed in four years, Coliver said.
Among the reasons Coliver cited for the relative speed of the project are that the federal government provided the land for the project, 1.1 acres in the middle of downtown San Francisco, for $1 with the proviso that the site be used exclusively for people experiencing homelessness, in perpetuity; and that it would be completed within 36 months after the land disposition agreement had been signed.
“The only way to meet this crazily fast schedule was to have the mayor’s support in demanding that the various review agencies make the project a super top priority, and in demanding that they all play nicely together,” Coliver said. “The city and the developers elected to utilize factory-built housing, which may have saved three to five months as well, but it also added a level of complexity, which cannot be overstated.”
The No Place Like Home program gives the state $2 billion in bond authority to provide funding to cities and counties to develop permanent supportive housing.
Bonds are repaid with revenue from the Mental Health Services Act, a measure approved by voters in 2004 that levies a 1% tax on personal income over $1 million to be used for mental health programs.
A study done on the connection between mental illness and homelessness conducted by the California Policy Lab at UCLA found that 78% of unsheltered homeless people had a mental health condition.
The California Department of Housing and Community Development disbursed $427 million from the NPLH program in March.
“The No Place Like Home awards are a key part of the state’s continued collaboration across all levels of government and communities to take urgent, meaningful action to address California’s homelessness crisis,” Lourdes Castro Ramirez, secretary of the Business, Consumer Services and Housing Agency, said in a release.
Two rounds of funding have already been awarded under the program, according to Jennifer Seeger, deputy director of financial assistance for the California Department of Housing and Community Development, who spoke during the online road show.
The first round of $757.7 million went to counties with at least 5% of the state’s homeless population, which include Los Angeles County, Santa Clara County, San Diego County and San Francisco County, Seeger said. The second round of $370.9 million was awarded to the remaining counties, she said.
The proceeds of the 2020 bonds will primarily fund the larger metropolitan counties through the first quarter of 2020.
Additional new money or refunding bonds can be issued provided that the total debt service on all bonds and administrative expenses does not exceed $140 million per year, she said.
Following next week's deal, there will be $1.05 billion remaining under the bond authorization, said Julie Giordano, the California treasurer’s assistant director of public finance.
Any increase to the bond authority would need to satisfy the California constitutional debt limit, which requires voter approval or for the financing to meet the constitutional debt limit, Giordano said.
The No Place Like Home bonds were initially authorized in legislation, only to be tied up in a legal validation challenge that led lawmakers to put the bond authorization before voters in November 2018. Proposition 2 was approved with more than 63% of the vote.
The bonds are secured by loan payments from the Department of Housing and Community Development to the CHFFA. HCD will make the loan payments from the service contract payments it receives from CHFFA for providing services under the service contract. CHFFA will pay the service contract payments from dedicated personal income tax revenues. HCD irrevocably pledges its right to receive service contract payments to CHFFA as security for its obligations under the loan agreement. HCD's obligation is unconditional.
The all-in true interest rate on last year’s 15-year fixed-rate NPLH bonds was 2.77%, with yields to investors ranging from 1.896% for the 2021 maturity to 3.034% for the 2034 maturity, according to the treasurer’s office.
The 10-year came in at 2.584%, a 79 basis point spread to the 10-year Treasury on the date, according to Refinitiv historical data.
The 15-bank syndicate generated in excess of $2.3 billion of total orders from over 100 unique investors, including $84 million directly from international investors.
The deal attracted $596 million in orders from 13 investors with environmental, social and governance and socially responsible investing objectives, California Treasurer Ma said following last year’s sale. It also drew $200 million in orders from 18 local government investment funds, including 14 from California.
“This deep and broad base of investors demonstrates the market’s support for the No Place Like Home program,” Ma said last year.
The state will be pricing the bonds in a COVID-19 impacted market this year.
The bonds are rated Aa3 by Moody’s Investors Service, and AA-minus ratings by both Fitch Ratings and S&P Global Ratings.
For Moody's and Fitch, the ratings are one notch below their California general obligation bond rating; S&P assigns the same rating as California GOs.
The rating “reflects the high resiliency of the pledged revenue stream, a relatively volatile personal income tax on higher earners that is expected to experience strong growth over time consistent with expected growth in the California economy,” according to Fitch, which affirmed its the rating on the original No Place Like Home bonds.
“The rating assumes leveraging up to the maximum annual service contract payments permitted in statute and approved by voters, of $140 million per year to pay debt service and full issuance of the $2 billion authorized by the No Place Like Home Act of 2018,” Fitch analysts wrote.
Fitch says the its rating is capped at California's AA issuer default rating, because the state collects the pledged revenues and the bond structure relies on transfers and true-ups between the state General Fund and the Mental Health Services Fund, from which service contract payments will be paid.