East Cleveland residential housing bonds default
DALLAS -- Although there were funds to cover interest on $5 million of residential housing bonds issued for an East Cleveland project, a majority of bondholders directed the trustee to file notice of default and future payments are in doubt.
S&P Global ratings downgraded the bonds to D from B-minus to reflect nonpayment of interest due on Sept. 1, said S&P Global Ratings credit analyst Aulii Limtiaco.
“While funds held in trustee accounts were sufficient to cover the interest payment, the trustee, upon the direction of the majority of the bondholders, has issued a notice of nonpayment,” S&P wrote. “It is unclear whether payment will be made within the next 30 days, or which remedies the project owner will put in place in the near future.”
On Sept. 1, the Cleveland-Cuyahoga County Port Authority filed a notice of non-payment on the Municipal Securities Rulemaking Board's EMMA website stating that the borrower had “failed to make payments to the Trustee in amounts sufficient to pay interest on the bonds.”
The Trustee and certain holders of the senior bonds are reviewing the financial and operational condition of the project, the notice said.
The bonds were issued for LEDAHF-East Cleveland LLC by the Cleveland-Cuyahoga County Port Authority in 2015. The Linked Economic Development & Affordable Housing Foundation Inc., is a Virginia based non-profit organization that promotes the availability of affordable housing.
The current owner is Social Housing, which acquired the project from LEDAHF in 2016. Alliance Fund Management LLC, an affordable housing developer founded in 2012, is asset manager. Social Housing and Alliance Fund Management are managed by the same principals. LEDIC Management Group LLC, which manages 26,000 multifamily units, serves as property manager.
The bond proceeds were used to acquire the Forest Hill Park Apartments Project in East Cleveland.
The bonds are secured on rents from residents. In 2016, the project's expenses were 34% higher than forecasted and net rent collection was 22% below, which resulted in an operating loss of $177,010, and insufficient net operating income to cover the project's debt service payments. As of December 2016 the project had an occupancy rate of 70%, delinquent rent of $67,210 and a waiting list of 21 applicants.
As of June 28, 2017, $115,066 of the $176,853 September 2017 senior debt service payment for the senior bonds was funded, and $9,669 of the $22,218 subordinate debt service payment was funded, according to S&P.
The rating agency had previously downgraded the bonds multiple notches to junk over the projects poor operational performance. S&P said that the project's coverage of projected potential losses was highly vulnerable, indicating limited recovery of principal to bondholders in the event of a default.
The bonds were underwritten by Raymond James & Associates and CFG Capital Markets LLC.