DALLAS — A vacant, hurricane-damaged residential tower in New Orleans will be rehabilitated with proceeds from Wednesday’s negotiated sale of $7.4 million of multifamily revenue bonds issued by Louisiana Housing Finance Agency.

The deal is structured so the developer can use the proceeds from the four-year bonds to meet the cash requirements of a federally insured mortgage loan during the construction and leasing phases.

The structure will allow developer and borrower Summit Garden Oaks Ltd. to realize the benefits of a federal 4% low-income housing tax credit, said Alysse Hollis, a partner with Peck, Shaffer & Williams LLP, which is counsel for Merchant Capital LLC, the sole underwriter.

“For some time, rates on taxable GNMA mortgage-backed securities have been lower than the rates provided by GNMA-collateralized tax-exempt bonds,” Hollis said. “This structure will allow borrowers to take advantage of available tax credits and that upside-down yield curve.”

If the structure is not unique, it is rare, according to Hollis.

“We believe this is the first time that publicly marketed tax-exempt bonds have been collateralized with the proceeds of a taxable FHA mortgage loan,” she said. “I believe we’ll see other multifamily developers using this type of financial structure while the yield curve remains inverted.”

Wednesday’s marketing resulted in a 0.75% interest rate through the first mandatory tender date of Nov. 1, 2012.

Foley & Juddell LLC is bond counsel for the Louisiana HFA.

The proceeds from the short-term tax-exempt bonds, rated SP-1-plus by Standard & Poor’s, will be used to satisfy the 50% cash requirement of the Department of Housing and Urban Development’s low-income housing tax-credit program.

As bond proceeds are drawn down to pay project costs, equivalent funds from a Federal Housing Administration taxable mortgage loan will be deposited into the escrow account. Mortgage loan proceeds in the account will be invested with the earnings used to pay debt service.

As a result, Hollis said, the bonds will be secured by cash through the anticipated construction phase. The bonds have mandatory calls, and the final debt will mature when the project is completed and leased.

“The ability to use bond proceeds in this way is a credit to some nice forward thinking by HUD,” Hollis said. “This idea has been floating around for about two years, but it really began taking shape a few months ago. We have been looking for the right project to do this the first time, and this project met all the parameters.”

The $9 million federally insured mortgage loan is provided through Prudential Huntoon Paige Associates Ltd.

The lender currently services nearly 1,400 multifamily and senior housing project loans totaling almost $12.5 billion, including $2 billion of FHA-insured mortgage loans and Fannie Mae mortgage loans of more than $10.4 billion.

The seven-story Garden Oaks tower is structurally sound, but has been vacant since it was damaged by Hurricane Katrina in 2005.

The tower will be totally rehabilitated to provide subsidized apartments for low-income elderly residents.

Work on the project will begin soon and is scheduled to be completed within 12 months.

Total cost of the rehabilitation effort is $6.3 million. The total project cost is estimated at $13.4 million.

The Low Income Housing Tax Credit Program is designed to generate equity capital for the construction and rehabilitation of affordable rental housing.

However, tax credits alone are not always sufficient to allow developers to reduce the debt burden to a point where project costs can be paid solely through affordable rents allowed by LIHTC regulations.

Often, developers must seek additional subsidies to make a low-income housing project feasible.

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