The New York City Education Construction Fund plans to competitively market $136.4 million of tax-exempt bonds on Thursday to complete the financing for construction of two public schools at an apartment tower and retail complex.
Nixon Peabody LLP is bond counsel and A.C. Advisory Inc. is financial adviser on the deal, which will be marketed as term bonds maturing in 2041.
The issuer sold $53.8 million of taxable Build America Bonds for the schools last April — the same month construction began. The project is being built on the former site of a public school at 250 East 57th Street in Midtown Manhattan and will include the 730-seat Public School 59 and the 1,400-student High School of Art and Design, which are scheduled to open next year.
Adjacent to the schools, developer World Wide Holdings Corp. will build a 660-foot-high residential tower and 112,000 square feet of retail space. The developer is leasing the site from the ECF for 75 years. The total project is expected to cost $700 million and will use commercial financing for residential and commercial space.
World Wide Holdings executive vice president David Lowenfeld said the program was a “win-win” for the city and the developer. “At a time of economic constraints it’s one of the foremost programs of the city to unlock underutilized or undeveloped assets,” he said. “It brings private sector vision and execution and marries it together with public sector expertise in the financing markets.”
The developer rehabilitated an existing building nearby to serve as a temporary school for P.S. 59 and then demolished the existing public school. The new school building will house both the elementary and high schools. Upon its completion, the developer will demolish the existing high school and build the residential tower.
The ECF uses lease payments and payments in lieu of taxes from the non-school portion of the project and other so-called combined occupancy projects to pay debt service on its bonds. The fund, which has developed 16 combined-occupancy projects to date, is an infrequent issuer, having sold $521.9 million of bonds in nine issues since 1989, according to Thomson Reuters. In 2010, it received payments from non-school portions of its projects totaling $18.4 million, according to the preliminary official statement.
If payments from the developers combined with any BAB subsidy payments are insufficient to pay debt service, the city is obligated to pay the difference under a rental agreement with ECF. The city it will do precisely that beginning next year, according to the POS.
“It is currently expected that ... commencing in the city’s fiscal year beginning July 1, 2012, and continuing for several years thereafter, the revenues derived from the non-school portions of ECF projects will not be sufficient fully to pay debt service on the outstanding bonds, and that the city will be required to make rental payments under the school leases in the amount of the shortfall during those fiscal years,” the POS said.
ECF executive director Jamie Smarr said the payment schedule gave the developer five years to build and lease up the tower before making full payments that would cover full debt service. As an additional layer of security, the New York comptroller can intercept state school aid due to the city to pay debt service on the bonds.
Moody’s Investors Service rates the bonds Aa3 with stable outlook derived from the city and state’s general obligation ratings. Standard & Poor’s rates them AA-minus with a stable outlook.
