The New York City Housing Development Corp. hopes to market $79.4 million of tax-exempt fixed-rate bonds this week to finance the construction of affordable housing and refinance outstanding debt. But given turbulent market conditions, the bonds may not be fixed rate - and with volume cap scarce, the amount offered may be only around $27 million.

The HDC has used up its allocation of private-activity bond volume cap and has applied for $52 million more, but as of last week that request had not been approved by the state's budget division. Last month, the agency received an additional $93.6 million allocation of private-activity bond volume cap that was made available under the federal housing bill that passed in July, but it needs more to get several deals done by the end of the year.

The HDC plans to issue two series of bonds on its open resolution: Series 2008L and Series 2008M. The bonds will be issued as serial and term bonds with maturities out to 2038. The corporation uses its open resolution for pooled financings rather than standalone projects. It has sold $3.86 billion of bonds since 1993 on its open resolution to provide mortgages. Bonds are backed by the combined mortgages.

The proceeds from the SeriesM bonds, which are expected to be issued at a par of $67.9 million, will be used to finance four low-income housing rental projects in Brooklyn and the Bronx. The developments will be financed under HDC's low-income affordable marketplace program, or LAMP, and most of the units are set aside for households earning no more than 60% of area median income.

Those projects all plan to use 4% federal low-income housing tax credits, or LIHTCs, and have commitments from investors to buy the credit. But some of those commitments expire at the end of the year, which has given rise to a sense of urgency to get the deal done. The market for the credits has softened over the past year.

Richard Froehlich, HDC's general counsel and executive vice president for capital markets, said the four projects have commitments from investors to buy the credits at between 85 to 93 cents on the dollar.

"That's why we want to get the deal done," he said. "It is better than what we're seeing going forward."

Tax credit rates look to be headed to the low 80-cent range, he said. The once-robust LIHTC market provided companies a way to reduce their tax burden while helping provide equity for affordable housing.

Freddie Mac and Fannie Mae were key investors in the market until they were overwhelmed by the mortgage market meltdown. Freddie, for example, purchased $450 million of the tax credits last year and $1.3 billion in 2006 but has not and doesn't expect to purchase any in 2008. Demand for the credits has fallen along with corporate profits and their tax burdens, pushing down the price.

When approving the Series M bonds, the HDC took an unusual, though not unprecedented, step of approving five projects, although the bonds will only finance four. The fifth project was approved in case one of the others drops out. The corporation has done this before for end-of-the-year deals because it would lose the volume cap allocation if it did not use it, Froehlich said.

Higher rates on fixed-rate bonds led the HDC to increase its maximum allowable interest rate to 7.5% on fixed-rate debt, a 75-basis-point increase. Even with this cushion, the agency gave itself the possibility of issuing the bonds as convertible option bonds which would be issued as variable-rate demand bonds that would carry a maximum rate of up to 4.5% until June 30, 2009. If the HDC decides to sell them in convertible mode it would issue a new preliminary official statement.

Each of the developers has to provide a letter of credit during the construction phase of their projects, but the letters of credit are for the benefit of the corporation.

The permanent financing of the projects will be enhanced with mortgage insurance from the State of New York Mortgage Agency or the New York City Residential Mortgage Insurance Corp.

If the HDC sells the bonds as variable-rate debt, it will provide its own liquidity.

The $11.49 million of Series L bonds will be used to refinance outstanding bonds for two affordable housing projects: Tanya Towers Development and Tivoli Towers Development.

Hawkins Delafield & Wood LLP is bond counsel. JPMorgan will manage the sale.

Standard & Poor's hasn't yet rated the bonds, but it rates the HDC's open resolution AA with stable outlook.

The rating is based on "the combination of [HDC's] strong asset management and the strong performance of [its] portfolio in relation to the important need that they serve because the affordable housing market is so much in need in New York City," Standard & Poor's director Valerie White said.

The affordable housing market in the city is different than some other markets because demand is so high and the developments have waiting lists to get in, she said, adding that developers are "not going to be trying to fill vacancies."

Moody's Investor Service assigns the issuer its Aa2 rating. Fitch Ratings does not rate the credit.

The corporation has sold $8.65 billion of bonds since 1999, including $864 million of bonds this year, according to Thomson Reuters.

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