The New York State Housing Finance Agency goes to market tomorrow with the third and final installment of a multi-year bond financing for a new 60-story apartment building in Manhattan, a deal helped by the fact that a letter of credit was obtained before the credit crunch took hold.

The $134 million offering of floating-rate bonds will help finance Silverstein Properties Inc.'s 1,169-unit Silver Towers at 42nd street and 11th Avenue.

Asked whether or not it would be possible to do a project of this size today considering how difficult it is to get construction financing, Silverstein spokesman Bud Perrone said, "probably not."

HFA executive vice president for housing programs and policy Marian Zucker said that "absolutely" it would be harder to do a deal like this today because LOC providers have pulled back from new project financing.

"This deal was originally committed to by the [letter of credit provider, Bank of New York Mellon] back in 2007 and the market for commercial real estate lenders has changed significantly since then," Zucker said.

The direct-pay letter of credit covers principal, interest and also any tenders. The LOC expires on July 19, 2011. To finance a $609 million aggregate mortgage, the HFA sold $268 million of bonds in 2007 and $241 million in 2008. The mortgage is less than the total issuance of debt because $34 million of bonds issued in 2008 will be redeemed this week.

Merrill Lynch & Co. will lead manage the sale of the variable-rate bonds that mature in 2041. BNY Mellon Capital Markets LLC will co-manage the deal as well as serve as remarketing agent.

Bondholders may tender their bonds on seven days notice while they are in variable-rate mode. The bonds are also subject to mandatory tender and mandatory redemption.

Hawkins Delafield & Wood LLP is bond counsel.

Moody's Investors Service rates the bonds Aaa/VMIG-1 based on the letter of credit, the creditworthiness of Bank of New York Mellon and the structure and legal protections of the transaction.

Money market funds are expected to be interested in buying the debt.

Housing bond issuance nationally dropped dramatically last year, falling to $17.84 billion from $30.66 billion a year earlier, according to Thomson Reuters.

Housing bond issuance is on track this year to plunge even further: issuance in the first half was $4.01 billion, roughly half what was sold during the first half of 2008 and a quarter of what was sold in the first half of 2007.

"It's really been a tough market for about a year and its just been getting tougher over the last few months," said Garth Rieman, director of housing advocacy and strategic initiatives at the National Council of State Housing Finance Agencies.

"With everything that's going on in the overall economy there are fewer investors for the critical resources people use to develop affordable housing, namely tax-exempt housing bonds and housing credits," he said. "Similarly, because of a lot of what's going on in the economy, multifamily lenders are tightening their underwriting standards and don't have as much money to lend."

Unemployment, loss of income and general nervousness on the part of would-be renters has also made for a more uncertain market, according to Rieman.

Silverstein's spokesman projected an upbeat attitude for the future of Silver Tower but acknowledges that it's a tougher environment.

"We are clearly in difficult economic times," Perrone said. "By designing a first-class product with the look and feel of a luxury condominium, we hope and expect to attract the rental population that's out there today."

The project, which includes 234 apartments set aside for lower-income tenants, is 90% complete and is expected to be finished in early 2010. The apartment complex began renting out apartments this summer and has rented out 125 units so far, Perrone said.

New building permits in the city issued in the first five months of 2009 fell to 720, a 48.5% drop over the same period in 2008, according to buildings department data published this month in The Real Deal magazine.

The real estate boom of the past few years brought a dizzying number of housing projects to the city and the HFA, and the New York City Housing Development Corp. didn't have enough debt to allocate under the private-activity bond volume cap to keep up with the demand.

"That's not the case this year," Zucker said. Though the HFA has a "robust pipeline" of projects, it is looking at more preservation deals and fewer large 80/20 projects, like Silver Towers, projects that reserve 20% for affordable units.

"In some ways it's easier to do preservation deals, existing deals that are being acquired and renovated," she said.

Though Zucker said the agency has had conversations with potential borrowers about some large construction projects, there is "much less demand for that type of financing" as some developers have adopted the "perspective [that] now is not a good time to put a shovel in the ground."

HFAs across the country are still waiting for the U.S. Treasury Department and the Department of Housing and Urban Development to announce a program in conjunction with Fannie Mae and Freddie Mac that market participants hope will boost the affordable housing bond market.

"It would be very helpful if the [Obama] administration came forward with an initiative that provided more liquidity both to help new bond issuance and to support some of the existing variable-rate debt that HFAs have issued," Rieman said. "We're hopeful they might be able to come forward with something soon."

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