About half of the bond-financed workforce housing projects owned by the California Community Housing Agency are distressed or in default — but recovery remains possible, says the agency's municipal advisor.
"There are issues with that portfolio for sure," said Michael LaPierre, president of GPM Municipal Advisors, LLC, a Walnut Creek, Calif.-based firm that acts as CalCHA's municipal advisor and serves as staff for the agency.
"There are several reasons [for the problems], not the least of which is that we acquired three of the assets right before COVID," LaPierre said. "Right out of the gate, many of the assets were struggling to make it and are still trying to recover today."
CalCHA is one of a few California joint powers authorities that has issued billions of high-yield, unrated bonds for housing for middle-income "essential" workers like teachers and police officers. The market boomed between 2019 and 2021, when interest rates were low and debt was cheap. The
Over the past few years, the market has all but disappeared amid rising interest rates and as many of the projects face challenges tied to overly rosy projections.
CalCHA, a joint powers authority created in 2019, owns 14 of the workforce housing projects — financed with a total of $2.5 billion of bonds — under its Affordable Housing Asset Ownership Division.
Seven of the 14 have either defaulted, dipped into reserves to make payments or reported some other type of impairment, according to filings on Electronic Municipal Market Access.
Nevertheless, LaPierre said recovery remains possible.
"A lot of people think that but for the timing, the projects would be doing great, so I do expect them to recover over time," he said. "And seven of them are providing workforce housing in very high-rent areas in California — which was the whole reason" for doing the transactions, he said.
GPM serves the same dual roles, as MA and staff, for the Public Finance Authority, the national conduit issuer based in Wisconsin. Like CalCHA, the PFA operates an asset ownership program in which it issues bonds and then uses the proceeds to acquire the assets. Both portfolios are distressed.
Of the nine assets owned by the PFA,
LaPierre defended the firm's work with the PFA and CalCHA, saying they don't perform financial analysis and are just "a small part" of the "village" that puts together bond transactions.
"We're not financial advisors; our role is to serve as staff," he said. "We need bond counsel, we need underwriters, we need institutional investors, the Nuveens and BlackRocks that have the mindset to evaluate the risks," he said. "These official statements are 300 pages and the risks are all laid out there."
Jefferies was the underwriter on most of the CalCHA deals. Orrick, Herrington & Sutcliffe is bond counsel. Catalyst Housing Group was the developer and asset manager for most deals.
The deals are brought to CalCHA and GPM by underwriters and the developer/asset manager, he said.
"These transactions are about 95% baked before they contact us," LaPierre said.
"We control nothing of that whole process other than our client saying it meets [the local government's] criteria," he said. "Everything we touch has a public benefit."
A failed
In March, Serenity at Larkspur was sold to a market-rate developer for $170 million. Senior bondholders face a roughly 21% haircut, according to a
Larkspur officials, meanwhile, criticized the project for its high fees, missed occupancy targets and property tax losses for the city.
"There has been a transfer of $13.9 million from taxpayers to institutional bondholders over this five-year period," officials said in a
In addition to Larkspur, two other CalCHA projects face substantial "going concern" doubts: Annadel Apartments, financed in 2019 with $194 million of bonds, and Mira Vista Hills Apartments, which has $95 million of bonds issued in 2021, according to CalCHA's
Other stressed credits in the portfolio are: The Arbors Apartments, with $60 million of bonds issued in 2020; Creekwood Apartments, with $165 million of bonds in 2021; The Exchange at Bayfront Apartments, with $135 million of bonds issued in 2021; and Twin Creeks Apartments, financed in 2022 with $101 million of debt.
Regulators have taken note of the workforce housing transactions. In a
"We have seen certain municipal entities cede authority for issuing conduit bonds to privately run entities that are the leading issuers of defaulted bonds," Sanchez said. "When we see deal structures and arrangements like this, it is questionable whether the appropriate gatekeepers (including [municipal advisors], [broker-dealers] and attorneys) are fulfilling their responsibilities," he warned.
There has so far
LaPierre said CalCHA, which did its last workforce deal in 2022, has no plans to finance future projects.
"I just think we've learned some stuff and the market has changed," he said. "It's not to say we wouldn't; we'd have to see what the opportunity looks like."
GPM, which has four employees, has three clients: the PFA, CalCHA and the California Public Finance Authority, LaPierre said. It lacks a website because the firm is "not out there promoting ourselves," he said.
Despite the PFA's defaulted asset ownership portfolio, LaPierre credited the conduit issuer with facilitating hundreds of solid and successful deals across the country. He said he's frustrated with the bad press and skepticism about the PFA, which he says suffers an unfair reputation as a controversial issuer with a high default rate.
"I would love to see a story that focuses on the success and public benefits generated with the assistance of PFA throughout the country since 2010," LaPierre said.
Kathie O'Donnell contributed to this report.
