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2002, ISSUE 1 THE CHANGING FACE OF PUBLIC HOUSING WOODHILL A Bond-able Development PLUS BANK-QUALIFIED TAX-EXEMPT OBLIGATIONS Travis County Housing Authority A Look at Public Housing Authorities WOODHILL A Bond-able Development Woodhill Apartments is the biggest The country’s 3,300-plus public housing authorities are providing affordable, mixed-income rehab project the San Anto- decent and safe rental housing for about 3 million low-income households. nio Housing Authority (SAHA) has ever According to the Department of Housing and Urban Development, 427 Texas taken on. Its scope meant SAHA would communities have a housing authority. Louisiana has 164 and New Mexico, 50. have to tap financing sources in addition to Since the 1930s, PHAs have been a key source of housing for very low-income families, the elderly and disabled. Until the 1990s, most PHAs relied solely on public funds to develop and maintain their properties. But many PHAs have worked hard in recent years to develop mixed-income housing, using both public funds and private financing. They are also developing and maintaining quality housing that both residents and their neighbors view positively. the federal money housing authorities have traditionally used. Woodhill was the first development for which SAHA issued publicly rated bonds, allowing for the extensive work needed to the 532-unit project on the city’s Northwest side. SAHA manages and operates 6,078 This issue of Perspectives looks at how five PHAs have developed innovative units of public housing and administers programs and how they’ve financed them. These five PHAs are proud of their 12,000 Section 8 rental vouchers. Since the businesslike approach. They are accountable to their communities through 1990s, housing authorities have been their boards of directors, which are appointed by city councils or county com- encouraged to build mixed-income, but missioner courts. The PHAs have audited financial statements and productive affordable, housing that is made available relationships with local banks. And they meet frequently with community rep- to both Section 8 voucher holders and the resentatives. general public. The idea is to avoid the high To find out how to contact your local housing authority, go to HUD’s web site concentrations of public housing that iso- at www.hud.gov/offices/pih/pha/contacts/index.cfm. late the poor from the larger community. The 2,713 units of mixed-income housing SAHA manages were developed with What Is a Public Facility Corporation? Nancy Vickrey Chapter 303 of Texas’ Local Government Code provides for the creation of pub- Assistant Vice President lic facility corporations with the broadest possible powers to finance or provide and Community Affairs Officer for the acquisition, construction and rehabilitation of public facilities at the lowest Federal Reserve Bank of Dallas possible borrowing cost. A sponsor—such as a municipality, county, school district or housing authority —may create one or more of the nonprofit public facility corporations to: ■ Issue bonds to purchase sponsor obligations. WEBZINE ■ Finance public facilities on behalf of the sponsor. e-Perspectives is on the web at e-perspectives.org. Look for a new issue six times a year. ■ Issue bonds on the sponsor’s behalf to finance the cost of the public facilities. ■ Loan the proceeds of the obligations to other entities to accomplish the sponsor’s purposes. To learn more about public facility corporations, see the Texas Legislature’s web site at www.capitol.state.tx.us/statutes/lg/lg0030300toc.html. 2 PERSPECTIVES | Federal Reserve Bank of Dallas million loan for interim financing of the in bonds maturing in 2029. JPMorgan development. Chase serves as the trustee for both bond “SAHA’s corporate structure gives it the flexibility to provide both public and Betsy Gleiser, executive vice president of Frost National Bank’s Real Estate Division, and Melvin Braziel, SAHA president and CEO, review rehab plans. both public and private financing. Since issues, which have been sold to a private third party. mixed-income housing and allows a com- The Woodhill project was completed mercial bank to offer financing,” says Betsy using the Frost loan, the bond issue and Gleiser, executive vice president of Frost’s rental income generated by the property Real Estate Division. itself. Rental income, now the source of SAHA was able to repay the interim loan repayment for the bonds, also enabled and continue renovating the apartments SAHA to continue rehab work on other by issuing more than $10.6 million in Stan- Woodhill units. SAHA went to great lengths dard & Poor’s A-rated bonds. The bonds to accommodate its tenants during the were issued in two amounts: $2,615,000 process. While work on Phase 1 was under in bonds maturing in 2015 and $8 million Continued on back page 1999 SAHA has created public facility corporations (PFCs) to acquire and redevelop its seven mixed-income developments. The PFCs have made it easier for SAHA to obtain private financing. And using private funds increases SAHA’s flexibility, says Diana Kinlaw, vice president of its Development and Asset Management Division. “If SAHA relied solely on public funding, we would have more limited facilities.” Woodhill was part of HUD’s property inventory and in bad shape when SAHA SAHA vice presidents Diana Kinlaw and Frank Jasso pay a visit to Woodhill. purchased it in 1994 for $1 plus a commitment to invest $4.8 million in improvements. HUD provided a list of work items that it estimated would cost $5 million to complete. Once the rehab began, however, it became obvious that more extensive renovation would be needed. SAHA’s in-house rehab crew encountered unexpected San Antonio Housing Authority WOODHILL APARTMENTS REHAB PROJECT SAHA acquired Woodhill from HUD in 1994 for $1 plus a commitment to spend $4.8 million on rehabilitating the property. However, when the work got started, SAHA discovered the cost to rehab Woodhill far exceeded HUD’s original estimates. Extensive interior and exterior work on Phase 1 and minor repairs to the exterior of Phase 2 were completed in September 2001 at a cost of $11,370,000. asbestos, mold, wiring, drainage and foundation problems. SAHA ended up gutting Woodhill’s Phase 1, built in 1973, to the framework. Phase 2, which is two years newer, required only exterior work. Ultimately, the cost would run more than double HUD’s original estimate. Armed with a reputation for making FINANCING DETAILS Interim construction loan Frost Bank originated the loan in 1996. $ 4,680,000 Multifamily housing revenue bonds $ 10,615,000 In 1999, SAHA— through Woodhill Public Facilities Corp.— issued two bonds: $2,615,000 maturing in 2015 and $8 million maturing in 2029. The bonds are the first S&P A-rated bonds SAHA issued. Bond proceeds were used to pay off the interim construction loan and complete the rehab of Phases 1 and 2. projects like this work, SAHA put a plan into action. The authority approached Frost National Bank, which made a $4.68 SAHA rental income $ 755,000 Rental income from Woodhill helped pay for some of the rehab costs. Rental income is now a source of repayment for the bonds. Federal Reserve Bank of Dallas | PERSPECTIVES 3 THE CHANGING FACE OF PUBLIC HOUSING Public housing authorities are evolving. They have become developers, community partners and social services providers. They are supplying affordable housing in many forms, including improved rental units for housing-choice (Section 8) voucher recipients, single-family homes available for ownership, and apartments and townhouses that rent at market rates. While many PHAs have a ways to go, the Dallas, Temple and Laredo housing authorities are good examples of how the entrepreneurial spirit is bringing a new perspective to public housing. For many years, public housing meant large concentrations of low-income families in impoverished neighborhoods. But a shift in thinking about how to assist those Roseland Homes, a Dallas public housing project, was built in 1942. with very low incomes, as well as legislative changes in the 1990s, has led PHAs to replace centralized projects with smaller, mixed-income developments in scattered sites throughout a community. Dallas Partnerships with corporations and financial institutions have been key to expanding DHA’s services. “For our families, providing affordable housing is only the first step,” says Ann The Dallas Housing Authority's $75 million redevelopment is turning Roseland Homes into mixed-income affordable housing. Lott, DHA president and CEO. “We also have to work on the psychosocial problems people face when they are in a crippling On the edge of downtown Dallas, the and sold 262 single-family homes and city’s oldest federally funded public hous- owns and operates student housing at DHA has taken a holistic approach to ing is undergoing a major renovation. Temple College, a child development cen- address these issues, forming partnerships Roseland Homes’ 611 apartments, built in ter and a senior citizens center. with Bank One, Walgreens, Marriott, Good- economic situation.” 1942, are being reduced to 486 units. The Along the U.S.–Mexico border, Metro will and others to offer preemployment Dallas Housing Authority (DHA) site will Affordable Housing, a community devel- skills training, GED classes and job fairs. provide 259 apartments for families, 100 opment corporation and affiliate of the Through a program offered by Bank One high-rise units for the elderly and 40 town- Laredo Housing Authority (LHA), has built and Goodwill of Dallas, DHA residents can houses for home ownership. On comple- 10 of 20 single-family homes and is pre- receive training for bank teller and other tion, 87 market-rate apartments will be paring to build 30 single-room units for entry-level positions. available to the general public. transitional housing and a 160-unit multi- About 130 miles south of Dallas, the Temple Housing Authority (THA) has built family complex. Sound like yesterday’s public housing projects? Hardly. 4 PERSPECTIVES | Federal Reserve Bank of Dallas PHAs are no longer relying solely on HUD money to meet the demand for their services. Instead, they’re using a mix of financing. For example, renovating the Dallas authority’s Roseland Homes is costing $75 million. DHA is using $35 million in HOPE VI funds. The remaining $40 million is being funded with low-income tax credits, private activity bonds, the Federal Home Loan Bank’s Affordable Housing Program money and loans from several Dallas-area banks. Says Lott, “Being able to seek out a variety of funding sources gives DHA the opportunity to provide a healthy mix in our housing developments.” Temple Housing Authority develops affordable single-family homes to aid the transition from public housing. Temple through TDHCA and supplements from the home ownership, even if they need a little Hal Rose, executive director of THA, city to provide $10,000 in down payment assistance from us.” caught the entrepreneurial bug years ago. assistance to each buyer. Through the down To help them accomplish this, Metro Rose anticipated changes in the role of payment assistance program, borrowers tries to build homes that look like other public housing authorities and began tak- can use funds for down payment and clos- houses in the market. “What goes on behind ing cues from HUD in the ’90s. ing costs, as well as for principal reduction the scenes to make a house affordable yet In 1997, THA launched a home-owner- or to buy down their interest rate, says Dave attractive is Metro’s business; what stands in ship program with the building of 41 Kuebler, vice president and branch manager front of the home is a proud family.” single-family homes for families with in- of Guaranty Residential Lending, a Guar- Ceballos says that legislative reform comes between 60 and 80 percent of the anty Bank subsidiary. The point is to find the such as HOPE VI and the Quality Housing area median. “The city, banks, mortgage best match of lending product and individ- and Work Responsibility Act (QHWRA) fun- companies, Texas Department of Housing ual. Kuebler stresses that a new home’s low damentally changed the way public hous- and Community Affairs (TDHCA), builders maintenance costs can make all the differ- ing authorities do business. The HOPE VI and the housing authority all came to- ence in affordability in the long run. program works to replace public housing gether to make this happen,” Rose says. THA acquired land from the city and developed lots for single-family homes. In 2000, HUD recognized THA’s Afford- complexes with mixed-income housing; able Homeownership Program as a Best QHWRA allows PHAs to own, operate, Practices winner in Texas. assist or otherwise participate in mixed- The city reduced building fees and pro- financing projects. vided infrastructure. Builders purchased “Our greatest challenge had been find- the lots from THA and built homes that ing a way to meet housing needs in a satu- were sold to families that had graduated rated multifamily market when all we had from a home-ownership counseling pro- was our housing-choice vouchers,” says gram. The homes, which sold for under Ceballos. “Because landlords can choose to $64,145, range from 950 to 1,150 square accept or deny the vouchers, many families feet, with two to four bedrooms and one bath. Among the amenities are exterior brick veneer on all four sides, an engi- are driven to colonias or other places of Laredo Housing Authority's Metro affiliate promotes home ownership through an innovative lease–purchase program. neered foundation, and central air and heat. Of the 262 homes this program pro- below-standard housing.” To address the situation, the housing authority created Metro as a nonprofit sub- Laredo sidiary; then Metro obtained status as a duced, 33 were bought by families who “Families don’t want to live in a develop- community housing development organi- were making the move from public hous- ment labeled as assisted housing,” says Jose zation. As such, Metro is able to access ing to home ownership. Ceballos, special projects director for LHA HOME funds from HUD. THA administers the home-ownership and its Metro affiliate. “Most families strive Next, Metro forged community partner- program, obtaining HUD HOME funds to live in an area where they feel the pride of ships to develop affordable housing. Metro Federal Reserve Bank of Dallas | PERSPECTIVES 5 joined with the city of Laredo, Fannie Mae PUBLIC HOUSING IN THE UNITED STATES and International Bank of Commerce (IBC) to build 20 single-family homes for 1933 National Industrial Recovery Act of 1933 creates the Public Works Administration, allowing for the construction of public housing. a lease–purchase program. These homes are available to families living in public housing or partici- 1937 Cedar Springs Place in Dallas becomes the first public housing project in Texas built under the PWA. Housing Act of 1937 establishes and funds the Public Housing Administration. Santa Rita Courts in Austin becomes the first public housing development in the nation built under the Housing Act of 1937. pating in the housing authority’s family self-sufficiency program. Metro built the homes on land provided by the city and used the city’s HOME funds to partially finance the construction. IBC originated 1940 Lanham Act of 1940 provides federal funds to build public housing for defense industry workers. the lease–purchase mortgage loans to Metro, and Fannie Mae purchased the loans through a 1948 10,332 public housing units are constructed in Texas over the first 10 years of public housing. product created specifically for Metro. Fannie Mae worked with Metro to tailor mortgage guidelines that 1953–55 West Dallas complex of 3,500 barracks-style homes becomes the largest public housing development in the nation. helped housing authority residents qualify. During the lease period, families make rental payments equal to the Juan Garcia/The Dallas Morning News monthly principal, interest and taxes on the mortgage. They also use a savings account to set aside money that will go toward a down payment. In addition, borrowers are required to contribute a 1 percent down payment from their own funds. Prospective homebuyers have one to three years to achieve qualifying credit status and become eligible to assume the loan from Metro, giving families the time to resolve any past credit problems while saving money for the down payment. “Having the housing authority form Metro as its development entity has helped create more affordable housing in Laredo,” says IBC Vice President Fernando de la Cerda. “We are helping develop homeowners and long-standing contributors to the community.” ■ —Veronica Garza Jackie Hoyer 6 PERSPECTIVES | Federal Reserve Bank of Dallas 1965 Department of Housing and Urban Development is created as a Cabinet-level agency to administer the public housing program. Section 23 program authorizes housing authorities to lease units from private owners and sublease them to low-income tenants. 1968 Fair Housing Act bars discrimination based on race, color, religion, national origin, sex, familial status and disability in the sale and rental of housing and other real estate transactions. 1974 Housing and Community Development Act of 1974 increases low-income families’ choice of housing with Section 8 tenant-based certificates. 1987 Housing and Community Development Act of 1987 creates a voucher program that requires families to pay approximately 30 percent of their adjusted incomes toward rent. 1993 HOPE VI program encourages PHAs to seek new partnerships with private entities to create mixed-finance and mixed-income affordable housing. 1998 Quality Housing and Work Responsibility Act creates incentives and opportunities for residents to work, become self-sufficient and ultimately transition into private housing. BANK-QUALIFIED TAXEXEMPT OBLIGATIONS Travis County Housing Authority Travis County Housing Authority (TCHA) it also needed low-cost, tax-exempt financ- manages more than 200 affordable and ing to make the deal work. The housing public housing units in the small com- authority created a subsidiary, Travis munities surrounding Austin. TCHA ad- County Public Facility Corp., to purchase ministers 575 housing-choice vouchers the building and lease it to the housing for low-income families, runs a family self- authority and other nonprofits. Under the building to other governmental entities sufficiency program and is developing Texas law, the PFC qualifies for tax-exempt or nonprofits and income from ongoing both affordable and market-rate housing. financing. TCHA operations. All of this takes office space, and until 2001, TCHA lacked a permanent home. But then TCHA Executive Director Wiley Hopkins found a suitable 7,800-square- Bank of America originated a bank-qualified tax-exempt obligation to finance the Travis County Housing Authority’s office building. Kathaleen Ford-Smith of Bank of America and TCHA’s Wiley Hopkins check building plans. Hopkins approached Kathaleen Ford- The cost of originating the tax-exempt Smith, a vice president at Bank of America, financing was far lower than the fees for seeking financing using a bank-qualified issuing bonds going to the open market. tax-exempt obligation (QTEO). Among the costs were attorney fees for foot building in East Austin. The building, According to Ford-Smith, banks can creating the PFC and the legal opinion on vacant for almost a year, was located in a originate QTEOs for public facility corpo- the project’s tax-exempt status, as well as low-income neighborhood. rations that issue less than $10 million in the loan origination fee. “I felt the building was an anchor in the bonds during a calendar year. Like a bond The loan probably would not have been neighborhood’s revitalization effort, and transaction, to qualify as tax-exempt economically feasible without tax-exempt the central location would be easy for our financing the project must receive a legal financing, says Ford-Smith. Taxable financ- clients,” he says. TCHA had the 10 percent opinion regarding the tax-exempt status of ing for a building such as the one TCHA down payment for the $725,000 building the PFC and the project. However, Ford- bought would cost at least 8 percent a year, but needed a way to finance the remainder. Smith explains, banks can carry the debt with loan origination fees of about $8,000. Looking at the Options Public housing authorities (PHAs) can receive tax-exempt financing for public facilities, such as the office building TCHA wanted to buy. Tax-exempt financing can also be used for low-cost financing of affordable housing owned by PHAs. Typically, the tax-exempt financing is in the form of a bond. The cost to issue the bonds is high, so most bond issues are on its books rather than sell the bond on The 6¼ percent interest rate for the Bank of the open market. The bank will not have to America loan lowers the monthly payment pay income tax on the interest income and by more than $670 and over the term of the can take an expense deduction of up to 80 loan saves TCHA almost $56,000 in inter- percent of the cost of funds. est. These savings significantly exceed the “Booking the debt as a QTEO saves the borrower money because there is no debt tax-exempt obligation. rating and the underwriting fees are lower,” “Typically, tax-exempt financing is good she says. “Because the cost of originating business,” says Ford-Smith. “The lower the debt is less, originating smaller tax- interest rate helps make the credit risk exempt obligations can be justified.” more reasonable, and the debt can be for $10 million or more to be cost-effective. Issuing a bond requires legal opin- additional cost of originating the loan as a Putting the Package Together ions on the tax-exempt status of the issu- Bank of America originated a QTEO to ing entity and the project, and the bond the public facility corporation for $697,000 must be underwritten and rated by a at 6¼ percent interest. The term of the debt credit rating firm. is seven years, with a 15-year amortization. In this case, TCHA needed to finance The debt will be repaid from rental income only $697,000 to purchase the building. But generated by leasing about two-thirds of structured as a profitable transaction for the bank.” ■ —Nancy Vickrey For Tax Treatment of QTEOs Sections 256(b), 265(b) (3),103(a) and 142(d) (3) of the Internal Revenue Code provide guidance on the tax treatment of bank-qualified taxexempt obligations. Federal Reserve Bank of Dallas | PERSPECTIVES 7 Woodhill Continued from page 3 Today, Woodhill Phase 1 consists of 25 new single-family housing. “The increased buildings housing 212 apartments, two competition in the area forces us to keep laundry rooms, an office, equipment stor- the property looking good,” Jasso says. way, tenants were temporarily relocated to age space and a pool. In Phase 2, 16 build- SAHA properties enjoy a good reputa- Phase 2 and other properties. ings house 320 apartments, two laundry tion in San Antonio, Braziel says. But he rooms, an equipment and maintenance and SAHA staff members work hard to shed, a clubhouse and a pool. maintain community support by talking to Woodhill has received project-based Section 8 funding for the 50 units it’s required to rent to very low-income people. “Woodhill is a good-looking develop- the neighbors of proposed SAHA property. The remaining units are priced to target ment that, compared with other multifam- When talking to them, Braziel always asks, individuals and families whose incomes fall ily properties, would probably be rated as “When a private-sector property needs between 50 and 80 percent of the area a B because it’s older and has low-mainte- repair, who can you complain to? If SAHA median, a group with a big demand for nance landscaping,” says Frank Jasso, messes up, you know who to call.” housing. “That’s our income target for our SAHA vice president of Architectural and privately financed properties. We can’t go Construction Services. below 50 percent of the median income Located in one of San Antonio’s fastest because the numbers don’t work,” says growing neighborhoods, Woodhill is close Melvin Braziel, SAHA president and CEO. to a new class A property and adjacent to perspectives The city council appoints the SAHA board, he points out. “We can’t ignore the community. We have to respond.” ■ —Diana Mendoza www.dallasfed.org 2002, Issue 1 Federal Reserve Bank of Dallas Gloria Vasquez Brown Community Affairs Office Vice President P.O. Box 655906 gloria.v.brown@dal.frb.org Dallas, TX 75265-5906 Nancy C. Vickrey Assistant Vice President and Community Affairs Officer nancy.vickrey@dal.frb.org Veronica Garza Community Affairs Specialist veronica.garza@dal.frb.org Karen Riley Community Affairs Specialist karen.riley@dal.frb.org Diana Mendoza Community Affairs Specialist diana.mendoza@dal.frb.org Jackie Hoyer Houston Branch, Senior Community Affairs Advisor jackie.hoyer@dal.frb.org Publications Director: Kay Champagne Editor: Monica Reeves Designer: Patti Holland Issue Editor: Diana Mendoza August 2002 The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. Articles may be reprinted if the source is credited and a copy is provided to the Community Affairs Office. ....................................................... Federal Reserve Bank of Dallas P.O. Box 655906 Dallas, TX 75265-5906 ADDRESS SERVICE REQUESTED PRSRT STD U.S. POSTAGE PA I D DALLAS, TEXAS PERMIT NO. 151
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