Luxury apartment or essential housing? How America’s most notorious junk municipal bond peddlers are getting rich off California’s affordability crisis
real estate developers, Jordan Moss has an exceptionally big heart. His Marin County firm, Catalyst, is dedicated to developing affordable housing—no small challenge in a state in which small one-bedroom apartments routinely lease for more than $3,000 a month and rents can climb at double-digit rates annually.
Welcome to the most exciting innovation to hit the municipal-bond business in decades. Essential housing bonds issued by quasi-governmental agencies like CalCHA aren’t limited by state municipal volume caps and cleverly sidestep the bureaucratic red tape required for tax credit–based financing. Since 2019, over $6 billion in muni bonds have been issued to acquire more than 35 upscale apartment buildings at nosebleed prices.
“It’s like getting a slight discount on a Ferrari and calling it affordable,” says Matt Schwartz, president of California Housing Partnership, an affordable-housing advocate. Tax-Exempt Havens: By selling to muni-backed buyers, REITs like Equity Residential and UDR and developers including Lennar got top dollar for these prime properties—now ready for California’s missing middle. Oceanaire in Long Beach, Anaheim’s Parallel and Sausalito’s Summit apartments, including its outdoor lounge area.One of the oldest and most prolific JPAs is the California Statewide Communities Development Authority .
Today those bonds are nearly worthless. According to an SEC complaint, Farias was running a Ponzi scheme. In addition to the $11 million in bonds he sold through PFA and Austin, Texas, broker National Alliance Securities, he raised $14 million in 12% promissory notes mainly from retired police and first responders in San Antonio. Farias was recently sentenced to 11 years in federal prison.
All are in financial trouble. Some of their woes stem from the pandemic. Says PFA attorney Andrew Phillips: “The bonds issued in the vast majority of all PFA projects, including the proton treatment centers that treat cancer patients across the country, are professionally underwritten by financial institutions, supported by feasibility studies and sold to institutional investors.” Still, some may never recover from the malignant effects of heavy debt and high interest costs.
Around a third of the units will be leased to those earning up to 80% of the average median income in the area, and most other apartments will go to those making between 81% and 120% of the average median income. Rents on units will be restricted to 30% to 35% of household income, with a cap on annual increases at 4%. No existing tenants, who are paying market rent in these fully occupied apartments, will be displaced.
Why the extra leverage? Generous fees are a big factor. Goldman; bond counsel Orrick, Herrington & Sutcliffe; and CSCDA shared an upfront fee of $5.6 million. The developer Waterford Property, responsible for securing the deal, booked an immediate $2 million “project administration” fee and will oversee the property manager, Greystar, which will earn at least $144,000 a year.
“Historically, capitalization rates for most multifamily properties in California have averaged 5% or higher,” he adds, referring to the ratio of annual net operating income to market value. “From 1989 to 1990 cap rates got down into the fours. Then we had disasters and lots of defaults. It happened again in 2006. The bond deal I was looking at last week had a capitalization rate of 3.25. Meaning these apartments are being bought for 33 times net operating income.
“In virtually all these cases, what we found is that the reduction in property tax is far greater than the reduction in rent,” Slater says.
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