BRIDGE Housing Corp. has created a new financing source for not-for-profit housing providers as the first to issue publicly offered tax-exempt bonds to finance construction of a new development.
The milestone was achieved when KeyBanc Capital Markets priced $70.7 million in tax-exempt multifamily housing revenue bonds Oct. 31 for BRIDGE through conduit Oregon Housing Community Services Department.
The bonds will help fund the 224-unit Hollywood Hub affordable housing apartment community in the Hollywood district of Portland, Oregon, being constructed on a half-acre site being leased for 99 years from the Tri-County Metropolitan Transportation District of Oregon.
"We are constantly seeking innovative financing to spur sustainable growth and advance our urgent mission to provide affordable housing," BRIDGE Housing President and CEO Ken Lombard said in a statement. "We are grateful to KeyBank for leading this pathbreaking bond sale, to our investors, and to our partners on this very important project."
BRIDGE is developing hollywoodHUB in collaboration with the Portland Housing Bureau and TriMet, the region's public transportation operator.
Two-thirds of units will be affordable for households earning 60% of Area Median Income, and one-third will accommodate households earning up to 30% of AMI.
The project promises affordable housing in a high-demand neighborhood with retail, grocery stores, healthcare facilities, schools, a large park and easy access to downtown Portland by light rail.
The 12-story residential tower will be built on the site of the Hollywood Transit Center, a hub for TriMet light rail and bus lines.
The project is one of the largest affordable housing developments in the Portland metropolitan area, according to BRIDGE.
The bonds were four times oversubscribed, according to the finance team.
"The strong demand for the construction bonds — from some of the biggest institutional investors — attests to the credibility BRIDGE Housing has earned from decades of financial stewardship and delivering on its mission to strengthen communities," Sam Adams, managing director of affordable housing for KeyBanc Capital Markets,
The bond structure effectively lowered BRIDGE Housing's borrowing costs to a fixed rate approximately 100 basis points, or one percentage point, below the federal government's benchmark Secured Overnight Financing Rate, he said.
The bonds, with a 2048 maturity, carry 4% initial fixed-rate coupons, priced to yield 3.62% to the optional call date of April 1, 2028, with the bonds subject to mandatory tender and conversion between then and Jan. 1, 2029, according to the official statement.
Tax-exempts for affordable housing have historically been issued by rated government entities such as housing authorities.
The program also taps low income housing tax credits and includes a 4% LIHTC Declaration of Land Use Restrictive covenants, according to the bond documents. In addition to the revenue bonds, funding for the $135.7 million project also included a $41.4 million Portland Housing Bureau loan and $12.5 million in investor equity.
BRIDGE first received a standalone issuer credit rating in 2020 and later that year issued its first debt, $100 million of general obligation taxable sustainability bonds.
"Within the last 20 years, this is the first nonprofit to guarantee municipal bonds using a credit rating," Adams said.
BRIDGE's 2020 GOs were sold as corporate, not municipal, bonds, Adams said. That issue was used for predevelopment funding and equity for acquisitions, he said.
Having predevelopment funding gives BRIDGE a leg up in working on projects involving local governments, because a lot of developers don't have access to predevelopment funding, he said.
"The general strategy has been quick and flexible short-term capital, which allows them to move quickly. Then once the property is acquired and the construction plan is in place, they can obtain long-term financing. That combination has been very effective in the space," Adams said.
"BRIDGE has helped open the door for peers or similar entities," Adams said. "They have shown there is a path to success."
Not-for-profit housing developers have tapped munis before, but primarily through direct bank lending, not by tapping the public markets, said Jim Mather, BRIDGE's chief investment officer and one of its executive vice presidents.
"Most private activity bonds have been private placements — and most used a credit rating to go direct," Mather said.
"We were the first nonprofit developer to get a rating and to do it to issue a general obligation bonds in 2020," Mather said. "We like pushing the industry forward. We have been doing it for 20 years."
Mather added that one of his goals has been to get public housing developers into the capital markets.
BRIDGE created the model working with KeyBanc that is based off how large housing authorities tap the muni markets, Mather said.
"There are some nuances," Mather said. "We are cutting out the middleman. BRIDGE is the guarantor to muni investors."
Investors are comfortable with BRIDGE, because they consider the investment-grade corporation a safe bet and they are willing to provide access to a low cost of capital because it has the scale and resources many nonprofit housing developers lack.
"It amounts to a considerably lower interest rate," Mather said.
The AA-minus S&P rating was based on BRIDGE as the guarantor to muni investors, Adams said.
Typically, rating agencies assign a rating at the low end of investment grade to anything involving construction risk, but because the evaluation was primarily based on BRIDGE's creditworthiness, it was able to obtain a higher investment grade rating, Adams said.
The savings from the low interest rate debt "really helped make the project feasible," Mather said. "The pricing on low interest tax credits has decreased, so the pricing wasn't really were we thought it would be."
The interest rate savings was 200 basis points lower than what tapping conventional debt would have been, Mather said.
Other benefits to the structure beyond savings are that the bond proceeds get invested until the housing developer needs to draw on them, Mather said.
"We don't need the $71 million all at once, so we are able to reinvest it and get a positive return," he said.
The market in late October was also favorable, because tax-exempt ratios were low, Adams said.
Mather said the structure is something BRIDGE considers on a case-by-case basis.
"It's not like we are going to run out and do a deal this way every time," Mather said.
"Sometimes it is just easier to do it the conventional way, but the industry needs more tools in its toolbox," Mather said, to reduce the affordable housing shortage.
After BRIDGE issued its corporate GO in 2020, Mather said other nonprofits took notice, and began calling.
When interest rates started going up, issuing muni debt wasn't as attractive, but as they start to decline, Mather believes more nonprofits will be interested in using the financial model.
"I think we will see more nonprofits reach out, because there are a lot of deals getting toward closing that have gaps and need to close them," Adams said.
"A lot of the interest has to do with change in the interest rate environment," Mather said.
"Before, the juice wasn't worth the squeeze, but now it's a pretty meaningful advantage," he said.
"One thing that helped is KeyBanc was a low interest tax credit investor in the project," Mather said. "I don't know if it would have been as easy if there were a different LITC investor. There was an alignment of interest."
KeyBank Community Development Lending and Investment is providing nearly $62 million in Low Income Housing Tax Credit equity for hollywoodHUB and arranged permanent financing with an $18.5 million private placement loan.
Adams added there is a firewall between LITC investor segment of the bank and its investment bank, but KeyBank has done a structure where the tax credit investor and housing are different.
"As one of the nation's leading affordable housing capital providers, KeyBank is delighted to support BRIDGE Housing by facilitating access to novel funding for hollywoodHUB," Adams said.
The estimated project cost is $149.9 million, according to the official statement for the bonds.
Caine Mitter & Associates Inc. was financial advisor. Orrick, Herrington & Sutcliffe was bond counsel and Kantor Taylor was borrower's counsel. Underwriter's counsel was Norris George & Ostrow PLLC.
BRIDGE Housing was founded in 1983. It has grown into a current portfolio of more than 14,000 apartments that are home to more than 30,000 residents in California, Oregon and Washington, with more than 10,000 additional units in the development and acquisition pipelines. The organization says it now has $4 billion in assets in the three states.
