The City and County of San Francisco has issued its second bond deal that will help a master-planned community that could eventually house 20,000 people takes shape in the middle of San Francisco Bay.
The first new residents on Treasure and Yerba Buena islands could be moving in early next year.
The second set of bonds were issued July 21 for the first phase of housing on Yerba Buena Island, the midpoint of the two San Francisco Bay Bridge spans that connect the city with Oakland.
Lead Manager Stifel and co-manager RBC Capital Markets priced $41.3 million in unrated tax-exempt special tax bonds for San Francisco — the second set of bonds issued off the bond authorization for Community Facilities District No. 2016-1 created in January 2017.
The land-secured bonds, authorized under terms set in the state's Mello-Roos Community Facilities Act of 1982, are paid back with a special property tax levy. They are a means to fund public infrastructure for a new development without weighing on a city's general revenue base.
The 15- to 20-year project first conceived in 2011, which calls for 8,000 new housing units, was delayed for three years as a development team lead by Wilson Meany and Lennar Corp. battled a lawsuit brought by a former county supervisor that was eventually resolved.
The developers and investors, Kenwood Investments and Stockbridge Capital Group, had purchased lots on the man-made Treasure Island and adjoining Yerba Island from the Navy, with plans for a master-planned development involving homes, retail, office buildings and open space with 22-miles of trails.
Today, construction of 266 units of condominiums and townhomes on Yerba Island, part of the development’s first phase, is well-underway. A 124-unit condominium building will be completed by year-end and some units have already sold. The two sets of bonds support this project.
“When we issued the first set of bonds in 2020, we didn’t anticipate we would be returning with the second set so quickly,” said Luke Brewer, the debt specialist in the San Francisco Controller’s Office of Public Finance. “The reason we did was that the development had been able to move forward quickly, and also to take advantage of the super-low interest rates.”
The Series 2021 special tax bonds achieved a true interest cost of 3.18%, nearly 50 basis points lower than the 3.66% expected when San Francisco’s debt team presented the bond sale to the board in early May, Brewer said. The deal was oversubscribed by 12 times, he said.
“I think a lot of that is market movement since May,” Brewer said. “The high-yield, non-rated market is less impacted by Treasuries and the volatility in the market. They are more focused on nominal yields and they are more credit focused.”
The finance team fielded fewer questions related to the Bay Area’s housing market than it had when Stifel and co-manager Backstrom McCarley Berry & Co. priced the inaugural $17 million on Oct. 15, Brewer said.
The team included more disclosure on the complex project. It also posted a
“It was easier to market, not just because it was the second financing, but because we are coming through the pandemic,” said Eileen Gallagher, a Stifel managing director. “There was less uncertainty about the San Francisco housing market.”
The developers have also started sales of the condominiums and are continuing to make progress on the project, Gallagher said.
Headed into the market, Gallagher said she wasn’t sure where they would end up on spreads, because of the market volatility in late July, but she was “confident they would get significant interest given what has been experienced with comparable transactions over the last few months.”
The deal brought repeat investors, said Brewer, noting that five out of the seven institutional investors had bought into the October deal.
The bonds are for the 15.5-acre Yerba Buena Island Improvement Area No. 1 in the CFD’s Improvement Area No. 1, which has authorization for up to $250 million in special tax bonds to support. The project includes construction of 266 condominium units and a hotel.
The Yerba Buena project is the first segment of 3,000 units of phase one housing planned in a 461-acre master-planned development that at build-out, near the end of the decade, will have 8,000 housing units.
The project also calls for 140,000 square feet of new commercial and retail space, 311,000 square feet of commercial-flex through the adaptive re-use of existing buildings, up to 500 hotel rooms, 100,000 square feet of office space and 290 acres of open space including walking-biking paths, playing fields, a marina and a ferry terminal.
The finance team also fielded questions about the entirety of the project.
Investors wanted to know when a grocery store and a school would be built and when the ferry will start service. The ferry terminal was completed this summer and is expected to start service by the end of the year. Residents are currently connected to San Francisco and Oakland by the Bay Bridge.
“There were a lot of questions about the amenities,” Gallagher said.
“They also asked about the developer’s financing,” Brewer said “It’s a large infrastructure budget that will involve hundreds of millions to finish everything.”
Brewer said his office spent at least an hour talking to the developers each week for the past two years.
Treasure Island was created by filling part of the bay in the late 1930s as a location to host the 1939 World’s Fair, later serving as a naval base from 1942 until 1997. It's physically connected to the naturally created Yerba Buena Island.
After the base was decommissioned, planning to redevelop the island began. The City of San Francisco has used the former military homes as rental housing.
The development team secured approval for the project in 2011 but was stymied from moving forward until 2014 until the state Supreme Court rejected an appeal from a lawsuit brought by former Supervisor Aaron Peskin claiming environmental reviews for the project were inadequate.
The Navy has been completing environmental cleanup of Treasure Island, which had high levels of radioactive contamination in some areas.
The island currently has about 250 units that house about 700 previously homeless people, and about 650 market-rate apartments. The master plan calls for 435 units for formerly homeless people out of the 2,000 units that will be set aside for low-income residents.
