Some Redevelopment Faces Risk: Projects Like Hawaii Housing at Stake

by Keeley Webster Friday, October 14, 2011, The Bond Buyer (excerpts)

LOS ANGELES — Residents of Hawaii’s largest public housing facility began returning to renovated units this month. They enjoyed the fruits of a public-private partnership that supporters worry will not be replicated in the future because of threats to the status of tax-exempt bonds that underpinned the project’s financing.

Renovations to the 555-unit Towers at Kuhio Park, near Honolulu’s airport, will cost $135 million, of which $66 million was financed with tax-exempt bond proceeds.

“It will definitely have an impact, because the interest rates will go up and the cost of capital will increase, which will decrease the amount of deals that get done and the amount of affordable housing that gets built,” said Mike Hemmens, director of Citi Community Capital, the community development lending and investing division of Citigroup, which structured construction and permanent financing for the project using the bond proceeds.

There are typically two ways that affordable housing construction is financed — through 9% tax credits, which is taxable debt, or with tax-exempt bonds, Hemmens said. But developers of large projects of 200 or more units typically use tax-exempt bonds.

“The size of the 9% deals is dramatically smaller,” Hemmens said. “It would dramatically affect the creation of affordable housing.”

The Kuhio Park project, which guts and reconstructs the exterior and interior of the 48-year-old housing project, represents the first P3 between the Hawaii Public Housing Authority and a private developer.…

The renovations are being funded primarily through the $66 million of bonds and $45 million in low-income housing tax credits equity….

Supporters say projects like Kuhio Park might not reach fruition if any of the recent threats to the status of tax-exempt financing that have emerged in Washington come to pass.

In September, President Obama proposed a plan to bar investors from using tax-exempt bond interest and other tax exclusions to reduce their income tax rates below 28%.

The proposal was deleted from Obama’s jobs bill before its eventual defeat this week in the Senate, but it is one of several limits on tax-exempt bond interest that have been floated in Washington as the federal government contemplates deficit reduction.

The issue is also being reviewed by the congressional Joint Select Committee on Deficit Reduction, which means it will not be fully resolved until December, said Garth Rieman, director for housing advocacy and strategic initiatives at the National Council of State Housing Agencies.

“There is still uncertainty for investors surrounding the pricing of tax-exempt bonds,” according to Rieman. “The hope is it will not impact pricing too much while investors wait for the committee to clear up the uncertainty now surrounding the bonds.”

Entities that benefit from issuing tax-exempt bonds are concerned that investors would not want to buy tax-exempt bonds or would demand huge interest-rate premiums if such proposals actually come to pass.

“It would impact the ability of state agencies to get a private development partner,” Tungol said. “The fact that state agencies can issue tax-exempt bonds is one advantage to buying into a public housing project.”

Tungol said Hawaii did a feasibility study before it issued the request for proposals seeking a developer and it was deemed the best way for the state to handle the project.

Given Hawaii’s budget difficulties, Tungol said the state would have been hard-pressed to make the project a reality on its own.

The deficit reduction committee has to file its report by Nov. 23 and a decision will be made regarding the recommendations in December, Rieman said, adding that between now and then there is likely to be a lot of uncertainty.

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