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Presentation, discussion, and possible action on Inducement Resolution No. 25-009 for Multifamily Housing Revenue Bonds regarding authorization for filing an application for private activity bond authority for Murdeaux Villas (#21614)
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RECOMMENDED ACTION
recommendation
WHEREAS, a supplemental bond application for Murdeaux Villas was submitted to the Department for consideration of an inducement resolution;
WHEREAS, at the Board meeting of April 8, 2021, Resolution No. 21-024 was approved authorizing the issuance of Multifamily Housing Revenue Bonds for Murdeaux Villas, Series 2021;
WHEREAS, unforeseen changes in circumstances following closing on the original Bonds, including inflation and related increases in construction costs, removal of the developer entity, and potential change in the equity investor has prompted the applicant to request the Department issue additional tax-exempt bond financing for the Development as further described herein; and
WHEREAS, approval of the inducement will allow staff to submit an application to the Bond Review Board (BRB) for the issuance of a Certificate of Reservation associated with the Development;
NOW, therefore, it is hereby
RESOLVED, that based on the foregoing, Inducement Resolution No. 25-009 to proceed with the application submission to the BRB for possible receipt of State Volume Cap issuance authority under the Private Activity Bond Program for the supplemental bond application for Murdeaux Villas is hereby approved in the form presented to this meeting.
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BACKGROUND
Murdeaux Villas was originally approved at the Board meeting of April 8, 2021, and subsequently closed on May 28, 2021, with a bond issuance of $35,000,000. The development involved the acquisition and rehabilitation of 301 units located at 125 South Murdeaux Lane in Dallas, Dallas County serving a general population. The prior award resulted in an increase in the total number of units, from 240 units to 301 units as three and four-bedroom units with a history of low occupancy were converted to one-bedroom and efficiency units. There will be 151 units rent and income restricted at 50% of Area Median Family Income (AMFI) and the remaining 150 units will be rent and income restricted at 60% of AMFI.
A supplemental bond allocation is being requested to aid in the absorption of increased costs to satisfy the federal requirements of the 50% Test. A project is eligible for the 4% Housing Tax Credit so long as at least 50% of the aggregate basis of the building(s) comprising the project, including the land on which the building is located, is financed with tax-exempt bonds. The Department performs a preliminary calculation of the 50% test in conjunction with its underwriting, as published on the underwriting report. At the time of the original approval, utilizing a bond issuance amount of $35M, the percent financed by tax-exempt bonds was 82.3%, as reflected by the applicant, which presumably would have provided some cushion in the event there were increased costs during construction. Without the supplemental allocation, the calculation, as provided by the applicant is approximately 45.3%. Assuming a supplemental bond issuance of $5,000,000, which will bring the total tax-exempt bond amount to $40,000,000, the applicant has represented that it would bring the calculation to 51.78%.
In evaluating the request, one of the documents requested in the supplemental bond application is a construction contract or contractor bid(s) with a detailed schedule of values that supports the costs reflected on the Development Cost Schedule. Although staff does not perform underwriting at this stage, it is important to get a clear understanding of what has been happening on the project during construction. This document was not provided and upon staff review of the application there were questions relating to the values reflected on the Development Cost Schedule. In response to staff’s questions, the owner provided a side-by-side comparison of the costs at the time of original application and what they believe the final costs will be.
Recognizing that a Construction Status Report (CSR), required pursuant to 10 TAC §10.401(b) of the Asset Management Rules, was recently submitted in July 2024, for the previous quarter’s end, staff reviewed and compared the documentation in the supplemental application with what was provided in the CSR.
The July 2024 CSR Report reflected a total contract sum of $26,986,309. The supplemental application reflected a total construction contract value of $39,994,961. Between the submission of the July 2024 CSR and the filing of the supplemental bond application on September 5, 2024, there have been $13M in additional costs that have been identified. According to the owner, the discrepancy is attributed to them working over the past few months to bid out and price the project after it became apparent that that the original bid provided by the original developer/contractor was substantially understated. The Department became aware in December 2023 that the developer/contractor, RISE Residential Construction notified the general partner that it was intending to stop work on the project and had already stopped work prior to the notice being received. Since that time the owner has taken over as developer and while trying to get the project back on track has contributed over $6M to keep the project moving forward. The Department is also aware that the owner is in the process of trying to secure another equity investor.
Included as Exhibit A attached hereto is a breakdown of the differences in costs between when the deal closed in 2021 to what was recently submitted.
Aside from the considerable costs increases noted above, there are concerns relating to the original bonds that were issued. The financing structure approved by the Board at closing involved IBC Bank as construction lender and Freddie Mac purchasing the bonds at conversion and holding them during the permanent phase. The Construction Phase Financing Agreement identified the Forward Commitment Maturity Date (i.e. conversion date) to be November 1, 2023. Shortly prior to this date the Department was advised that the parties were contemplating a modification of the construction period interest rate in connection with an extension of the Forward Commitment Maturity Date to May 1, 2024. In March 2024, the Department received the fully executed first extension. It was around this time that an Interest Deferral Agreement was entered into that modified the construction period interest rate from 10% to 7% through the earlier of June 30, 2025, or the Conversion Date. The bonds continue to bear interest at 10%, but with 7% being paid currently and the remaining 3% deferred and to be paid at conversion.
Recognizing that the first extension was only granted through May 1, 2024, the Department has not been advised whether a second extension was or will be granted or when conversion is expected to occur. Based on the CSR submission, construction of the project is estimated to be complete in May 2025.
While there are unanswered questions relating to the status of the original bonds, staff believes the various parties are actively working to develop a path forward. The issuance of the supplemental bond reservation will create urgency in working through any issues associated with such path forward, considering the parties will have 180 days to close. Moreover, staff believes there have been an unfortunate series of events associated with this development that the owner is actively working to remedy in order move it forward and finalize construction, and; therefore, recommends the inducement be approved.
This inducement resolution would reserve approximately $5,000,000 in private activity bond volume cap. The supplemental bonds for Murdeaux Villas will be entered into the 2025 Private Activity Bond Lottery to secure a bond reservation under the Department’s 2025 set-aside, which is anticipated to be approximately $200,000,000. Based on the applications received to date, the set-aside is oversubscribed.