High-yield municipal bonds to finance workforce housing for cops, teachers and nurses in the Bay Area may be teetering toward trouble.
At least five apartment complexes across the nine-county region have either failed to meet the debt-service coverage ratio required by investors or have drawn on reserves since the start of last year to help pay their debt, Bloomberg reported, citing securities filings.
Mira Vista Hills Apartments, a 280-unit complex at 2201 San Jose Drive in Antioch, disclosed in a filing last week that it didn’t meet the debt-service coverage ratio. At least four other unidentified workforce housing complexes have tapped into their reserves.
The state has issued between $8 billion and $10 billion of the municipal bonds to convert market-rate apartments into affordable housing for middle-income families, according to Municipal Market Analytics. The bonds are speculative and lack a credit rating.
Local agencies borrowed as much as 120 percent of the purchase price of each complex to fund capital expenses, fill reserves and pay deal fees, Lisa Washburn, managing director at MMA, told Bloomberg.
In addition, the loans assumed high occupancy to pay debt service and fees to property managers, project administrators and government agencies that issue the debt.
The properties, loaded with debt, were financed by workforce-housing bonds sold between 2019 and 2022, when interest rates were at historic lows. Local authorities have brought a few dozen such deals to market, according to Bloomberg.
“It’s a highly leveraged property that’s paying out a lot of fees, so it needs to generate enough revenue to cover all of that,” Washburn said.
Mira Vista, built in 1986, was 88.5 percent occupied in June, down from 98.2 percent in June 2022. according to a bond filing.
The offering document for $94 million of bonds issued in 2021 projected 95 percent occupancy this year and thereafter, according to Bloomberg. Mira Vista munis with a 4 percent coupon and maturing in 2056 last traded Aug. 6 at 63.5 cents on the dollar, down from above 70 cents in the middle of last year.
Stefan Friedman, a spokesman for Larkspur-based Catalyst Housing Group, an affordable housing developer that administers Mira Vista, said the complex, like others in California, faced “unprecedented” financial challenges after the pandemic.
Rent collections declined, while inflation jacked up expenses.
“Catalyst remains committed to partnering with ownership, management, residents and the City of Antioch to ensure that Mira Vista Hills continues to provide high-quality affordable housing serving Contra Costa County’s essential workforce,” Friedman told Bloomberg in an email.
A Morgan Stanley analysis of 20 California workforce-housing deals found the average occupancy for such a project was 95 percent in June, while average net operating income covered 93 percent to 94 percent of that month’s debt service. Expenses have also exceeded projections.
The workforce-housing model, which has helped alleviate a national housing shortage, remains untested over a full business cycle, Mark Schmidt, a Morgan Stanley municipal strategist, said.
“As performance in California remains mixed, we have become more skeptical that there is a workforce housing 2.0 waiting in the wings,” Schmidt told Bloomberg in an email.
— Dana Bartholomew
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