[IMGCAP(2)]Meagher tells GlobeSt.com that when the last of the FHA loans has closed, most likely in June, the city will have $100 million in proceeds to add to its existing stock of 1,371 affordable housing units―most of which serves as collateral for the new loans―by acquiring additional affordable rental units throughout San Diego. The housing commission's first goal will be to add 350 units and its overall goal will be to add 1,000 units; Meagher points out that the way the program is structured, the commission has the potential to continue leveraging its portfolio to provide cash flow and funds to acquire additional affordable units, virtually in perpetuity. The loan program ultimately will provide the housing commission with more cash flow than it had when the portfolio of 1,371 units was entirely unleveraged, he notes.

Meagher and Gardiner Champlin, also a managing director in NorthMarq's San Diego office, have worked on developing the program since before the capital markets hiatus of 2008. Designing and implementing it involved "a lot of moving parts and a lot of people," according to Meagher. He and Champlin joined Bloomington, MN-based NorthMarq in early 2009 to launch the firm's San Diego office, which specializes in multifamily originations.

The unusual structure that NorthMarq has created uses the federal government's Build America Bonds program to provide interest rebates on the housing commission's Fannie Mae and FHA loans. The Build America Bonds program, adopted as part of he American Recovery and Reinvestment Act of 2009 to foster investment by municipalities, will provide the housing commission with interest rebates of 35% for the full terms of the loans.

The rebates will result in annual interest savings of more than $1.2 million for the housing commission, according to Champlin, who notes: "To our knowledge, this is the first in the nation Build America Bonds financing for multifamily housing" with government-sponsored entities like Fannie Mae, Freddie Mac and Ginnie Mae. It is "one of the first uses of Build America Bonds for multifamily affordable housing generally," Champlin says.

Among the unique aspects of the program, according to Meagher, is that it not only allows the housing commission to take ownership of its affordable housing stock, but it also "creates the means to almost double the size of the portfolio within the next three years," he says.

Meagher points out that one of the complexities of the deal was the collateralization of the loans because the San Diego Housing Commission's portfolio consists of so many small buildings, averaging 10 units each. Here he credits Greystone and PNC with crafting solutions to the small-property nature of the portfolio―Greystone for its expertise with Fannie Mae lending and PNC for its expertise in FHA loans.

The housing commission plans to invest approximately 60% of the proceeds, or $60 million, in direct acquisitions of existing affordable housing complexes or new buildings that need to be leased. It plans to invest the other 40% of the proceeds into public-private partnerships, working with for-profit and nonprofit borrowers on tax credit deals and providing subsidies to those partners through a variety of arrangements, such as buying the ground for a project and leasing it to the developer.

Meagher says that the $60 million in direct ownership will produce nearly 600 units. "Those 600 units can be leveraged again, which will create more proceeds for them to continue forward on their acquisitions," he points out. He estimates that, "The cash flow in year four will be better than it is today in a portfolio that has no debt on it at all." He calls the program, "a self-sustaining capital plan."

Soon after Meagher and Champlin began working on the financing plan for the housing commission, the capital markets began unwinding. The two NorthMarq managing directors had initially envisioned a more conventional tax-exempt financing plan for the city, but the collapse of the credit markets derailed that plan.

The assignment had begun with a request for proposals in 2008, after HUD transferred ownership of the 1,371 units to the San Diego housing commission with the requirement that the commission must add at least 350 units of affordable housing while maintaining affordability at or below 80% of area median income for families, and 50% of AMI for seniors. Richard C. Gentry, San Diego Housing Commission's president and CEO, says that with the Fannie Mae funding, the commission "moves a step closer to the first major expansion of agency-owned affordable housing units in more than a decade."

Meagher says that in designing and executing the program, NorthMarq had to meet the challenges of a public entity borrower, a portfolo of small and scattered properties and the "constrained rental economics" of affordable housing. The end result, he says, is a program that "may be a model for other communities that are trying to find innovative options to increase the size of their affordable housing portfolio within constrained budgets."