[IMGCAP(2)]Meagher tells GlobeSt.com that when the last of theFHA loans has closed, most likely in June, the city will have $100million in proceeds to add to its existing stock of 1,371affordable housing units―most of which serves ascollateral for the new loans―by acquiring additionalaffordable rental units throughout San Diego. The housingcommission's first goal will be to add 350 units and its overallgoal will be to add 1,000 units; Meagher points out that the waythe program is structured, the commission has the potential tocontinue leveraging its portfolio to provide cash flow and funds toacquire additional affordable units, virtually in perpetuity. Theloan program ultimately will provide the housing commission withmore cash flow than it had when the portfolio of 1,371 units wasentirely unleveraged, he notes.

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

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The unusual structure that NorthMarq has created uses thefederal government's Build America Bonds program to provideinterest rebates on the housing commission's Fannie Mae and FHAloans. The Build America Bonds program, adopted as part of heAmerican Recovery and Reinvestment Act of 2009 to foster investmentby municipalities, will provide the housing commission withinterest rebates of 35% for the full terms of the loans.

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

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

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

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The housing commission plans to invest approximately 60% of theproceeds, or $60 million, in direct acquisitions of existingaffordable housing complexes or new buildings that need to beleased. It plans to invest the other 40% of the proceeds intopublic-private partnerships, working with for-profit and nonprofitborrowers on tax credit deals and providing subsidies to thosepartners through a variety of arrangements, such as buying theground for a project and leasing it to the developer.

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

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Soon after Meagher and Champlin began working on the financingplan for the housing commission, the capital markets beganunwinding. The two NorthMarq managing directors had initiallyenvisioned a more conventional tax-exempt financing plan for thecity, but the collapse of the credit markets derailed thatplan.

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The assignment had begun with a request for proposals in 2008,after HUD transferred ownership of the 1,371 units to the San Diegohousing commission with the requirement that the commission mustadd at least 350 units of affordable housing while maintainingaffordability at or below 80% of area median income for families,and 50% of AMI for seniors. Richard C. Gentry, San Diego HousingCommission's president and CEO, says that with the Fannie Maefunding, the commission "moves a step closer to the first majorexpansion of agency-owned affordable housing units in more than adecade."

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

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