By Natalie Posgate
( A p r i l 2 8 ) – In today’s corporate M&A climate, $500 million of this and $1 billion of that roll off transactional lawyers tongues as casually as the discussion of last night’s scores in the NBA playoffs.
Often, the parties behind these big dollar deals are the world’s biggest players in the energy or real estate sectors. Seldom do these sizable deals involve public service while paying the lawyers handling the work big bucks in the process.
This month, such a deal occurred in West Texas.
On April 9, the Housing Authority of El Paso (HACEP) closed Phase 1 of the largest rental assistance rehabilitation project in the country. The transaction also marks the largest single issuance of housing tax credits ever approved by the Texas Department of Housing & Community Affairs.
The project, initially valued at $250 million, will provide major renovations to nearly 1,600 public housing apartment units among 13 properties in El Paso, which constitute 30 percent of HACEP’s entire ownership of housing units. The publicly and privately funded five-year project has a potential to reach $1 billion in value if El Paso completes renovations for all of its roughly 45 properties. HACEP will spend $65,000 per unit in renovations.
The lawyers for HACEP and the 13 other project participants executed the transaction through a fairly new program by the U.S. Department of Housing and Urban Development –touted as the “future of public housing”–called the Rental Assistance Demonstration Program (RAD).
The program allowed for HUD to transfer ownership of El Paso’s public housing to HACEP and allowed HACEP to use private financing to rehab and replace old and deteriorating residences to meet current and future housing demands, utilizing housing tax credits and bonds to secure the necessary financing.
It was structured as a 4 percent tax credit/bond transaction with $125 million of tax-exempt bonds and $80 million of tax credit equity.
Gerry Cichon, a lawyer and the chief executive officer of HACEP, said the renovations will make an “immeasurable”difference in the lives of the properties’ tenants, many of whom are elderly or disabled. He said two major renovations will include the installation of individual heating and cooling units in each apartment and redesigning the buildings to better accommodate the disabled.
The buildings currently operate under an evaporate cooling system, which requires someone to climb the roof twice a year to switch the unit from heating to cooling for the entire building, or vice versa, he said.
Clichon said “just knowing that if there is a leak in the roof that asbestos is not falling through the ceiling is going to be a major quality of life improvement for the tenants.”
He added that the transaction also guarantees HACEP’s existence for at least 40 more years.
“It’s a quality of life improvement for a population that is yet to realize that desperation,”he said.
The complexity of the transaction resulted in the need for 10 law firms and in-house legal departments to get the job done. Four of the law firms are Texas- based.HACEP hired Houston-based Coats Rose as its primary outside counsel, along with Washington, D.C.-based Reno & Cavanaugh. Bracewell & Giuliani served as bond counsel, advising a bond issuer that is an affiliate of HACEP. Bob Blumenfeld of Mendel Blumenfeld in El Paso advised HACEP as its outside general counsel. Austin member William C. “Cliff”Blount of Waco-based Naman, Howell, Smith & Lee served as trustees’counsel.
Hunt Companies and Stifel, Nicolaus & Company were the investors for the project and were represented by New York-based Nixon Peabody and Cincinnati-based lawyers from Jones Walker, respectively.
Freddie Mac, the lender, hired Philadelphia-based Ballard Spahr as its legal counsel for the deal.
The Coats Rose team was led by Houston director Barry Palmer and Austin director Bill Walter, who received assistance from Austin director Scott Marks and Austin paralegal Deborah Thibodeaux.
Palmer, who has practiced affordable housing law since 1993, said the new RAD program creates a great opportunity to revamp outdated public housing units, many of which were built as a result of the New Deal and have never been renovated.
“It’s really a good opportunity for the housing authority to access capital and meet the backload of maintenance and repair issues that anyone would have operating apartments that were built in the 1940s and 1950s,”he said. “It has been very successful in encouraging private development and private equity to develop affordable housing to be available to people in moderate to low incomes at more affordable rents.”
Palmer is part of Coats Rose’s 13-lawyer affordable housing practice group, which is one of the largest groups of lawyers dedicated to affordable housing in Texas and the Southwest region.
Coats Rose also represented the Housing Authority of New Orleans before and after Hurricane Katrina, closing a series of transactions from 2005 to 2013.
San Antonio partners Jane Macon, William Avila and Carey Troell served as the lead attorneys for Bracewell’s team. Also working on the deal were San Antonio partners Michael Bernard and Blakely Fernandez and associate Shelby Gutierrez, Austin partner Victoria Ozimek and Houston associate Brian Teaff.
“At Bracewell, we’re excited about having an opportunity to work on some cutting-edge projects that not only have legal significance, but also have an impact on the future of multi-family housing,”Macon said.
“As we know, dollars are short not only in Texas, but nationwide,”she added. “The private sector is participating in monetizing this project so [the apartments] can be rehabbed in a significant manner in which [without private investment] there would never be enough funds available to do the rehab and make an impact for the housing practice that we see in this country.”
Bracewell is not new to working on bond transactions for public improvement projects. Avila, a partner in Bracewell’s public finance practice group, has closed approximately 1,000 transactions in his career totaling more than $50 billion in municipal bonds. Some of his previous work includes securing bonds to finance an apartment complex designated to provide year-round housing for teachers in the school district of Presidio, Texas and refinancing the debt of various 501(c)(3) housing charities in Houston, Austin and San Antonio.
The biggest challenges of the deal were the obstacles that the structure of the transaction itself created, Palmer said. He said the biggest hurdle was to get the regulatory agencies to approve the financing plan because of its size.
“They had never done a transaction this big before and had never done financing with multiple properties, and there were 13,”Palmer said. “Getting them comfortable was probably the biggest challenge.”
There were also major time constraint issues. Because the financing involved tax-exempt bonds, Palmer explained that once developers receive an allocation for one, the bond is only good for 150 days.
“If you don’t close in that time frame, you lose the bond allocation and have to start all over again,” he said. “We got the allocation in November and the deadline to close the bonds was April 10. We closed on April 9.
“When you have a due diligence checklist with 300 items on it, you can [usually] think of a couple more to add,”Palmer added. “At some point, you have to stop adding items…and get the lender and investor to come to the closing table.”
Though the transaction has closed, Cichon, HACEP’s CEO, said time constraints will again be the ultimate challenge in getting the project done. Rehabbing thirteen properties is an undertaking that could take 10 years normally, he said, but the government said the housing authority must get it done in five at the latest.
Though the deadline is daunting, Cichon said he is confident his team will deliver.
“The team we have is the Google of public housing,”he said. “No one is better situated than the Housing Authority of El Paso.”
Relocating tenants during the renovations will be another concern, but Cichon said HACEP staff is working hard to make the process as seamless as possible. During the renovations, Cichon said families will be relocated to the same area of town to prevent transportation issues and other hardships. He added that the HACEP staff has met with tenants six or seven times face-to-face before their moves, and that every single tenant has the cell phone number of one of his staff members.
“For us, it’s all about customer service,”Cichon said. “Obviously there are a lot of special needs out there…this is that chance to really respond to [residents] and give [them] a safe, affordable and sustainable place to live.”
HUD initially announced the RAD program in 2011 with a bid or application competition for 60,000 units nationwide. El Paso, the 14th largest housing authority in the nation and largest in Texas, obtained 6,000 units, or 10 percent of the entire units offered at the time.
HACEP celebrated its 77th anniversary this February. Cichon said its prominence today as a housing authority is credited widely to HACEP’s early leaders and their efforts to make El Paso’s great need for affordable housing known. According to recent U.S. Census Bureau data, El Paso is among the top 11 poorest cities in America. Cichon said 75 percent of El Paso’s public housing families have an attrition rate of five years.