BILL ANALYSIS
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: ab 2293
SENATOR ALAN LOWENTHAL, CHAIRMAN AUTHOR: torres
VERSION: 6/22/10
Analysis by: Mark Stivers FISCAL: yes
Hearing date: June 29, 2010 URGENCY: YES
SUBJECT:
Construction loans for housing-bond funded projects
DESCRIPTION:
This bill requires the Department of Housing and Community
Development, until June 30, 2013, to offer construction
financing alternatives to specified bond-fund awardees that are
unable to secure a construction loan from a private lender.
ANALYSIS:
In November 2006, California voters approved Proposition 1C, the
$2.85 billion Housing and Emergency Shelter Trust Fund Act of
2006. Among other things, Proposition 1C included funds for the
following programs administered by the Department of Housing and
Community Development (HCD):
$490 million for the Multifamily Housing Program (MHP), which
funds the new construction, rehabilitation, and preservation
of permanent and transitional rental homes for lower income
households through loans to local governments and developers.
This amount also includes the allocations for the two MHP
subprograms, the Supportive Housing Program and the Homeless
Youth Program.
$300 million for the Transit-Oriented Development (TOD)
Housing Program, which provides grants to cities, counties,
and transit agencies for the provision of infrastructure
necessary to support mixed-income housing developments within
close proximity to a transit station and loans to housing
developers for the development of the TOD housing units.
$135 million for the Joe Serna, Jr. Farmworker Housing Grant
(FWHG) Program, which funds the development of ownership or
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rental homes for agricultural workers through grants to local
governments and non-profit organizations.
The housing loans that HCD makes under these three programs are
known as permanent loans. They provide the long-term financing
for the project. In order for construction to occur, however, a
developer must obtain a short-term construction loan from a
private lender, which the developer later pays off with the
permanent loan once construction is complete.
Prior to the fall of 2008, private lenders made construction
loans based on a developer having received an award of HCD
funds. Although HCD did not have the cash in hand at the time
it made the award, the private lenders were comfortable that HCD
would have access to the cash when necessary. When construction
was complete, HCD borrowed from the state's Pooled Money
Investment Account (PMIA) to fund the permanent loan. HCD's
borrowing from the PMIA is known as a "warehouse loan", and at a
later time the State of California sold the voter-authorized
general obligation housing bonds to repay the PMIA.
In the fall of 2008, the PMIA ran extremely low on cash, and the
board overseeing the fund decided to quit making warehouse
loans. At the same time, the bond market crashed, and the State
of California was temporarily unable to sell new bonds. Because
it was no longer clear how HCD would fund the awards it had made
from bond-funded programs, private lenders quit making
construction loans. Projects that had received HCD awards now
could not move forward.
Since the fall of 2008, the state and HCD have developed a new
model for funding bond awards. Instead of selling bonds after
loans are funded as was done in the past, the state now projects
the amount and timing of funding needs, sells bonds in
anticipation of these needs, and holds the money until needed.
Since the fall of 2008, HCD has received $1.8 billion from the
state's sale of general obligation bonds and currently has
almost $1.2 billion on account. While this amount on account
does not yet cover all awards made to date (and those yet to be
made), it is more than enough to fund all claims projected over
the next twelve months. Given that the state since fall 2008
has sold more than $26 billion worth of general obligations
bonds in a time of great economic uncertainty and massive budget
deficits, it is also extremely likely that the state will be
able to sell additional bonds as needed. Nonetheless, some
private lenders remain concerned that funds may not be available
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when it comes time to close a permanent loan on a bond funded
project and continue refusing to make construction loans for
such projects.
This bill requires HCD until June 30, 2013, with respect to each
awardee under the MHP, FWHG, and TOD Programs who is unable to
secure a construction loan from a private lender, to offer, upon
request of the developer, one of the following alternatives:
Make permanent loan funds available during the construction
period. This shall take the form of a contract with a private
construction lender to oversee construction and disburse funds
on behalf of HCD. HCD shall utilize the reports of the
lender's construction inspector or jointly engage a
construction inspector with the lender.
Escrow, reserve, or set aside permanent loan funds for the
project as of the date of closing of the construction loan.
The bill further:
Requires HCD, within three months of the bill taking effect,
to establish and publish standards, requirements, and
procedures for, and begin offering, one or both of the
options.
Requires HCD to set an initial application deadline and, for
awardees that submit an application prior to the deadline and
meet the HCD's threshold requirements, give priority to
awardees in the order in which they received their awards.
Thereafter, the department shall accept applications on an
over-the-counter basis.
Prohibits HCD from exercising this authority for any project
that received an award after December 18, 2008, until HCD has
obtained access to bond funds sufficient to fund all projects
within the same class of projects that received an award prior
to December 18, 2008.
COMMENTS:
1.Purpose of the bill . According to the author, private lenders
are no longer willing to make construction loans to affordable
housing projects which rely upon Proposition 46 or Proposition
1C bond funds as permanent financing. Lenders are concerned
that the state will not have sufficient bond funds at the time
the construction is completed. As a result, shovel-ready
rental housing, farmworker housing, and transit-oriented
housing projects that have received state funding awards are
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unable to move forward. This bill requires HCD to offer
developers funding alternatives while giving HCD options for
how to do so.
2.A temporary fix . Construction lending is a relatively
labor-intensive and costly business. The lender must oversee
construction and approve draws on the loan based upon the
developer's completion of certain construction milestones and
expenditures. There is much more day-to-day involvement than
with permanent lending, and it helps for the construction
lender to have a local presence. For these reasons, HCD
generally has preferred to rely on private lenders to fulfill
the construction lending role, though HCD already does limited
construction lending under the FHWG Program and the Emergency
Housing Assistance Program. In general, it may be preferable
to maintain this role for the private sector, but in the
current circumstances where private lenders are unwilling to
make construction loans, it may be necessary for HCD to take a
more active role temporarily in order to fulfill its mission.
This bill seeks to strike a balance by leveraging HCD's money
during construction to entice private lenders back into the
construction lending and oversight business without making HCD
the construction lender per se. In addition, the bill sunsets
HCD's authority on June 30, 2013, by which time the current
economic and state budget uncertainties will hopefully be
resolved.
3.Completing the fix . In March 2010, the State Treasurer's
Office, in conjunction with HCD, invited private lenders to
participate in a new program designed to resolve the lack of
construction lending in part. Known as the Option Program,
the program offers construction lenders the ability, with
respect to a specific multifamily rental housing project, to
purchase directly from the state a general obligation bond in
the amount of the HCD loan committed to the project. At the
time of closing for the permanent loan if HCD has insufficient
funds on hand to fund its loan, the lender may then exercise
the option. The state then uses the proceeds from the private
placement bond issuance to fund HCD's permanent loan. In
essence, the construction lender buys state bonds specifically
to repay its own construction loan. To the extent that HCD is
likely to have sufficient funds to fund all of its bond awards
when needed, lenders will probably never exercise these
options but nonetheless will enjoy greater certainty that
construction loans will be repaid on time.
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To date, Citibank, Wells Fargo, and Bank of America have
chosen to participate in the Option Program. Some other
lenders, however, are unable to participate because they have
reached their internal limit on purchasing municipal bonds or
because they do not invest in such bonds, in some cases due to
their smaller size. As a result, projects relying on these
non-participating lenders are unable to move forward. The
sponsor, Housing California, is aware of four projects that
received HCD awards, have not yet been served by the Option
Program, and remain unable to obtain construction loans.
These four projects represent a total of 345 affordable rental
homes, and the HCD awards leverage a total of $81 million in
non-state funds. These developments are intended to serve
various special need populations, including
extremely-low-income youth transitioning from foster care who
are homeless or at-risk of homelessness, homeless
transition-aged youth with severe mental illnesses, and very
low-income families. In addition, HCD is currently accepting
applications for a new round of MHP awards, and some of the
new awardees may run into a similar problem.
To the extent that some construction lenders are unable to
participate in the Option Program, it is possible that the
remaining developers still needing construction loans could
take their business to lenders who do participate. It is not
exactly clear, however, whether the participating lenders are
able or willing to do business with all of these additional
projects. This bill seeks to provide concrete options for
those affordable housing developers whose lenders cannot or do
not participate in the Option Program.
4.Urgency clause . In order to get the shovel-ready affordable
housing construction projects that need construction financing
back on track as quickly as possible, this bill contains an
urgency clause.
Assembly Votes:
Floor: 75-0
Appr: 17-0
HCD: 8-0
POSITIONS: (Communicated to the Committee before noon on
Wednesday,
June 23, 2010)
SUPPORT: Housing California (sponsor)
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Affordable Housing Associates
Cabrillo Economic Development Corporation
Century Housing
Community Economics, Inc.
Community Housing Improvement Systems and
Planning Association
San Luis Obispo County Housing Trust Fund
South County Housing
Southern California Association of Non-Profit
Housing
Union Bank
OPPOSED: None received.