High-yield municipal bonds intended to finance affordable housing for essential workers in California are encountering financial difficulties. The Mira Vista Hills Apartments, a 280-unit complex in Antioch, has recently reported failing to meet its required debt-service coverage ratio. Since the beginning of 2023, at least four other similar “workforce housing” projects have tapped into their reserves to meet debt obligations, according to recent securities filings.
California has issued between $8 billion and $10 billion in municipal bonds for the purpose of converting market-rate apartments into affordable housing for middle-income residents. These bonds fall into a speculative category and are not credit-rated, as noted by Municipal Market Analytics. The state is home to seven of the nation’s top ten most expensive housing markets, according to the National Association of Realtors.
Local agencies often borrowed up to 120% of the purchase price to cover capital expenses, reserves, and deal fees, as explained by Lisa Washburn, managing director at MMA. Additionally, these projects assumed high occupancy rates to manage debt service and fees associated with property management, project administration, and debt issuance.
The ability to carry such heavy debt loads was facilitated by the sale of many workforce-housing bonds between 2019 and 2022, a period characterized by historically low interest rates, particularly following the pandemic. Numerous local authorities brought these bonds to market during this time.
“It’s a highly leveraged property with substantial fee payouts, necessitating significant revenue generation to cover these costs,” Washburn noted.
Mira Vista, built in 1986, was 88.5% occupied as of June, a decrease from 98.2% the previous year. The bond issuance documents from 2021 had projected a 95% occupancy rate for this year and beyond. Rising interest rates have also affected commercial real estate values.
As of August 6, Mira Vista’s bonds with a 4% coupon maturing in 2056 were trading at 63.5 cents on the dollar, down from over 70 cents in mid-2023.
Scott Carper, a program administrator with the California Community Housing Agency, which issued the Mira Vista bonds, did not respond to an email inquiry. A representative from Catalyst Housing Group, which manages Mira Vista, stated that the complex has faced “unprecedented” financial challenges post-pandemic. Issues such as decreased rent collections and rising inflation have contributed to these difficulties.
“Catalyst remains dedicated to collaborating with all stakeholders to ensure Mira Vista Hills continues to offer quality affordable housing for Contra Costa County’s essential workforce,” wrote Stefan Friedman, a spokesperson for Catalyst.
An analysis by Morgan Stanley of 20 California workforce-housing deals revealed that the average occupancy rate was 95% in June, with net operating income covering 93% to 94% of the month’s debt service. However, expenses have often surpassed projections.
Amid a national housing shortage, the demand for affordable housing remains high. Yet, the workforce-housing model has not yet been tested through a full economic cycle, according to Mark Schmidt, a municipal strategist at Morgan Stanley.
Other efforts to address affordable housing have been financed through municipal debt, such as bonds issued by universities and ski towns like Telluride in Colorado.
“As the performance in California remains inconsistent, we are increasingly doubtful about the emergence of a refined workforce housing model,” Schmidt commented.
Chad Farrington, co-head of municipal bond strategy at DWS Group, emphasized that not all workforce-housing projects should be generalized. The condition of the apartments, local rental markets, and reserve levels funded by the bonds can vary significantly.
“We exercised caution in our purchases,” Farrington stated.
In these transactions, a local bond-issuing entity, such as the California Community Housing Agency, collaborates with a municipality where the apartment complex is located. The agency purchases the property with bond proceeds, and the municipality agrees to forgo property-tax revenue, which subsidizes rents for households earning between 80% and 120% of the area’s median income.
Unlike conventional municipal bonds that offer scheduled principal repayments, workforce-housing bonds do not guarantee a set repayment schedule. Instead, excess income from the projects may be used to reduce principal, but bondholders largely rely on the sale of the properties at an appreciated value for repayment.
Many of these projects would struggle to meet debt-service coverage requirements without the reserves funded by the bonds. “The issuance was done in the most aggressive manner possible,” Washburn concluded.
