$116M Refinance Rescues 3,301-Unit Portfolio

[IMGCAP(1)]DALLAS-Amid the Fannie Mae turmoil, a nonprofit owner of affordable housing has turned around its financial picture with a $116.49-million DUS first-mortgage loan to replace a 2005 issue of auction-rate securities. The nonprofit was on a collision course with the capital markets, but the deal saved the 3,301-unit portfolio in Texas, Florida and South Carolina just months before its due date.

Philip Melton, senior vice president of Charlotte, NC-based Grandbridge Real Estate Capital LLC, says the nonprofit from Southlake, TX started the wheels churning in December 2007 to replace the floating rate of the now-illiquid ARS program. “We were really fortunate that Fannie Mae decided to stay with us. There were some times, some challenges, with this deal because of market conditions,” Melton says. “There was some concern about whether we could get it finished.”

Melton says the 16-asset portfolio’s saving grace was that it met Fannie Mae’s mission to provide affordable housing. The deal closed practically on the eve of the agency’s conservatorship. “If it had gone on too much further, we were looking at a nonprofit that might not be able to keep its doors open,” he tells GlobeSt.com. “It created a situation in which they could stay in business.”

Melton wouldn’t disclose the identity of the nonprofit, but did say the Fannie Mae circuit was aware of the Texas borrower’s financial stress due to the collapsed ARS program. Internet research shows the borrower is Atlantic Housing Foundation Inc.

Melton describes the deal as a Fannie Mae credit enhancement in a cross-collateralization pool with cross-default provisions. Effectively, one default throws the rest of the portfolio into jeopardy. The refinance is a 10-year loan at a fixed-rate interest with the first five years as interest only and followed by a 35-year amortization schedule.

Melton says the borrower has options in the seventh year to move to a fixed-rate vehicle with an interest cap, a three-year swap or refinance the bonds again. However, he says the credit enhancement was inked with a 10-year term in order to shave 25 basis points from the interest rate and provide more cash flow to subordinated bond holders and note holders, who provided the capital for the Fannie Mae-guaranteed financing. Capital Trust Agency, headquartered in the Florida Panhandle, was the bond issuer.

[IMGCAP(2)]In repackaging its financing, the borrower got roughly $4.5 million of reserve capital to address deferred maintenance at the complexes and create a future cap-ex pool. Melton blames the deferred maintenance on the borrower being forced to dip into its reserves to pay an extra $300,000 per month on top of its usual debt service due to an ARS restructuring.

“There was no cash for subordinated bondholders and the capital reserve and there was no cash to go into the property,” Melton says. “They didn’t create this. They got hit by the market. It was a market-driven phenomenon and not because they did anything wrong.”

The portfolio averages 91% occupancy. Melton says the cross-collateralization was done because some assets’ occupancies were slightly lower. “The only way we could get the leverage we needed with Fannie Mae was to cross-collateralize,” he explains. “It was done to strengthen the pool overall.”

The garden-style complexes, amassed over time, were built between 1969 and 2002. The mix of one, two and three-bedroom units is predominately class B complexes with a smattering of class A and a couple class C’s. In North Texas, the largest concentration is 716 units in three properties in Fort Worth, with one asset each in Dallas, Denton, Lewisville and McKinney. The portfolio’s only Houston asset is Arrowood, a class B-minus asset at 8304 S. Course Dr. in the Alief submarket. There is one complex each in Huntsville and San Marcos, TX.

In South Carolina, there are four complexes, totaling 576 units, in Beaufort, Charleston, Columbia and Orangeburg. In Florida, there is a 238-unit complex in Titusville and 236-unit asset in Melbourne.