Students Help Preserve Affordable Housing

Students Help Preserve Affordable Housing
Lynn Safranek
Law School Office of Communications
February 23, 2010

Two students in the Law School's Housing Initiative have put the finishing touches on their project to refinance a low-income Chicago housing complex, a move that will help keep the complex affordable for its tenants and will generate more than half a million dollars in much-needed new money.

Ian Bushner, '09, and Eitan Hoenig, '10, along with Jeff Leslie, the Paul J. Tierney Director of the Housing Initiative, worked well over 150 hours from September 2009 to January 2010 handling the refinance of Villa Guadalupe, a senior apartment complex in the South Chicago neighborhood.

The Villa, which is owned by the Claretians, a Catholic missionary group, contains 53 units of low-income housing for seniors; the average income of the residents is $11,000, which is 42 percent of the median household income of residents in Chicago and 32 percent of the median household income of the residents of Cook County.

Villa Guadalupe had prior bonds from 1990, but its credit enhancement/letter of credit provider refused to renew its letter of credit. This triggered a mandatory redemption.

"There was a real need to do this refinance to keep the project from defaulting, which would have ruined its credit and caused defaults on the other financing that supports the Villa - which potentially could have shut down the Villa entirely," says Leslie, the Paul J. Tierney Director of the Housing Initiative & Clinical Professor of Law. "We've worked with Claretians since 2002 on a variety of projects, so they brought the Villa transaction to us to work on as well."

Established in 2002, the Housing Initiative provides legal representation to individual and community-based housing developers, tenant groups, and other parties involved in the development of new or rehabilitated affordable housing units. It focuses on innovative transactions sponsored by community-based organizations on the South and West sides of Chicago.

In this project, the Housing Initiative represented the Claretians and its corporate parent, which served as guarantor on the project's financing. They began by researching the tax issues that go along with bank qualified 501(c)(3) bonds, and explaining these to their client. Under the Internal Revenue Code, the project must be used for a charitable purpose, and the bonds must be structured to comply with the tax rules that apply to tax-exempt bonds.

They also negotiated business issues between the borrower, the guarantor, and the bank that purchased the bonds. Those issues included reserve requirements, reporting obligations, default and cross default provisions, balance sheet requirements, and terms by which borrower may call the bonds, extend the bonds, or convert to a different bond structure.

The project involved further negotiation of voluminous documents, such as the trust indenture, loan agreement, bond purchase agreement, bank agreement, and tax compliance agreement.

Leslie and the students prepared borrower's and guarantor's resolutions authorizing the transaction, and prepared the closing opinion as borrower's counsel. Finally, they worked with bank counsel, bond counsel, and issuer's counsel on coordination of deliverables to close on the bonds.   

In December, the Housing Initiative closed on the issuance of tax exempt 501(c)(3) bonds to refinance the Villa. The bonds were issued by the Illinois Finance Authority and sold in a private placement transaction to Fifth Third Bank.

Refinancing helped lower Villa's building payments, which will benefit residents by keeping the facility affordable. It also generated about $700,000 in new money that is being used for improvements and upgrades. (While the overall bond issue was $3,345,000, the bulk of it involved refinancing prior bonds.)

The Housing Initiative's work on this project continues, as the Villa is now contemplating an interest rate swap and private property management and wellness center contracts that must be structured so as not to run afoul of the tax exempt bond rules.

Congratulations to Bushner and Hoenig for their work in closing this transaction!

Jeff Leslie