Apartment Builders Rush to Obtain Tax-Free Bonds
Orange County apartment developers are scrambling to obtain tax-exempt bond financing approval within the next seven weeks for as much as $302 million worth of projects for fear that no more of the bonds will be issued after Jan. 1.
Proposed federal tax law changes could kill or greatly restrict the bond program, which is used more heavily by builders in Orange County than anywhere else in the nation as a way to cut financing costs and make apartment construction economically feasible.
Tax-free revenue bonds provide apartment builders with financing at interest rates two to three points below the rates offered by conventional lenders. As a trade-off, the developers agree to set aside a certain number of apartments for low- and moderate-income renters.
For the last 30 months, the bond program has been at the heart of the county’s efforts to make up for its huge shortfall of low- and moderate-income housing.
John Murphy, the county’s bond counsel, said he is working overtime to hurry the processing of a backlog of about $302 million worth of applications filed by 11 county builders, including the giant Irvine Co.
The reason for the pell-mell rush, county officials said, is that all of the proposed tax bills--even if ultimately enacted late next year--would be retroactive to Jan. 1.
Tom Beckett, the county’s housing bond program administrator, said that separate proposals being backed by the U.S. Treasury and the House Ways and Means Committee would eliminate or reduce local governments’ power to use their tax-exempt status to issue revenue bonds on behalf of apartment builders.
“All of these proposals, regardless of when Congress gets around to passing them, are effective Jan. 1, 1986,” Beckett said. Because of the retroactive clauses in the pending legislation, he said, attorneys who specialize in bond issues won’t be able to assure potential bond buyers that the interest they earn on the bonds will be tax-free. Therefore, Beckett said, the low-yield bonds simply will not sell. “The financial market doesn’t deal well with uncertainty,” he observed.
Murphy said developers in California are concerned about the potential elimination or reduction of tax-free bond programs because they have made the greatest use of the programs. “And in California, Orange County is far and away the leader,” Murphy added.
To date, the county has issued $745 million worth of bonds to finance the development of 12,570 apartments. As mandated by the state, 20% of the apartments must be priced to be affordable to low- to moderate-income families, defined as those earning no more than 80% of the county’s median household income. The current median income figure is about $29,000 per year, meaning that families with annual incomes of $23,200 or less are eligible to rent the specially priced units.
Working 18-Hour Days
“A tremendous amount of low- and moderate-income housing has been built in the county because of the bond program,” said attorney Richard Cornutt, who is working late hours on behalf of several Orange County builders to complete the legal paper work needed for the bond issues. Cornutt said he and Murphy have been putting in 18- to 20-hour work days to beat the deadlines.
Cornutt said that developers seeking tax-free revenue bond issues also are being pressured by state-imposed deadlines. The state makes a certain amount of bond-granting capacity available each year, doling it out to cities and counties on a first-come, first-served basis.
Beckett said that when the bond capacity allotted to local governments is used up this year, Orange County will begin to issue tax-free revenue bonds through its housing authority. Because of a legislative fluke, he said, housing authorities have no limits on the number or value of bond issues they sponsor.
Builders, however, consider housing-authority bonds less desirable than county-issued bonds because they come with stiffer controls on rental prices.
Murphy predicted that with only $320 million in bond-issuing capacity still available to local governments in California this year, some of the Orange County applicants will have to settle for the housing-authority bonds.
Developers in the Race
Among the local developers in the frenzied race for bond money are the Irvine Co., Sterling Development Co. and the William Lyon Co., all of Newport Beach; Lincoln Property Co., Irvine; Western National Properties, Orange, and Shea Homes, Laguna Niguel.
Irvine Pacific Development Co., the home-building arm of the Irvine Co., currently is applying for $50 million to $60 million in additional multifamily revenue-bond financing, said Pat White, Irvine Pacific’s vice president of finance. The company has applied for a new issue even before it has used all the proceeds of previous bond issues, she said, “because we think the requirement (for issuing revenue bonds) will change at the beginning of ’86.”
White said that if federal legislation outlaws the county’s multifamily revenue-bond program, “we wouldn’t be building apartments unless conventional rates went way down.”
The county bond program enabled the Irvine Co. to revive apartment building on its lands in 1983 after a seven-year hiatus, White said. In the last two years, she said, the big land developer has obtained $261 million in bond money. With the funds, she said, the company has completed construction of 1,500 apartments, begun construction on an additional 1,000 units and plans to begin work on 2,000 more within the next few months.