Atlanta’s proposed $200 million debt for affordable housing resembles balloon mortgage
By David Pendered
Terms of Atlanta’s plan to borrow $200 million to fund affordable housing resemble a balloon loan on a residence – interest-only payments for the first two years, plus a higher interest rate than other types of debt and the ability to stretch the loan out to 50 years to lower the payment due each year.
The Atlanta City Council is slated to vote Monday on the proposal to sell up to $200 million of what Atlanta calls Housing Opportunity Bonds. The program is outlined in a city presentation. The legislation did not receive unanimous consent in a council committee. Consequently, it is to stand alone on the agenda for an up or down vote, or a delay.
Atlanta specifically agrees to set the property tax rate at whatever level is necessary to collect property tax revenues sufficient to make the payments over the life of the bonds, according to the legislation.
Highlights of the terms include:
- Interest-only payments for two years, then payments are to more than double. Payments are planned at $5 million a year for the first two years, followed by estimated annual payments of $13.7 million for the life of the loan, according to a report by the city’s chief financial officer, Roosevelt Council, Jr. The purpose of the two-year balloon is to allow city revenues to rebound from a projected two-year dip related to COVID-19, Council said.
- The interest rate will be higher than for other types of municipal debt, perhaps by up to 1.5 percent. This is because investors will pay taxes on their earnings, terms show, and the city can expect to pay a higher rate to attract buyers. The federal government typically waives taxes on municipal bonds, and some states follow suit. These proposed municipal bonds don’t qualify for the federal exemption because they don’t, “promote a policy objective such as school construction or energy conservation,” which is the requirement of tax-exempt municipal bonds, according to report by a regulator established by Congress, the Municipal Securities Rulemaking Board.
- Specific language in the city’s proposed legislation ensures a 50-year lifespan for the debt arrangements with the arms of city government that are to sell and manage these bonds. This provision is enabled in the state Constitution. This timeframe will enable the bonds to be refinanced and the terms extended, just as in the refinancing of a residential mortgage. The legislation observes: “The term of this Contract shall commence with the execution and delivery hereof and shall expire on the date on which the Bonds have been paid in full, but in no event shall this Contract expire later than fifty years from the date of the execution and delivery (the ‘Effective Date’).”
Proceeds of the bonds are to finance a portion of Mayor Keisha Lance Bottoms’ affordable housing program, dated June 2019: One Atlanta: Housing Affordability Action Plan. Bottoms had made the provision of such funds a central issue in her 2017 mayoral campaign. Bottoms’ is eligible to seek reelection in 2021. The legislation observes the mayor’s program has four “concrete strategies”:
- “Create or preserve 20,000 affordable homes by 2026 and increase the overall supply of affordable housing;
- “Invest $1 billion from public, private, and philanthropic sources in the production and preservation of affordable housing;
- “Ensure equitable growth for all Atlantans and minimize displacement; and
- “Support innovation and streamline processes….”
One observation on the structure of the proposed bond package was offered by Matt Fabian, head of market and credit research at Municipal Market Analytics. Fabian served on a panel discussion sponsored April 16 by the Volcker Alliance in partnership with the Penn Institute for Urban Research – Special Briefing on the Impact of COVID-19 on the Fiscal Outlook of State and Local Governments.
Fabian’s response is based on information presented to him:
- “Usually affordable housing bonds target first-time homebuyers at or below some poverty threshold. So a normal, state-run affordable housing program doesn’t much help keep low-income folks in homes they already own. I’m unaware of a large program that helps any borrower who didn’t get their mortgage from the state or city in the first place.
- “I guess such a thing is possible though, probably done fully taxable like suggested so that it doesn’t interfere with private use restrictions, etc. Because it’s novel, it would probably need a GO or appropriation backstop from the city. This is not something, though, that should be structured and capitalized in a hurry. The city would need to know what it was getting into.”
Atlanta does intend to offer a backstop of the type Fabian cited, in the form of a guarantee that it will raise property taxes to the level necessary to pay bondholders.
This is the same guarantee used to secure general obligation bonds, the GO bonds Fabian mentioned. They typically are issued to pay for roads and bridges, parks, and equipment.
This is relevant language contained in the legislation:
- “The City covenants and agrees that it shall, to the extent necessary, levy an annual ad valorem tax on all taxable property located within the corporate limits of the City, as now existent and as the same may hereafter be extended, at such rate or rates, without limitation as to rate or amount, as may be necessary to produce in each year revenues that will be sufficient to fulfill the City’s obligations to make any such payments required to be made by the City hereunder, from which revenues the City agrees to appropriate sums sufficient to pay in full when due all of the City’s obligations to make any such payments.” [Emphasis provided.]