City’s affordable finance arm plans first CMBS deal

Housing Development Corp. expects to issue $550M for Forest City’s 8 Spruce Street

From left: Housing Development Corp.'s Gary Rodney, 8 Spruce Street (Photo credit: Google) and Bruce Ratner
From left: Housing Development Corp.'s Gary Rodney, 8 Spruce Street (Photo credit: Google) and Bruce Ratner

The city’s affordable housing finance unit is planning for the first time to issue bonds that will be packaged as commercial mortgage backed securities. This inaugural group of loans pegged at $550 million will be secured by the market-rate residential high-rise 8 Spruce Street, known as New York by Gehry, located in Lower Manhattan.

The Housing Development Corporation, which generally focuses on financing affordable housing for the city, will issue the bonds, which will then be packaged and divided into different risk levels and sold into the CMBS market. Wells Fargo will be the loan servicer.

Sources within the city agency said there were special circumstances that made the CMBS structure useful here, and it was not expected to become a common practice. This bond deal is similar to two the state’s New York Liberty Development Corporation structured to finance 1 Bryant Park and 7 World Trade Center, but this is the first for the city.

Nonetheless, insiders said it showed an inventive use of market tools.

“It demonstrates HDC’s willingness to get creative on structuring in order to diversify how HDC-financed projects are capitalized,” Ben Thypin, director of market analysis with data firm Real Capital Analytics, said.

HDC is not issuing any new debt, however. Instead, this deal is structured to refinance floating rate bonds that were issued between 2008 and 2010, including Liberty Bonds. There were $8 billion in Liberty Bonds created in 2002 following the September 11 attacks to spur commercial and residential development in Lower Manhattan.

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“This would be [HDC’s] first transaction to be structured as CMBS,” the agency’s president, Gary Rodney said in a letter to board members.

There is no affordable element to 8 Spruce, a 902-unit tower that Bruce Ratner’s Forest City Ratner opened in 2011. HDC is handling the refinancing for Forest City and its partners TIAA-CREF and National Real Estate Advisors, because it issued the original bonds. Thus, to obtain the same tax-exempt status, the city must be the originator.

The city disclosed the arrangement last month during the agency’s board meeting on September 22. Neither the city nor its taxpayers are liable for the bonds, which are privately financed. While the loans were pegged at $550 million, the deal would allow for up to $610 million, the agency’s documents show.

The city sees a low lending risk, as the building was appraised in July at $1.1 billion, the documents reveal. In addition, the market for securitized loans has improved in recent years.

“The CMBS market has been strong over the past two years and it seems like [HDC] is taking advantage of the demand for CMBS bonds by going to it for fixed-rate financing while rates are still low,” said Joe McBride, a research analyst from the loan tracking firm Trepp.