Ballard Spahr Andrews & Ingersoll, LLP has helped Puerto Rico's Public Housing Administration (PRPHA) close a transaction valued at more than $600 million for the modernization of about 4,100 units of public housing. The complex deal required what HUD's deputy secretary called a "sophisticated financial package" and a "complex interagency agreement."

"Puerto Rico has taken HUD's bond financing program to a new, extraordinary level with this deal," Deputy Secretary Roy Bernardi said in his department's press release on the transaction, for which Ballard acted as legal advisor and special counsel to PRPHA and the Department of Housing (DOH). The financing involves the leveraging of public funds with over $235 million in private investment.

The deal is significant for several reasons:

  • It is the first 4 percent low-income housing tax credit transaction in Puerto Rico, introducing a new financing source for developers in the commonwealth.
  • It involves the first volume cap private activity housing bond issues of the commonwealth.
  • It is the largest single low-income housing tax credit transaction ever closed in the 22-year history of the program, both in number of units, 4,132, and amount of equity investment ($235 million).
  • It generates net cash from sale and developer fees of approximately $165 million that will go toward modernizing public housing units beyond the units in this transaction.

The deal presented complex challenges:

  • A six-month time frame to develop a finance plan that required numerous HUD approvals and involved a HUD team of about two dozen central and local personnel.
  • The need to address the unique issues under commonwealth law related to transferring 33 properties from public to private ownership while maintaining them as public housing, subject to the federal and commonwealth protections accorded such housing.
  • The goal of maximizing the economic advantage to the commonwealth through the sale of Puerto Rico Housing Finance Authority (PRHFA) bonds by the underwriters was timed to occur immediately following enactment of the Housing and Economic Recovery Act of 2008. The timing enabled the bonds to take advantage of certain provisions written into the law.

The team of Ballard attorneys, led by Baltimore-based partner Paul K. Casey, comprised partners Wayne H. Hykan, Teri M. Guarnaccia, Linda B. Schakel, and Lila G. Shapiro-Cyr; of counsel Mark J. Maichel; associates Amy M. McClain and Michelle M. McGeogh; and paralegal Nicole K. Counts.

About the Deal

In 2003, PRPHA began a program to modernize public housing projects throughout the commonwealth. The PRHFA, a division of the Government Development Bank for Puerto Rico, issued $663 million in general purpose bonds for the modernization program. The bonds were secured by a pledge of PRPHA's capital fund allocations from HUD. As the modernization proceeded, the need to modernize as many units as possible required identifying additional resources.

In 2007, the PRPHA decided to supplement limited public resources by designing a finance plan that would leverage public funds with private investment. This plan, which was completed on August 7, involved the defeasance of approximately $391 million of the 2003 bonds; the issuance of two new private activity bond issues by the PRHFA, totaling approximately $484 million; and the generation of approximately $235 million in low-income housing tax credit equity from a private investor, Hudson.

The leveraging of the private investment is being accomplished through the sale of 33 public housing developments, with over 4,100 residential units, to a limited liability company, Vivienda Modernization 1, LLC. The sole member of Vivienda LLC is a limited partnership, with the DOH as the managing general partner and a private investor as the limited partner. Vivienda LLC will acquire the properties and complete the modernization by borrowing funds generated by the private activity bonds issued by the PRHFA, which will make Vivienda LLC eligible for federal low-income housing tax credits.

PRHFA is undertaking two bond issues, each of which received an allocation of private activity volume cap authority from the commonwealth: 

  • $384,475,000 Capital Fund Modernization Program Subordinate Bonds (Puerto Rico Public Housing Projects), Series 2008, secured by a pledge of the PRPHA's capital fund allocation from HUD, and
  • $100,000,000 Housing Revenue Bonds (Vivienda Modernization 1, LLC Projects), Series 2008, which are secured in part by a permanent loan from the PRHFA and by a standby letter of credit from the Government Development Bank for Puerto Rico.