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102814i bank housing graphicIn a deal that connects Wall Street to poor families in Cambridge, two of the largest banks in the country are investing in low-income public housing here. The planned agreements with Citibank and Wells Fargo will help fund $320.9 million in redevelopment of five sites, the first phase of the Cambridge Housing Authority’s comprehensive plan to preserve its aging housing.

Citibank, whose parent, Citigroup, is the third-largest U.S. bank in assets, will lend more than $109 million in a first and second mortgage, and also finance construction costs. No. 4 bank Wells Fargo will invest $101.6 million in equity in return for tax credits. Wells Fargo will essentially own the housing for the 15-year term of the tax credits, although the housing authority will continue to manage and operate the developments and plans to repurchase them after the credits expire.

The deals are a major milestone in the housing agency’s long quest for money for major repairs to its portfolio as federal support has dwindled. Without the renovations, the developments could become so dilapidated that they couldn’t be used for housing, authority officials have said.

Plan A, Plan B

Two years ago, the authority tried to take advantage of a loophole in federal rules that would have doubled federal aid if the CHA “disposed” of its housing to a private entity – in this case, nonprofit corporations controlled by the authority. But the U.S. Department of Housing and Urban Development, or HUD, closed the loophole as scores of housing agencies lined up to exploit it.

The authority then turned to another HUD program – the Rental Assistance Demonstration, or RAD – and met success. The program doesn’t provide any more money from the federal government but makes it easier for the authority to get private money if it puts its housing under private ownership. Two days before Christmas last year, HUD approved the authority’s application.

That didn’t make the effort a slam-dunk. There were questions about whether banks would want to lend and finance companies would want to invest in a venture for which the payback depended on money in a federal budget that had to be approved by Congress every year. Supporters responded that politicians wouldn’t want to endanger a project supported by the financial industry.

The optimists apparently were right. Financial companies showed keen interest in the Cambridge project. Eight lenders bid on Phase 1, with three offering both construction and permanent financing. Seven companies bid to invest equity in return for tax credits.

Authority commissioners chose Citibank and, tentatively, Wells Fargo on Sept. 21; officials at the agency are still negotiating some items with Wells Fargo and made approval contingent on reaching a satisfactory agreement. The authority is benefiting from penalties imposed on Citibank for its conduct during the financial crisis. In addition to construction and permanent loans, the bank offered a supplemental loan for $16.7 million to fulfill obligations under its settlement with U.S. prosecutors for selling risky mortgage-based securities, authority consultant Margaret Donnelly Moran said in an Oct. 20 memo.

How it works

To win private financing under the RAD program, the authority will transfer its housing to nonprofit corporations under its control; legally it will no longer be public housing with deed restrictions guaranteeing affordability. In place of those protections, the authority is keeping ownership of the land under its buildings and will include requirements that the housing remain low-income. Investors also have an incentive to keep the units for low-income tenants for at least the 15-year term of the tax credits, which require that poor people occupy the housing.

Authority officials have told tenants that their rents won’t increase and tenant protections will remain virtually the same as they are in public housing. Income limits for the tax-credit program are lower than they are for public housing; authority officials have promised that any current tenants over the limit will be moved to non-tax-credit apartments.

Still, there are potential downsides to the project; it will cost more because of private-sector involvement, and it could affect the availability of rent vouchers that help poor families and individuals rent private housing.

Public housing tenants now pay about 30 percent of their income as rent; the rest of operating and capital costs for the housing come from federal public housing payments. After the change, the subsidy will come from Section 8 rental assistance for each apartment, also financed by the federal government.

This Section 8 aid, which is tied to the unit instead of a tenant, could affect Section 8 certificates awarded to low-income tenants to use in the private market. Federal rules allow tenants in housing with project-based Section 8 vouchers to get tenant-based certificates after a certain time. Authority officials are asking HUD to modify the rules to discourage public housing tenants from taking advantage of the opportunity; tenant advocates oppose any change.

More worries

If too many public housing occupants get tenant-based certificates, it could reduce the total available and would lead to vacancies in authority developments, officials there have said. The authority also intends to use the funding from a small number of unused tenant-based vouchers to fill gaps in financing for the second phase of its renovation project. Officials said no existing Section 8 recipients will lose support. But about 1,300 families and individuals are on the waiting list for the scarce subsidies.

Although the RAD program doesn’t increase federal housing aid, it could add to taxpayers’ burden because the private investors can offset their tax bills with credits and exemptions. Wells Fargo will get low-income housing tax credits, the most common vehicle for private investment in affordable housing. Citibank will finance its construction loan by buying tax-exempt bonds.

And the total cost of the project will be higher with private investment than it would if supported directly by federal funds. That’s because of fees charged by investors for putting the deal together; Citi will charge about $8.9 million in fees, according to a CHA summary of bids. Even with fees and other costs, however, its bid is the “most favorable” to the authority, giving CHA more than $100 million in “true” borrowing ability, Moran said in her memo.

What’s affected

The Citibank and Wells Fargo funds will help finance the first phase of the program, which covers 1,153 units in nine developments. Four of the sites were already renovated with federal stimulus funds, leaving five to be repaired: Manning Apartments in Central Square; Newtowne Court and Washington Elms in Area IV; Putnam Gardens in Riverside; and Woodrow Wilson Court in Cambridgeport.

Phase 2, to begin next year, includes the five other developments, smaller properties and scattered housing.

The four developments already repaired with stimulus grants, LBJ Apartments, JFK Apartments, Lincoln Way and Jackson Gardens, also used money from private investors who bought tax credits, with some units transferred to authority-controlled private nonprofit corporations and subsidized with project-based Section 8 vouchers.

Two other authority sites that need extensive repairs are being handled separately. Millers River, in East Cambridge, will go through the “disposition” process that HUD rejected two years ago, authority officials hope; federal officials indicated they would consider approving that project along with the RAD work.

The only remaining state-funded public housing site, Jefferson Park State in North Cambridge, is getting aid from Massachusetts for renovations. The state-funded apartments are on the same site as the federal Jefferson Park development, which will be repaired in Phase 2 of the federal project.

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