When Oregon Changed the Terms on Subsidized Housing Deals, Private Lenders Balked

The market for new projects dependent on state bond funding seized up.

A legal change has upended state financing for affordable housing. (Brian Burk)

When Gov. Tina Kotek took office, she made creating 36,000 units of new housing each year her top goal.

The Oregon Department of Justice got in the way.

A perplexing and previously unreported decision by DOJ lawyers has halted the state’s aggressive investment in subsidized housing, throwing the most precarious part of the housing sector into turmoil.

The state’s affordable housing plan for the rest of 2023 included subsidizing two dozen new projects slated to comprise more than 1,700 units. But after an abrupt March edict from the state’s attorneys about language in the bond documents used to help fund state-subsidized development, private lenders balked. They have withdrawn their money, a crucial portion of any subsidized development.

The DOJ’s sudden shift baffled experts.

“As a member of the affordable housing industry, I’m puzzled,” says Javier Mena, affordable housing manager for the city of Beaverton and a member of the Oregon Housing Stability Council, which approves all state housing investments.

“I have not heard any type of response about why the DOJ looked at the bond documents or if they engaged with lenders to see what the impact would be,” Mena says. “I don’t understand it.”

Last month, the Housing Stability Council averted one crisis created by the DOJ’s decision. It was the financial equivalent of rescuing a single passenger from a sinking ferry.

The council normally works in a deliberate fashion because developing new subsidized housing is slow and complicated, often requiring a half-dozen different sources of funding.

On April 13, however, the council faced a situation so urgent it waived the normal rules for public notice and called its members together for an emergency meeting to approve a hasty swap of one kind of state financing for another that was unaffected by the DOJ decision (but extremely limited).

The swap occurred in a confusing thicket of Roman numerals and acronyms. But the underlying issue was simple: In March, the Oregon Department of Justice materially altered the terms on which the state would now make its principal source of housing subsidy available.

As part of what DOJ says was a regular review, lawyers examined the standard language in the Article XI-Q bonds that provide funding for subsidized housing. (Disclosure: Attorney General Ellen Rosenblum is married to the co-owner of WW’s parent company).

The DOJ determined the bond documents underlying state financing provided insufficient collateral and had to be changed to specify that any new project include a greater level of security for the state of Oregon.

The practical effect of that change: Rather than acting as an unsecured lender for subsidized projects, the state now wanted to share the priority position typically held by private lenders such as Citibank, U.S. Bank and Umpqua Bank—and to receive a pro rata distribution of proceeds in the case of a foreclosure sale, rather than getting paid after the primary commercial lender.

In effect, DOJ was demanding that the banks surrender some of their security interest in the underlying collateral—the affordable housing projects—to the state.

Lenders said no.

The immediate result: a direct threat to a planned $52.7 million 96-unit affordable housing project in Montavilla referred to as Glisan Family Apartments. The developers, Related Northwest and the Immigrant & Refugee Community Organization, were set to close the deal April 18, using money from tax credit investors, the Portland Housing Bureau, Metro, the state, and private lenders.

But the private lenders balked at the DOJ’s new terms.

The Housing Stability Council had previously finalized the state’s participation in Glisan Family Apartments in February. The deal: It would contribute $6.23 million from the Local Innovation and Fast Track, or LIFT, program.

LIFT, created by lawmakers in 2015, has enabled the state to contribute to the development of 6,600 new affordable apartments.

But when DOJ announced its rule change in March, it not only caused the private lenders to the Glisan Family Apartments project to threaten to pull out—it cast a cloud over the entire LIFT program, slated to help fund the two dozen new projects around the state in 2023 that promise 1,700 or so new units.

After lawmakers created LIFT in 2015, Oregon Housing and Community Services began funding it in 2016 by issuing what are called Article XI-Q bonds.

The State Treasury sells the bonds to investors, and the state lends the bond proceeds to affordable housing developers to help cobble together projects that meet federal affordability definitions for low-income renters.

As Oregon’s housing crisis worsened, lawmakers increased LIFT’s bonding allocation from $40 million in 2015 to $300 million in 2021.

“In terms of affordable housing and funding, the LIFT funds have been an amazing tool,” Mena says. “Without the LIFT funds, I don’t think many of the Metro projects [from a 2018 housing bond] would have moved forward.”

Article XI-Q bonds are a big part of the governor’s strategy—Kotek wants $770 million from them over the next two years.

The second pool of money used to close the Glisan Family Apartments deal is not an option. And so, two dozen projects are now in limbo.

Until the state can reach some kind of accommodation with lenders, the next project in the state’s LIFT pipeline is officially in jeopardy and a year’s worth of deals are now clouded with uncertainty.

At the April 13 meeting of the Housing Stability Council, Mena and others asked how long it would take to solve the standoff between private lenders and the DOJ.

The answer then: Oregon Housing and Community Services “expects to have the program issues resolved and addressed by the end of this month,” the agency said. But the end of April came and went. The answer now is still the same—soon.

“We expect that this will be resolved in the coming weeks and able to close transactions with updated documents before the end of the biennium,” Housing and Community Services spokeswoman Delia Hernández says.

DOJ spokesman Roy Kaufmann says there are good reasons to seek a greater security interest in LIFT projects.

“The changes continue to ensure that Oregon leaders have meaningful operational control of these developments in the unlikely and rare instance of foreclosure,” Kaufmann says.

Many experts, including Mena, are puzzled by the change, adding that affordable housing projects almost never go into foreclosure.

But Mena says the current impasse imperils the new development that Kotek and just about every public official in Oregon want to see happen.

“There’s no way that achieving those goals would be possible without the XI-Q bond program and the LIFT money,” Mena says.

Kotek wants a speedy resolution, says her spokeswoman, Elisabeth Shepard.

“The governor is eager to see the DOJ clarify their opinion in a way that supports affordable housing development in the state,” Shepard says. “She appreciates the expeditious collaboration among DOJ, OHCS, and affordable housing stakeholders to achieve that outcome.”

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