3 California Essential Housing Projects Flagged for Going-Concern Issues in California Community Housing Agency’s Audited FY’24 Financials

The California Community Housing Agency’s, or CalCHA’s, audited financial statements for the fiscal year ended June 30, 2024, were posted to EMMA today, include going-concern warnings regarding CalCHA’s Annadel Apartments, Serenity at Larkspur Apartments and Mira Vista Hills Apartments projects.

The going-concern language was included because the projects experienced “unforeseen operating challenges that have hindered their ability to meet debt service requirements.” These challenges included high vacancy rates, uncollected rent, pandemic-era rent restrictions, rising insurance costs and “[l]ong-term impacts of submarket rate suppression presenting challenges to program leasing and overall revenue targets relative to pre-pandemic underwriting,” according to the financials. They also included unforeseen roof replacement costs and “[i]nsufficient initial capital expenditure funding due to oversight in third-party property condition assessments at the time of underwriting.”

The financials also note water damage at Serenity at Larkspur from “hundred-year storms” in 2021 and 2022, and Annadel being affected by wildfires in 2017 and 2019.

According to the financials, the challenges faced by the CalCHA projects “resulted in suppressed occupancy and revenue needed to meet financial obligations,” and “there is substantial doubt about [the projects’] ability to continue as a going concern for a reasonable period of time.” They also “hindered [the projects’] ability to meet debt service coverage requirements required under the bond indentures.”

However, management is “actively working to mitigate these conditions to improve overall market rates and restore its competitive position” and also to reduce expenses. The financials state that management is “actively engaged with bondholders on a capital budget reallocation” to address pressing needs.

In addition to the notes in CalCHA’s financials, a going-concern warning was also included in Serenity at Larkspur’s audited financial statements for the fiscal year ended June 30, 2024. The Larkspur City Council withdrew from the CalCHA joint power agreement in April, and Serenity at Larkspur has retained FTI Consulting as an advisor.

Annadel Apartments also posted a notice to EMMA on Oct. 2 stating that it made a $1.3 million draw on its debt service reserve fund, or DSRF, to pay a portion of its Oct. 1 interest payment on its senior Series 2019A bonds. Following the draw, there was no remaining balance in the coverage reserve fund and $7 million in the senior DSRF.

As previously reported by Octus as part of its California Essential Housing Database update in September, Serenity at Larkspur, Mira Vista Hills and eight other projects have also made unscheduled reserve draws since June.

CalCHA’s financial statements note that the projects comprising the Affordable Housing Asset Ownership Division of CalCHA all operate independently of each other, and that bonds issued for each project are specific to the project to which they are affixed and do not have interest in the other projects.

As a result, the going-concern warning does not apply to CalCHA as a whole, which has $2.312 billion of bonds outstanding across all projects. The agency overall finished the fiscal year with $2.191 billion in total assets and a net deficit of $312.6 million. The agency had operating income of $16.5 million and a change in net position of negative $72.6 million.