Serenity at Larkspur Recapitalization Challenged by City Council; Projects Affected by Wildfires Expect Rapid Shifting Rental Market; Introducing Octus’ Proprietary Database on California Workforce Housing

Relevant Items:
California Workforce Housing Database – April 2025
Serenity Project Administrator Notice: EMMA / CalCHA
Larkspur Ad Hoc Committee Page: Report Findings / CalCHA Response
CalCHA January 2025 Property Data

Serenity at Larkspur could be the first example in restructuring for a niche $10 billion sector of California-based workforce housing. A worsening relationship with the partnered municipality, taxes imposed by the county assessor and a sudden change in project administrator could muddy the waters in the project’s efforts of financial turnaround.

California borrowers for more than 45 workforce housing deals from 2019 through 2021 flooded the municipal market with unrated, highly leveraged single-asset, multifamily real estate that converted existing private properties to publicly owned workforce housing units.

What was meant to be a stopgap to a worsening housing crisis in California, became laden with debt surpassing its appraised values. Economic loss and rent growth expectations at issuance were not realized for many of the developments now distressed.

Of the more than 45 projects tracked by Octus, formerly Reorg, nine are experiencing distress to date, tapping into coverage reserve funds, or CRFs, to pay for interest payments.

The full Workforce Housing Database lives HERE. This first release features the capital structures of more than 45 projects and their latest quarterly filing, as well as a separate tab of the reserve balances for the nine distressed projects as of April 1.

The sector, which was identified as a credit concern back in 2022, has now seen three technical defaults after tripping up debt service coverage ratio covenants for fiscal 2024: Serenity at Larkspur, Mira Vista Hills and Annadel Apartments.

“A lot of the underwriting assumptions didn’t necessarily hold up,” said a source. “There were assumptions that economic loss would go down, quite a bit, and that wasn’t the case. Another thing we’ve looked at is rent growth, that it would increase over time to pay down the bonds. Those assumptions haven’t come to fruition either.”

The table below shows the most recent coverage reserve balances across the nine stressed projects and the next payment expected, according to the debt service payment schedule cited in the original offering memorandums. All reserve balances are according to financial disclosures for the quarter ended Dec. 30, 2024.

Distress in the Sector

Multiple layers of reserves are typically baked into a workforce housing deal structure to provide additional security for bondholders, but the intention during issuance was that the project would generate sufficient revenues to cover debt service without tapping into deeper backup reserves.

“Some of them have basically fully exhausted several layers of reserves, and are now going to the debt service reserve fund. It doesn’t seem to be getting better for any of the credits that are thoroughly distressed,” said a source.

There are three new projects that have made unscheduled draws from their CRFs since August. CTR City Anaheim, a 231-unit complex in Anaheim, Calif., disclosed a series of draws on Aug. 21, 2024; Creekwood, a 309-unit development in Hayward, Calif., drew from its CRF to pay a portion of an interest payment due Feb. 1; the Exchange at Bayfront Apartments, a 172-unit housing facility in Hercules, Calif., also had to make an unscheduled reserve draw for a payment on Feb. 1.

The six other projects under Octus coverage have continued to make regular unscheduled draws, and are now dipping into backup reserves. This includes housing developments such as Westgate Phase 1, Twin Creeks Apartments, Oceanaire-Long Beach, Annadel Apartments, Mira Vista Hills and Oceanaire-Long Beach.

While three projects have already defaulted on their debt service covenants, Twin Creeks was required to engage with a housing consultant after missing its debt service coverage ratio for the first time in fiscal 2024. Westgate Phase 1 also missed its mezzanine debt service coverage ratio for the fiscal year 2024, though it is only one portion of the projects’ covenanted net debt service.

“It’s a tough sector to restructure. It takes a while before you really have any remedies here,” said a source. “We want to collect interest on this over a long period of time, get some paydown on the principal, and then we want to be left with an asset that is going to support a decent recovery on the bonds that may be outstanding at maturity.”

This is not the first time a workforce housing project has considered restructuring its bonds. Annadel Apartments, the first project funded through this unique deal structure, experienced a spate of distress immediately after issuance.

Catalyst, Annadel’s project administrator, borrowed various cash flow notes in 2020 and 2021 for temporary liquidity to make interest payments. As of 2024 fiscal year-end, Annadel had $1.3 million cash flow notes outstanding due to Catalyst, bearing 10% annual interest. Initial discussions with bondholders in 2021 introduced a potential restructuring of its debt in favor of reissuing the bonds with longer maturity dates, but the project never pursued that option.

The market remains sour to the experimental essential housing deal structure prevalent in the early 2020s. The project 787 The Alameda, which priced its senior and subordinate debt in January 2024, is the last of a near-similar issuance in California to date. This was a Catalyst Impact Fund with a slightly different structure, noted a source.

The more interesting opportunity for these projects, however, lies in the secondary market. Many deals were priced with low coupons, and the bonds now trade at “substantial discounts,” according to a source. “You can have much more conservative assumptions than in the underwriting, and still have a deal that works out well today in trading.”

The seniors bonds that amortize first is something the market seems to be comfortable with, the source added.

Looming Oversight on Serenity

Serenity at Larkspur, a 342-unit affordable housing development in Larkspur, Calif., is emblematic of the stress permeating the sector.

The project is eyeing a restructuring process involving bondholders and has already exhausted its multiple layers of reserves. As of its debt interest payment due Feb. 1, the development is down to only $8.15 million in the senior debt service reserve fund after drawing $1.6 million. It has exhausted its balances in the CRF and operating reserve fund.

Initial talks of the recapitalization plan included Serenity refinancing its $220 million bonds with issuance of new $280 million bonds. It would also consider eliminating the project administrator fee and the California Community Housing Agency, or CalCHA’s, monitor fees for the next six years, as well as reducing costs involving contract services and maintenance. At the time, CalCHA had hoped to work with existing project administrator Catalyst Housing Group to oversee the turnaround plan.

But just last month, the CalCHA board passed a resolution to engage Waterford Residential 16 as the new project administrator for the housing development. The new agreement removes mention of a management fee fund in several areas of the document and ensures Waterford is not liable for any previous “acts or omissions” of Catalyst while managing the properties.

Pressures between the Marin County tax assessor, the Larkspur City Council and CalCHA over Serenity have also intensified in the past year. An ad hoc committee was formed to reassess the city of Larkspur’s membership in the CalCHA program, following the deepening stress of the credit.

A series of emails between the committee and CalCHA points toward a worsening relationship.

“Given its already overleveraged structure, the ad-hoc committee is skeptical that a recapitalization plan which further encumbers the property is a viable solution,” according to a committee report.

Other findings include that the property is only 56% leased to middle-income tenants, despite their mandate aiming for 100%, according to the report. Larger rent discounts are also given more to nonprogram tenants than income-qualified tenants. “The ad-hoc committee has found that the costs to taxpayers for subsidizing the property taxes and paying administrative fees at Serenity outweigh the rent benefits being provided to income-qualified tenants by a factor of 4 to 1.”

The report also references a nearly $9.1 million in possessory interest tax bills issued by the Marin County assessor to Catalyst, delinquent since 2019 with a 10% penalty. There is expected to be a step-up penalty of 1.5% per month assessed on unpaid tax balances starting November 2024.

A number of project administrators have been charged possessory interest tax and have challenged it, noted a source. Orange County has been one of the most aggressive on this issue.

An exchange between CalCHA and the Larkspur City Council references a February 2025 hearing before the Board of Appeals in order for Catalyst to contest the tax claims. A closed session by the CalCHA board on the Jan. 28 agenda alludes to anticipated litigation and conference with legal counsel.

It is unknown whether Waterford will be liable for the delinquent tax payments under the new project administrator agreement.

Issues such as the possessory interest tax and committee oversight like in the case of Larkspur are worrisome and might have some adverse impact on bond trading, “but it’s not a death knell for the sector,” said a source.“I don’t think it’s something fundamental that would cause massive losses for bondholders,” the source added.

The latest update from CalCHA in late November regarding restructuring efforts mentions a forbearance agreement with trustee UMB Bank, on behalf of bondholders, and CalCHA. “We have not agreed to any recapitalization plan nor have bondholders committed to any plan.” CalCHA disputes several of the calculations from the ad hoc committee report.

After the Wildfires

In the aftermath of the California wildfires that devastated neighborhoods in Los Angeles County, many of the workforce housing developments in the area will need to reckon with a quickly shifting renting environment.

Westgate Phase 1-Pasadena, which made unscheduled CRF draws last year in December and June, along with Pasadena Portfolio, Theo-Pasadena and MODA at Monrovia Station, are all housing developments south of the Eaton Fire that Octus flagged of concern in January. Sources are not aware of wildfire damage to any of the 45 essential housing projects.

“A good thing on the rebound is that while people are repairing their homes, they need somewhere short-term to stay. There might be a lot of demand for these rentals.” said a source. Los Angeles regional rent growth rose 0.7% during the first two months of the year, which is more than twice the rate of last year, noted the source.

“On the flip side, there are also rumblings about rent control measures,” the source cautioned.

Los Angeles County on Feb. 25 approved a temporary moratorium for income-eligible tenants financially affected by the wildfire on Feb. 25 through July 31. Gov. Gavin Newsom extended executive orders on March 7 that put in place state price-gouging restrictions. A Los Angeles Council committee rejected a proposal to implement a citywide rent freeze but did advance eviction protections.

All three housing consultant reports by Century Urban for the Serenity, Mira Vista and Annadel projects have cited rent control measures during the pandemic as a significant stressor to their bottom line. Serenity, for example, claims to have absorbed nearly $2.9 million in uncollected rental payments since the start of the pandemic.

According to CalCHA’s January 2025 rental property data, Annadel is averaging at 90.8% occupancy for the month, Serenity at 90.1%, Creekwood at 89.6%, Mira Vista at 78.6%, Exchange at Bayfront at 89.5% and Twin Creeks at 94.6%. The authority has yet to post February rental data as of today.