“Uninhabitable squalor” was the description given by a former tenant of this property developer’s 2019 housing project. Neither that disastrous episode of property development incompetence nor the proposed project’s wildfire exposure are disclosed at all within this week’s 618 page preliminary official statement.
This week’s non-disclosure charlatan:
Waterford Place Apartments by BLVD Capital: $236,565,000 CSCDA Community Improvement Authority, Essential Housing Revenue Bonds
The Bonds are secured by Revenues received from the Mortgaged Property, which includes all “land, buildings, fixtures and equipment comprising the Project” (POS pg. 28). The Project comprises a 390-unit multifamily residential rental community located in Dublin, California, known as Waterford Place Apartments (risQ Score 2.9; Wildfire risQ Score 3.7). The proceeds of the issuance will be used to finance the cost of acquiring and making improvements to Waterford Place Apartments, and the Bonds will be issued to BLVD Dublin Waterford LLC, an affiliate of BLVD Impact Housing LLC which is serving as the Project Administrator; both LLCs are subsidiaries of Boulevard (BLVD) Capital LLC, a real estate investment and development company that redevelops affordable multifamily housing for lower-income communities. The issuer is CSCDA Community Improvement Authority, which is tasked with securing financing for “projects that provide affordable local housing for low-income, median-income and moderate-income families and individuals” (POS pg. 46).
Okay, where do we even start…how about on a positive note. The POS does a stellar job of disclosing the Project’s flood ‘risk’ — the word “flood” appears 41 times throughout the disclosure document. The issuer goes as far as to provide the Flood Area Panel Number (06001C03238G) as well as a description of the location’s Flood Zone (Zone X): “Area of minimal flood hazard, usually depicted on Flood Insurance Rate Maps as above the 500-year flood level” (POS Appendix C pg. 46). Drilling down into the property loss estimates for the area within a 20-minute drive time radius of the Waterford Place Apartments appears to support the issuer’s disclosure of the Project’s minimal flood risk. We estimate just 2% property losses as a result of a 100-year inland flood event, and only marginal additional losses from a 500-year event which puts under 4% of property-at-risk. Inland flooding is only expected to drive 2% property losses over the next 10 years in the 20-minute drive time radius surrounding Waterford. The issuer also provides some information on its exposure to earthquake and severe wind hazards in the NATURAL HAZARD INFORMATION section of its Property Condition Report in Appendix E.
Robust disclosure of non-existent flood risk is truly the only positive ESG-related aspect that we picked up on in this disclosure document. While a 500-year inland flood event is only expected to drive 4% property loss within the 20-minute band surrounding Waterford Place, we estimate that a 500-year wildfire event (6% probability over 30-year time horizon) will drive losses to nearly 52% (!) of properties within that same area, giving Waterford Place a wildfire risk ranking of 94th percentile nationally across the housing cohort. Surely “wildfire” appears at least a handful of times in this POS given the materiality of that risk…? No, in fact, the word wildfire doesn’t appear even once in the POS, and neither does the term “climate change”.
The area surrounding the City of Dublin (risQ Score 2.9; Wildfire risQ Score 3.8) has a history of wildfire activity, which appears to be gravitating closer. According to our WILDFIRE ALERTS dashboard, 3 wildfire events have occurred within 15 miles of Dublin since 2020, including the Del Puerto fire which burned over 390,000 acres. Although a wildfire event hasn’t directly burned Dublin historically, this may be more an indication of good luck than low exposure. The City is surrounded by burnable terrain to the north, and on the other side of neighboring Pleasanton to its south. The failure to disclose wildfire risk could be attributed to an innocuous overlook, but more likely an indication of incompetence and negligence (or, deliberate omission).
BLVD Capital, the firm that is managing the development of the Waterford Place property, is no stranger to incompetence and negligence. In May of 2019, 40 lawsuits were filed against a subsidiary of BLVD Capital called ‘Stay Away From the Cans LLC’ (in an apparent homage to a line in the 1979 Steve Martin comedy classic, The Jerk). The lawsuits was filed by tenants living at the BLVD-redeveloped Park Plaza Apartments in Johnston, Rhode Island. Tenants alleged that the apartments were “uninhabitable squalor,” and unhealthy living conditions, extensive water damage and mold were all cited as health hazards. The suit also alleged that children living at Park Plaza suffered respiratory and pulmonary issues, fungal infections as well as severe emotional distress. An attorney representing the plaintiffs noted at the time that the “tenants believe[d] that the Owner [was] taking advantage of their economic disadvantage to force them into living in unsafe conditions in order to maximize their profits.” BLVD’s display of gross negligence in the Park Plaza development was not an outlying event — just one year earlier, the Lucas County Land Bank of Ohio wrote that BLVD “demonstrated an ongoing disregard for the safety, health and well-being of the tenants” during a project that consisted of 8 properties in Toledo, Ohio.
BLVD Capital switches things up a bit with this issuance. Maybe the firm no longer felt like confronting the moral hazards associated with taking advantage of tenants’ economic disadvantage to force them into living in unsafe conditions at the expense of maximizing profits. Instead of investing in an affordable housing project serving a lower-income demographic, BLVD swings to the other end of the social impact spectrum with this proposed project. Pulling up the socioeconomic profile of the most immediate surrounding area (6-minute drive time band), we can attain a data-driven view of the level of community improvement and Social Impact that can be effected by financing this project.
Lower Social Impact Scores indicate that the community does not need resources, while higher Social Impact Scores indicate that the community does need resources (e.g. capital investment). First, we see both a high cost of living and relatively high minority population indicated in the socioeconomic data. Scores for Percent of Income Spent on Housing Score (74.4/100) and Nonwhite/Minority Population Score (91.8/100) are relatively high within the 6-minute drive time band, and both stay approximately the same as we expand the area from 6- to 30-minute drive time bands.
Looking at the other 5 sub-Score metrics within the 6-minute drive time radius indicates that the immediate surrounding community appears to already have a robust profile when we consider the population’s key socioeconomic attributes and health outcomes:
- Persistent Health Obstacles Score (3.8/100) — lower scores are seen in areas where the populations have low rates of underlying health conditions/risks and more access to health insurance.
- Poverty Concentration Score (1.9/100) — lower scores are seen in areas where the populations have lower rates of poverty.
- Low Affluence Score (1.7/100) — lower scores are seen in areas where the populations with higher household incomes, per capita incomes, and lower income inequality.
- Low Educational Attainment Score (5.0/100) — lower scores are seen in areas where the populations have higher rates of educational attainment.
- Low Prestige Employment Score (4.2/100) — lower scores are seen in areas where the populations with higher rates of employment in sectors that are generally higher paying, often at lower risk to automation and adverse health events, and less exposed to carbon transition risk.
As we see below, the total Social Impact Score as well as the sub-Scores across these categories are all low (=< 5.0) within the immediate 6-minute drive time band, but increase materially as we expand the scope of our view of the surrounding area…
Despite the already financially healthy, affluent profile of Waterford Place’s nearby population, the Series is being marketed under the brand of ‘Social Bonds’, a term that shows up 141 times in the POS. BLVD was able to secure the Social Bond designation for this issuance given that the proceeds are being used to finance (according to them) “essential housing projects” that conform to the specifications of the Workforce Housing Program (U.S. Department of Housing and Urban Development defines “workforce” as workers with incomes between 80% to 120% of the area median income). Within the 6-minute drive time radius of the Waterford Place apartment complex, median household income ($141,326) and median housing costs ($2,731) rank in the 99th percentile nationally, percentage of high income young homeowners (40%) ranks in the 98th percentile, and population with health insurance (97%) ranks in the 97th percentile. Within the letter of the regulations, this may well conform to affordable housing, but there are unquestionably better targets for such socially motivated investors.
To that point, the Waterford Place complex is chock-full of unessential amenities. Below are a select few from the brochure provided in the POS:
- Resort-style Swimming Pool
- Soothing Spa
- Unique Waterscapes
- Recreation Room with Fireplace and Gourmet Kitchen
- BBQ/Seating by Pool Area
- Fire Pits
- Weekly Yoga Classes and Monthly Culinary Classes
- Free DVD Rental Program Through Leasing Office
Perhaps BLVD Capital is just fed up with the whole low-income, affordable housing thing. “Soothing spas” sure sound a whole lot more fun than “uninhabitable squalor”, “unique water scapes” certainly ring with a promise of romantic scenic views in a way that “water damage” and “fungal infections” truly do not. Undisclosed wildfire or climate risk exposure, abhorrent misuse of the ‘Social Bonds’ brand, and a property developer with an awful track record of governance. Some will argue that the primary obstacle with determining whether an investment has a strong ESG component is that everyone has a slightly different definition of what qualifies as good ESG; I think we can all agree on the fact that this BLVD Waterford Place Apartments issuance does not meet anyone’s ESG standard.
Livermore-Amador Valley Water Management, CA (risQ Score 2.8; Wildfire risQ Score 3.7) $55,915,000
Unlike the complete absence of wildfire risk disclosure that we saw with the above BLVD’s Waterford Place Apartments POS, coincidentally within the service area of Livermore-Amador Valley Water Management Agency (LAVWMA), this utility issuer does a substantially better job at disclosing its exposure to climate hazards. This joint powers agency was created in order to provide cost effective operations and maintenance for the cities of Livermore and Pleasanton and the Dublin San Ramon Services District (DSRSD). With a Wildfire risQ Score of 3.7, LAVWMA’s POS mentions climate change once and wildfire 5 times, addressing not only the possible interruptions to operations as well as resulting costs (pg. 79), but also recent fires and planning areas that pose both urban and wildland fire risk (pg. 82). Although the issuer does a good job with the acknowledgement aspect, proposing plans for mitigation is another story entirely. There is no mention of wildfire mitigation at all in the POS; however, a tri-valley hazard mitigation plan has been set forth by the cities that identifies critical infrastructure assets that are potentially exposed, loss estimates for general building stock, warning systems, forest and vegetation management, and hazard information centers. The agency sits in the 96th percentile nationally for wildfire property VaR, with recent fires such as Morgan (2013) and Tesla (2005) burning approximately 3,000 and 6,000 acres, respectively, less than 10 miles away from the issuer’s service area. One noteworthy consideration here is that LAVWMA issued a $105 million revenue refunding bond in 2011, wherein the associated disclosure documents used the same language as is seen in this POS, suggesting that not a lot has changed in the past decade in terms of wildfire focus.
Lifespace Communities Inc, multi-state (risQ Score 2.9; Hurricane risQ Score 2.4) $120,465,000
Lifespace Communities Inc is offering a $120 million series secured by 11 CCRC communities spanning 6 states. The average risQ Score across the portfolio is 2.9 with a Hurricane risQ Score of 2.4 and a Flood risQ Score of 2.2. Five of the continuing care retirement communities are in Florida, four of which are sitting in Palm Beach County with exposure to hurricane risk. While the POS acknowledges that natural disasters, including hurricanes, may damage facilities and lead to the impairment of operations and revenues (pg. 54), there is (unsurprisingly) no quantitative disclosure of just how bad that risk is. For starters, the Palm Beach CCRCs — Harbor’s Edge, Abbey Delray, Abbey Delray South, and The Waterford (yes, a different ‘Waterford’) — have risQ Scores ranging from 3.9 – 4.5; these CCRC facilities rank in the 97-100th percentile nationally for property VaR and GDP impairment from hurricane precipitation flooding and wind damage within a 6-minute drive time radius of each facilities. In terms of emergency management, Lifespace prides itself on hurricane preparedness that enabled some residents of The Waterford to ride out Hurricane Matthew (Category 4 storm in 2016) from the comforts of their homes.
In a recent collaborative piece with Municipal Market Analytics we discuss the relationship between climate risk and municipal bond issuer impairment. We find that in CCRC cohorts, higher risQ Scores are correlated with greater levels of impairment. Along those lines, 1,547 of Lifespace’s 4,168 living units (37%) are at one of the four facilities mentioned above and thus have high risQ Scores (A-15). That means that a sizable portion of Lifespace’s units and services are in geographic areas that make them more prone to financial and asset impairment — a statement that is echoed in the POS by saying, “extreme weather events[…] could significantly reduce property value of the facilities” and may have a negative economic impact on coastal communities where certain facilities are located (pg. 54). On the other hand, the remaining 63% of units are located in lower risk areas of the U.S. and have risQ Scores of less than 1.9. We have a case of two extremes — one where roughly ⅔ of assets lie in areas generally insulated from climate-related perils, while the remaining ~⅓ lie in risky geographic locations.
San Fernando, CA (risQ Score 3.1; Wildfire risQ Score 3.9) $37,000,000
San Fernando, California ranks in the 98th percentile nationally for wildfire risk and is surrounded by an environment infamously known for historical wildfire outbreaks. The POS mentions some of this in a short paragraph (pg. 25), but fails to quantify the severity of living and doing business in such a location. The 2019 Saddleridge Fire, which ultimately destroyed around 8,800 acres and several structures, was a close call that had pollutive impacts on the San Fernando area. This wildfire, however, wasn’t the last major threat on record…
The 2020 California wildfire season was a record-breaking year with close to 10,000 fires and 4.4 million scorched acres. A major node for California wildfire activity is the San Gabriel Mountain area located just northeast of the City. Last year, the Bobcat Fire ignited in the mountains and razed 115,000 acres. This amount of destruction is very troubling for the future of San Fernando when considering that the Percent of Income Spent on Housing Score is 96/100, and the percentage of the City’s population that is considered stressed renters (40%+ rent-to-income ratio) is already 46%. Investors should be keenly aware of these data points given that the housing value in San Fernando has a relatively high likelihood of going up in smoke – a 100-year wildfire event is expected to drive 15% property losses. So far, the City has managed to stave off being completely engulfed by the San Fernando Valley wildfires, but this year’s outcome could prove to be dire for the City of San Fernando as the wildfire season heats up.
El Campo, TX (risQ Score 2.9; Hurricane risQ Score 2.5) $3,420,000
The POS dedicates a paragraph to climate disclosure, conceding that the City’s proximity to the Texas Coast makes it vulnerable to coastal hazards (pg. 23). The POS rightly notes that significant damage from extreme weather may reduce the assessed value of property in the City and thus its tax revenues. These bonds are secured by ad valorem taxes (pg. 24), so a reduction in property values could potentially impact the City’s operations and its ability to service debt obligations. The City sits in the 93rd percentile nationally for property VaR from hurricane flooding and the 94th percentile nationally for property VaR from hurricane force wind events. While El Campo was spared the worst of flooding from Hurricane Harvey, the City still enforced evacuations and experienced power outages.
The POS is less forthcoming about climate mitigation and adaptation… because they aren’t doing too much. El Campo’s county, Wharton County, released a Hazard Mitigation Plan which integrates jurisdictional level considerations. Strategies include storm drainage improvements and more stringent and updated building codes. This latter measure would be a marked improvement to the State’s requirement (whose building codes date back to the early 2000s).