The city of Memphis entity that sold $12 million in municipal bonds on behalf of Global Ministries Foundation has been told it can no longer conduct such business.

The Tennessee Housing Development Agency has temporarily de-authorized the Health, Educational & Housing Facility Board of the city of Memphis to sell bonds. The decision is related to the withdrawal of federal subsidies going to Global Ministries Foundation’s portfolio and a subsequent downgrading of those bonds as well as leadership changes at the Health & Ed Board.

Two pending Memphis-based projects handled by the Health & Ed Board are being redirected to the Memphis-Shelby County Economic Development Growth Engine and the Shelby County Health, Education and Housing Facility Board.

The Memphis Health & Ed Board sells tax-exempt revenue bonds to finance education and affordable multifamily projects. It is granted this ability through THDA. The Memphis Health & Ed Board also administers a payment-in-lieu-of-taxes program for affordable multifamily projects and is authorized to do so through the city of Memphis.

The Memphis Health & Ed Board is essentially an agent that sells tax-free bonds for a fee. THDA gives bond authority to the board, but is otherwise not involved in its financing deals. Regulatory oversight falls to the federal Department of Housing and Urban Development.

At the end of 2015, the Memphis Health & Ed Board had 28 active bonds worth nearly $245.6 million. In 2011, the board issued $12 million in municipal bonds to support GMF’s purchase of the Warren and Tulane apartments.

After the Warren and Tulane apartments failed multiple HUD inspections, HUD announced in February that it would no longer provide Section 8 rent subsidies. It also ordered the relocation of all residents to safe and sanitary housing, with relocation costs partially funded by the subsidy payments that would otherwise have gone to Global Ministries Foundation.

At the time of the 2011 transaction, Standard & Poor rated the bonds as A- investment grade. After HUD cut ties with GMF, that rating plunged to CCC+, with the securities losing more than two-thirds of their value.

“We will not be adding to their workload by sending additional bond deals through them for the time being.”

–Ralph Perrey
Executive director, Tennessee Housing Development Agency

Ralph Perrey, executive director of THDA, said that his decision stems from concerns over leadership and national media attention around the GMF controversy.

“There are obviously some large issues that the Health Ed Board is dealing with, and they are dealing with them at a time of transition,” Perrey said. “The big thing is they’re going on their fifth month without an executive director.”

Last December, John Baker resigned as executive director of the board after 17 years in the position.

“We will not be adding to their workload by sending additional bond deals through them for the time being,” Perrey said.

Perrey added that he was concerned by a March 13 article published by Bloomberg. In his article “In Roach-Infested Slums, A Muni-Bond Default Spurs Big Questions,” Martin Braun laid out events that led to GMF defaulting on its tax-exempt bonds.

Residents rely on the HUD-backed subsidies to pay rent. GMF needs the subsidies as revenue to operate the apartments and pay bondholders. Without HUD, the bonds went into “technical default,” according to Braun’s article.

“I want to see who’s going to be running the Health Ed Board moving forward,” Perrey said. “The other aspect is, is there more clarity about these issues that are in the press – these controversies over some of these investments and some of these bonds. What is that situation, and how is that resolving itself?”

When Perrey was asked about what he specifically would like clarified, he responded, “Well, I would just like to know a little bit more about what’s going on. Let me just leave it at that.”

GMF said it would try to sell Warren and Tulane in the aftermath of their failed inspections and the loss of HUD subsidies. GMF confirmed this week that the foundation continues discussions about selling Warren and Tulane. Even if the apartments sell, it is likely they won’t garner enough to retire the $12 million debt.

According to the Shelby County Assessor of Property, the complexes have a total of 448 units and were assessed at a combined $7.1 million in 2015.

Memphis City Council members passed a resolution urging HUD officials to delay the relocation of more than 300 families in the two complexes. Memphis Mayor Jim Strickland has expressed a desire to see the two complexes rehabilitated in some way so the city doesn’t lose the stock of affordable and low-income housing.

Meanwhile, Global Ministries is responding to local code violations in General Sessions Environmental Court, where court referee John Cameron told GMF to resume making repairs at the complexes but to board up units as residents move out.

That would become a court order by the next hearing April 21.

Dan Reid, chairman of the Memphis Health & Ed Board, declined to comment.