Orrick Advises on First-Time Use of Social Impact Bonds to Rehab Abandoned Properties


Orrick assisted pro bono clients the Richmond Community Foundation and the City of Richmond in California in the successful closure of a $3 million social impact bond issue to fund the acquisition and rehabilitation of dilapidated and vacant housing in the city for sale to first-time homebuyers. This is the first such bond to be issued in the United States and represents the culmination of a nearly two-year effort by the Foundation, the City, Orrick and others to help solve a significant problem in a low-income Bay Area city. It is a promising model for other communities.

Richmond has hundreds of dilapidated, abandoned houses that have become a magnet for crime and public health problems, as well as a blight on neighborhoods – dampening both property values and community spirit. About two years ago, the City explored the idea of using eminent domain to forcibly acquire “underwater” mortgages below face value to try to address the fallout of the housing crisis. However, this program, which never got off the ground, was targeted at properties that were still owner-occupied and were current in their mortgage payments. Not only did it not address the real problem of the abandoned properties, but it also brought the wrath of several large banks and financial institutions in the form of litigation and, at least temporarily, froze Richmond out of the capital markets (the City had to pull an “A” rated bond issue during the period it was trying to sell when there were no bidders for the bonds).

Many of the dilapidated properties have been abandoned by their owners; have significant tax and mortgage delinquencies, serious code violations and code enforcement citations; and are sometimes occupied by squatters and drug users. In short, they are “zombie” properties that no one wants to take responsibility for. To address this problem, Orrick partner John Knox came up with an idea to marry the issuance of social impact bonds with a program run by a nonprofit community foundation to acquire and rehabilitate these “zombie” properties. John is a native and current resident of Richmond and has served as the City’s bond counsel for more than 25 years. Other members of the City’s regular financing team, including RBC Capital Markets, Schiff Harden, and Backstrom, McCarely & Berry LLC, agreed to pitch in on a pro bono basis to get the transaction accomplished.

The City agreed to act as a conduit issuer for the bonds, and the Foundation put together a team involving local contractors, real estate agents, Home Depot and another nonprofit called SparkPoint to acquire and rehabilitate the homes, and ultimately make them available for purchase by first-time homebuyers through the SparkPoint program. After significant effort by the entire financing team in structuring the bonds, pulling together the team and soliciting investor interest, the Mechanics Bank, a local bank with longstanding ties to Richmond, agreed to purchase the bonds. The bank will get Community Reinvestment Act Credit for its participation. The bonds have a five-year term, which allows the funds to be “recycled” as rehabilitated homes are sold and used to purchase additional properties, so that the Foundation ​will have the opportunity to spend the money several times over during the life of the program. The bonds do not bear current interest but provide for “supplemental interest” to be paid at the end of the term, which is capped at 10% for each of the five years the bonds are outstanding but is paid from a 50% share of the net profits from the rehabilitation activity. The Foundation shares in the other 50% of the net revenue remains to enable it to continue to operate programs like this to benefit the community. If the Foundation finds the need for more funding, future series of bonds could be issued to extend the program further than the initial five-year period.

The Orrick team advising the Foundation and the City was led by John and included Chas Cardall, Christine Cadman and Ray Brandt.