Wow. This is pretty complicated, no alders asked questions, and I’m beginning to wonder if they understand it. And it looks like another $3.4M for structured parking . . . .
This was the only place I saw this discussed at any length and often on the council agenda these things just get approved without comment, so I thought I should blog it. I’ve obviously been out of the loop and not paying close attention to this deal along the way. I don’t find it too offensive, but it is of interest.
Board of Estimates
The discussion starts 40 minutes in.
Mike Verveer asks Joe Gromacki, the TIF Coordinator to explain the project and TIF deal.
Gromacki says this is a very large project with many moving parts, 478,000 sq ft, $70M project. 255 apartments, 331 structured parking stalls, 300,000 sq ft condo for the fire department with parking. There had to be a TID boundary amendment which has been adopted by the council. There is complicated HUD financing. The fire department is taken out of the deal because of TIF law prohibition and there are some exceptions to TIF policy involved. The fire station is $13M that is a condo in the project that will be owned separately by the city, we will purchase at costs and then build it out ourselves. All these transactions have already been done, this is the final piece. The HUD financing will be completed in October and they are running this through as if the HUD financing will occur, if not, there is a back of plan of a bank financing it in place if HUD falls through. The method of dispersing funds will be from the lender 309 W Johnson Lending Inc, to Hovde West Johnson (borrower). We provide the loan to 309 W. Johnson lending who will immediately give the loan to Hovde West Johnson. We have personal guarantees from the principles of those entities (Eric and Steve Hovde) as well as from the entities themselves. The gap analysis, the shortage between sources of funds (investment) and the total cost of the project. In this case we have a blend of ability to leverage the financing and the costs of the project (downtown) creating the gap. Land and parking are driving the costs. They were satisfied that the developer paid market rate for the land. The developer is providing $8.8M in cash and value of the land they own. The borrower owns all the parcels, but owned one of the parcels debt free for some time, that is considered cash equity. The loan of $49M will only be for apartments and parking, not the fire admin building. There is also a commercial loan for the commercial portion, the financing is leveraged to the maximum as far as they can tell. Sources and uses are in acceptable ranges and there is a $3.4M gap. HUD has language about not paying TIF back before the 40 year HUD loan. If they sell the property in 10 years, the city policy requires an “equity kicker” and that would be considered a default by HUD. In order to deal with that, they will prepay the equity participation in today’s dollars. They said $375,000 would be the present value of a $1.9M payment in 17 years, that was taken out of the TIF loan, that brings down the $3.4M loan to $3.025. The developer has to make up the difference by raising more capital and reducing the rate of return. The number will not change if HUD falls through and they go with private banking. In addition to the guarantees, they have a mortgage note and increment guarantees from the LLCs. The TIF loan is 52% of the TIF generated by the project so that is a minor exception. The loan will be done prior to certification by the state, but not TIF Joint Review Board approval. They also did that on the Wingra project. This is contingent on Jr. Review Board approval. This will also require a budget amendment and there will need to be internal borrowing to start until we can use future borrowing.
No discussion or questions, its approved unanimously.
Why is this important?
Just a few things to note – things that are not maybe “normal”.
1. I wanted to know more about the HUD financing. Does this mean the units might be affordable? Could we use TIF to make them even more affordable? What is the deal with HUD if they get the money? A 40 year agreement sounds unusual to me. So I made a call and this is what it seems to be.
Section 221(d)(3) and (4) – Rental and Cooperative Housing
Section 221(d)(3) and 221(d)(4) insures mortgage loans to facilitate the new constructiofn or substantial rehabilitation of multifamily rental or cooperative housing for moderate-income families, elderly, and the handicapped. Single Room Occupancy (SRO) projects may also be insured under this section.Section 221(d)(3) and (4) – Single Room Occupancy (SRO) Projects
Section 221(d)(3) and 221(d)(4) program insures mortgage loans for multifamily properties consisting of single-room occupancy (SRO) apartments. There are no Federal rental subsidies involved with this SRO program. It is aimed at those tenants who have a source of income but are priced out of the rental apartment market. SRO projects generally require assistance from local governing bodies or charitable organizations in order to reduce the rents to affordable levels. Although SRO housing is intended for very low-income persons, the program does not impose income limits for admission.
Parcel G? 🙂
2. I like the Fire Station and creative use of TIF, if we are buying at cost theoretically that should mean that we saved some money. However, not sure that is true once we do the build out of the gray box.
3. Credit for land that is paid off is considered equity. The city sometimes says this is ok and others times it is not. In this case it’s not a “cost” of the project so the value of the land is considered an equity investment by the owner.
4. Prepay of equity participation? That’s a little silly, because if they can afford to pay it in advance, then there wasn’t really a gap, was there? If the project can be done with this much less money, then it can’t meet the “but for” test can it? (The “but for” test says that “but for” the TIF assistance, the project could not be one.
5. Good job on the personal guarantees from the millionaires. Much different than this stinky deal!
6. 52% of the TIF? The city has a rule the 50% of the TIF that is generated can go to the developer and the other 50% goes for city improvements. In this case, going 2% over isn’t a concern to me, it is when it is 20% over that I start to be concerned.
7. Um, the loan will be done before the State approves the TIF (or TID boundary extension, I”m not sure which). So, what happens if the state has an issue? To be fair, I don’t think this has ever happened, but what would happen at that point?
8. I’m not sure I’m clear about what the ramifications of the short-term internal borrowing as a result of the budget amendment means, but I think it means we save money because we are not paying interest on the money while it is internally borrowed. So, unless there is some other issue with that internal borrowing that I am not aware of, this should be fine.
9. This still has to go to the Joint Review Board which consists of the other taxing entities that are impacted when we do a TIF deal (Madison Schools, County, MATC). They have to approve this before the loan can be made. I’m not aware of any issues that they would have with this, except they want the TIF districts closed as soon as possible so they can start benefitting from the increase in property taxes.
That’s all I got here. The HUD issue is very interesting to me and I’d love to see details on affordability if they get that loan. And, I’m a little concerned about the argument on the prepayed equity participation – I think that might not be intellectually honest, but over all in a project this big, its not something I’d go to the wall over. Just wondering what policy slippage might happen in the future as a result when other developers point to this deal.
