Form revised February 12, 2004

FISCAL NOTE FOR NON-CAPITAL PROJECTS

Department:	Contact Person/Phone:	DOF Analyst/Phone:
Office of Economic Development	Ken Takahashi 684-8378	Janet Credo 684-8687

Legislation Title: AN ORDINANCE relating to redevelopment in the Pioneer Square neighborhood; authorizing a loan of federal Section 108 loan proceeds to finance acquisition of the Cadillac Hotel Building at 319 Second Avenue South; appropriating and authorizing the disbursement of Brownfields Economic Development Initiative grant ("BEDI Grant") funds to reduce or subsidize interest on the loan; authorizing and ratifying loan documents, amendments, replacements and related documents and actions; amending Ordinance 120873; and authorizing amendments to the City's 2001-2004 Consolidated Plan to reflect the transactions contemplated by this ordinance.

· Summary of the Legislation:

This legislation authorizes OED, on behalf of the City, to make a $2,040,000 Section 108 Loan to Historic Seattle Preservation and Development Authority, for site acquisition of the Cadillac Hotel Building at 319 Second Avenue South in the Pioneer Square neighborhood. Loan proceeds oflend $2,040,000 in federal Section 108 funds will come from a previously approved federal Section 108 loan fund in the amount of $15,500,000 (Ordinance 120873). This legislation also authorizes the appropriation and disbursement of $230,323 from a previously approved companion federal Brownfields Economic Development Initiative grant in the amount of $1,750,000 (“BEDI Grant”). The BEDI Grant will be used to reduce or buy-down the interest rate or stabilize interest on thise Section 108 loan to 4.5% . The proposed Section 108 loan and BEDI Grant funds are for the acquisition of 319 Second Avenue South in the Pioneer Square neighborhood.

· Background: (Include brief description of the purpose and context of legislation and include record of previous legislation and funding history, if applicable):

In August 2002, OED, on behalf of the City, created a federal Section 108 loan fund in the amount of $15,500,000 and accepted a companion federal BEDI Grant in the amount of $1,750,000. The purpose of the Section 108 loan fund is to assist with economic and community development activities in the City of Seattle's Brownfield Showcase and Enterprise Communities. The guaranteed loan funds are used to create a loan pool targeted to projects that will have positive economic and community development benefits within targeted communities. BEDI Grant funds are applied as needed to reduce or stabilize interest on the Section 108 loans.

Four previous loans have been made from the loan fund – 211 First Avenue, the Buttnick Building, the City Loan Building and Compass Center. These loans provided acquisition and rehabilitation financing for projects in the Pioneer Square neighborhood.

Similarly, the Section 108 loan to Historic Seattle Preservation and Development Authority (“Historic Seattle”) will provide financing for Historic Seattle to acquire the Cadillac Hotel property, located at 319 Second Avenue South in Pioneer Square.

The Cadillac Hotel is a three-story plus basement, 26,000 square foot, historic commercial building located at 319 Second Avenue South. Of all the properties in Pioneer Square that were damaged by the Nisqually Earthquake, the Cadillac sustained the most extensive damage. The building is currently unoccupied and red tagged, needing immediate seismic upgrades and other rehabilitation. Upon completion, the rehabbed Cadillac Hotel will contain the assembly and exhibition space for the Klondike Gold Rush National Historical Park on the basement and first floor. The second and third floors will contain offices for the National Park Service and other commercial/office tenants. Acquisition and rehabilitation costs of the site have been estimated at $9,879,963.

The Section 108 loan will be in the amount of $2,040,000. The term of the loan will be 19 years, with the loan repayment schedule based on a period longer than 19 years. Loan payments will be based on a 30 year amortization schedule. Because all principal and interest will be due in 19 years (and not 30 years), there will be a significant balloon payment due on the maturity date in 2022.

Historic Seattle will pay interest at 4.5% as long as the floating rate (as determined by 20 basis points above the 3-month London Interbank Offered Rate (“LIBOR Rate”) as adjusted monthly) does not rise above 4.5%. If the floating rate exceeds 4.5%, the $230,323 in BEDI Grant funds will be applied as needed to stabilize the rate at 4.5%. If both the floating rate exceeds 4.5% and BEDI Grant funds have been exhausted, Historic Seattle will pay interest at the floating rate.

The Section 108 loan will be secured by:

(a) second position deed of trust on the Cadillac Hotel during construction; after completion of construction, deed of trust converts to second lien on borrower’s rights to master lease on the property;

(b) second position deed of trust on outside collateral – 1117 Minor Ave (the office headquarters of Historic Seattle known as the Dearborn House); after completion of construction, deed of trust converts to first position deed of trust;

(c) recourse loan to Historic Seattle.

The Cadillac Hotel project has several strengths:

· The completed project will provide significant public benefits including historic preservation, creation of 45 new permanent jobs and continued economic revitalization of Pioneer Square.

· The project has a strong development team. All team members – Historic Seattle as developer, Rafn as contractor and Stickney Murphy Romine as architect – have considerable experience and capacity for rehabilitation projects such as the Cadillac Hotel.

· The project has a solid key tenant – National Park Service. The National Park Service’s leasehold represents over 60% pre-leasing of the building rental income, a reliable source of rental income that far exceeds market rates. The National Park Service in acquiring the land portion of the Cadillac Hotel property will also provide a valuable source of equity ($800,000) for construction financing.

· The project financing, with the exception of the Section 108 loan, is fully committed with all construction and permanent financing sources.

The Cadillac Hotel project also has potential risks which will be mitigated:

· As in any real estate development project, construction risk represents the most significant risk for the loan. The Cadillac Hotel project will have high rehabilitation costs due to the extensive damage caused by the 2001 earthquake and the high costs associated with rehabbing any historic building. Rehabilitation costs in the amount of $8,642,048 will exceed the post-rehabilitation appraised property value of $6,050,000. Despite the high cost, the Executive is supportive of this project, because it will result in the creation of new jobs in a low-income neighborhood and the rehabilitation of an historic property that the community felt strongly about preserving. OED believes that the risk will be mitigated to a significant degree. OED will have rights to approve a guaranteed maximum price construction contract. The project will also have sufficient construction contingencies to cover cost overruns. The City will also have a security interest in Historic Seattle funds totaling $460,474 until the later of construction completion and project stabilization. Finally, as discussed above, an experienced development team has been selected.

· The City and other lenders are providing financing on the project that is 96.7% of the total post-rehabilitation appraised value of the Cadillac Hotel property. This is in excess of OED’s underwriting guidelines which caps our loan to value coverage ratio at 80%. A deed of trust in the Cadillac Hotel property alone does not provide sufficient security for the City’s loan. As such, the City needs to rely on outside collateral by taking a deed of trust in Historic Seattle’s office headquarters (Dearborn House). The combined value of the two properties will provide sufficient security to achieve 80% loan to value. The use of outside collateral to meet this guideline is permissible by HUD. In the event of a loan default, the City would foreclose on both deeds of trust. Finally, the City will have recourse to Historic Seattle in the event of loan default.

· Lease-up stabilization also represents a risk for the project, particularly given the current vacancy rates for commercial properties in the City. The loan applicant has not yet obtained pre-leasing sufficient to reach the break even point. However, as discussed above, the loan applicant has obtained an impressive 60% pre-leasing of the building rental income. The operating pro forma includes reasonable rent ($18 per square feet) and vacancy (10.3 percent) assumptions for the remaining space – supported by an appraisal within market range. The project will also have reserves sufficient for 2.5 years of rental income on the vacant space.

· The loan repayment schedule assumes a $1,201,000 balloon payment due on the maturity date of the loan (2022). This represents some risk. However, several factors mitigate this risk and provide assurances that Historic Seattle will privately refinance the Section 108 loan in order to make the balloon payment. First, on the maturity date of the Section 108 loan, the loan balances for the Section 108 loan and the private bank loan associated with the Cadillac Hotel property will be less than 60 percent of the current appraised value of the building. Also, it is anticipated that the property value will appreciate over the 19 year term. As such the increased value of the property will make a refinance attractive. Finally, the leases on the Cadillac Hotel property will mandate that tenants maintain their respective tenant space, thereby helping the building to retain its value. The good condition of the building will make a refinance attractive.

The complete loan proposal containing the full details of the Section 108 loan proposal and the Cadillac Hotel project is attached as Exhibit C to the Ordinance.

Following disbursement of the Section 108 loan and BEDI Grant for the Cadillac Hotel, a total of $11,356,000 of loan proceeds from the $15,500,000 HUD Section 108 loan pool will have been disbursed. The remaining $4,144,000 will be set aside for more projects yet to be identified. Loan fees in the cumulative amount of 41,440 will be returned to the City in connection with such additional projects. Also, a total of $1,282,129 of grant funds from the $1,750,000 BEDI Grant funds will have been disbursed. The remaining $467,871 will be set aside for more projects yet to be identified.

· Please check one of the following:

____ This legislation does not have any financial implications. (Stop here and delete the remainder of this document prior to saving and printing.)

__x__ This legislation has financial implications. (Please complete all relevant sections that follow.)

Anticipated Revenue/Reimbursement: Resulting From This Legislation: This table should reflect revenues/reimbursements that are a direct result of this legislation. In the event that the issues/projects associated with this ordinance/resolution have revenues or reimbursements that were, or will be, received because of previous or future legislation or budget actions, please provide details in the Notes section below the table.

Fund Name and Number	Department	Revenue Source	2004 Revenue	2005 Revenue
N/A
TOTAL

Notes:

Total Regular Positions Created Or Abrogated Through This Legislation, Including FTE Impact: This table should only reflect the actual number of positions created by this legislation In the event that positions have been, or will be, created as a result of previous or future legislation or budget actions, please provide details in the Notes section below the table.

Position Title and Department*		Fund Name	Fund Number	Part-Time/ Full Time	2004 Positions	2004 FTE	2005 Positions**	2005 FTE**
	N/A
	TOTAL

* List each position separately

** 2005 positions and FTE are total 2005 position changes resulting from this legislation, not incremental changes. Therefore, under 2005, please be sure to include any continuing positions from 2004

Notes:

· Do positions sunset in the future? (If yes, identify sunset date):

N/A

Spending/Cash Flow: This table should be completed only in those cases where part or all of the funds authorized by this legislation will be spent in a different year than when they were appropriated (e.g., as in the case of certain grants and capital projects). Details surrounding spending that will occur in future years should be provided in the Notes section below the table.

Fund Name and Number	Department	Budget Control Level*	2004 Expenditures	2005 Anticipated Expenditures
Special Purpose Grants Fund, No. 17820	Office of Economic Development	6XD20	$230,323 (BEDI funds)
TOTAL			$230,323

* See budget book to obtain the appropriate Budget Control Level for your department.

Notes:

This is the fifth project of a $15,500,000 federal Section 108 loan fund and companion $1,750,000 federal BEDI Grant, both of which were created in August 2002. If this loan is approved, proceeds from the Section 108 loan fund in the amount of $2,040,000 will be deposited directly by HUD to the City’s trustee/custodian known as JP Morgan Chase (“Custodian”). Proceeds from the BEDI Grant fund in the amount of $230,323 will be deposited by the federal Treasury Department to the City, and the City will then deposit such funds with the Custodian. According to an agreement with the Custodian, the City will direct the Custodian to disburse Section 108 and BEDI Grant funds to Historic Seattle, and the Custodian will also be authorized to receive loan repayments from Historic Seattle.

The $2,040,000 Section 108 loan to Historic Seattle will have a term of 19 years with principal and interest amortized over a 30 year period. Historic Seattle will pay interest at 4.5% as long as the floating rate (as determined by 20 basis points above the 3-month London Interbank Offered Rate (“LIBOR Rate”) as adjusted monthly) does not rise above 4.5%. If the floating rate exceeds 4.5%, the $230,323 in BEDI Grant funds will be applied as needed to stabilize the rate at 4.5%. If both the floating rate exceeds 4.5% and BEDI Grant funds have been exhausted, Historic Seattle will pay interest at the floating rate.

· What is the financial cost of not implementing the legislation? (Estimate the costs to the City of not implementing the legislation, including estimated costs to maintain or expand an existing facility or the cost avoidance due to replacement of an existing facility, potential conflicts with regulatory requirements, or other potential costs if the legislation is not implemented.)

There is no financial cost for not implementing the legislation. The cost would be measured in terms of unachieved public benefits.

· What are the possible alternatives to the legislation that could achieve the same or similar objectives? (Include any potential alternatives to the proposed legislation, such as reducing fee-supported activities, identifying outside funding sources for fee-supported activities, etc.)

None.

· Is the legislation subject to public hearing requirements: (If yes, what public hearings have been held to date, and/or what plans are in place to hold a public hearing(s) in the future.)

Yes. A public hearing will be held before Council committee consideration of this Ordinance.

· Other Issues (including long-term implications of the legislation):

None.

Please list attachments to the fiscal note below:

N/A