Federal Way converts $3M federal PAEC loan to permanent

The council voted 6-1 to turn the loan permanent which will fix the interest rate through the life of the loan.

The Federal Way City Council decided to turn their $3 million interim Section 108 loan for the Performing Arts and Events Center into a permanent loan during the March 5 meeting.

The motion to change the loan status carried from council 6-1 with Deputy Mayor Susan Honda as the only nay vote.

According to Community Services Manager Jeff Watson, while Housing and Urban Development offers interim loans to ensure cities have federal funding sources for their projects, the variable interest rate is more stable with a permanent loan.

This is why HUD recommends that cities “lock in” permanent loans to avoid the risky variable interest rate that accompanies interim loans.

Watson said HUD advised the city that on March 28 the $3 million interim loan would be converted to a permanent loan, which will fix the city’s interest rate through the remainder of the loan. He said the current fluctuating interest rate that accompanies the interim loan makes it difficult for the city to accurately budget for the principal and interest payments, so making the loan permanent would be the best option to stop that.

According to the council meeting packet, the city will continue to pay off the loan until 2035, and the city will have the option to pay back the loan completely after 2029.

However, Watson said the loan can be defeased at any time. According to Investopedia, this would mean the city could exchange another cash-flow asset instead of paying HUD directly.

Watson gave a presentation during the council meeting explaining that the city needed to notify HUD by March 11 if they wanted to participate in the loan conversion. The city has since done this, according to Finance Director Ade Ariwoola.

During the presentation, council member Hoang Tran asked if the city would have the option to pay the loan back quarterly like they are currently, or if they could only pay semi-annually if they voted to convert the loan.

Watson confirmed that with this conversion, the city could only pay the loan back semi-annually.

Honda also explained after the presentation why she was going to vote down the conversion.

“I had proposed at the last Finance, Economic Development & Regional Affairs Committee (FEDRAC) meeting … about going out for a bond for this, getting out of this loan,” she said. “Because, I am very concerned that if that hotel is not built that we will never be in compliance with the [job requirements].”

The deputy mayor said she knows the city will be looking for a bond for the $13 million interfund loan the city recieved for the PAEC in 2017, and it makes more sense to look for a bond for both loans.

“It’s a risk that I’m not willing to take knowing that if, perhaps, we are not in compliance, that this loan could be called,” she said.

Watson answered Honda’s concerns, noting that according to HUD, it’s unlikely this will happen. But the worst case scenario would be HUD would disallow the city to use Community Development Block Grant funds to pay the loan back, as they are currently doing.

Ariwoola confirmed the loan would not be called, even if the city does not meet job requirements, but the city would have to use the CDBG funds for other projects if HUD decided the city was not meeting goals fast enough.

The Mirror previously reported that HUD expressed concerns that the PAEC and potential hotel property have not generated the number of jobs the loan requires.

According to the loan requirements, the PAEC, the potential hotel property and surrounding businesses need to create at least 110 full-time jobs that would last over the life of the loan. Construction jobs would not count towards this stipulation.

So far, the PAEC has generated around 15 full-time jobs, according to Watson.

Other conditions that will apply to this conversion include the city not being able to prepay the loan for 10 years, and the city needing to pay issuance costs. The issuance costs are estimated at $13,560 and can be paid with CDBG funds.

“We are still required to create jobs in either scenario, we are still required to meet national objectives under either scenario,” Watson said.

According to communication coordinator Tyler Hemstreet, to-date the city has paid back $318,000 of the principal amount along with $129,571.75 of the interest.

“Interest rates for interim financing have increased by 52 percent over the past 52 weeks; long-term interest rates have also increased, but are still at historically low levels,” he told the Mirror.

As for the potential hotel property adjacent to the PAEC, Hemstreet said the city is working on negotiating the easement that currently prevents construction on the property, but the city has nothing new to report at this time.

Ariwoola told the Mirror as long as the city is consistently working towards meeting the goals outlined in the loan documents, they will be allowed to continue paying the loan back with CDBG funds.

Watson also confirmed this during his council presentation.

However, if HUD determines the city has not met these requirements, they would pull back that allowance and the city would have to pay the loan back with other funds, such as real estate and excise tax funds.

“If this happens,” Ariwoola said, “the city has other funds it will use.”

The full City Council meeting can be viewed here.

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