HUD concerned Federal Way has not met requirements for PAEC loan

Housing and Urban Development says city has not met job growth goals since the PAEC has opened.

The federal government has expressed concerns that the Performing Arts and Events Center and yet-to-be-constructed hotel have not generated the number of jobs required for the Section 108 loan the city received in 2016 to increase economic growth.

This means the Community Development Block Grant the city receives annually from Housing and Urban Development — which the city pledged as security to cover the $3.03 million loan — may not be used as collateral to repay the loan, pending an official notice from HUD.

The city applied for the Section 108 loan from the HUD’s Seattle office in 2013 to go towards the Performing Arts and Events Center. The $3 million loan, to be paid back over 20 years, was originally supposed to create 303 full-time jobs for the length of the loan, according to the original loan application.

However, Deputy Mayor Susan Honda said recently Ade Ariwoola told the council the job requirements for the loan are 29 full-time employees for the PAEC, 35 full-time employees for the hotel once it’s constructed, and 46 full-time employees for businesses immediately surrounding the PAEC and future hotel. Tyler Hemstreet, communications coordinator for the city, confirmed these numbers.

The employees have to be full-time throughout the life of the loan, so construction workers for the hotel would not be included in this final number, Hemstreet said.

Some residents expressed concerns over this loan after a Human Services Commission meeting Oct. 15 when Community Services Manager Jeff Watson gave a presentation on the possibility of the city losing the option to use Community Development Block Grant funding to repay the loan.

As of right now, about 10 percent of the city’s CDBG funds are used to pay back the loan.

If HUD decides the city has not met the goals they set for job creation, the city will still receive CDBG funds but will no longer be able to use them to pay back the loan. Instead, the city could use the funds towards other eligible projects.

In case HUD does reach this decision, there is a line item in the 2019/2020 budget called “target property” that consists of real estate excise tax (REET) funding that will be used to pay back the loan instead, said Ariwoola.

Mayor Jim Ferrell said $300,000 of REET money is set aside in the projected budget as a buffer for the loan payment, though the actual payment amount varies between $202,000 to $230,000 depending on interest rates.

Lee Jones, an employee in the public affairs office for HUD-Seattle, said earlier this year they expressed some concerns they had about the city’s job creation numbers for the PAEC, but no formal decision has been made yet.

HUD consistently monitors recipients of loans like this to ensure goals are being worked towards, so this is nothing out of the ordinary, he said. Jones noted if HUD decides to disallow the city to use CDBG funds to pay for the loan, they do have an appeal process the city can utilize if they choose.

Jones declined further comment on the matter, stating HUD prefers to keep conversations like this between the guarantee, Federal Way in this case, and themselves.

When the Section 108 loan was given to the city, Watson said the city decided to use the funds for a single project — the PAEC. After that was decided, the city had to fill out a separate application to get approval to use the funds for that project, he said.

Watson said the approval of the loan was made with an understanding that the city would use some CDBG funds to pay it back. According to Watson, HUD expressed concerns about the city not meeting the job requirement goals in July.

He said while it’s true the requirements have not been met, the city was only 10 months into the project at the time. The city is still working on moving forward with the hotel and hopes to meet the job requirements in the future, Ferrell said, though he is uncertain on how long it will take to resolve the easement issue over the hotel property.

The hotel property, which formerly housed a Target store, was sold to Ottone-Salinas in July of 2017, with a stipulation in their contract that construction on a hotel would begin by June 1, 2018. Due to an easement over the property that prevented any construction unless purchased, Ottone-Salinas was unable to meet this stipulation.

The city voted to buy back the property for the same $2.18 million amount it sold for originally in July 2018.

Ferrell remains positive the city will not face any negative financial outcome, no matter what decision is made about the Section 108 loan.

“There’s no chance of us defaulting on the loan,” he said.

Ferrell said this issue is a consequence of trying to move forward with the property, but they want to do everything by the book for Federal Way residents.

“I think what this is all about is making sure we continue to revitalize the downtown that four years ago, five years ago was dead,” Ferrell said. “So this is what this is all about and it’s just one more step in the process and I’m looking forward to the days when we can get this staircase moving and completed, get a University of Washington-Federal Way at that location and get a hotel there.”

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