A rendering of the Performing Arts and Event Center, which is scheduled to open this summer. Courtesy of city of Federal Way

A rendering of the Performing Arts and Event Center, which is scheduled to open this summer. Courtesy of city of Federal Way

New Markets Tax Credits come up short for Federal Way’s performing arts center

Expectations: Fully paying for the $33 million Performing Arts and Event Center with funding from New Markets Tax Credits.

Reality: Drawing from the city’s $13 million interfund loan as early as this month if an upcoming bill is more than $300,000.

Three months ago, city officials rejoiced that their third application for the highly coveted New Markets Tax Credit allocations would finally result in some cold, hard cash.

Clearinghouse Community Development Financial Institution had raised $7 million in allocations, and the city’s Economic Development Director Tim Johnson estimated the community development entity to receive even more – up to $20 million.

Since then, however, Clearinghouse has only received $2.5 million more for a total of $9.5 million. This means, after fees paid to the community development entity, lawyers, accountants and consultants, the city will net just over $2 million.

A closing date will likely occur this May.

“We have three different legal firms working on this now,” Finance Director Ade’ Ariwoola said this week. “That is how complicated it is.”

Although the city has not yet received the Performing Arts and Event Center’s April bill from Garco Construction, Ariwoola said if it is more than their cash balance of $300,000, the city will need to draw upon its 2014, council-approved, $13 million interfund loan to pay for it. The Performing Arts and Event Center’s budget balance is $10.21 million.

Once drawing from the interfund loan account, Ariwoola said the city has three years to repay it, or city officials will need to refinance.

“When the council approved the interfund loan, it was based on the rate that we’re getting from our own investment, the rate we’re paying on our own debt,” Ariwoola said, adding that it is a win-win because the city is lending itself money at a lower rate.

Ariwoola is confident the city will have the funds to pay off whatever is used from the interfund loan in three years because the city still anticipates collecting $3.5-5 million in naming rights for the PAEC and the sale of the hotel site near the property.

If, for whatever reason, the city cannot repay the interfund loan, it would have to bond it over a period of time – a move the council could act upon without a vote by the people.

Before closing on the New Markets Tax Credits in May, the City Council is required to create a nonprofit to act as a “middleman” on the transaction. Ariwoola said this is so the nonprofit’s board members are not comprised of a majority of city officials and that the agency is independent of the city.

More details on the nonprofit will be released at a later time.

“The team is working on it, and it is moving along,” Ariwoola said of the New Markets Tax Credits deal. “… Twenty-six people are involved.”

The city has worked with Butler Snow LLP on legal matters, Novogradac &Company LLP on accounting and Roeder &Company LLC for consulting.

Ariwoola said the New Market Tax Credits federal program attracts private capital into low-income communities by permitting individual and corporate investors to receive a tax credit against their federal income tax in exchange for making equity investments in “community development entities.”

The program was formed in 2000 as part of the federal Community Renewal Tax Relief Act, designed to spur economic development.

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