Attention!
By Mark Fogarty
6 min read
Historic, four percent and nine percent credits turn Seattle barracks into housing and more
Can the four percent and nine percent tax credits co-exist peacefully in the same housing project? At the Building 9 project in Sands Point, Seattle, Mercy Housing Northwest decided the two forms of credit could, as long as they were segregated into separate projects in the same development.
The project, a 240,000 square foot former military barracks on a five-acre site, certainly had room for a host of financing sources – 14 in all for the $70 million development, according to Alisa Luber, senior project developer for Mercy Housing Northwest. That includes Historic Tax Credits, as well as the two kinds of Low Income Housing Tax Credit fundings, financing four condominium projects in two distinct partnerships for the housing units plus an early learning center and health clinic.
“Combining four percent and nine percent tax credits in one project also requires careful, separate accounting for each partnership and separate construction contracts for each condominium within each partnership to carefully track separate project costs and avoid tainting the nine percent credits. It is an extremely complex structure that required detailed, early guidance from our tax counsel, tax accountant and financial partners and very careful in-house cost accounting,” says Luber, who illustrated a powerpoint slide on this topic with a graphic of an aspirin bottle.
The commercial development at Naval Air Station Barracks Building 9, a community health clinic and a six-classroom learning center, “Was financed entirely by non-housing, community development resources, including the Washington State Building Communities Fund, the City of Seattle Child Care Bonus Program and $2.1 million in private foundation support,” she reports.
Investors for the three kinds of tax credits were Capital One and Enterprise, for a total of $8 million in nine percent credits, $11 million in four percent credits and $14 million in Historic Credits. They apparently were not put off by the complicated combination of tax credits.
“Both Capital One and Enterprise understood the four percent/nine percent structure and brought rigor and creativity to the underwriting process,” according to Luber.
The end result next year will be called Mercy Magnuson Place, located at 7101 62nd Ave NE, Seattle in Magnuson Park on Lake Washington, and will include 148 energy efficient apartments for individuals and families earning between 30 percent and 60 percent area median income. Unit mix is 29 studios, 47 one bedrooms, 63 two bedrooms and nine three bedrooms.
Layout determines usage
The commercial space came about as a result of the layout of the original barracks. In addition to barrack space for 800 men, the center building was a kitchen and mess hall.
“The center building was key to redeveloping the north and south buildings but wasn’t a fit for housing. In light of these limitations, we sought out compatible commercial uses that would be useful to our residents and that provided access to distinct, non-housing public and private financing resources,” says Luber.
The nonprofit commercial aspect of the building was designed to take up ten percent of the space. Neighborcare Health will operate the healthcare clinic. The Denise Louie Education Center will operate the early learning center.
“The State of Washington, the City of Seattle and the Washington State Housing Finance Commission provided key public financing. Bellwether Enterprise will provide a Freddie Mac Tax Exempt Loan (FMAC TEL) takeout upon completion and stabilization,” says Luber.
The whole process is projected to take four years, from when the state awarded the redevelopment contract in 2015 to the projected opening in May 2019.
“Securing Seattle Landmarks Board and National Park Service approval, construction permits and financing required over two-and-a-half years of predevelopment work. Construction started in September 2017,” says Luber. Tonkin Architecture is the architect while the RAFN Company is doing the construction.
Luber feels the complex will serve the housing needs of the service-level employees of Childrens Hospital and the University of Washington, which are located two miles from Building 9.
There’s a lot of need for affordable housing in high priced Seattle, Luber feels. “Area housing costs have escalated dramatically in the last several years, reaching a crisis level particularly in family-sized housing. The supply of new affordable housing, particularly in Northeast Seattle, is completely overwhelmed by the demand. Rents in the surrounding northeast Seattle area for comparable sized market rate units are 50 percent to one 100 percent higher than the rents for Building 9 units.”
Aspirin, please
Luber’s powerpoint presentation on the project at a recent meeting of the National Housing & Rehabilitation Association, besides containing the aspirin bottle for relief from the strain of the complex financing, also combined both the opportunity and challenge at Building 9 into the same phrase: “redevelop large, historic, dilapidated naval barracks.”
Not only was the building vacant and structurally damaged, it was also environmentally contaminated, she told the NH&RA meeting.
The four percent component consists of 108 LIHTC units at a 60 percent AMI set-aside for studio, one- and two-bedroom units. Also, in the four percent section is a 1,500 square foot community room and 2,500 square foot resident services resource center and classroom.
The nine percent project has 40 units at 30 percent to 50 percent AMI set-aside and adds in the three-bedroom units. The 20,000 square foot childcare center and 1,500 square foot health clinic are in the nine percent area.
Financing for the two projects was slightly different, although both had all three types of tax credits. The four percent project had a tax-exempt construction loan from JPMorgan Chase and a tax-exempt permanent loan from Bellwether FMAC. The nine percent capital stack includes a taxable construction loan from Capital One.
Key structuring elements, Luber told the NH&RA meeting, were separate owners and borrowers for the four percent and nine percent projects; separate tax credits for each condo Building Identification Number and use; no cross collateralization allowed between four percent and nine percent units; separate construction contracts for each condo unit; and consistent development and operating cost allocation.
Development objectives included optimizing the number of units; optimizing affordability; fully funding development costs and reserves; establishing a stable cash flow; and maintaining historic structure and site character.
Story Contact:
Alisa Luber, Senior Project Developer
Mercy Housing Northwest
[email protected]
(206) 602-3479
