The City of Port Townsend should finance the completion of an affordable-housing apartment complex that was brought by barge from Victoria, British Columbia, this year, City Manager David Timmons has …
The City of Port Townsend should finance the completion of an affordable-housing apartment complex that was brought by barge from Victoria, British Columbia, this year, City Manager David Timmons has told City Council members.
The four-unit apartment building was barged across the Strait of Juan de Fuca May 10 and placed on land near the Grace Lutheran Church, located at 1120 Walker St.
The total cost of the project is estimated to be $672,689. That includes the $250,000 loan from the city to purchase and move the property. An additional $422,689 needs to be financed and paid back by Homeward Bound over a 40-year period, Timmons said.
The building has four two-bedroom units, and the plan is to add four more studio units on a new basement foundation level, which would bring the total number of units to eight.
Because of the building’s proximity to Cherry Street, the city is referring to it as the Cherry Street apartment project.
Financing provided by the city would demonstrate the city’s commitment to making an effort to deal with the dearth of affordable housing, Timmons told the council Sept. 5. Homeward Bound is to manage the complex.
The project faces two major challenges, Timmons said.
“One is decoupling the issues of getting Homeward Bound revitalized and reorganized and moving forward, while at the same time, on a parallel track, getting the project completed and getting the house secured and moving forward,” Timmons said.
The building is currently sitting on wood blocks as permits are processed. Utility work also is required at the site. Timmons said work needs to be done quickly to minimize risk to the building.
Homeward Bound and Timmons have worked on a financing plan, and determined that the best option is for the city to finance completion of the project, Timmons said.
“It looks like the best alternative that we’ve found would be for the city to finance the completion of the project,” Timmons said, adding that he’s had the proposal reviewed by First Federal Bank and Kitsap Bank to compare the city’s plans with conventional financing to make sure the plan would work.
Timmons said getting a regular loan from a bank would be more expensive than if the city were to lend it.
“It all seems to be looking good in terms of how we can do this and move forward. It does demonstrate the city’s commitment. It also would demonstrate how complicated these projects are going to be to get these rents affordable. No matter whether it’s these [Cherry Street] units or future units … it’s going to take a significant amount of economic subsidy going into these projects,” Timmons said.
Obtaining adequate economic subsidy is an issue nationwide, not just in Port Townsend.
The plan is complicated, he said, “but from what we’ve heard from a lot of the people in the profession and the business … that’s the norm – it’s a lot of complex financial arrangements and complications.”
Timmons said that normally a project like this would have all the financing and permitting work done first. But because the Cherry Street project required immediate action from the council, the city acquired the building first, and is now going back to figure out the details on financing and permits.
Housing developers are not chomping at the bit to build affordable housing, Timmons said.
“We did also reach out to [the] Beacon housing group, which is based out of Seattle and nationwide, and inquired to them in terms of ‘Why aren’t we seeing affordable or even housing projects coming and knocking on our door?’
“And what they tell us is that the current market right now, post-recession in housing, the margins are very narrow, so a lot of development companies are not willing to step out of their market areas to take on a new market, because those margins are not there to support them, there’s risk to come into a new area.
FREE LAND, SHOVEL READY
“In addition, they said to make something affordable, you’ve got to have free land, shovel ready, and some type of loan subsidy program to even attract [developers] to consider doing anything in the affordable category. And that’s going to make a challenge, because we have very little, if any, of that,” Timmons said.
Another factor, Timmons said, is a severe labor shortage and the fact that contractors are booked a full year out.
Timmons said Beacon told him margins are thin, even with larger, 100- to 200-unit projects, where “economy of scale” is a factor.
The for-profit market-rate units in such a complex would not generate enough income to fully subsidize the affordable units, and thus such a project would still need some other subsidy, he said.
Timmons said he is going to bring a formal recommendation to the City Council in October. The building was acquired by the city in April after the council voted unanimously to loan as much as $250,000 to Homeward Bound to snap up the Victoria fourplex before it was demolished.
The building is in excellent condition and is much cheaper than what it would cost to build a new building of similar size, city officials said.
Mayor Deborah Stinson said the city had to act quickly to obtain the fourplex.
“It was an opportunity that had to be moved on quickly,” Stinson said. “It was a bit of a risky move. We knew that. But we thought it was a well-informed risk on really getting some motion, some movement on a problem that’s been with us for years.”
In addition to the $250,000 loan, the city also sold city-owned property for $1 to serve as a site for the building.
RENTS OF $533-$756
Timmons said rents for the planned eightplex would be set at 80 percent of the adjusted monthly income for the area, using HUD formulas. Estimated rents are $756 for the two-bedroom units and $533 for the one-bedroom units. The eightplex would be open to Section 8 vouchers.
The city estimates that the complex would generate $56,922 per year in total rent income. Operating expenses for the eightplex covers property management, maintenance, insurance and other costs, and is estimated to total $24,258 per year.
Subtracting the operating expenses from the rent income yields $32,664, which would be enough to finance a $346,000 loan, Timmons said, which is $76,689 less than the $422,689 that is needed.
Timmons explored options for financing and determined that a 20-year taxable general obligation bond would allow the city to borrow the money and then lend it to Homeward Bound.
Timmons said that a bond for $715,000 (instead of $672,689) to cover contingency costs could be repaid via a 40-year financing agreement with Homeward Bound with annual payments of $26,131.
Including interest, the project is to cost $981,728.
The plan calls for the city to help make bond payments for the first 13 years by using money it saved during a recent refinancing of a different, unrelated bond.
Once Homeward Bound has repaid the debt to the city, the city would have that money available for other affordable housing projects in the future.
“This is about the only way that I’ve found that we can actually now make this project pencil out,” Timmons said.
$84,000 PER UNIT
Timmons said that when the project is complete (based on the $672,689 figure), each of the eight units will have cost $84,000 per unit, not including the cost of the land.
But if interest costs are factored in, the cost per unit is about $120,000, he said.
“Also, the fact that the city’s got … close to a half-million-dollar subsidy funding the differential. If you threw all that back in there, we’re talking $250,000 a unit. But it demonstrates why we’re not seeing any affordable housing being built. It just doesn’t pencil out without these subsidies,” Timmons said.
Timmons said that with the various fees, the utilities, the value of the land and the city’s subsidy, the city would wind up subsidizing each unit by $140,000.
“The city’s comprehensive plan policy has some pretty good policy guidelines that says the city should participate in demonstration projects. And this is probably one of the best ones that I can think of in terms of how we can demonstrate how hard it will be to get properties to meet these kinds of numbers. It’s going to be hard and challenging … we’re making a commitment here,” Timmons said.
Kevin Coker of Port Townsend spoke in favor of the plan during public comment at the special finance and budget meeting.
“Putting together a land trust and getting it started is critical to helping our community out over the long haul,” he said. “I know businesses that can’t hire individuals because they can’t find housing, because people don’t want to drive from Sequim and Silverdale to get here for a job.”
Coker said that the eightplex project would pave the way for future affordable housing projects.