The proposal to have the city of Milwaukee provide $10 million in loans for The Moderne development would, if approved, represent a dramatic policy shift for city government.
City officials often provide assistance for development, the most common method may be tax incremental financing, but the idea of the city providing loans that are usually provided by the private financial markets is new.
The financing package for The Moderne, a 30-story, $55 million residential tower that would be built at the southwest corner of North Old World Third Street and West Juneau Avenue in Park East corridor, hinges on the city loans, which need the approval of the Common Council.
In addition, city officials typically do not provide financial assistance for development of new market-rate residential buildings in the downtown area. Until the collapse of the housing market a few years ago, those projects were self sustaining.
“The proposed loan to The Moderne represents a departure from city government policy to stay out of financing for market-rate housing,” Department of City Development (DCD) Commissioner Richard “Rocky” Marcoux said in a letter to aldermen. “However, we believe the current credit crunch necessitates a short-term change in policy in order to jump-start critical development projects. When the credit market becomes more reliable, we anticipate it will be appropriate for the city to return to its previous approach. In light of the conversations we have had with several housing developers, we expect that we will bring several other rental housing projects with proposed city financial assistance to the Common Council.”
Many aldermen are eager to see a major development like The Moderne built, and the tax base and construction jobs that the project would create, but are unsure if they will support direct city loans for the project.
“If there was a vote today, The Moderne wouldn’t be approved,” Alderman Robert Bauman said recently. “There appears to be a fair amount of concern about the project by Common Council members. There is a considerable amount of discomfort with the city becoming a bank. It’s going to take some time for the council to become familiar with the idea of being a direct lender for projects. There is a strong unfamiliarity issue here.”
Many aldermen are waiting to see an analysis of the loans done by city comptroller W. Martin “Wally” Morics before they decide whether or not to support the proposal. Therefore, it is clear that Morics will have a major impact on whether The Moderne gets built or not. Morics did not return a phone call seeking comment.
“I pretty much trust (Morics) and his staff to analyze whether or not we can do this without harm to the taxpayer,” said Ald. Terry Witkowski.
DCD officials say the loan for The Moderne is necessary because the financial markets, which collapsed about a year ago, are still very tight and major developments are having an extremely difficult time obtaining financing. If the city wants to grow its tax base it needs to loan money for developments until the financial markets improve, DCD officials say.
“The access to capital in today’s economy is close to zero,” Allison Rozek, senior planner with the Department of City Development said to the city’s Redevelopment Authority. “What has traditionally been available for commercial loans has been shut down. At times when the private market fails at some point the government steps in. This is our way of helping the market along.”
“We have not come to this lightly,” Marcoux said. “This is an appropriate role for government to play at this point, with this particular economy.”
Since the loans would be paid back to the city, Marcoux told the Redevelopment Authority that, “this is not a subsidy. I want to be clear about that.”
If built, The Moderne would have 203 apartments, 14 condominiums, 204 structured parking spaces and 7,500 square feet of retail space.
Under the current financing proposal for the project, the primary lender would be Capmark Financial Group Inc. The primary construction loan would be guaranteed under the U.S. Department of Housing and Urban Development’s 221(d)4 loan program, which insures mortgage loans to facilitate the new construction or substantial rehabilitation of multifamily rental or cooperative housing.
The two loans from the city of Milwaukee for the project would be: a $6 million loan with 6.4 percent interest and a four-year term and a $4 million loan with 15 percent interest and a four-year term.
The loan from the city could help the project complete its financing package and break ground as early as November, said The Moderne developer Rick Barrett.
DCD staff and Barrett have made a “compelling argument” for the need for city loans for the project, said Ald. Nik Kovac. But he and other aldermen say they must examine the project further to be sure the loans will be a wise investment for the city.
“On this we are essentially an investor in the project,” Kovac said. “So, we have to ask a lot more questions.”
“We have to make certain that this tool will yield the greatest amount of return,” said Ald. Willie Hines, the president of the Common Council. “There are a lot of questions that I have.”
Bauman, who represents the downtown area, has been one of the biggest advocates for having the city lend money for development while the credit markets are so tight.
“If the city wants to continue expanding and growing its tax base, the city may have to play a different role in supporting projects,” he said.
However, Bauman said the Common Council should consider the loan proposal for The Moderne at the same time that it considers a similar proposal for an apartment building that Milwaukee-based New Land Enterprises LLP plans to build at the northeast corner of East Kilbourn Avenue and North Van Buren Street. The proposed 19-story, $70 million New Land building would have 224 apartments, 292 structured parking spaces and 3,000 square feet of retail space.
New Land is seeking a $5 million loan guarantee for the project from the city, according to Tim Gokhman, director of sales and marketing.
“The council might only have the stomach to (provide a loan) for one of these projects, if any,” Bauman said. “That’s why we should consider them at the same time.”
Bauman said he supports city loan assistance for both The Moderne and the New Land project.
Like The Moderne, New Land is also seeking a primary loan for the project that would be guaranteed by HUD’s 221(d)4 program, Gokhman said. The primary funding source for the project would be St. Louis-based Love Funding Corp.
The Moderne site is in a tax incremental financing (TIF) district. TIF funds would provide a “security blanket” for the city loans for the project, Marcoux said. However, the loan is intended to be paid back with project cash flow, and not TIF funds.
However, the New Land site is not in a TIF district and the city would benefit from the tax revenue from the development right away, Gokhman said.
Marcoux told the Redevelopment Authority that the DCD has brought the loan proposal for The Moderne forward first because the project is “shovel ready” and could break ground in November.
“We take projects based on where they are in the pipeline,” he said.
But Gokhman said the New Land project could break ground just a few months later, in January or February. Since the two projects are so similar and are both close to breaking ground, he said New Land hopes the city will review its project side-by-side with The Moderne.
Timing is critical for the project, Gokhman said. Any delays will result in higher construction costs because costs are low now, but will likely rise as the economy picks up steam.
An advantage for The Moderne project is that it is located in the Park East corridor. Aldermen and DCD officials say the project could help boost development in the corridor, especially the area west of the Milwaukee River, which has struggled for years to attract development.
“To see some development west of the river, I think (The Moderne) will lead to further development in that area,” Witkowski said.
Still, Marcoux said he knows he has to make a strong sales pitch to aldermen to convince them to support city loans for The Moderne.
“I have work to do to make the case that this is a project that should move forward,” he said.