Hispanic organization loan brings CityScape hotel

The developer of the downtown Phoenix office and retail project CityScape has received a $12 million loan from a Hispanic organization's community development agency for construction of the Hotel Palomar.

A limited-liability corporation under Chicanos Por La Causa's umbrella, Prestamos CDFI, awarded the loan recently to CityScape's developer, RED Development.

RED agreed to pay a $1 million exit fee as part of the seven-year loan, said Rodie Hernandez, director of Prestamos.

That exit fee "would be utilized and put back in CPLC's services," Hernandez said.

CPLC focuses its community development efforts on assisting low-income and minority residents, businesses and communities, and Hernandez said the hotel project is no exception.

"Our community is a Latino community and a minority community in general. And those permanent jobs (at the hotel) are going to be filled by those individuals," she said.

RED applied and completed a screening process with Prestamos officials in order to get the loan, Hernandez said.

The latest loan is the second this year that RED has received from a Phoenix community development organization for construction of the about $90 million, 242-room boutique hotel near First Street and Washington Street.

It is yet another example of the extensive financial support that community and city officials have provided the downtown hotel, office and retail project since it was proposed in 2006.

Earlier this year, RED received a $34.3 million loan for the hotel from the Phoenix Community Development and Investment Corp., a non-profit group overseen by the city. The remaining $45 million cost of the project has been covered by a loan by Principal Life Insurance Co.

RED officials said that in the sluggish economy, money for big construction projects has been hard to obtain.

Before the recession hit, borrowers could get a loan with a loan-to-cost ratio of 80 percent, enabling them to borrow more money to pay for the bulk of the project while leveraging their equity for the remaining 20 percent.

Jeff Moloznik, RED's development manager, said the typical ratio has fallen to a 50 percent loan-to-cost ratio, which many investors find unappealing. This means the remaining 50 percent would be covered by an investor deemed, in loan terms, "subordinate."

If the project fell apart, and the full loan wasn't repaid, the subordinate might never recover the investment.

In these tight-fisted times, RED has sought help from agencies that handle federal dollars for community development.

The PCDIC and Prestamos loans for the hotel are a unique method of economic development financing, the new markets tax credit program.

The U.S. Department of the Treasury oversees this financing, which Congress established in 2000 as an economic driver in low-income communities. The program reduces a company's project costs by cutting its federal income tax.

To qualify for the tax credit, the company's project must be in an area deemed low-income and in need of development. Under federal standards, downtown Phoenix is both.

The investor or developer is granted a seven-year tax credit against its federal income tax return. In exchange, the developer invests equity in the community development organization. The tax credit is worth 39 percent of the company's equity investment, according to Treasury rules.

The PCDIC and Prestamos are among a dozen organizations in Arizona federally certified to dole out the tax credits.

Since the program began, the Department of Treasury has awarded $29.5 billion in tax credits to 594 projects. Whether the new market tax credits measurably improve the economy in low-income areas remains to be seen; no federal agency tracks the success of the program, according to the Government Accountability Office, Congress' investigative arm.

MORE ON THIS TOPIC

Downtown Phoenix's CityScape

A portion of the constructions costs for the $600-million CityScape project by RED Development has been eased by investment from community development groups and the city of Phoenix, which owns the two-block property. The groups and the city supported CityScape's development through various forms of investment:

- Phoenix has given RED $57 million in incentives, primarily by paying for construction of the garage beneath CityScape. The city also has, through an economic growth mechanism available through Arizona law, abated all property taxes for CityScape for eight years.

- An estimated $82 million in loans for the hotel, retail and office project were given by Phoenix Community Development and Investment Corp., a community development non-profit group overseen by the city.

- This summer, the Chicanos Por La Causa community development organization, Prestamos, agreed to loan $12 million for the hotel project.

Source: Interviews and Phoenix public records

by Emily Gersema The Arizona Republic Jul. 21, 2011 12:00 AM




Hispanic organization loan brings CityScape hotel