Group OKs $34 million loan to build CityScape hotel

The developer of downtown Phoenix's CityScape project has secured a $34.3 million loan from a non-profit board to help cover construction costs for the 242-room Palomar Hotel.

This is the fifth loan RED Development has received for CityScape construction costs from the non-profit Phoenix Community Development and Investment Corporation, a participant in a U.S. Department of Treasury community-development program. RED has received more than $82 million in loans from the corporation for retail and office construction. The latest loan, which is good for seven years, covers a portion of the cost of the $90 million hotel, which is expected to be finished by next year.

RED's development manager, Jeff Moloznik, said opportunities for construction loans have narrowed due to the economic slowdown, which prompted RED to approach the corporation last fall.


"Effectively what we witnessed in the market is there's this gap between the amount a developer like us can borrow, and the amount of money that can be loaned," Moloznik said.

Previously, 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 equity for the remaining 20 percent, he said.

The ratio has fallen, he said, 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 full investment.

"So we reached out to the (corporation) to bridge that gap," Moloznik said.

To receive the financing, RED committed to starting a $1 million endowment for low- to moderate-income students seeking four-year degrees at accredited universities. RED also agreed to work with the city to hire and train low-income workers to fill lower- to middle-management jobs at the Palomar. In turn, the city will create a customized training program, said Roberto Franco, president of the Phoenix corporation.

The Phoenix corporation is an organization independent of the city, but three of its seven board members are city staff - Franco, an assistant community and economic development director; finance chief Jeff DeWitt; and deputy city manager Jerome Miller.

The other four members are community leaders - George Dean of the Greater Phoenix Urban League, Pete Garcia of the Victoria Foundation, Patricia Garcia Duarte of Neighborhood Housing Services, and Don Keuth of Phoenix Community Alliance. The organization issues what are called "new markets tax credit" loans, which are regulated by the U.S. Treasury and meant to fund development in impoverished areas.

Most borrowers repay the loans before the seven-year mark, and then the corporation must fund new projects with the repaid money. The hotel at CityScape is benefiting from repayment of a $44.5 million loan for a warehouse at 51st Avenue and Mohave Road that Amazon.com moved into.

Karen Leone, vice president and treasurer for the Phoenix corporation, said 23 loans in Phoenix had been issued under the federal program since the corporation board was organized in 2003.

Some projects that received loans were the Maryvale YMCA, the Hacienda Skilled Nursing Facility for children's health care, and the rehabilitation of the former Phoenix Union High School for the University of Arizona College of Medicine-Phoenix campus downtown.

According to Treasury, the federal program allows taxpayers to receive credits against their federal income taxes when they invest equity in community-development groups such as the Phoenix corporation.

Treasury determines which organizations are qualified to handle the special loans. Treasury also pinpoints the low-income areas of a city where a project must be located to receive the special tax-credit loans. Those areas are determined according to the 10-year census results.

In Phoenix, federal officials consider downtown a low-income area that qualifies for the corporation's loans.

by Emily Gersema The Arizona Republic Feb. 17, 2011 12:00 AM





Group OKs $34 million loan to build CityScape hotel