TO: Council Members

FROM: William M. Worden & Deborah M. Goldstein, HDAB Staff

January 27,1997

SUBJECT: National Terminal (Cleveland) Project

On January 23,1997, Council held a discussion about the J.L. Hudson Building with, among others, Beth Duncombe of DEGC, Larry Marantette of Greater Downtown Partnership, and Joseph Vassallo, P&DD. In the course of that discussion, the Alexander Company's National Terminal Project in Cleveland was characterized as having received 90% public subsidy. An Executive Summary of that project was distributed to the Council members. Our staff sought clarification of the subsidies provided to the National Terminal from the project manager in the City of Cleveland Department of Community Development.

Cleveland's Downtown Housing Manager, Paul Krutko, strongly objected to the characterization of the National Terminal Project as 90% public subsidy. He went through the "Sources and Uses of Fllnds'' in the Executive Summary line by line to explain that only 7.5% of the total $26 million project was subsidized by the City of Cleveland. The greatest source of funding, amounting to over 50% of total project costs, were Fannie Mae-insured tax exempt mortgage revenue bonds of a type sold on Wall Street; these are available for projects across the country and require a percentage of units to be rented at moderate rates. Although the bonds are induced through the county government, neither the city nor the county's faith and credit are at risk. Mr. Krutko said that to describe these mortgage revenue bonds as being public subsidy was inaccurate. These bonds are exempt from federal taxation, and therefore bring a low interest rate. The principal amount plus interest is an obligation of the developer and cost local government nothing.

Cleveland Tomorrow, a private nonprofit composed of the fifty largest corporations in Cleveland, uses private funding to loan to strategic projects. Cleveland tomorrow is satisfied with a 5% interest and repayment of its principal, being willing to view the remainder as an investment in the downtown as a whole. The National Terminal Project was obviously deemed to be "strategic" in the sense that its adaptive reuse would contribute to the numbers of people moving into the city while eliminating the building's blighting influence on an important sub-neighborhood of Cleveland's downtown.

The next two funding sources, NDIF and UDAG Repayments, are city loans amounting to only $2 million of the $26,380,000 total project cost; while there may be some modest element of subsidy in the interest charged (4.5%), the principal and interest are an obligation of the developer.

The historic and low income tax credits plus the cash equity amount to almost $8.5 million or one-third of the project cost. A subsidiary of Kimberly Clark is buying the credits and investing its own cash. (Kimberly-Clark is so pleased with the arrangement that it is investing $50 million with the Alexander Company for projects nationwide.)

The City of Cleveland has a policy of promoting middle class housing, thus bringing people back into the city. By choice, Cleveland provides tax abatements as an incentive for that kind of development. In the case of the National Terminal Project, the building had been tax delinquent for some time. Upon purchase by Alexander, over $400,000 in back taxes were paid to the city. Cleveland provided a 75% tax abatement over a 12 year period thus assisting in putting the property back on the tax rolls at 25% of its newly improved value, reaping over $106,000 in new property taxes annually.

In sum, the project manager objects to the characterization of this Cleveland project as “90% subsidy” and would have it more accurately characterized as "90% creativity." He noted that he and his colleagues had checked over fifteen municipal references, visited Alexander Company projects, and have now worked first hand with the Alexander Company. He would recommend the Alexander Company to any city in the nation.