BRADENTON, Fla. — Kentucky officials hope a popular federal loan guarantee program will be the catalyst to resume construction of a $465 million, 62-story skyscraper on the banks of the Ohio River in downtown Louisville that has been stalled by the credit crisis.
The Museum Plaza project also would be funded with private equity and public financing. It is expected to create thousands of badly needed jobs for the region.
Hoping to kick-start the project, state officials announced last week that they would apply for a $100 million loan guarantee from the U.S. Department of Housing and Urban Development’s Section 108 provision of the community development block grant program. The CDBG program provides communities with a source of financing for economic development, housing rehabilitation, public facilities, and large-scale development projects.
Since it was implemented in 1978, the Section 108 program has issued $7 billion in commitments for projects around the country, many of which used a combination of public and private financing, federal officials said.
If Kentucky’s application is approved it will be the third-largest federal loan guarantee ever granted. It also will be the first time the state has used Section 108.
“Tough economic times mean we must be more creative to find funding for important projects,” Gov. Steve Beshear said when he announced the new strategy to build Museum Plaza. “Applying for this federal loan [guarantee] is a first step, and while we cannot predict whether it will be approved, my administration is excited about the potential opportunity to create thousands of jobs and get Kentucky’s economic engines moving again.”
Site work began in late 2007 on the 703-foot-tall multi-tower project designed by Joshua Prince-Ramus, an architect at New York City-based REX. It includes office and residential space, hotels, the University of Louisville’s Master of Fine Arts program, a nonprofit contemporary art museum, and a public park.
However, actual building construction never got under way largely because of the credit crisis, according to Craig Greenberg, an attorney with Frost Brown Todd LLC and one of the project’s four development partners.
“From the beginning this has been a public-private partnership to make this project a reality,” he said. “It has strong support from state, local, and federal officials as well as the business and labor community. It has enjoyed that support for years and I think everyone is excited about getting this project under construction and it becoming a reality.”
Developers have already invested $48 million. They expect to obtain a $140.5 million traditional construction loan and to repay the $100 million obtained under the HUD loan guarantee program, which will be backstopped against default by state CDBG funds.
Project financing also includes $90 million of tax increment financing bonds, $45 million of general obligation bonds to be sold by Louisville, $15 million of revenue bonds secured by pledges of art museum supporters, and $26.5 million from the university. Discussions about how the university will fund its portion are still under way, Greenberg said.
Although the financing plan has not been finalized and members of the finance team are still being selected, he said the goal is to issue debt before the end of the year and to take advantage of the taxable Build America Bond program.
HUD’s Section 108 program will be critical to the financing package. The Kentucky Department for Local Government plans to submit the application after holding a public hearing on July 7.
It can take up to two-and-a-half months to process a Section 108 application, according to HUD spokesman Brian Sullivan.
While Kentucky would be the borrower, the developer actually repays the loan. However, the state guarantees the loan by pledging future CDBG funds.
“It is structured this way so if the developer stops making payments, [CDBG funds] guarantee the loan for private investors,” Sullivan said. The maximum repayment period for a Section 108 loan is 20 years.
Typically, Section 108 loans are initially financed through a short-term, variable-rate loan based on the three month London Interbank Offered Rate plus 20 basis points. These loans currently are provided by Pittsburgh-based Federated Investors Inc. and are subject to a drawdown schedule provided by HUD.
Once the loan has been drawn down, permanent financing pegged to yields on U.S. Treasury obligations is arranged through periodic public offerings by HUD’s underwriting group.
“The Section 108 loan guarantee is designed to provide financing for higher-risk economic development activities that would not otherwise secure financing,” Sullivan said.
No Section 108 loan has defaulted, according to HUD’s website.
“We need the HUD loan to get this project financed in the very near future,” Greenberg said. “We believe our project is an important project for the region.”
The developers want simultaneous closing on all the financing elements, and once that occurs construction could begin in as soon as 30 days, he said.
While it remains to be seen if Kentucky’s application for Museum Plaza is approved, state and local officials are counting on the project for badly needed jobs.
According to the Bureau of Labor Statistics, unemployment in the Bluegrass state in May was 10.4% and in Louisville it was 9.9% compared to the nation’s 9.7%.
It’s estimated that the Museum Plaza project will create 4,500 construction jobs, and more than 2,300 will be employed there after opening.
“The Greater Louisville Building and Construction Trades Council is excited to see that Museum Plaza is back on track to becoming a reality,” said Joe Wise, business manager of the Greater Louisville Building and Construction Trades Council.
“Just as Museum Plaza will be an exclamation point on Louisville’s skyline, the thousands of good-paying jobs created by this building will be an exclamation point for the economy of the city, the region, and the Commonwealth,” said Louisville Mayor Jerry Abramson.