Milwaukee is taking an unnecessary risk by loaning $10 million to a condo project in a soft condo market, according to the city comptroller’s office.
“I think we can drive a harder bargain, to be frank about it,” said Mike Daun, Milwaukee deputy comptroller.
City aldermen are considering giving a $9.3 million loan with a 14 percent interest rate to the more than $55 million Moderne condominium and apartment high-rise. The loan primarily would pay for the project’s condo portion because a $41.4 million loan from the U.S. Department of Housing and Urban Development is paying for the apartments.
Daun said the city’s weak condo market increases the chances the developer will be unable to pay off the loan. If that happens, the city could foreclose on the condos, he said, but there is a possibility the city would compete with HUD to recover project loans.
“If the city is going to consider this,” Daun said, “they should do so knowing there is a major risk involved.”
Daun has suggested removing the condos from the project and giving the developers a less risky $1.5 million loan with a lower interest rate for the apartments.
But the Department of City Development and project developer Rick Barrett rejected Daun’s proposal.
The project needs city money because the developer cannot get a loan from a private lender, said Jeff Burns, a partner in the Moderne project. The city is in a better position than a bank to recoup the loan money because a city tax-incremental financing district would support the loan, he said.
If the developers reach a worst-case scenario and can’t make loan payments, the city can rely on increased taxes generated by the project to pay for the debt, Burns said.
To create a TIF district, cities borrow money to stimulate development in a certain area and use the increased taxes generated by new development to pay off the debt. According to state law, cities must prove that TIF money is the only way that a project can get financing for construction.
“What (the comptroller) did was basically prove the point of why we can’t go out and get a typical loan for this,” Burns said.
The fact that HUD reviewed and approved a much larger loan for the project gives the city assurance its risk is justified, said Development Commissioner Rocky Marcoux. The idea of loaning money to the project through a TIF district is a new approach, and not one the city wants to use often, he said. But the department supports the loan because the project could be a catalyst for the Park East area, he said.
“There’s always room to disagree, certainly,” Marcoux said. “It is part of the public process.”
The Moderne is not the first time a comptroller report questioned a project financing deal proposed by DCD, and Daun said the city should set policies to smooth out the process. The city should adopt standards for projects to be considered for TIF money, and lay out limits for the subsidies, he said.
“If the developers understand these are the parameters,” Daun said, “they won’t just throw anything to the city.”