Questions & Answers – KCCHA/County Loans

Why is the County taking on this debt?

In 2005, Kitsap County entered into a contingent loan agreement

requiring the County to loan the Authority money in the event the
Authority would be unable to pay the loans needed to build the
Harborside Condominiums in downtown Bremerton. The County
entered into a similar financing arrangement for the Poplars
Apartments. These loans have or will shortly retire and because
of the economic downturn and the implosion of the credit
markets, the Authority is unable to restructure or repay the loans.

Thus the County was asked to fulfill its legal obligations to loan
the Authority the funds to pay these loans. The County, the
Authority and then banks have been in negotiations for several
months to extend and restructure the debt.

What are the terms of the new loan?

The County will borrow up to $40.5 million over a 4 year term, and
will be required to make interest-only payments during that term.
The interest rate is variable, but the initial rate is under 2.5%.
The $40.5 million will pay off the Harborside debt (totaling $31.09
million) and Poplars (totaling $5.09 million). The final $4.32
million the County will draw as needed, to pay for the carrying
costs associated with the Harborside condominiums with
structuring this debt, and the interest payments needed for the 4
year loan.

Where will the County get the money to pay back this
loan?

The County will assume sole responsibility for the Poplars Debt
and ultimately incorporate the Poplars Property into the Central
Kitsap Community Campus Project, with the potential to convert
its use in a way that will repay the $5.09 million. The remaining
debt will be paid through:
KCCHA/County Loans
Page 2 of 6

• Proceeds from sales of Harborside condos and the adjacent

land (the Sinclair Lot)

• Proceeds from sales of all non-low income residential assets

of the Authority (office buildings, land & market rate
apartments)

• “Excess Revenues” from the Housing Authority

The County will manage the sale of assets, including the

Harborside Condominiums. The four year term will give the real
estate market a chance to recover so the condos and other real
estate assets do not need to be sold at today’s fire-sale prices.
Proceeds from asset sales will go directly to paying down the Bank
of America loan.

What are Excess Revenues?

Sources of Revenue not required by the Authority (a) to sustain

the operating costs of fulfilling the Authority’s core low income
housing mission; or (b) to satisfy the Authority’s other existing
obligations.

What happens in four years if Proceeds from asset sales

aren’t sufficient to repay the loan?

At the end of the 4 year term if there is a gap between the

amount the County financed and the sale proceeds of the assets,
the County will need to issue long-term bonds to cover that gap.
County staff is working to establish a plan, including a
contingency fund to set aside any one-time only revenues the
County receives beginning in 2009 to provide for debt payment
needs starting in 2013, at the end of the loan’s term. The
Authority in turn is required to pay back this loan as it receives
one-time only revenues in excess of its budget.

Were recent County budget reductions related to taking

on this debt?
KCCHA/County Loans
Page 3 of 6

No; the County has not made any cuts in expenses or staff
because of this debt. The Board has been negotiating with the
Bank and the Authority to minimize the loan’s impact on the
County’s general operating fund. As noted above, there may be
debt service payments the County will need to make from its
general fund beginning in April 2013; the County will take every
step to plan and save now to avoid making cuts to absorb these
payments.

Why is the County in the business of housing in the first

place?

Under state law, Washington counties and cities are required to

form a housing authority. This Authority is jointly comprised of
the county and the cities of Bainbridge Island, Poulsbo and Port
Orchard. The Authority owns or operates over 1,000 units of low
income and senior housing throughout the county and within
those four cities. Through use of grants, loans and bond
proceeds, the Authority has provided for and expanded the supply
of good-quality housing units in the county, for both home buyers
and renters. In addition to minimizing the impact to the County
as it lives up to its legal obligations, this debt restructuring
ensures that the Authority will be able to carry out its core
affordable housing mission.

Why was the Authority building condos in downtown

Bremerton and why did the County guarantee the debt for
a project in an incorporated city?

The Authority had been designated as the official Community

Renewal Agency for the City of Bremerton, and the original plan
was formulated during the height of the real estate market in
2005. Excess proceeds from the Harborside condominiums were
intended to be used to supplement funding for low income
housing programs. The County was the one member agency with
sufficient debt capacity to guarantee the financing for this project.
KCCHA/County Loans
Page 4 of 6

Is the City of Bremerton obligated for any of this debt?

The City of Bremerton also entered into a contingent loan

agreement to pay $2 million to the County to assist in paying
down the Harborside debt. Just like the County, the City will be
asked to live up to its legal obligations.

Do the component cities have any liability for this debt?

Counsel to the Authority believes the County and component

cities (Port Orchard, Poulsbo and Bainbridge Island ) have an
obligation to subsidize the “core function” operating costs of the
Authority. Repayment of the new loan is not a core function
operating cost. Therefore, the new loan has been structured to
avoid any liability exposure to the component cities even if the
Authority is unable to pay any resulting deficiency to the County.

Could the County have done anything else besides taking

on this debt?

The County Board and the Authority Board members did seek
federal and state assistance with this debt. In response, the state
legislature did pass an increase in the existing recording
surcharge that could be used to sustain the Authority’s core
programs and in this way ensure the county’s or members
agencies’ own budgets are not tapped to make up any operating
shortfalls of the agency.

What has the Authority done to get its finances in order?

The Authority has made deep budget cuts, eliminating staff and
programs that are not fully supported by grants and program
revenues, begun liquidating properties and consolidating office
space. The Authority Board has convened a working finance
group to assist staff in developing a balanced 2009-2010
operating budget and it will develop financial policies to ensure
the Authority will be sustainable going forward.
KCCHA/County Loans
Page 5 of 6

What are the real estate properties or assets that are

pledged to help pay back the County’s debt?

The county will have the right to direct and manage the sale of
specific properties, including the Harborside Condominiums, the
Sinclair Lot and Tree Tops Apartments. Additionally, the county
will take ownership of the Poplars Building. The county intends to
retain a property manager with full authority to act on behalf of
and direction of the Board of County Commissioners and will
benefit from any and all rental agreements. The County will be in
full control over the sale price, timing and marketing of these
properties. Other than Poplars, the properties are vacant or in the
case of Tree Tops, the sale will have no impact to existing tenants.

What will happen to the low income seniors residing at the

Poplars?

The Authority and the County have agreed to work on

transitioning Poplars ownership to the County in a way that will
preserve the seniors’ housing vouchers and to not disturb the
seniors’ tenancy for as long as possible. The Poplars apartments
have provided safe housing opportunities for seniors aged 62 and
older with extremely low incomes. The Authority acquired this
property as part of the replacement housing strategy for residents
at Westpark Public Housing, owned and managed by the
Bremerton Housing Authority. Given its location, situated next to
the Central Kitsap Community Campus, the County will purchase
the Poplars, and eventually the County will work to redevelop the
property in keeping with its Central Kitsap Community Campus
plan.

What assurances are there that this situation will not

occur in the future?

• The KCCHA Board is committed to insuring the Authority

reverts to its original mission: to provide affordable housing
for the most vulnerable members of our communities. The
KCCHA/County Loans
Page 6 of 6

Authority will no longer participate in renewal projects for

any jurisdiction.

• The County Board of Commissioners will approve a resolution

that limits the county’s ability to guarantee debt of other
agencies in the future.

What will happen to the Housing Authority in the future?

The authority has reduced staff and expense and is committed to

focusing on its core affordable housing mission. They are working
to create a sustainable organization that will preserve the over
1000 low income housing units now owned and managed by the
agency. Current budget projections demonstrate the Authority
will have sufficient revenues to sustain its core functions for at
least the next two years.