JOHNSON CITY, Tenn. (WJHL) – Johnson City Development Authority (JCDA) leaders are wrestling with how the agency will make a pending $1 million “balloon payment” on its $4.6 million John Sevier Center mortgage.
Due Sept. 30, the payment would decrease the principal balance to $3.6 million just as mortgage payments transition from interest only to principal plus interest. The rate is 4.55 percent. JCDA purchased the former hotel last August.
“We’ve looked at how we can make the payment and what the impact will be to the general fund of JCDA,” the agency’s director, Dianna Cantler, told commissioners who attended a March 3 executive committee meeting. Commissioners discussed several plans that would offer lender HomeTrust Bank — where JCDA chairman Robert William and another board member, Freddie Malone, both are employed — less than the full $1 million and negotiating from there.
“Let’s get some things in our head that we think we can live with as an organization and then let’s go have a conversation with (the bank) and ask them what they think is reasonable,” commissioner Hank Carr said. Carr isn’t an executive committee member but has significant commercial real estate experience and was asked to attend.
After failing early last year to gain approval to use tax increment financing (TIF) funds for the purchase, JCDA took out a standard mortgage with HomeTrust.
JCDA is paying a management company to run the apartments while it seeks a builder interested in creating new housing for the 96-year-old former hotel’s 150-odd assisted housing residents. JCDA would transfer the “Housing Assistance Payments” contract to that developer and hopes to profit from that transaction.
Following that deal, if not before, JCDA will look for a developer to buy and restore the building to its former grandeur for mixed use. Both stages will involve requests for proposals and bid processes.
In a Jan. 15 interview, Williams called the John Sevier “the absolute most important downtown redevelopment project in Johnson City.”
A city loan? TIF? Something else?
Before it’s many steps down the road to the John Sevier’s transformation, JCDA has to deal with the mortgage. The full board meets Friday.
At March 3’s executive committee meeting, Cantler presented several scenarios that pulled $225,000 from JCDA general fund reserves and $275,000 from $346,112 in John Sevier reserves that is expected to be available by September. That $500,000 total left commissioners to toss about several potential options — none of them guaranteed.
One option involves offering HomeTrust the $500,000 in September and an additional $100,000 in principal each of the next three years. That scenario relies on the bank to agree, and would increase JCDA expenses through 2023.
In addition to the extra $100,000 annually, JCDA would pay higher monthly mortgage payments. Those payments will include principal beginning Oct. 1. A $500,000 balloon would leave them at almost $6,000 a month higher than the current interest only payments.
A second option involves requesting either a $100,000 or a $200,000 loan from the City of Johnson City. In the case of the $100,000 loan, JCDA would offer Hometrust $600,000 plus two years of extra $100,000 principal payments.
That idea didn’t find much favor with Craig Torbett, the chairman of JCDA’s TIF advisory committee. “I would personally prefer the city as the option of last resort,” Torbett said.
JCDA Treasurer Tracy Johnson agreed. “I think the city’s going to want to see us solve our own problem,” she said.
Torbett suggested a potential return to the Washington County Commission, where a TIF request was narrowly defeated in early 2019. Williams, the JCDA chair, also suggested the possibility in a Jan. 15 interview.
“We have about $880,000 in our operating account, we also have over a million dollars in our TIF restricted account, which again hopefully we can work with the county that …that could be an option in the future,” Williams said. “If not we will work with the funds that we have.”
Others balked at the county commission idea. Northeast Tennessee Regional Economic Partnership (NETREP) CEO Mitch Miller, meanwhile, said he will discuss with an attorney an option that could free up some funding through the local Industrial Development Board.
When the full JCDA board meets, the situation certainly won’t be resolved. For his part, Hank Carr said lenders look for ability to perform, and that with its significant reserves, and what he called “other solutions,” the JCDA has demonstrated such an “ability to perform.”
HomeTrust, Carr acknowledged, “may have a complete different thought process than, say, I do, and if that’s the case then we’ll have to have a reality check and adjust.”
Since JCDA may request a lower balloon payment, Carr added: “I think you do this now, you do it quickly and you get ahead of this curve so that in April and May you’ve got it solved. Not later in the year.”
Speaking of later
The mortgage challenge is among several as JCDA continues moving forward with the John Sevier project. For one thing, it comes as the JCDA and NETREPh the Northeast Tennessee Regional Economic Partnership are essentially parting ways.
Miller presented a letter March 3 regarding the split, which will be effective by June 30.
That separation leaves some uncertainty surrounding JCDA budget needs, even as leaders face a long-expected need to draw on those $800,000 in reserves — which would be closer to $575,000 after paying on the HomeTrust note.
The reserves built up during a five-year period when Northeast State Community College was paying $272,880 a year to lease the Downtown Centre from JCDA. That amount dropped to $12,000 annually in December 2018 and will remain at that level through December 2023.
Current JCDA budget projections — which don’t include additional $100,000 principal payments to HomeTrust — anticipate drawing down $50,000 a year from those reserves. Were the bank to agree to the annual extra principal payments and no other income source was available, JCDA’s reserves could dwindle rather quickly.
A draft fiscal 2021 budget attempts to forecast expenses without knowing how much JCDA will have to pay for space. It includes spending for two new positions, one administrative and the other event-related. It does not factor in additional principal payments on John Sevier.
‘A transformative project’
In January, Williams said any risks JCDA undertook with the John Sevier purchase are worth the end reward. The building is not at its “highest and best use,” Williams said, nor is it the ideal living situation for the residents.
JCDA has had “multiple conversations” with developers interested in taking over the HAP contract and building new housing. The agency expects to develop a request for proposals soon, after which it would be another 24-30 months before those units would be complete.
Following that, the “highest and best use,” Williams said, will likely include some residential space, retail and a restaurant and perhaps a boutique hotel. Williams pointed to similar renovations of historic hotels that have successfully occurred in Knoxville, Chattanooga and Greenville, S.C.
“We’ve had several parties both in the market and out of the market with a lot of experience in similar projects come in, express their interest and actually walk through the property and inspect it,” he said.
Even so, Williams said the building isn’t likely to bring a purchase price equal to what JCDA paid. The sale price was $4.1 million, and the $4.6 million mortgage included a $205,000 reserve for anticipated building upgrade expenses, as well as a commission.
Additional public capital to put the project over the finish line — including to pay off whatever may be owed on the mortgage at time of sale — isn’t something out of the ordinary for downtown redevelopment, Williams said.
“Take for example the property where Tupelo Honey was located. That was a property the JCDA purchased and we ended up selling back to the developer for a dollar. A project like John Sevier is one that we may not get our full purchase price, but that’s a way that we can incentivize the end use developer to redevelop the property and really make it a transformative project for downtown.”
Williams called the “buy-purchase-sell back at a reduced price” just one arrow in JCDA’s economic development quiver when it comes to the John Sevier’s future.
“We also have TIF. Hopefully the state of Tennessee will be passing some historic tax credits that can combine with the federal tax credits. So there’s a lot of different economic development tools that we’re hoping to use and see this property redeveloped.”