The Federal Way City Council voted 6-1 on Tuesday to authorize city staff to apply for a $3.03 million federal loan for the Performing Arts and Events Center.

If the U.S. Department of Housing and Urban Development approves the Section 108 loan application specifically for the arts center, the city will repay the loan using its Community Development Block Grant entitlement funds.

This would cost the city an average of approximately $192,000 — or 31 percent of its block grant funding — per year over a 20-year period.

The council first broached the subject of applying for the federal loan in August 2013, which ended in a split vote to approve moving forward with the application process. Councilwomen Susan Honda, Kelly Maloney and then-Deputy Mayor Jim Ferrell cast the dissenting votes.

At that time, city staff said the city could use the loan to spur economic development in general, which included but was not limited to the arts center. In June 2014, the Department of Housing approved the $3.03 million loan and gave Federal Way officials one year to identify what projects the loan would fund.

City staff weighed the redevelopment of the Twin Lakes Commercial District near Fred Meyer and the arts center, but decided the funds would best be spent on the latter as the city has already established a master plan for the $32.7 million center. If approved, the $3.03 million loan will be used for design fees and other “soft costs” for the arts center, including legal, accounting and closing fees.

During the meeting, the council held a public hearing but no one spoke.

Community Services Manager Jeff Watson also presented the council a breakdown of how the city currently uses its Community Development Block Grant funds, which this year totaled $617,465.

He said a 20-percent maximum — or $123,493 — goes to planning and administrative costs. A maximum of 15 percent — $92,619 — of the funds go to public services.

“We always fund the maximum amount of the public services,” Watson said, noting that portion this year funded eight programs for the needy in Federal Way.

The remaining 65 percent of the block grant funds go to the community economic revitalization fund, which totals $401,353. The city will repay the Section 108 loan using approximately $192,000 from that portion.

Councilman Bob Celski asked what projects the city would have to forego to use the $192,000 to repay the federal loan.

Director of Community Development Michael Morales emphasized that since the city already uses the maximum amount of block grant funds for public services, it could not use any more of the funds for that category.

“Nothing is being taken from that category in order to make this happen,” he said.

Morales said it’s hard to gauge what other projects the city could use the $192,000 for instead of the Section 108 loan.

“ … Do you have another $3 million project by itself, or would you do a half a dozen sidewalk projects somewhere else, which gets to be very, very costly when you get into prevailing wage,” he noted. “We’re not using this for the construction of the (arts center) project, so the value of the dollar here would be diminished somewhat going into another public facility project where we’re actually going to carry out construction …”

Honda, who gave the lone dissenting vote on Tuesday, said she’s been concerned about how the city is going to fund the arts center from the get-go.

“That’s not a secret to anyone,” Honda said. “I’ve always said that I’d be very hesitant to borrow money and this is borrowing money, which I realize is from our Community Development Block Grant allocation, but it’s borrowing money. So the total amount of payments over 20 years would equal how much?”

Watson said the city’s total payment in principal and interest would come to over $4 million.

“So if we do go ahead with this, I would like to see that when we’re talking about the cost of the Performing Arts and Events Center, that we include that in the cost,” Honda said.

Councilwoman Lydia Assefa-Dawson asked staff what would happen with the Section 108 loan if the city’s block grant allotment gets reduced.

Morales said once the loan’s fixed rate is set, the debt service will remain the same.

“So with any Section 108 loan, you’ve already executed the document, so if our entitlement went down by $100,000 or $50,000, our obligation on the debt service doesn’t change, so everything else has to be absorbed,” he said.

City staff noted cities cannot use block grant funds for any debt service other than the Section 108 loan program.

“I can certainly understand the uncertainty of (if we are) funding something that is commonly accepted and utilized in other communities and what would the impact be on our entitlement moving forward,” said Morales during Tuesday’s meeting, noting this was the city’s first Section 108 loan.

He highlighted several cities across the U.S. that financed Section 108 loans with Community Development Block Grants, including the city of Oceanside, California that used a $6.4 million loan to fund the Joe Balderrama Recreation Center.

Watson said while the city is hopeful the Department of Housing will approve the loan, there are still a couple of challenges.

To meet the funding criteria, the Performing Arts and Events Center must generate approximately 310 jobs for low- and moderate-income households.

“That’s a lot of jobs to create but we have a lot of promising potential with the redevelopment in the town center, so we feel pretty confident about that,” Watson said. “I think the other question is really just simply is the city comfortable with the repayment terms, et cetera and I think that we are. I think that we feel pretty confident that things will move forward.”

Watson said the 310 jobs include a mix of jobs that the arts center will create directly, as well as jobs that the arts center will create “as a catalyst for redevelopment.” This includes jobs at the new hotel the city expects will be built near the arts center and additional development in the Town Center 3 area as a result of the arts center, he said.

The city has a special advantage in this job creation process, as the city owns some of the properties for the next phases of the Town Center project, Morales said.

“And the reason that’s important is because as we go into property transactions and development agreements for those properties, we have the unique opportunity to be able to sit down that perspective developer and say, ‘What we will need you to do as part of this agreement is go through this reporting process,’” he said, noting it should be an easy cost-free process for developers to report new jobs to the city annually.

If the city does not meet its job-creation target over a three-year period, however, the city will not default on the federal loan, Morales noted.

“So if you’re worried about that, we’re making the best-faith effort and (the Department of Housing) understand that,” he said, adding the department will look closely at the city’s job projections during the loan underwriting process.

The city’s next steps for the Section 108 loan will be submitting the application to the Department of Housing’s Seattle office and its headquarters in Washington, D.C. If the department approves the loan for the Performing Arts and Events Center, the council will hold a second required public hearing.