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Despite High Demand, It’s Not Always Easy To Create Apartments In Tacoma. This Is Why:

Tacoma has a lot on its plate keeping multifamily developments on schedule to completion, and several significant projects show what it takes to get there. Financing issues, shifting investors, and altering property-tax exemptions in the middle of a project are just a few of the things that might cause delays. Recent projects have resulted in public back-and-forth between departments guiding developers through the process and elected officials deciding whether to approve or deny requests.

To encourage the construction of market-rate units, the city grants an 8-year MFTE. Developers that put aside 20% of apartments in each project at a rent-restricted, or “affordable,” rate are eligible for the 12-year version. The Hailey project began in 2017, with officials excited about the prospect of converting a city parking lot near to the downtown public library into much-needed affordable homes. The switch to an 8-year MFTE, entirely market rate, a few years later was made to qualify for a new construction loan, which required City Council approval, which was delayed after at least one council member objected. At the time of the MFTE switch to market rate, then-Council member Chris Beale said, “I think we have a duty and an obligation to make sure that we uphold the principles we talk about when we talk about affordable housing, particularly land that is going to be developed that was public at one point.” Beale voted no on the amended agreement, which was eventually adopted by the council after two rounds of voting.

Progress remained still sluggish. In February 2020, Cypress Equity Investments, based in Los Angeles, took over the land as its first Tacoma development. In October 2021, the Hailey acquired its certificate of occupancy. According to web ads, it offers 186 market-rate units with prices ranging from $1,446 for a studio to slightly under $3,000 for a larger two-bedroom apartment. In a phone interview with The News Tribune on Jan. 28, Alla Sorochinsky, chief financial officer for Cypress Equity Investments, said the building was 20% leased and 18% occupied at the time. “The Pacific Northwest has always piqued our interest,” she explained. “We had already arrived in Portland.” We were seeking for projects in the Washington, D.C., area. So when the opportunity to learn more about the Tacoma market and the project itself presented itself, it seemed like a good fit.

“At the time, we were already looking at what I’ll refer to as city center adjacent projects, as opposed to the infill projects that we were constructing in California’s Bay Area and other areas around the country.” She stated that the investment firm is excited about the prospect of extra work. “We’ve had a terrific time in Tacoma, both interacting with the city and our construction partners, and our product has received a lot of positive feedback.” Sorochinsky stated, “We’d love to conduct additional projects there.”

ARRANGEMENTS WITH THE CITY THAT HAVE BEEN MODIFIED

It’s not uncommon for original agreements with the city to be changed when market conditions change. According to information provided by the city and developer at public meetings, the Old City Hall project had to reduce its offerings last year from 40 micro-residential units (20 market rate and 20 affordable) to 19 micro-units (10 market rate and nine affordable at 60 percent AMI) due to building code restrictions. When its original developer, North America Asset Management Group, had to bring in new partners, Galena Equity Partners of Boise, to take over the project in 2021, Tacoma Town Center received clearance for a revised development agreement. The project has come to a halt because NAAM was unable to get enough funding, including EB-5 investment. Tacoma Town Center, in this example a project whose 2015 land sale and contract terms were made before of the present booming real estate market, demonstrated the limits of what the city could accomplish.

Some council members questioned the judgments made at the time to keep the NAAM project afloat. Staff issued a statement in response to council’s concerns at the time, claiming that the city needed to stay focused on completing Town Center. “Rather than litigate the matter, incurring unknown expenditures and creating investment uncertainty in Tacoma’s market,” the statement added, “the City has remained focused on its fundamental aim of achieving project completion.” “The rights the City retains under the Development Agreement are expressly and only for the purpose of ensuring that NAAM as the property owner completes the project in compliance with the development terms,” according to staff. In summary, the city tries “extremely hard not to exercise a right of rescission,” according to Jennifer Hines, assistant division manager of the city’s Real Property Services, who spoke during the May 25 council study session at which Town Center was discussed. “We want the proposal to continue forward because the city of Tacoma wants a development.” Though we rescind, it’s almost as if the clock starts over. Then we have to start looking for new development and go through the entire contracting process and agreement negotiations.”

Construction will resume after permits are approved in March, according to Elly Walkowiak, assistant director of the city’s Community and Economic Development Department, who told the Puget Sound Business Journal in January.

SEARCHING FOR THE RIGHT DEVELOPER

Trax, whose plans were first revealed in 2016 and was originally scheduled to open in the summer of 2020, recently celebrated its groundbreaking in January of this year. Trax is now scheduled to be completed in 2023. The 5-story building will have 115 residences, street-level retail, and 53 secure parking slots when completed. Each citizen will obtain an annual regional ORCA transportation pass that will allow them to travel by bus, train, or ferry throughout the region.

The development was an early example of Tacoma’s transit-oriented development, which consists of high-density residential and commercial developments located near transit hubs with minimal parking. Pierce Transit and the city looked for a developer for the land for years. “The property was owned by Pierce Transit because it was used as a staging location when Tacoma Dome Station was built,” Rebecca Japhet, Pierce Transit’s communications manager, informed The News Tribune via email. “We’re also connected since this is one of Pierce Transit’s first ‘ORCA for Multifamily’ accounts, in which the developer has consented to issue an ORCA card to building inhabitants.” We’re also marketing this concept with other Pierce County developments.” In 2014, the city and Pierce Transit partnered to find developers for the site at 415 E. 25th St. The procedure was explained as follows by Pat Beard, company development manager at the city’s Economic Development Services:

“We then launched a (request for proposal) and chose a developer for the project.” We re-issued a request in 2016 when that project became impracticable during an exclusive negotiating period.” DMG Capital Group was chosen as the preferred developer for the project, which is essentially the same as the Trax project that broke ground last month, as explained at the time. The only true obstacle to getting something off the ground, according to Beard, is the market itself. “If you recall, the Tacoma multifamily market was not nearly as healthy in 2015 as it has been over the last five years,” Beard said. “At the time, the attention we were receiving was in the city’s more established housing neighborhoods.” She went on to say, “The multifamily market in Tacoma has exploded in the previous seven years, with cranes dotting the downtown skyline, the Tacoma Link extension nearing completion, and UWT continuing to expand.” Eugene Gershman is the CEO of GIS International Group, which has been working on Tacoma Trax for almost a year. He spoke with The News Tribune in January. He mentioned that the project’s long-promised indoor 15,000-square-foot farmers market facility with roll-up garage doors might become something else. “It’s still possible to go to the farmers market. However, instead of a farmers market, we’re looking into other options such as leasing retail space to individual tenants,” he said. “We’re still looking for a master lease tenant who wants to run a farmer’s market.” It was created with the idea of a farmers market in mind. The market, on the other hand, will tell us who the best tenant is.” GIS is developing the site under a 99-year ground lease with Safehold, which Gershman claimed was employed as a project financing vehicle.

“By separating out the grounds and the building, we were able to have this renovation funded,” he added of the ground lease. “It wasn’t always the intention….” There were several options for funding the project, and this was one of them. The project’s activities, not the land on which it is built, provide the most long-term value. “We received some cash for the building when we sold the land, and we supplemented it with a construction loan.” Gershman has nothing but praise for Tacoma’s development team. Trax is their lone project in the city so yet. “The city’s overall approach has been really inviting,” he added. “It was quite wonderful for us to encounter that, and we would love to conduct additional projects in Tacoma.” Is it possible that we will overbuild? Sorochinsky was not convinced. “We’re simply seeing such a massive demand for housing across the country,” Sorochinsky said, “and particularly in markets where you’re close enough to… employment growth and cities like Seattle, but you’re a little bit outside of the city, you might get more for your money.” “People are flocking to those markets,” says the expert. Many of them work from home or work in an office two or three days per week. As a result, they can chose markets that they couldn’t before since they had to be at an office five days a week.” “We expect demographics and the quality of tenants in urban Tacoma to continue to attract an increasing number of out-of-market investors,” Kidder Mathews said in a new research released Feb. 17 about Tacoma’s growth.

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