The Cherry Street Project is in more trouble than city and non-profit leaders are letting on. Behind the scenes they have been wrestling with the realization that the original cost estimate appears to have been unrealistic. The fledgling non-profit group of volunteers the City of Port Townsend wants to build the apartments lacks construction expertise and has been shedding officers and board members.  Things are so bad the city is stepping in to provide project management in hopes the building can be “stabilized.” It has been sitting on wood blocks since arriving by barge from Victoria, B.C. approaching two years ago. 

It is not an “affordable housing project.” It is an extravagant waste of money that has provided shelter for no one with no clear date as to when it may ever be occupied.  The waste of money, time, and energy–the lost opportunities to accomplish something that might actually help the housing crunch in our town–has been tragic.

Unrealistic Cost Projections

In April 2018, based on cost projections prepared by Homeward Bound’s volunteer project manager, the city council voted to issue a bond so that a line of credit in the amount of $834,000 could be extended to finish the project.  The city had already lent Homeward Bound $250,000 to purchase, transport and set up the old apartment building on wooden stacks known as “cribbing.” In addition, because Homeward Bound was not a viable organization, it granted the group $30,000 to get itself organized and train its leaders. Plus, the city threw in a $451,115 subsidy buried in the loan documents because otherwise Homeward Bound would not be able to meet its full debt obligations for the next forty years.

We reported on May 28, 2018, that the costs of the Cherry Street project had ballooned to $2,006,355.  (click here for article). This made the eight projected apartments some of the most expensive real estate in Jefferson County.  The actual cost was somewhat higher because we were unable include the value of the free utility work performed by the city or the permit fee waivers extended to move the project forward.

Even these astronomical costs for what are supposed to be eight “affordable” apartments may fall short.  As disclosed by the Homeward Bound treasurer at the city council meeting on December 3, Homeward Bound has been incurring rental costs for the “cribbing” supporting the building over the past twenty months.  That contractor has also returned to the site to service those supports.  The Treasurer mentioned other debts the group would clear with the city’s money…once it signed the loan agreements.

That’s right.  As late as December 3, the group had still not signed the loan documents that would release money to fund the project. Nonetheless, city council authorized the city manager to provide project management by city staff–another direct expense to the city.

But more importantly: the original cost projection has now been acknowledged by Homeward Bound to have been unrealistically low.

We obtained this information from Homeward Bound board minutes and city documents produced in response to a public records request.  Neither the city nor Homeward Bound responded to our email questions.

At the September 8, 2018, meeting, in discussion of whether the group should sign the loan documents, this entry was recorded in the group’s minutes:  “Get a general Contractor: who should then create a realistic budget…then we would sign the loan.” 

This desire for a “realistic budget” reflects a realization that hit the Homeward Bound board months before during their July meeting.  Cost changes due to delays and market conditions required them, just a couple months after city council approved the loan, to have suppliers rerun the numbers behind the cost estimate.

A November 13, 2018 email from Mark Cooper, Homeward Bound’s treasurer, to City Manager David Timmons and others states, “I’m also convinced the budget proposed by Mike Szatlocky [the former project manager] isn’t sufficient to cover the project. We must discuss how we might finance the gap.” Cooper further stated that Szatlocky “has convinced some board members that they will be held personally liable if there is a shortfall in the project and HB is forced to withdraw at a later date. This needs to be added to the discussion. Is there a way to formally exempt the board except in the case of financial fraud?”

The Treasurer’s concern about a funding shortfall is serious enough that he has asked the city about the possibility of the apartments being sold as condos so that the sale proceeds from the first sales in the uncompleted building could finance construction of the rest of the project:

Thanks to the city’s assistance, a general contractor has agreed to take on the work, but on a time and material basis, not on a fixed bid.  Pacific Environmental Services Company of Port Townsend will serve as general contractor.  They are widely known for their work with the petroleum industry in the Pacific Northwest.

As City Manager Timmons reported at the December 3 council meeting, the first stage of work will be to “get a foundation under the building” to “stabilize it.”

Another recurring problem has been Homeward Bound’s inability to secure the services of an attorney to advise them regarding the loan documents and other matters.  The volunteer attorney who was helping earlier this year backed away and board members have reported calling multiple attorneys and not receiving return telephone calls.  Board members have wanted legal advice before they signed documents obligating them to a large loan and potential personal liability.

An Unstable Partner

When the City started the project, Homeward Bound was in mothballs.  It had only one board member who signed the documents to accept the sale of the $600,000 property for $1 and obligate Homeward Bound to a $250,000 loan for the building’s purchase and transport.  The city wanted a non-profit land trust in the area and it wanted this to be their first project.  So it resurrected Homeward Bound.  The $30,000 organizational grant was supposed to create a viable organization that could see this and other projects through.

Things started on an optimistic note.  Homeward Bound attracted enough interested people to elect a new 12-member Board of Directors on October 5, 2017. Shortly after, they elected officers.  Announcements promising forward momentum on the project hit the Homeward Bound Facebook page and local newspapers.  In March 2018 the Board completed 16 hours of training. Outreach events were held at the Finnriver Cidery and the Quimper Unitarian Universalist Fellowship.  An outside source of donations, called the Nest Egg Project, was founded to help bring in funding.

The city and the group predicted in April 2018 that the project would soon get its “stabilizing” foundation. That has not happened.

Somewhere along the way things began to fall apart.

Board members began resigning.  The president, elected in October 2017, was replaced in June 2018.  Her successor President was replaced only a few months later. Board members took their complaints about fellow board members and volunteers to Timmons, including a concern that one board member was actively attempting to undermine the project and that the volunteer project manager had “not been friendly to the project.”

As Homeward Bound’s Treasurer informed City Manager Timmons, by November 2018 the group was down to only two people who could give time to the project. Shortly afterwards Timmons informed the city council that no one in Homeward Bound had the ability to serve as a project manager and proposed having the city serve in that capacity.

Homeward Bound’s annual meeting took place December 5, 2018. They announced in advance they were seeking four new members.  They got two.  Those two people are activists known for Democratic Party involvement and promotion of a local or state income tax.  They are not people with backgrounds in construction or finance.

What Were City Leaders Thinking?

The city brought the building from Victoria before it had a plan on what to do with it.  It gave it to an organization that existed only on paper and which, even in its most robust days, had never built anything like this.  Neither the city nor Homeward Bound had any permits, architectural drawings or engineering plans in advance; they designed the plans and sought the permits after the building was already on site. They went at it backwards.

Without knowing who would eventually be Homeward Bound’s leadership, the city decided it was going to rely on them to complete and run the project.  It decided that for the next forty years it would rely on these unknown individuals and an organization that had already once folded. Forty years is the length of the city’s loan to the group.

The city knows this is a difficult project with “a lot of complex financial arrangements,” Timmons has said.  What the city put in motion is far more complicated than if the land had been sold and the $600,000 estimated value applied to buying and rehabbing run-down properties.  Alternatively, the more than $2 million going into possibly eight apartments (the number remains uncertain for a variety of reasons, ranging from legal codes to financial concerns), could have put a lot of people into used or new manufactured housing. As we pointed out in an earlier report, a newer, larger apartment complex in Port Townsend could have been purchased for less money.  It would right now be housing several dozens of people, not the few the Cherry Street project may one day hold.

Overwhelming the volunteers and supporters of Homeward Bound with a complicated construction project is not helpful to anyone or the cause of affordable housing.  They are now the recipients of a political football. What has become an embarassment to city political leaders will become their long-term liability. Instead of accepting full responsibility and seeing this project to completion, city leaders have shifted responsibility to a fledgling organization that has already cracked under the first year’s uncertainties and pressure. Guess who gets the blame if the project fails?

Just last month, the Treasurer of Homeward Bound asked Timmons if the city would consider taking the project back.  That is not likely to happen.  The city’s decisions are now being driven by politics.  In the council meeting that approved the city absorbing project management costs, the sole consideration discussed was public appearances.  “This is all over Facebook.” “I am being asked about this all the time.” “We need a win.” Those were the justifications given. Not one question was asked about the viability of Homeward Bound.  Nothing was discussed about the acknowledgement that the original cost projection might be inadequate and more public money would be required. How much more will it cost to get this done?  When will it be finished? Not a single council member wanted to know.

Trouble Lurks in the Financial Pro Forma

The loan agreement between Homeward Bound and the city gives the group a two-year grace period at the start during which it will not have to make loan payments.  In that time, the pro forma projects the group will begin accumulating enough rent revenue to address its inability to regularly service its debt at the front end of the loan term.

That assumes that the project will be completed very quickly after the loan agreement is signed and Homeward Bound draws its first dollar.  The track record on this project shows that delays are ingrained and inevitable.  With a struggling volunteer board, no executive director and complete reliance on the city for intermittent project management, more delays can be expected.  The date of receipt of the first rental payment will likely be pushed closer to the date the loan service starts, giving Homeward Bound less time to accumulate any kind of surplus to defray projected deficits.

This analysis does not even address the fact that the cost projections underlying the pro forma are now recognized to be unrealistic.

The city’s project management commitment extends only through installation of the foundation.  It does not encompass managing any the project’s remaining needs. City council will likely be called upon to again authorize the contribution of more public resources.