Westward Ho…Again!

7 min read

After 3 financings, project is finished

Three deals over four decades have gradually transformed the historic Westward Ho Hotel complex in Phoenix, Arizona.

The first deal, in the 1970s, rescued a crumbling landmark, converting its rooms to small apartments for low-income seniors.

A second deal at the turn of the century rehabbed the hotel’s once-famous Thunderbird Room to make space for larger apartment units.

The latest deal, closed this year, completes the redevelopment, with more spacious apartments, new windows and mechanicals and fully-leased commercial space.

“With each financing, we always had something left to do,” says David Twombly of Twombly Consulting, based in Wakefield, Rhode Island, who participated in all three deals.

A proud, tangled history
From the year it opened in 1928 through the swinging 1960s, Westward Ho was the center of social, economic and political life in Phoenix. It fell on hard times in the 1970s, along with the rest of downtown. In 1979, Gadreau Development Company, a company affiliated with Cathedral Development Group, bought the old hotel and converted its 600 hotel rooms into 289 small apartments, with just a few hundred square feet of space apiece.

“When you convert hotel rooms into apartments, the ‘efficiencies’ that you create are really what you would call ‘micro’ units today,” says Jonathan Bentz, Vice President for Cathedral, based in Providence, Rhode Island, with offices in Denver, Colorado. It’s always been possible to eventually find residents for these apartments because they are affordable, though Phoenix renters generally want more space.

The first rehabilitation had too little funding to rehabilitate the Thunderbird Room. John F. Kennedy, Ronald Reagan and Richard Nixon all visited the grand, 1,000-seat dinner theatre, which stood empty until Westward Ho’s second rehab, more than a decade later. A federal housing assistance payment contract subsidized rents. The developer made $7.2 million in improvements to the hotel complex, in addition to the cost of buying the property, paid for with a $12 million loan insured by the Federal Housing Administration (FHA). The property also received its first round of equity from federal Historic Rehabilitation Tax Credits. There would be many more.

Two decades later, as the federal rental subsidy contract neared its expiration, Westward Ho closed its second deal to recapitalize the property.

This second rehab turned 64 very small apartments in the tower building into 32 larger, new, one-bedroom apartments that would be more attractive. The rehab also cleaned the dust out of the old Thunderbird Room and filled the massive, empty auditorium with another 32 new one-bedroom units, keeping the total number of apartments at Westward Ho to the 289 subsidized by its renewed HUD rental subsidy contract.

To pay for the work, in 2003 Westward Ho received a Mark-to-Market (M2M) refinancing from the U.S. Department of Housing and Urban Development. It was the agency’s first deal completed through its Additional Funds model, which combined a M2M refinancing with equity from 4 percent, federal Low-Income Housing Tax Credits (LIHTCs) and more equity from another round of federal Historic Rehabilitation Tax Credits.

However, even this second infusion of cash left work for the future. More than 10,000 square feet of retail space on the first floor still needed to attract a tenant and two-thirds of the apartments were still very small, efficiencies.

The letter of credit
The second deal to recapitalize Westward Ho in 2003 was supposed to last at least 15 years. The compliance period for its 4 percent LIHTCs would not end until 2018.

The first signs of trouble came in 2011, well before the end of the compliance period. The recapitalization completed in 2003 included a $6.8 million mortgage from tax-exempt bonds. The bonds were credit enhanced by Bank of America. Its ten-year letter of credit expired in 2013, five years before the end of the LIHTC compliance period.

“We thought we would just re-up for another five years when it expired,” says Bentz. However, Bank of America wasn’t interested, and only offered a one-year extension of the letter of credit.

“We needed an interim financing plan,” says Bentz. Also, the building needed to replace some vital equipment, including the chiller and cooling towers for its heating, ventilation and cooling systems.

An insurance company offered $6 million to pay off the remaining $4.8 million of BoA’s credit-enhanced bonds, in addition to covering $1.2 million in repairs.

Meanwhile, the developer planned a fuller, $44 million recapitalization – the biggest deal yet for the Westward Ho Apartments.

State housing officials ruled that the property could receive competitive 9 percent LITHCs, but only if the developer first bought out the property’s old tax credit investor, J.P. Morgan, long before the end of the property’s 15-year compliance period. The developer gave the investor a dollar amount equal to its city taxes and fees related to the property, along with guarantees that Cathedral would keep the property in compliance with the rules of the LIHTC program.

Cathedral applied to state officials for new LIHTCs in March 2014. “There was some concern that we would have had severe stress if we hadn’t gotten the tax credits,” says Bentz.

Fortunately the property did very well in Arizona’s point-scored competition. “We scored the highest in the state for that round,” says Twombly. The application earned extra points from the state housing authority because it preserves a historic building and is located a few steps away from the heart of Phoenix’s rail system. The LIHTC sold for $13.8 million to the Richman Group.

Another challenge created another opportunity for the developer: Cathedral had planned to take out a loan through the FHA’s 223(f) loan program. But the scope of work for the rehab rapidly grew past the program’s limit of $40,000 per unit. Cathedral had to switch to the FHA 221(d)(4) loan program, which allows for larger loans, though it also requires developers to pay contractors the local prevailing wage instead of the unregulated labor rates. In early 2014, there was barely a difference.

The developer was able to take out a bigger, $14.2 million loan under the FHA 221(d)(4) program. The developers could increase its scope of work so much it allowed the old hotel to qualify for another, third round of federal Historic Rehabilitation Tax Credits, which can only be used for projects that rack up a significant amount of hard construction costs. The new historic tax credits sold for $3.6 million in equity. The new tax credit partnership also assumed $11.8 million in existing loans to the property, rounding out the $44 million total development cost.

The rehab will leave Westward Ho with an attractive unit mix, new energy efficient windows, and no empty, unused spaces.

Westward Ho also offers health and social services to its residents which earned it additional points in the competition for LIHTCs. During the rehab, the property found a tenant for its 10,000 square feet of ground-level retail space, which had stood vacant for more than a decade. Arizona State University will operate a program in the space to provide basic health services like health checkups and activities.

“We are finally getting good, long-term occupancy on the commercial space,” says Twombly.

The last hurdles
The drama wasn’t over, however, even after Westward Ho won its tax credits.

Because the total development cost is so high for Westward Ho – $44 million – the property faces another challenge to meet the “ten percent” for its LIHTCs, which requires the property to spend ten percent of its total development cost within 12 months of winning these tax credits. Smaller projects can meet this standard simply by completing some pre-development work. For a large project, like Westward Ho, the developers needed to spend a major amount of funding.

“The only way was to buy the property and close the deal,” says Twombly. The deal finally closed July 21, 2015. “It was a race to the finish line. It came down not to days, but to hours.”

Work will be finished by the end of 2016, putting a new shine onto one of the grandest, tallest landmarks in downtown Phoenix.