The Kitsap County Consolidated Housing Authority (KCCHA) received a financial reboot on

Monday night, when the Kitsap County Commissioners ratified an agreement that assumes
responsibility for a $40 million debt.

"This has been a challenge to the commissioners," said North Kitsap Commissioner Steve Bauer,
who also serves as KCCHA Board Chair. "We were confronted with several choices, and none of
them were good ones. If we hadn't assumed this responsibility it would have driven the Housing
Authority into bankruptcy, and we still would be on the hook for $29 million.

"It wasn't this board that created this mess," he said. "But it was up to us to resolve it."

The trouble began when KCCHA, which began as a vehicle for low-income housing, sought to
build condominiums in downtown Bremerton and convinced the county to guarantee the loan.
The previous commissioners approved the guarantee in 2005, but a series of events led to the
current financial straits. The project was delayed due to faulty windows, and was ready for
occupancy just as the housing market crashed.

The loan will be due later this year, and there is no money to pay the debt. Sales were far short of
projections, and the county was unable to sell the condos because current market was below the
minimum price allowed by the bank.

The county has negotiated a new loan with Bank of America, also the current lender, which
requires interest only payments for three years. After that time the county will need to pay on the
principle, but the assumption is that sales will pick up before those payments are due.

The loan is structured to allow pre-payment with no penalties, so that any money from a sale can
be applied directly to the principle.

Along with the restructuring of the debt, the commissioners are examining the idea of
restructuring KCCHA itself. Interim Director Deborah Broughton said she expected the agency
“to return to its core mission,” which is to coordinate low-income housing. Silverdale resident
Jack Hamilton said the KCCHA board members should not be drawn solely from local elected
officials, since it makes it difficult for the commissioners—who all sit on the board—to evaluate
themselves. Bauer said such action was under consideration.

“The Housing Authority never should have entered the business of building condominiums,” said
Central Kitsap Commissioner Josh Brown. “Governments should not enter into agreements to
develop buildings for non-government entities. The rules are different.”
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The mission of the Housing Authority has been re-focused to providing quality low income
housing for approximately 2250 seniors, families and special needs residents of our County. The
KCCHA Board on Monday adopted a resolution officially withdrawing as Bremerton’s Urban
Renewal Agency stating in a press release “the KCCHA Board now confirms the over arching
goal of The Authority is to provide a continuum of affordable housing opportunities, both rental
and homeownership, to low-income households.”

On Monday afternoon, the county distributed a question-and-answer document to all employees

meant to provide reassurance that the money saved through staff cuts and budget measures was
not squandered by the new agreement. This included the assertion that the situation could not
repeat itself, guaranteeing that KCCHA will no longer participate in renewal projects for any
jurisdiction and the County Board of Commissioners will approve a resolution that limits the
county’s ability to guarantee debt of other agencies in the future.

Throughout the process the action to guarantee the initial loan was attributed to the previous
commissioners, none of who are still in office. But the assertion by one speaker that “none of
those who are responsible for this are here today” was incorrect, as former Central Kitsap
Commissioner Patty Lent attended the hearing.

“We made what looked like a good decision at the time,” she said. “The market was booming
and there was lots of money available. We wouldn’t make the same choice today. But I came
here to take responsibility for this action, and to tell the current board that they are on the right
track.”

After the meeting Bauer approached Lent, greeting her with a hug.

“Thank you for coming,” he said. “That took a lot of courage.”

value because the

ity money in the event the Authority would be unable to pay the loans needed to build the
Harborside Condominiums in downtown Bremerton. The County entered into a similar
financing arrangement for the Poplars Apartments. These loans have or will shortly retire and
because of the economic downturn and the implosion of the credit markets, the Authority is
unable to restructure or repay the loans.

Thus the County was asked to fulfill its legal obligations to loan the Authority the funds to pay
these loans. The County, the Authority and then banks have been in negotiations for several
months to extend and restructure the debt.

What are the terms of the new loan?

The County will borrow up to $40.5 million over a 4 year term, and will be required to make
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interest-only payments during that term. The interest rate is variable, but the initial rate is under
2.5%. The $40.5 million will pay off the Harborside debt (totaling $31.09 million) and Poplars
(totaling $5.09 million). The final $4.32 million the County will draw as needed, to pay for the
carrying costs associated with the Harborside condominiums with structuring this debt, and the
interest payments needed for the 4 year loan.

Where will the County get the money to pay back this loan?

The County will assume sole responsibility for the Poplars Debt and ultimately incorporate the
Poplars Property into the Central Kitsap Community Campus Project, with the potential to
convert its use in a way that will repay the $5.09 million. The remaining debt will be paid
through:

• Proceeds from sales of Harborside condos and the adjacent land (the Sinclair Lot)

• Proceeds from sales of all non-low income residential assets of the Authority (office
buildings, land & market rate apartments)

• “Excess Revenues” from the Housing Authority

The County will manage the sale of assets, including the Harborside Condominiums. The four
year term will give the real estate market a chance to recover so the condos and other real estate
assets do not need to be sold at today’s fire-sale prices. Proceeds from asset sales will go directly
to paying down the Bank of America loan.

What are Excess Revenues?

Sources of Revenue not required by the Authority (a) to sustain the operating costs of fulfilling
the Authority’s core low income housing mission; or (b) to satisfy the Authority’s other existing
obligations.

What happens in four years if Proceeds from asset sales aren’t sufficient to repay the loan?

At the end of the 4 year term if there is a gap between the amount the County financed and the
sale proceeds of the assets, the County will need to issue long-term bonds to cover that gap.
County staff is working to establish a plan, including a contingency fund to set aside any one-
time only revenues the County receives beginning in 2009 to provide for debt payment needs
starting in 2013, at the end of the loan’s term. The Authority in turn is required to pay back this
loan as it receives one-time only revenues in excess of its budget.

Were recent County budget reductions related to taking on this debt?

No; the County has not made any cuts in expenses or staff because of this debt. The Board has
been negotiating with the Bank and the Authority to minimize the loan’s impact on the County’s
general operating fund. As noted above, there may be debt service payments the County will
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need to make from its general fund beginning in April 2013; the County will take every step to
plan and save now to avoid making cuts to absorb these payments.

Why is the County in the business of housing in the first place?

Under state law, Washington counties and cities are required to form a housing authority. This
Authority is jointly comprised of the county and the cities of Bainbridge Island, Poulsbo and Port
Orchard. The Authority owns or operates over 1,000 units of low income and senior housing
throughout the county and within those four cities. Through use of grants, loans and bond
proceeds, the Authority has provided for and expanded the supply of good-quality housing units
in the county, for both home buyers and renters. In addition to minimizing the impact to the
County as it lives up to its legal obligations, this debt restructuring ensures that the Authority will
be able to carry out its core affordable housing mission.

Why was the Authority building condos in downtown Bremerton and why did the County
guarantee the debt for a project in an incorporated city?

The Authority had been designated as the official Community Renewal Agency for the City of
Bremerton, and the original plan was formulated during the height of the real estate market in
2005. Excess proceeds from the Harborside condominiums were intended to be used to
supplement funding for low income housing programs. The County was the one member
agency with sufficient debt capacity to guarantee the financing for this project.

Is the City of Bremerton obligated for any of this debt?

The City of Bremerton also entered into a contingent loan agreement to pay $2 million to the
County to assist in paying down the Harborside debt. Just like the County, the City will be asked
to live up to its legal obligations.

Do the component cities have any liability for this debt?

Counsel to the Authority believes the County and component cities (Port Orchard, Poulsbo and
Bainbridge Island ) have an obligation to subsidize the “core function” operating costs of the
Authority. Repayment of the new loan is not a core function operating cost. Therefore, the new
loan has been structured to avoid any liability exposure to the component cities even if the
Authority is unable to pay any resulting deficiency to the County.

Could the County have done anything else besides taking on this debt?

The County Board and the Authority Board members did seek federal and state assistance with
this debt. In response, the state legislature did pass an increase in the existing recording
surcharge that could be used to sustain the Authority’s core programs and in this way ensure the
county’s or members agencies’ own budgets are not tapped to make up any operating shortfalls
of the agency.
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What has the Authority done to get its finances in order?

The Authority has made deep budget cuts, eliminating staff and programs that are not fully
supported by grants and program revenues, begun liquidating properties and consolidating office
space. The Authority Board has convened a working finance group to assist staff in developing a
balanced 2009-2010 operating budget and it will develop financial policies to ensure the
Authority will be sustainable going forward.

What are the real estate properties or assets that are pledged to help pay back the County’s debt?

The county will have the right to direct and manage the sale of specific properties, including the
Harborside Condominiums, the Sinclair Lot and Tree Tops Apartments. Additionally, the county
will take ownership of the Poplars Building. The county intends to retain a property manager
with full authority to act on behalf of and direction of the Board of County Commissioners and
will benefit from any and all rental agreements. The County will be in full control over the sale
price, timing and marketing of these properties. Other than Poplars, the properties are vacant or
in the case of Tree Tops, the sale will have no impact to existing tenants.

What will happen to the low income seniors residing at the Poplars?

The Authority and the County have agreed to work on transitioning Poplars ownership to the
County in a way that will preserve the seniors’ housing vouchers and to not disturb the seniors’
tenancy for as long as possible. The Poplars apartments have provided safe housing
opportunities for seniors aged 62 and older with extremely low incomes. The Authority acquired
this property as part of the replacement housing strategy for residents at Westpark Public
Housing, owned and managed by the Bremerton Housing Authority. Given its location, situated
next to the Central Kitsap Community Campus, the County will purchase the Poplars, and
eventually the County will work to redevelop the property in keeping with its Central Kitsap
Community Campus plan.

What assurances are there that this situation will not occur in the future?

• The KCCHA Board is committed to insuring the Authority reverts to its original mission:
to provide affordable housing for the most vulnerable members of our communities. The
Authority will no longer participate in renewal projects for any jurisdiction.

• The County Board of Commissioners will approve a resolution that limits the county’s
ability to guarantee debt of other agencies in the future.

What will happen to the Housing Authority in the future?

The authority has reduced staff and expense and is committed to focusing on its core affordable
housing mission. They are working to create a sustainable organization that will preserve the
over 1000 low income housing units now owned and managed by the agency. Current budget
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projections demonstrate the Authority will have sufficient revenues to sustain its core functions
for at least the next two years.

Contact: Debbie Broughton, Interim Executive Director (360) 535-6142

At a special meeting this afternoon, the Kitsap County Consolidated Housing Authority
(KCCHA) Board of Directors approved a set of documents which set the stage to resolve
KCCHA debt issues related to the Harborside Condominiums, and the Poplars project.

The Harborside project was financed and developed by KCCHA as the Urban Renewal
Agency for the City of Bremerton, with the debt guaranteed by Kitsap County. Due to the
dramatic and unexpected collapse of the housing and credit markets, KCCHA became unable to
restructure, or repay the loans at their maturity.

Today, the KCCHA Board approved a County Loan Agreement between Kitsap County and
KCCHA that will allow KCCHA to restructure debt for Harborside and Poplars and accept a loan
from the County to pay off Housing Authority debt for the two projects. The terms of the
agreement require the Housing Authority to liquidate all of its non-low income housing assets,
and to pledge excess revenues to the County to help retire the debt. The County will manage the
sale of the condominiums and liquidation of the Housing Authority’s assets.

The new County loan replaces $31.09 million in Harborside debt, and $5.1 million in Poplars
debt. It also provides available credit of $4.32 for project carrying costs and interest on the loan
until it matures in four years, which allows the condos and KCCHA assets to be sold under more
favorable market conditions. Any debt remaining after four years will be rolled into long term
debt to be issued by the County that will be repaid over a 20-year period, thereby minimizing
impacts to the County budget.

“The Kitsap County Board of Commissioners and the Housing Authority Board of Directors
have put in a lot of time and effort to craft and implement a plan to deal with agency debt issues
that could negatively impact all citizens of the County,” stated KCCHA Board Chair Steve
Bauer. “The proposed action and plan by the County to issue bonds and use assets from
disposition of other properties is a positive step in the right direction. It is a creative resolution to
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one of the biggest challenges to ever face the agency and the County.”

The mission of the Housing Authority has been re-focused to providing quality low income
housing for approximately 2250 seniors, families and special needs residents of our County. The
KCCHA Board adopted a resolution this afternoon officially withdrawing as Bremerton’s Urban
Renewal Agency stating “The KCCHA Board now confirms the over arching goal of The
Authority is to provide a continuum of affordable housing opportunities, both rental and
homeownership, to low-income households.”

The KCCHA Board and staff are also working to resolve the agency operating deficit and are in
the process of developing a sustainable budget. “Much has changed at KCCHA over the last
eight months” stated Interim Executive Director Debbie Broughton, “Those that were
responsible for the current financial dilemma of the Authority are no longer a part of KCCHA.
Both the current Board and the management team inherited these problems and have been
working diligently to resolve them. We have a ways to go but I am very pleased with the
progress we are making.”