The Seattle Art Museum wants city taxpayers to guarantee up to $65 million in bonds to pay for the museum's downtown expansion. The bonds would be...

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The Seattle Art Museum wants city taxpayers to guarantee up to $65 million in bonds to pay for the museum’s downtown expansion.

The bonds would be issued by the Museum Development Authority (MDA), a public agency created by the city to assist with construction of the art museum, which opened in 1991.

The city has lent its credit to similar projects in the past, backing public-development authorities at Pike Place Market and in the Chinatown International District.

The proposed art-museum bonds would be the largest such project, according to Dwight Dively, the city’s finance director.

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The bonds would count against the city’s credit limit, limiting the amount the city could borrow for other purposes. Dively said the city has about $425 million in unused debt capacity next year, not counting the museum request.

Gerry Johnson, a bond lawyer with Preston Gates & Ellis, the firm representing the museum and MDA in the deal, said the city’s backing would enable the project to save money on interest rates.

“It’s worth millions of dollars to the project,” Johnson said. “The city guarantees the cheapest financing you can arrange.”

A public hearing on the proposal is scheduled for 1:45 p.m. today in council chambers at Seattle City Hall, 600 Fourth Ave., Second Floor. A council vote is not expected until next month.

City and museum lawyers have been negotiating in recent weeks about what sort of financial assurances the city would get in exchange for lending its credit rating to the museum.

For example, the city is asking for claims on museum property in the event of a bond default.

Dively said Mayor Greg Nickels won’t sign off on the deal unless taxpayers receive adequate protections.

“The issue is always what kind of security the city gets for its debt guarantee,” Dively said.

“It’s not a done deal.”

The museum project is being financed through a mix of museum-donor dollars, Washington Mutual contributions, and tax-exempt bonds issued through the Washington Housing Finance Commission, which offers cheap financing for low-income housing and nonprofit groups.

It includes a 42-story private office tower for Washington Mutual, where the savings and loan plans to consolidate thousands of its employees starting next year.

A second, 16-floor building will be shared by the savings and loan and the museum. The bonds the city is being asked to guarantee would pay only for space occupied by the museum.

The shared building will provide more than 100,000 square feet of immediate expansion space on the first four floors for museum exhibits when it opens in 2007.

The next eight floors will be owned by the MDA but leased to the bank for up to 25 years. The lease payments will help pay off the debt on the building, and the museum will be able to begin expanding into the upper floors after 10 years.

The new buildings, just north of the existing museum building, will take up the rest of the block between Union and University Streets, and First and Second Avenues.

“Because we don’t have to take all the floors initially we are able to expand our endowment and move into the new space when we can afford it,” said Erika Lindsay, a museum spokeswoman.

Jim Brunner: 206-515-5628 or jbrunner@seattletimes.com