MIXED-USE AND HISTORIC REAL ESTATE FINANCE TRACK 4 Community Development Presented: Thursday, May 14, 2015, 10:00am-Noon 1 Presenters Corey Leon, Director, NDC Moderator Kevin Gremse, Senior Director, NDC Erik Aulestia, Partner, Torti Gallas John Simone, Connecticut Main Street TRACK 4 Community Development 2
Mixed-Use and Historic Real Estate Financial Challenges and Financial Resources Two examples Bijou Square Bridgeport CT Theater was centerpiece of historic rehab redevelopment Landmark (M&F Bank Redevelopment) Transit oriented mixed use development Leveraged location to train station Wyandanch Rising Town of Babylon NY Transit oriented mixed-use, mixed-income development Leveraged train in station and public park Public plaza become centerpiece of placemaking Lessons Learned from Mixed-Use Development and Public Sector s Role 3 Mixed-use Development Mixing Residential and Commercial Uses in the Same Development Residential rental and/or condo market and/or affordable Commercial retail commercial Parking often required to be included in development costs parking requirements by local municipality Civic Space, Culture and Entertainment helps establish demand for residential dwellers
5 Mixed-use Challenges Retail and Residential do not Always Mix Well Mixed-use are more complicated, lengthier, and expensive Developers sometimes Do not Understand both the Residential and Commercial Market different design features, financing tools and management skills Zoning some communities not zoned for mixed-use 6Mixed-use Challenges (cont.) Parking Requirements Adversely Impacts Economics Structured parking costs $20,000 - $30,000 space Sufficient land not available for surface parking Zoning parking requirements difficult for mixed-use Commercial market often weaker than residential market
Mixed-use Challenges (cont.) Affordability Requirements on residential units Inclusionary Zoning requirements 10 20% of residential units to be affordable Important to define affordability Mixed-income adds further complications LIHTC Regulations sometimes creates complications High land acquisition and infrastructure costs TIF Bond Use tax increment as source of repayment on bond Density bonuses helps spread acquisition and infrastructure costs Mixed-use Challenges (cont.) Higher Costs Mixed-use has higher costs PSF then other projects: parking structures, firewalls, elevators Financing Gaps Mixed-use that incorporates affordable housing two financing problems Financing gaps Cost-Value Differential
9 Cost Value Differential Example Mixed-Use Adaptive Reuse Reuse Plan Residential Units 60 Commercial Retail Space 40,000 Project Costs Fair Market Value $20,000,000 $10,000,000 Project Costs $20,000,000 Debt 75% $7,500,000 Other Sources Needed $12,500,000 National Development Council 10 Mixed-use Challenges (cont.) Unproven Market Demand Conventional financing remains skeptical dense residential housing in smaller urban areas associated demand for the commercial component Lenders are especially skeptical of commercial component, unless it is pre-leased to credit tenants
11 How to mitigate challenges Experienced development team Integrate urban design elements that make the project a community amenity Watch financing restrictions w/ regard to the commercial and residential mix and how their impact on funding How to mitigate challenges (cont.) Be conservative on leasing assumptions at or below the market For commercial market Use Master Lease Developer absorbs commercial market risk. developer can lease commercial space at $15 Master lease to affiliate of developer @ $10, lease to tenant @ $15 Include Tenant Improvements in capital budget to help commercial leasing Commercial tenants have difficulty in financing Tenant Improvements Assume patient returns in the commercial portion
Mixed-use Opportunities Replace Older Businesses and Industrial Buildings with New Generation of Commercial, Retail and Residential Catalyst for Vibrant Communities Replace Dormant 9-5 Business Districts Sleepy Main Streets Increase Tax Base Change Perceptions Prove and/or Recreate a Market Non-financial Requirements Right Location High visibility Parking availability Access from roadways and transit Pedestrian traffic Political leadership Need to be development partner Smart Planning Receptive Market Patience
Real Estate Challenge Development Costs > Fair Market Value (FMV) Debt and Equity are functions of Value If development costs exceed FMV conventional debt and equity will not be sufficient to cover development costs There will be a funding Financing GAP When have cultural institutions and civic space improvements in development, public financing sources will almost have to be involved in financing structure General Approaches for Filling Gap Reduce Development Cost (Uses of Funds) Bargain Sale or contribute property to development Change Development Program Value Engineering Raise other source of funding (Sources of Funds) Equity raised through state and federal tax credits Subordinated debt Tax abatements that increase borrowing capacity Monetize tax increment to cover infrastructure costs Secure Grants Expand borrowing capacity by providing tax abatement
Federal Tax Credits Low Income Housing Tax Credit (LIHTC) Federal 9% competitive 4% with tax exempt private activity bonds State (some, not all) Rehabilitation (Historic) Tax Credits (RTC) Federal 20% credit for historically significant buildings 10% for buildings constructed prior to 1936 State (some, not all) New Markets Tax Credits (NMTC) LIHTC Considerations Programmatic/Eligibility 20% of units priced < 50% of AMI 40% of units priced < 60% of AMI Practical Will you get allocation? Very competitive Political Will affordable draw support of community and elected officials? 100% affordable/ Mixed income? Financial What works best? 100% affordable? Mixed-income? 18
Rehabilitation Tax Credit (RTC) Considerations Programmatic/Eligibility National Register of Historic Places Contributing Building in Historic District Practical 20% and 10% credits For 20%, need to follow Secretary of Interior Standards, i.e. restore building back to original design/look Will equity exceed increase in costs? Net benefit? Can state historic tax credit be used to supplement equity raise? How long will it delay development process? 19 NMTC Considerations Eligibility In low income census tract (qualified census tract)? Deep Distress? Practical Are you likely to get allocation? Community benefit story QEI Too low? < $5 million QEI Too high? > $20 million QEI Financial Will you net sufficient to justify effort? Is there another way to structure w/o NMTC? 20
Bijou Square, Bridgeport CT Bijou Square Phase I Before
Bijou Square (After) Bijou Square: Market Transformation Development Adaptive Reuse Oldest continuously-used theater in country Other nearby performance spaces Tenant mix Restaurants Professional offices Cultural Space Open Space Historic buildings Recreating the market and creating a sense of place Working off asset base of downtown Theater Nearby Train Station Downtown workforce Underutilized Parking garage
Financial Imbalance Bijou Square Phase I USES OF FUNDS $4,300,000 SOURCES OF FUNDS Conventional Debt $2,300,000 Developer Equity for Market Return $700,000 $3,000,000 GAP ($1,300,000) 2 Types of Tax Credits Bijou Square Rehabilitation Tax Credit (RTC) Historic Building Historic District New Markets Tax Credits (NMTC) In deeply distressed census tract Commercial development Used as basis to strengthen and re-establish market in CBD
Historic Tax Credit Investment Historic Tax Credit Basis $2,400,000 Historic Tax Credit % 20% Historic Tax Credit $480,000 Price/$ 86% Equity Raised $410,400 NMTC Investment Investor Investment $3,200,000 NMTC Value 39% NMTC $1,248,000 Investor NMTC Investment $900,000 Investor Loan $2,300,000 Total Citi Investment (QEI) $3,200,000 Citi Investment as a % of NMTC $900,000 NMTC $1,248,000 Citi Investment as a % of NMTC 72%
Gap Filling Summary Gap $1,300,000 RTC Equity ($400,000) NMTC Investment ($900,000) New Gap $0 Bijou Square Phase I Bijou Sq. at Night 30
Bijou Theatre Bijou: Former Ballroom now used as architectural firm s office
Bij0u Square I Programming Historic Theater was key element of development While lynchpin for development for creating sense of place, it could not lease at fair market rent Secured operator Developer had to do fit-out Lease at discount rate Programming Independent movies Live shows Community theater and theater camps Private parties 33 Bijou Square I programming Commercial Space Creative class Started w architectural firm Others followed Movie producer, marketing company. Landscape architect, software development Gen X and Millennials Created demand for next phase of mixed-use development 34
Bijou Square II 35 Bijou Square Summary Bijou Square 2013 Winner of Timmy Award National historic rehab award for best rehab w new construction Large demand for rental housing Downtown location Proximity to train station Cultural and civic assets to leverage Mixed-use development often does not pencil out and commercial component is most difficult Creative use of tax credits, favorable financing, and tax abatement helps create financial feasibility New development catalyzes additional investment First newly constructed development in over 2 decades 500 new housing units in downtown since completion 36
Landmark (M&F Bank Building redevelopment) 37
Site Overview Site Overview
Site Characteristics Transit-oriented development (TOD) Bridgeport Transportation Center, Bus, Ferry, Route 8, I-95 Former Mechanics and Farmers Bank (Vacant for 25 years) 2 separate buildings (@ 60,000 SF) Program 20,000 SF feet of commercial office (Fletcher Thompson) 2,000 SF retail 30 units of Mixed-income housing New Zoning encourages more adaptive reuse and TOD s Historic Landmark - Bridgeport Downtown South Historical District Forstone successful responder to RFP issued by City Based upon sales price, developer vision, and developer capacity Economic Challenge(s) For new construction or substantial rehab in downtown Bridgeport Costs exceed value Project Cost > As Complete FMW $18.8 million > @ $9.0 million Cannot finance these types of development with conventional debt and equity For commercial space, need tenants Can t get financing to build commercial space on spec Luring anchor tenant (Fletcher and Thompson) was key Need attractive financial package to lure anchor tenant Need to provide parking without adding to capital structure Use nearby parking garages, not connected to building Less than 1:1 parking for residents
Economic Challenge(s) Need multi-layered capital structure and finance incentives Reasonable underwriting for first mortgage Developer equity pegged at reasonable return Reduced acquisition cost Tax credits to raise outside equity, options included Historic Rehabilitation Tax Credits (RTCs) Low Income Housing Tax Credits (LIHTC) New Market Tax Credits (NMTCs) Soft loans Comprehensive Housing Assistance for Multi-Family Programs (CHAMP) Brownfields RLF RE tax consideration (PILOT) Sources and Uses USES OF FUNDS 18,510,914 SOURCES OF FUNDS Webster Bank Mortgage 5,475,000 30% State of CT DECD CHAMP 3,500,000 19% State of CT DECD Brownfields Loan 400,000 2% City of Bridgeport Brownfields Loan 800,000 4% Federal Historic Tax Credit Equity 3,176,944 17% State Historic Tax Credit Equity 2,214,000 12% Developer Equity 1,523,334 8% Deferred Developer Fee 1,421,636 8% TOTAL 18,510,914 100%
Important Lessons Mixed-use, mixed-income is winning formula Both businesses and residents want to be downtown Need critical mass to establish market for retail Need mixed-income housing, primarily market rate housing, to reestablish marketplace While there will continue to be cost-value differential, the hope is that the income stream improves so that the cost-value differential is reduced While adaptive reuse of historic buildings is as expensive or more expensive than new construction, it offers historic tax credits to offset high rehab costs State housing tax credit program real important Project economics can t support new structured parking Need to use existing parking resources Additional Mixed-Use Development Since Bijou Square 30 units of housing Another leading architectural firm moves downtown 46
Wyandanch Rising Town of Babylon, NY 47 Wyandanch Rising: Phase I Transformative mixed-use, mixed income development 170 units of housing 50% market, 30% affordable, 20% workforce 20,000 sf commercial retail 100,000 sf commercial office and public space Long Islands Music Hall of Fame Public Plaza Structured parking replaces surface parking Improved park Transit oriented development Adjacent to Long Island Railroad (LIRR) First significant new construction in Wyandanch in 30 years Most distressed community on Long Island 48
Instead of dwelling on market weaknesses, plan involved leveraging existing assets Train Station New train station Public Park Splash park, botanical garden, community center Engaged community Executive elected leadership Quality plan and design standards 13-year process 49
Key Elements and Lessons Learned Community Visioning Process Small Wins for Community Land Assemblage Market Analysis and RFP Infrastructure Land Use Approvals Form Based Code for walkable mixed use community Schematic plan for sustainable walkable community Request for Qualifications and Proposals (RFQ/RFP) Complex Financial Structure and Public Investment Executive Leadership 58
Community Visioning Process Charrette Public Involvement Acknowledgement that it was a long-range process Hallmarks of community plan Mixed-use multi-story buildings Sewers Parking Garage Quality Design Improve Parks Develop around transit 59 Community Visioning Process 60
Small Wins Build Momentum Neighborhood Beautification 61 Community Insists Design Matters 62
Land Assemblage No development without land assemblage Town completed most of assemblage Large investment Needed in order to create development opportunity 63 Market Analysis, Form-Based Code and Schematic Design Market analysis Important to demonstrate market responsiveness Form-based code and schematic design Done by renowned planning/architectural firm A form-based code is a land development regulation that fosters predictable built results and a high-quality public realm by using physical form (rather than separation of uses) as the organizing principle for the code. Walkable mixed-use, mixed-income Set standards for quality design and materials Traffic calming through road width reduction 64
RFQ/RFP Developer selection process 15 RFQ responses, 3 developers short-listed for RFP Developer Interest due to Land assemblage Land use approval Infrastructure and funding Market analysis Very clear community invested in itself Albanese Organization selected 65 Complex Financial Structure Complex financial structure Costs > FMV 2x Needed range of financial resources (13 sources) for vertical construction, many others for public infrastructure Buildings A and B Building C Site Work, Infrastructure, Public Plaza and Garage Phase I $76 million $34 million $87 million $196 million 66
Phase I Capital Stack 13 different funding sources on vertical construction Including $36 million off of federal and state tax credits LIHTC State and federal RTC NMTC Several different funding sources for infrastructure, site work, public plaza, and parking garage 67 FIRST PHASE SOURCES OF FUNDS Commercial Loan $31 million Tax-Exempt Bond $14 million NYS Project of Regional Significance $5 million New Markets Tax Credit Equity $7 million Federal LIHTC Equity $22 million NYS Housing Tax Credit (SLIHC) Equity $9 million NYS Neighborhood Stabilization Fund $1 million NYS Housing Trust Fund (HTF) $2 million NYS Homes for Working Families $2 million Town of Babylon HOM E $1 million Suffolk County Infrastructure Fund $3 million Developer Equity $9 million Deferred Developer Fee $2 million TOTAL $108 million 68
Executive Leadership County Executive Steve Bellone Town of Babylon Supervisor (2002 2012) Suffolk County Executive (2013 current) Prioritized project Worked closely with community Always advocating and demonstrating progress Very involved in planning, selection of developer, and securing funding But for this leadership, development does not happen 69 Loudoun Metro - TG+P Architects of a Better World Place-Making: Beauty is More than Skin Deep
Why Design Matters Conventional Suburban Retail Mixed-Use Retail Product Type Valuation Premiums Walkable Urban versus Drivable Sub-urban Office 134% Hotel 120% Rental Apartments Retail 41% 54% For Sale Residential 20% Source: George Washington University
Property Tax Revenue by Acre $ Walkups 12 X The tax revenue of Edge Cities Walkable Neighborhoods 6 X The tax revenue of Suburban Source: George Washington University What Makes Us Healthy? Recent Studies 10% 20% 20% Clinical Care Genetics Environment Atlantic Station Atlanta, GA Increase in Walking: Recreation or Fitness = 46% - 54% Transportation = 44% - 84% Mueller Austin, TX Significant Increase in Walking Largest Increase in Low Activity Group 50% Healthy Behaviors Source: Health Beyond Healthcare Robert Wood Johnson Foundation Source 1: Mumford, KG, et al. Changes in Physical Activity and Travel Behaviors in Residents of A Mixed-Use Development. American Journal of Preventative Medicine 41.5 (2011) Source 2: Calise, TV, et al. Peer Reviewed: Do Neighborhoods Make People Active, or Do People Make Active Neighborhoods? Evidence from a Planned Community in Austin, Texas. Preventing Chronic Disease 10 (2013)
Place Making Begins with a Recipe Needs All the Right Ingredients Must be Combined www.dreamatico.com and Combined in the Right Way Recipe for Place Public Space + Pedestrian Friendly Streets + Mix of Uses + Blocks/Connections + Human Scaled Architecture + Tame the Parking!
Policy Planning Vision Consensus Building Implementation Neighborhood/ Urban Design Place-Making Public Realm Mix of Uses Connections Building Design Unit Types Building Types Market Responsive Real Estate Econ. Public Space The Greene Mixed-Use - TG+P
Open Space as Catalyst Phase 1 Phase 2 Phase 3 Phase 4 South Bend, IN - TG+P Active Open Space
Walkable Streets - Before Walkable Streets Streetscape Improvements
Walkable Streets - After Brookview - TG+P Pedestrian Friendly Streets
Mix of Uses Human Scaled Architecture George Mason Square - TG+P
Architecture Appropriate to Place City Vista - TG+P Ft. Belvoir - TG+P Haverstraw - TG+P City Contemporary ~10+ Stories Town & Village Traditional ~3-4 Stories Hamlet Vernacular ~Two Stories Architecture Appropriate to Place City Vista - TG+P Ft. Belvoir - TG+P Haverstraw - TG+P Columbia Heights - TG+P
Connectivity Rail Blocks Fort Belvoir TG+P Bike Rail Twinbrook Metro TG+P Pedestrian Bus BRT Bethesda Row - TG+P Janie s Garden Sarasota TG+P Taming the Parking Who Wants to Live Here?
The Inverse Relationship Between Parking and Place Making $ Surface Parking $3,000/sp. x 500 sp. = $1,500,000 Hardest for Place Making $$$ $$$$$ $$$$$ Above Grade Pre-Cast Concrete $20,000/sp. x 500 sp. = $10,000,000 Underground Parking $40,000/sp. x 500 sp. = $20,000,000 Easiest for Place Making Shared Parking: Costs Less Reduces Asphalt/Impervious Material Reduces Area Dedicated to Parking Makes it Easier to Screen Parking Allows for Park Once Strategies Cross-Patronage Only Works if Parking is Centrally Located & Lots are Shared % of Total Parking Demand % of Total Parking Demand 100 90 %% 80 % 70 % 60 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % 100 90 %% 80 % 70 % 60 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % Parking Demand: Weekday Daytime Residential Office Retail Hotel Restaurant Cinema Parking Demand: Weekday Evening Residential Office Retail Hotel Restaurant Cinema Weekday Evening is Typically the Highest Overall Demand
Parking Strategies in Existing Neighborhoods Reduced Parking No Minimum Parking Parking Districts On Street Parking Off-Site Parking De-Coupled Parking Bishop Arts District, Dallas, TX On-Street Parking Shirlington - TG+P Landsdowne Village Green- TG+P
Implementation Tools: Master Plans & Form Based Codes Illegal
Form Based Codes South Bend, IN Currently Drafting Multi-District, Easily Amended RP, Applicable to New Areas Wyandanch, NY FBCI National Award Winner Dover, NY Private Sector Brookview - TG+P
Design Coding Design Coding
Design Coding Design Coding
Design Coding Flexibility
Phasing and Flexibility Wyandanch Master Plan - TG+P Loudoun Metro, TG+P Architects of a Better World Place-Making
Mixed-Use Real Estate Planning National Development Council Academy May 14, 2015 Come Home to Downtown Connecticut Main Street Center & Connecticut Housing Finance Authority
Overall Findings Discover, encourage & support urban pioneers It takes a village to bring old buildings back to life Small deals need easy-to-cook lasagna financing recipes The Problem Connecticut s downtown properties are needlessly under-utilized and under-valued.
Comparison Asheville Big Box vs. Downtown Mixed-Use Development The Problem & Opportunity Vacant Buildings Cost Communities $222,340/year/vacant space Reduced property value, property tax, sales tax, utilities, professional services, and workers pay Upper-story Residential Units Benefit Local Economy Annual downtown impact/unit = $20-39K Main Street Iowa Economic Development Study, Donovan Rypkeyma
The Opportunity People want to live in authentic, compact places where one can walk to shops and services. Especially Baby boomers & Millennials The Challenge Mixed-use/mixed-income development has become a lost art form.
Mixed-Use Real Estate Planning Program Downtown Development Audit Recommendations for regulatory changes, parking requirements, marketing and financial incentives
Program Model Building Analysis Assistance to Property Owners Program Downtown Management Assistance
Lessons Learned Small, mixed-use developments are some of the hardest real estate deals to accomplish because: Older building gut rehabs costly In complex downtown settings Requires well-integrated PPPs Market & affordable rental rates are often the same, making market rate financing difficult Lessons Learned Many state & federal resources are only available to projects larger than a typical downtown building Education & technical assistance programs are needed to prepare property owners for redevelopment & property management
Overall Findings Land use regulations promoting redevelopment is not enough Downtown property owners are not developers or even landlords The financial gap for redevelopment is significant A mechanism is not always available to address the gap Addressing the Gap Federal & State Historic Tax Credits Low Income Housing Tax Credits Tax Increment Financing (TIF) Tax Abatement Incentives for city workers to live downtown Live where you work
Waterbury New Britain
Meriden Overall Findings Discover, encourage & support urban pioneers It takes a village to bring old buildings back to life Small deals need easy-to-cook lasagna financing recipes
www.ctmainstreet.org Connecticut Main Street Center c/o CL&P PO Box 270 Hartford CT 06141 860 280 2337 info@ctmainstreet.org