CASE STUDY: Minneapolis LIHTC Project Deals with Mixed-Use Challenges
By Caitlin Jones & A. J. Johnson
8 min read
Tax Credit Advisor July, 2006: Mixed-use development can pose many challenges. Those challenges typically begin with the complexity and high cost of these projects, and their long timelines. There is also the pressure to bring in commercial as well as residential tenants, and the special issues of addressing the needs of a multitude of different stakeholders.
When deeply targeted affordable rentals are part of the mix, the challenges multiply, says Kevin Dockry, Multifamily Housing Development Project Manager for the Minneapolis Community Planning and Economic Development Department. Dockry is a recent participant in the Midtown Exchange Project, a $190 million mixed-use rehab of the Sears Building in Minneapolis that includes a 219-unit affordable apartment complex.
Identifying Funding, Ensuring Support
The top obstacle to developing the apartments at Midtown Exchange, Dockry said, was financing the cost of an unusually expensive rehabilitation. This cost was driven by the need to build well-appointed units that would fit in with the building’s other projects: mixed-income condominiums and townhouses as well as retail and commercial office venues. Expenses were also exacerbated by the costly rehab of the 78-year old Sears Building itself, which had been vacant for a decade before construction began in 2004. The total development cost of the Midtown Exchange Apartments was eventually pegged at $46.2 million, or approximately $220,000 per apartment.
Dockry said that the key to funding the affordable apartments was obtaining a large infusion of tax credit equity – at $19.7 million, it comprised 43 percent of the total. Historic rehabilitation tax credits (HRTCs) contributed $7.4 million. A total of $12.3 million in tax credit equity from 4 percent LIHTCs was syndicated by PNC Bank, N.A. Grants from a total of six sources were also obtained, ranging from $4.7 million from given by Minneapolis’ Affordable Housing Trust Fund to $500,000 from the Family Housing Fund, a local nonprofit. The combination of subsidies and grants kept long-term debt, provided by tax-exempt and tax increment bond proceeds, to about $16 million.
Dockry said that the project was able to win the grants because the development team, working closely with city officials, successfully pitched the benefits of the project to potential investors and private donors, as well as the city of Minneapolis, Hennepin County, and the state of Minnesota. The team effectively built on the early efforts of city officials to broadcast the project’s importance for the revitalization of a neighborhood. He said that Sears’ decision to close down its million-square-foot retail and distribution center in 1994 had deepened the decline of the Phillips neighborhood in South Minneapolis, already one of the poorest sections of the city.
“There was an extraordinary effort to put together subsidy and grants to make this work,” Dockry said. He noted supporters of the rental project successfully argued that the affordable apartments were crucial to the mission of the Exchange project, and the larger revitalization of downtown Minneapolis. “The case made was that this project had wide-ranging regional significance, and I think it was a very convincing case.” Dockry said that the choice of 4 percent credits combined with tax-exempt funding was also an important one, allowing the project to avoid development expense limitations imposed on allocations of 9 percent tax credits. “The lesson here to developers of these project is: Don’t be afraid to use tax-exempt bonds,” he said.
The Overall Project
The Midtown Exchange apartments are part of 440,000 square feet of residential living space within the Sears Building being developed by Sherman Associates. This space also includes affordable and market-rate homeownership properties. Eighty percent, or 176, of the 219 units in Midtown Exchange Apartments are affordable to low-income families at or below 60 percent of area median income (AMI). Sherman has also developed an 88-unit condominium project in the Sears building, Chicago Historic Lofts on the Greenway. A third developer, Project for Pride in Living, will soon complete a complex of 57 townhomes, called Midtown Exchange Condos on the Greenway, located on two sides of a parking ramp that has been built as a detached structure in front of the Sears Building.
The office and retail portion of the overall Midtown Exchange project, which comprises 420,000 square feet within the Sears building, is owned by the Ryan Companies, the Minneapolis-based firm that is also the master developer of the project. Allina Health System leases 411,000 square feet of this space. In addition to the parking ramp, Ryan also owns a 136-room hotel, both new construction on land next to, but separate from, the Sears Building. A second developer, Neighborhood Development Center, has purchased 73,000 square feet to build Midtown Global Market, a public food market in the building.
Rounding out the project are two local government facilities. Hennepin County has built a 10,000-square-foot service center, where citizens can meet needs like obtaining a driver’s licenses and passports. In addition, the city of Minneapolis has built a transit hub for city buses on land it purchased in front of the Sears building.
Historic tax credits and new markets tax credits were a crucial part of the funding of the commercial and retail parts of the project, with development costs totaling about $70 million. U.S. Bancorp Community Development Corporation is providing a total of $12.5 million in HRTC equity and $16.1 million in NMTC equity, according to a recent presentation. Dockry noted that the substantial amount of NMTCs brought in as equity for these projects freed up more HRTC equity for the affordable apartment complex than might otherwise have been the case.
Benefits of a Good Anchor Tenant
Another reason why Midtown Exchange Apartments was able to pull together its funding was the success of the development team in signing on commercial tenants, beginning with an early commitment from the Minneapolis-based Allina Hospitals System to become the Sears Building’s anchor tenant. More than any other single event, this spurred interest from potential investors in the project, as well as galvanizing government support at the city, county, and state level, says John Leith-Tetrault, president of the National Trust Community Investment Corporation, which served as a consultant to the project.
Allina signed on in early 2004, when the health care corporation – on the verge of moving its administrative offices to the suburbs – opted to consolidate those offices from eight sites scattered throughout the Twin Cities to a 411,000 square foot space in the Sears Building. The move made economic sense to the hospital system because it was able to obtain favorable rent, partly because of the subsidy provided by the historic and new markets credits, Leith-Tetrault said. Allina’s move also has brought on 1,500 employees, which should help ensure the economic viability of the other commercial parts of the project, including the Midtown Global Market. The project’s planners also expect the location of Allina’s headquarters to bolster the hotel.
“Because mixed-income projects can be fragile, bringing on a large anchor tenant early on can make a tremendous amount of difference,” Tetrault said. An anchor tenant that is a significant source of well-paying permanent jobs can provide a special boost for an affordable housing development included in the project, he added.
Neighborhood Outreach and Economic Benefit
Another reason for the success of the project, says Dockry, was a neighborhood outreach effort that was made part of the development process. This began with a series of ongoing community meetings. One of the issues discussed was parking, in which residents were assured that with the building of a new garage, the businesses being located in Midtown Exchange would not create a shortage of parking spots in the neighborhood. In addition, after Ryan was chosen as developer in August 2004, it held meetings to discuss how the project would help provide employment to neighborhood residents, including eventual tenants at the apartment complex. One of the upshots of these meetings was a commitment by Allina to offer jobs. In addition, each tenant in Midtown Exchange was enrolled in a job counseling program offered by the City of Minneapolis and its transit agency.
An analysis of the economic impact prepared for Ryan Companies estimates that there will be 1,875 permanent jobs created from the office and commercial parts of the project, 200 from the Global Market businesses, 65 from the Sheraton Hotel, and 25 from the Hennepin County Service Center. On-site daily construction jobs provided 700 jobs.
“The fact that this project leaders communicated with people in the neighborhood and made an effort to provide employment benefits was a clear plus,” said Dockry.
Gary Schiff, a city councilman and longtime supporter of the project, agrees. He says that providing affordable housing to the city’s poorest residents is still the most pressing issue Minneapolis faces, but the Midtown Exchange Project is an important step in dealing with the problem. “I view the project as a major success,” he said. “We succeeded in finding a reuse for a very large building that is an important part of the city’s history – and we did it in a way that provides not only jobs and opportunity in a distressed area, but also first-rate housing.”
Except for the Midtown Exchange Condos, which should be complete by this September, and the build-out of a number of vendors at the Midtown Global Market, the entire project is complete, said Ryan vice president Rick Collins. Allina has fully moved into its space and the hotel has been open since January. According to Bernadette Hornig, a project manager at Sherman Associates, 70 percent of the Midtown Exchange Apartment project units are leased, with full occupancy expected by October.
By Don Yacoe
