Creating Your Own Bridge Financing
By Caitlin Jones
5 min read
Tax Credit Advisor, February 2010: At a time when it’s often difficult to secure all of the necessary funds for a new tax credit project, developer Tom Wilkinson is getting creative in order to get to closing and construction. In a couple of deals, he’s created his own bridge financing, by getting the general contractor to carry the pre-development or early development costs until the tax credit equity comes in.
Wilkinson is a partner in Franklin Development Group, LLC, a Richmond, Va.-based company that develops primarily market-rate apartments, about 90% involving the rehabilitation of historic buildings, usually with federal and/or state historic tax credits.
Two Projects
In two historic rehabilitation market-rate apartment projects, now under construction in Petersburg, Va., the general contractor for each has agreed to subordinate, or carry, part of the construction costs until the equity for the Virginia state historic tax credit is received from the investor. At that time the developer will reimburse each contractor. In addition, Boston-based Carlisle Tax Credit Advisors, the federal historic tax credit investor, helped by funding a portion of its investment at the time of construction loan closing.
With the larger project, Perry Street Lofts, involving the renovation of an old manufacturing plant of 130,000 square feet into 147 apartments, the contractor is subordinating $2.5 million of the $11 million construction contract for 18 months. On Dunlop Street Flats, which will create 34 apartments, the contractor will carry $400,000 of the $2.2 million construction contract for 12 months.
“Given the market these days, general contractors and subcontractors are all hurting for business,” says Wilkinson, who simply asked each of the general contractors if they’d be willing to subordinate part of the construction costs until the receipt of the state tax credit equity. Both agreed, with the terms inserted in the construction contracts.
“Other than writing a large check” to cover the gap, says Wilkinson, “I ask the people who benefit to come up with the cash or the equivalent of cash.”
Wilkinson’s firm, which has worked with both contractors in the past, will pay 6.5% interest on the carried expenditures for Perry Street Lofts, but no interest for the smaller job. “They just wanted the business that bad, and understood that they needed to help finance the project to make it work.”
Each project had a funding gap because banks have tightened their loan practices and underwriting standards, according to Wilkinson. Banks have reduced their maximum loan-to-value ratio for loans, and will no longer lend against the future equity expected from the Virginia historic tax credit. Developers normally get this equity about 90 to 150 days after construction completion or the issuance of the certificate of occupancy.
Both projects are expected to receive federal and state historic tax credits.
Wilkinson advised other developers considering the same tactic to make sure they select a general contractor with a strong balance sheet who works with well-capitalized subcontractors. He asks general contractors wishing to bid on his jobs to provide an audited financial statement. The odds of getting a general contractor to go along with a subordination agreement are better if the developer has an existing relationship with the contractor, he says.
Design-Build Job
Wilkinson has used a different approach for a third project which will involve the historic rehabilitation of an old former Philip Morris tobacco plant in Richmond into market-rate apartments.
In this case, Wilkinson has entered into a design-build construction contract with a general contractor who has agreed to advance the upfront architectural and engineering costs and get reimbursed by the developer at construction loan closing.
With the design-build contract, Wilkinson has agreed to pay the contractor a negotiated fixed price for the hard construction costs for the project, based on an agreed-upon price per square foot, thereby eliminating his construction risk. “It pays for all the cabinets, the granite countertops, the floors, the drywall, and other hard costs,” says Wilkinson. “The only thing I’m left to pay for is soft costs, like the interest carry, legal fees, and things of that nature.”
Even though the contractor will foot the bill, Wilkinson picked the architect. “I have the architect looking out for my best interest,” he notes.
Wilkinson says he’s been able to get adaptive re-use projects built in Richmond on a design-build basis for $75 per square foot, sometimes less, given the present economic environment.
The Richmond project marks the first time that Wilkinson has used this general contractor, who suggested doing the project on a design-build basis and to carry some of the pre-development costs. “They’d been courting me for several years trying to get me to let them bid on projects.”
Called Hopper Paper Lofts, after the name of the paper manufacturing company that first occupied the plant before Philip Morris, the project has also been lucky for Wilkinson. He’s cut a deal to sell, for more than $100,000, the existing steel in the old plant that won’t be needed or used for the renovation, including machines and conveyors once used for processing tobacco, catwalks, etc. This offsets part of the $2.5 million purchase price for the property. “They’re actually paying me for the right to demolish the interior and take the salvage steel out of there.”
