The Shining Knight New Markets Tax Credit Rescues Developer, Lender on Stalled California Mixed-Use Project
By Caitlin Jones
4 min read
The project is nearly finished. The construction loan is exhausted, and most of the trades have not been paid for months. Sounds like the perfect path to Foreclosure City, right? Not quite.
In downtown Pasadena, the federal new markets tax credit (NMTC) has been used to assure the completion of a troubled mixed-use real estate project, rescuing both the developer and construction lender from a potentially costly mess.
The $40 million Raymond Renaissance development, completed in April 2010, contains office condos, retail space, and 47 residential and commercial condos. The project involved the renovation and adaptive re-use of an ornate former 2,000-seat vaudeville theater built in 1921 called the Jensen Raymond Theatre. In later years it was used as a movie theater and musical concert venue, until it was closed for good in the late 1980s. In subsequent years a number of redevelopment plans were made and fell through, until the current project began.
A Bucketful of Troubles
By the fall of 2009, project construction was just over 90% complete. But the construction loan was exhausted and at maturity. The developer was unable to put more cash in, and “the trades hadn’t been paid for two or three months,” says Sarah Woodward, a partner in CT/KDF Community Development Partners LLC. This community development entity (CDE) ultimately provided a nearly $36 million NMTC allocation for the project. In addition, condo sales couldn’t close escrow, and some of the signed retail tenants couldn’t move in because the project had not yet received its certificate of occupancy.
The project had “pretty much come to a halt,” recalls Woodward. “There was a smattering of trades that were dutifully showing up. But most of the trades had walked off. The general contractor had filed a mechanic’s lien. It was a situation that could have turned into a lot of litigation, bankruptcy, and the shutdown of the project.” Says Woodward, “The idea of that project boarded up, with litigation, would have been tragic for Pasadena.”
NMTC as Shining Knight
Using a leveraged NMTC business model, and after negotiations with the developer, construction lender, and others, CT/KDF created a new markets-centered funding solution that closed in December 2009. It enabled the developer to complete the project and pay more than 40 contractors and vendors, and enabled the construction lender to avoid foreclosure proceedings and potential losses and to secure an excellent chance of getting out whole.
Capital generated by the NMTC was used to refinance the existing $30 million construction loan. This was replaced by the same lender with a new $25 million position that was channeled to the project through a leveraged fund structure, along with roughly $7 million of new funding from US Bank, the new markets tax credit investor through US Bancorp Community Development Corporation. The developer also provided just under $4 million in equity.
The NMTC equity, provided as an interest-only mezzanine loan at 5.25%, should be paid off within two and a half years from condo sales proceeds. As these proceeds are returned to the CDE, CT/KDF will redeploy them into new NMTC investments, the first of which has already been “teed up,” Woodward said.
The project’s certificate of occupancy was issued in April 2010. As of mid-May, the first nine residential and commercial condos had closed escrow; some of the retail space had been leased; and another retail lease is in negotiation.
CT/KDF, whose new markets credit service area is Southern California, provided its new markets allocation to the project from a $90 million NMTC award received in late 2006. The CDE has been using its allocation primarily to provide below-market mezzanine debt for the development and redevelopment of commercial real estate projects and for-sale housing projects, including for workouts of non-performing, overleveraged real estate projects.
Useful Tool
Woodward, who has extensive prior experience in structured finance and real estate workouts, suggested that the NMTC can be a valuable tool for facilitating the workout and completion of stalled, troubled real estate projects. In addition, she said it can provide a positive solution for construction lenders to such projects.
Woodward’s firm “spends a lot of time” talking with financial institutions about their portfolios of troubled commercial real estate loans. “They’re all looking for solutions, and there is, as we all know, a shortage of capital in the market. I see the NMTC program as a viable solution to a lot of what is going on in banks’ portfolios for the betterment of the community.”
