|Beautiful downtown Lynchburg, Va.|
Have you heard this one? An owner of a historic building walks into a bank…
You know the punch line – the lender says, “no.” There are many reasons why a preservation project might not move forward. Some of the reasons might have to do with the market, some may have to do with the business plan, some might have to do with the lender, others might have to do with Mercury in retrograde.
I’ve been learning a lot about financing rehabilitation projects lately. I’ve learned lenders can be a bit linear, too often showing preference single-use projects because they don’t “get” mixed-use or they will only fund the residential portion of the project. But my biggest lesson overall is that the bottom line when when dealing with financiers is that they always like to see signed tenants for your project. Before you even lift a hammer, signed leases from business owners or residents light up a banker’s eyes.
In the beautiful riverside town of Lynchburg, Va., the owner of a turn-of-the-century shoe factory was trying to fuel the momentum of the downtown revitalization by bringing a gorgeous rehab project to the table with a couple of businesses of which he was going to be the owner and manager. He approached lenders and tax credit investors for more than a year with his project that he pitched as a hotel, two restaurants, and a microbrewery. It seemed like a great project and it had the complete support of the city – the municipality even provided land for a parking lot and property tax abatement incentives.
|Giant shoe paying homage to the building's heritage.|
The developer finally sought help from Tetrault & Associations. (Full disclosure: Al Tetrault was a professor of mine and the first person who made real estate and tax credits make sense for me.) The team had an “Ah-ha!” moment and suggested that the project be repackaged to tax credit syndicators and lenders as a real estate deal – not as a series of businesses including a hotel, restaurants, and microbrewery. The owner of this 55,875 square-foot diamond-in-the-rough pitched his project as a rehabilitation of two historic warehouses that was pre-leased with four businesses. Even though he was still the owner of the businesses, he hired four managers for each business and pitched his project as a real estate deal.
It worked. This real estate deal raised almost $17,000,000 in debt and equity in less than 90 days. The $21-million project also took advantage of federal preservation tax credits, new market tax credits, a HUD 108 loan, and $3 million from local private investors.