Written by Erica Stewart
To read the papers today (yes, thank you, I still do), with their dire news about climbing unemployment, paltry job growth and dry capital markets, there are plenty of reasons to think an adaptive use project like The Laurel could never happen in today's economy. Yet it is. And given its eye-popping economic impact numbers, St. Louis can't really afford for it not to.
The 660,000 square foot property—formerly known as the Stix Baer and Fuller, then the Grand Leader, and later still, Dillard's—housed a series of department stores from the time it was originally built in 1906. It anchored the east end of Washington Avenue's retail district, which was, for the first several decades of the 20th century, one of the largest and most vibrant retail districts in the country. But as retail and residences flocked to the suburbs, the property withered along with the rest of downtown. It was one of the largest vacant properties in the central business district, and given its location next to the St. Louis Convention Center and the Edwards Jones Dome, was a vexing, highly visible, eyesore.
The story of how the old Dillard's building in downtown St. Louis began its $162 million transformation into a 212-suite hotel, 205 residential units and 32,000 square feet of ground-floor retail, is a story of tax credits—specifically the federal historic tax credit, the Missouri state historic tax credit and the New Markets Tax Credit.
Without going into mind-crushing detail, a quick and dirty on what we're talking about here:
The federal historic tax credit, enacted in 1976, has been instrumental in catalyzing historic real estate development, economic growth, and job creation in all 50 states. (See this recent report by Rutgers University for complete statistical information.) It operates as a dollar-for-dollar reduction in taxes owed, and can be earned if the rehabilitation of a designated historic building conforms to a set of standards defined by the Secretary of the Interior. The credit is equal to 20% of the qualifying rehabilitation costs of the project.
The Missouri state tax credit equals 25% of qualifying rehab expenses and has been very effective in attracting private investment in the state's historic resources. The credit was widely regarded as a model policy, until this year when legislators capped the credit, meaning the state Treasury has an annual limit on its payout. (Shout-out to Missourians: please tell your elected state officials what a poor decision that was. See below for ample evidence on the importance of state historic tax credits.)
The New Market Tax Credit is notoriously complicated, but the upshot is that this 39% tax credit is available to investors who provide capital to Community Development Entities (special entities) that have been allocated New Markets Tax Credits (such as NTCIC, the Trust's for profit subsidiary), which in turn invest that capital in qualifying low income businesses located in low-income census tracts.
Phew! Are you with me? The larger message to take home here is that if a historic rehabilitation project is considered a qualifying low income business, and that if say, US Bank provides capital to NTCIC for its investment in a historic rehab located in low-income census tract, US Bank receives an additional return on its investment, which spurs it to make a larger initial contribution of funds. The equity boost is a significant additional source of funds for the project, and helps offset the more difficult economics associated with developing historic properties in low-income areas.
The developers of The Laurel project, Brady Capital and Spinnaker Real Estate Partners, orchestrated the convergence of these three tax credits, in addition to the Missouri Brownfields tax credit. In this case, the developers are not keeping the credits to reduce their own tax liability, but instead have transferred them to corporate investors in exchange for their dollars into the project while construction is underway. For example, NTCIC is providing $10 million of its New Markets Tax Credit allocation to the hotel portion of The Laurel project, which has enabled US Bank Corp to bring additional equity to the project.
These tax credit equity sources, representing approximately $80 million in cash for the project, were truly difference-makers in getting the deal to make financial sense. A $45 million HUD loan was another huge financing piece, which when secured, enabled The Laurel to move forward. The result?
St. Louis has a handsome, historic mixed-use project that is seeking LEED Silver certification now and which neatly addresses what has been called the "hole in the donut" problem in the central business district. Once completed in December of 2011, The Laurel will be a huge boon for the city of St. Louis and the state of Missouri, as the economic impact figures below demonstrate. The Convention Center stands to benefit in particular from the project, as one of the facility's greatest marketing challenges was the neighborhood's dilapidated condition, its unappealing retail offerings, and a lack of varied hotel room types and price points.
Take a look at The Laurel and you can clearly see it as a veritable economic stimulus package in its own right:
- 800 construction jobs over two years;
- 300 permanent jobs;
- $7 million in projected annual retail sales, generating $500,000 a year in sales tax revenue;
- $6 million in hotel room sales, generating $420,000 a year in sales tax; and
- 205 new households living in downtown, and their associated economic multiplier effect.
The Laurel, along with the historic rehab of a nearby 1928 building into offices and retail space, combine with two large redevelopments of more modern commercial buildings to create more than 1,600 construction jobs and signal the biggest construction boom downtown St. Louis has seen in several years.
So when the bad news from the Business pages (yes, of course, also online if you must) threatens to get you down, recall fantastic projects like The Laurel and recognize the vacant and abandoned historic assets in your city or town for what their really are: truly assets and not liabilities, and that when cast into new roles that meet existing opportunities, the thoughtful rehabilitation of these properties is an undeniable economic development engine that can lift us from these doldrums and retain a respectful link to our past. And that's true whether you live in St. Louis, Missouri, or St. Augustine, Florida or anywhere in between. But before you make it happen, be sure to read over what I said about tax credits a few times.
Erica Stewart is the outreach coordinator for the National Trust for Historic Preservation’s community revitalization department.