Managed risk key to funding historic renovation projects

$35M White Stag redevelopment gets equity from lenders, tax credits

By Kennedy Smith

For new construction projects, getting the necessary funding from institutional lenders generally takes a couple of months. But Portland developer Venerable Properties spent the better part of last year taking the necessary steps to start rounding up the dough to redevelop three historic building that make up the White Stag block at the foot of the Burnside Bridge.

Historic renovations are a tricky business in Portland and around the country because of their inherent risks. It’s cheaper and less risky for developers to raze a historic building and start over, and lenders are more willing to foot the bill for new projects. But, experts say, lenders are finally starting to warm up to historic redevelopments.

Venerable Properties bought the three buildings–the White Stag Building, built in 1907, the Bickel Block Building, built in 1883 and the Skidmore Building, built in 1889–last year from the Naito Family for $5.5 million.

Art DeMuro, president of Venerable, estimated the cost of renovation will reach around $35 million, with a $10 million cash flow gap to fill. That’s enough to convince some lenders to stay away.

“No matter what the lender is, whether commercial or some other private-entity lender, they’re going to go through their traditional underwriting,” said Cam Turner of Portland Family of Funds, a holding company that allocates the White Stag renovation’s tax credits. “If you can bring money to the deal with historic tax credits, it helps, but you’re also automatically narrowing the field of lenders who can deal with the additional debt structuring.”

When it came to securing funding for the White Stag historic renovation project–two-and-a-half times bigger than any project the company’s done to date–the key was covering a cash flow shortage.

The new life being breathed into the dilapidated structures wouldn’t be possible without a mix of funding from dozens of sources, DeMuro said.

That’s where a number of funding structures come in, he said.

“Historic renovations typically are more expensive than the market rates will bear, so there’s a gap between the actual development costs and fair market value of the completed project,” he said. “You have to make up the gap with some sort of subsidy which falls in different categories.”

For the White Stag, those subsidies came from New Markets Tax Credits, Historic Tax Credits, Portland Development Commission loans, Energy Trust of Oregon tax credits, and institutional lender Key Bank.

Historic tax credits are given to projects on the National Register of Historic Places at a rate of 20 percent of the renovation costs. For example, if a renovation costs $1 million, the developer will get a $200,000 tax credit, and that credit is sold to an investor, typically a large income generator like a bank.

New Markets Tax Credits are financial incentives to get lenders interested in properties in low-income neighborhoods.

The PDC has gotten involved with the White Stag renovation by providing a low-interest seismic upgrade loan and matching funds for storefront improvements.

Venerable is also relying on the Energy Trust of Oregon’s tax credit program, which gives cash in advance to offset extra costs for energy efficiency.

“You’re grabbing from Pot A, B, C and D and putting it all together to fill the gap,” DeMuro said. “There’s no question it’s more difficult. There’s all this layering that goes on, and of course, every one of those participants needs to know how you’re participating with the other investors. You’re forcing these people into the same room who have the commonality of trying to get the project done.”

Convincing a lender to sign up for a historic renovation project is a challenge, said Jessica Engeman, historic preservation specialist at Venerable.

“The lender, especially if they’re not familiar with the tax credit process, needs to understand the technicalities of how the funds flow into the project,” she said. “It’s often educating the lender if they haven’t had previous experience.”

Another challenge is getting real market data for areas that might not have a history of catering to business.

“Historic projects are often in edgier neighborhoods,” she said. “The lender will want to see pre-leasing data as a requirement before moving forward.”

For the White Stag, that prelease commitment came early on from University of Oregon, which signed on for 66,000 square feet for its roughly 250 students.

The third requirement from the lender’s point of view, Jan McKee of Key Bank said, is a track record of successful redevelopment.

“One of the first steps in the process is looking at the expertise of our client when I’m investing in the tax credit,” she said. “It’s critical that the work done on the building is not jeopardizing any of the tax credits.”

The number of lenders willing to dip their feet into the historic renovation pool is slow to grow, DeMuro said.

“When we do a tax credit project, we have certain people we call automatically,” he said. “It tends to be people you have some experience with because they already have a confidence level. If I go to a stranger and say I want to renovate this 140,000-square-foot building and it looks like a bombed out structure, most of them wouldn’t be very warm to it.”

By the end of this year, the White Stag block will be home to the University of Oregon’s architecture and allied arts, journalism, and law schools, and will also house Venerable Properties and Portland Family of Funds.