Case Study

CASE STUDY: Dominium Saves St. Louis’ Giant Arcade

7 min read

Three kinds of tax credits revive national treasure 

There’s a reason the Arcade Building stood empty for more than 30 years. Bringing the landmark back to life took more than a dozen separate funding sources.

“Certainly it’s the most complicated deal we have ever done,” says Jeff Huggett, vice president and project partner for Dominium, based in Plymouth, MN. “And we have done our share of complicated deals.”

The Arcade Building is 19-stories tall, with a half-million square feet of space. The building is simply too large for a simple financing plan. The giant building has been split into two separate ownership entities, so that the developers could use both federal Low Income Housing Tax Credits (LIHTCs) and federal New Markets Tax Credits (NMTCs) at the same property.

The Arcade rehabilitation includes the multiple layers of ownership entities that are necessary to generate NMTCs, plus state and local subsidies and Historic Rehabilitation Tax Credits, plus relatively conventional debt underwritten by the income from 80 new luxury apartments.

National treasure, St. Louis landmark
The first piece of the building opened as the Wright Building, an ornate office tower, in 1906. In 1913, the Arcade Building opened, merging with the Wright Building next door and wrapping around the Wright Building on two sides and creating the Arcade’s elegant, vaulted shopping spaces.

The Arcade Building was once famous as the biggest indoor shopping mall in the country, a precursor to downtown urban malls, like Watertower Place in Chicago. The Arcade was also known as the largest concrete structure in the world. Steel was in short supply during World War I, so the original developers made do with concrete. As downtown St. Louis declined, so did the Arcade, which finally closed in 1978. Its vast shopping halls would be silent for more than three decades.

Preservationists hurried to save the building from the wrecking ball. The city designated it a protected landmark soon after it closed. Several developers tried to redevelop it over of the years, but the building was simply too large and the real estate market too weak to support redevelopment.

In recent years, downtown St. Louis has gradually begun to heal. “This building was the last piece of a critical part of downtown that has seen a lot of investment,” said Steve Kramer, senior vice president of business development for U.S. Bancorp Community Development Corporation.

Apartment developer Dominium took on the building with a redevelopment plan that included both commercial space and affordable and market-rate apartments.

But first Dominium had to deal with the damage caused by decades of standing empty. Architects photographed every inch of the exterior of the building to identify problems. More than half of the parapets that ornamented the Arcade needed to be replaced because they had been removed, been damaged or had simply fallen off.

Rain had also cut into the masonry. More than a hundred window sills needed to be replaced. Dominium worried the damage could be even deeper. Water had cracked the mortar of the walls, which were gradually sliding out of true. “We could have had whole walls collapse,” says Huggett.

The developer hired teams of engineers to tear down the walls, examine individual bricks for water damage and measure the tilt. They finally gave the building a clean bill of health in early 2014.

Dominium divided the office spaces on the upper floors into 282 units of rental housing. That makes the new community easily the largest housing development in downtown St. Louis in the last 50 years.

Downtown has made a lot of progress in recent years – enough to support 80 new apartments that rent at unrestricted market rates. The other 202 apartments are priced to be affordable to residents at a variety of income levels, ranging from 50 to 80 percent of the area median income.

These affordable apartments are targeted towards artists and the tower includes special common areas designed to attract them, including classrooms and 11,000 square feet of studio space for dancing, painting and music.

The retail spaces below were renovated to provide a 54,000-square-foot home to one single commercial tenant: Webster University.

Parking also posed a challenge for the redevelopment. “We told the city we couldn’t close the deal without a parking solution,” says Huggett.

Arcade Building includes 129 underground spaces.  The city signed a long-term lease with Dominium that gives the developers the right to rent spaces as needed for its residents at a parking ramp a block away, so that Dominium can offer one parking space for each apartment.

Those spaces aren’t needed now – parking is relatively easy in the neighborhood. But as downtown becomes more popular, parking will probably become more challenging. “We better solve problems not just for today, but for ten years down the line,” says Huggett.

Layer upon layer of financing
To pay for all this, Dominium needed both LIHTCs to help pay for the apartments and NMTCs to pay for the commercial space. Since the NMTC rules don’t allow these two different tax credits to mix, the building had to be divided into two separate ownership structures.

The $118 million redevelopment needed a lot of each type of tax credit. The apartment condominium had a total development cost of $67.7 million, which needed roughly $20 million in LIHTC equity – requiring hard-to-get, large reservation Housing Tax Credits from the Missouri Housing Development Corp.

The commercial condominium had a total development cost of $49 million, which needed $30.4 million in NMTC equity – requiring $41 million of NMTC allocating authority from five different community development entities (CDEs): St. Louis Development Corporation, National Trust Community Investment Company, Enterprise Financial CDE, Central Bank of Kansas City and U.S. Bancorp Community Development Entity.

The complicated financing was made slightly easier because all five CDEs agreed to work with the same attorney.

Both the residential and commercial sides of the redevelopment also needed millions in equity from federal Historic Rehabilitation Tax Credits to work. Missouri also has a state Historic Tax Credit that brought a few more million dollars to the closing table.

This olio of tax credits brought another level of uncertainty to the development. As Dominium structured the transaction, the controversial Historical Boardwalk Hall court case scrambled the assumptions on how tax credit partnerships need to be structured for historic rehabilitations to meet the approval of the federal Internal Revenue Service.

“By the end of 2012, no one would invest,” says Huggett. Federal tax officials did not offer clear guidance until the end of 2013. The financing for Arcade finally closed in August 2014. “Ours was one of the first Historic Tax Credit deals to close after the IRS issued its guidance.”

The Arcade Apartments opened in December 2015, and was fully-leased a few months later. Surprisingly, the market-rate apartments were rented more quickly than the affordable apartments. Residents appreciated the many balconies in the market-rate units.

More than a year later, the property is fully occupied, while new apartment properties continue to open downtown.

Sources of Funding

Low Income Housing Tax Credit (LIHTC) condominium
$47 million, tax credit investment by U.S. Bancorp Community Development Corporation including federal LIHTC ($19.7 million), federal Historic Rehabilitation Tax Credits ($14.2 million) state Historic Tax Credits ($12.8 million)
$8.9 million, permanent financing
$4.2 million, HOME funds from the Missouri Housing Development Corp.
$4 million, St. Louis Land Clearance Redevelopment Authority and St. Louis Development Corp.
$2 million, deferred developer fee
$67.7 million, total development cost, LIHTC condominium

New Markets Tax Credit (NMTC) condominium
$30.4 million, tax credit investment by U.S. Bancorp Community Development Corporation including federal NMTCs, federal Historic Rehabilitation Tax Credits and state Historic Rehabilitation Tax Credits
$16 million, BMO Harris, construction and permanent financing
$2 million, deferred developer fee
$800,000, loan from the City of St. Louis
$49 million, total development cost, NMTC condominium
$118 million, total development cost