CASE STUDY: Masonic Temple Rehab Showcases Complexity of Combining NMTCs, Historic Credits
By Caitlin Jones & A. J. Johnson
6 min read
Tax Credit Advisor May, 2006: Increasingly, historic rehabilitation projects are funded with a combination of New Markets (NMTCs) and Historic Tax Credits (HRTCs). But as these deals have become more commonplace, they have also grown more complex, with developers striving to combine NMTCs and HRTCs in creative ways to help finance projects that might not have otherwise been economically feasible.
A good example is Washington, D.C.-based William C. Smith & Co.’s recent $26.5 million rehab of a 140-year old Masonic Temple in Baltimore into a conference and banquet center. The challenge facing the developer was finding a way to finance a rehabilitation costing about $300 a square foot. With help from the subsidy provided by NMTCs and state and federal historic credits, the Smith Company was able to fund the project, which will have its grand opening on May 25.
Use of Multiple CDEs
The project employs two separate Community Development Entities (CDEs), a departure from the usual model of using a single CDE in conjunction with deals that bring together NMTCs and HRTCs.
One of the CDEs, the National Trust Community Investment Fund (NTCIF) provided $6.6 million in equity financing, pairing $1.3 million in NMTC equity with $3.7 million in equity from federal historic credits and $1.6 million from state historic credits. NTCIF is managed by the National Trust Community Investment Corporation, the National Trust for Historic Preservation’s for-profit subsidiary, and capitalized by the Bank of America.
NTCIF made use of a pass-through structure, contributing tax credit equity to the Master Tenant entity, 225 North Charles St. Tenant, LLC, which then made an investment into the Qualified Active Low Income Community Business (QALICB), 225 North Charles St., LP, the Property Owner/Lessor. (See Transaction Diagram on page 17)
A second CDE, Wachovia Bank, provided a $7.1 million NMTC-enhanced loan directly to the Property Owner/Lessor. It is comprised of two notes, with one maturing in seven years and the other 30 years. The 30-year note can be put by Wachovia at the end of the seven year period. Wachovia was given an additional security pledge of $5.5 million by the developer through 225 North Charles Street Investment LLC.
The two separate sources of NMTC funding were necessary because the scope of the project created a need for tax-credit equity that surpassed what NTCIF alone was able to offer under its program guidelines, said project manager Brad Fennell, a senior vice president at Smith Company.
“Getting the additional NMTC money from another CDE was a challenge, but it also allowed the deal to move forward,” he said.
“To preserve that quality of space [at the Masonic Temple], there was the need for a fairly deep subsidy,” added Al Shehadi, NTCIF’s Acquisitions Manager.
Jerome Breed, a partner at Powell Goldstein LLP, legal counsel to the developer, said that the increasing size and expense of historic rehab deals using NMTCs and HRTCs has resulted in a small but growing number of transactions that employ multiple CDEs. Some other examples of this, he noted, are the Old Post Office Building in St. Louis and Court Square Center in Memphis, Tenn.
“When these deals get to a certain size, they can become larger than one CDE can handle,” Breed said.
An Unusual Loan
The use of two CDEs was not the only unusual aspect of the Masonic Temple deal. The transaction also involved loans for the project made to another property owned by the developer and then passed through to the rehab.
Bank of America loaned $9.4 million to the Tremont Plaza Hotel, a 300-suite nearby hotel owned by the Smith Company that is now connected to the Masonic Temple building via an elevated walkway. The proceeds of the loan were then passed through the Master Tenant and on to the Property Owner/ Lessor. (See Chart on page 17). Under the deal’s structure, Tremont Plaza Hotel, LLC, is the sole Subtenant of the Master Tenant.
One of the reasons for this loan structure was Smith Company’s desire to place the debt against the Subtenant – the hotel – while keeping the Property Owner – the QALICB – unencumbered. In addition, Bank of America and Wachovia preferred this structure because of the Subtenant relationship and proven track record of the hotel.
The Rehabilitation Project
Designed by architect Edmund Lind in the Renaissance Revival style, the five-story 90,000 square foot structure was originally built in 1866 and reconstructed in 1907. It was used by the Masons as their main Baltimore meeting place until 1994. In 1998, the Smith Company bought the building and a small adjacent lot, intending to create a full-service banquet and conference facility for the Tremont Plaza Hotel and the Tremont Park Hotel, the other hotel it owns in the city.
In rehabbing the Masonic Temple, the challenge was to fully modernize the structure, while retaining its original architectural integrity, Fennell said. There are 10 main meeting rooms, including Edinburgh Hall, which is modeled after the Tudor-style Rosslyn Chapel in Scotland; and the Oriental Room, modeled after an Egyptian Temple. (See pictures on page 16.) The building also features a marble staircase, stained-glass windows, rococo chandeliers, pipe organs, ornate plaster moldings, and columns and pilasters finished in scagliola, an imitation marble. Metal refinishing, mural conservation, and plaster work were particularly challenging, said Fennell.
Besides restoring and cleaning of the exterior and interior finishes, the project’s scope of work included constructing a large commercial kitchen, and adding new heat, air conditioning, electrical and safety systems, new bathrooms, and three elevators. The developer also built a skywalk connector between the building and the Tremont Plaza Hotel.
Renamed the Tremont Grand Meeting facility, the rehabilitated Masonic Building now provides 45,000 square feet of conference and banquet space. It was opened for business in October 2005. A 1,300 square foot cafe on the ground floor will be completed by the end of this month.
Other Challenges
The developer had to deal with a number of other issues that added to the challenge of funding and completing the rehabilitation, Fennell said.
Less state historic tax credit equity was generated by the rehab than had been expected, after the Maryland state legislature in 2003 lowered the amount of tax credits that can be allocated to any one project from $3 million to $2 million. Furthermore, because the connector to the Tremont Plaza hotel was an addition to the building, its $1.3 million cost could not be included in the total of Qualified Rehabilitation Expenses (QREs) used to calculate the HRTC.
Part 2 certification of the federal HRTCs occurred in 2002, with Part 3 certification expected this summer. Fennell is hoping to obtain additional state historic tax credit equity for the project now that the Maryland legislature has restored the $3 million cap.
The project also faced a two-year delay after the City of Baltimore unexpectedly announced plans to use its power of eminent domain to take over the building and tear it down to make way for a municipal parking lot.
After prolonged negotiations, city officials finally relented, agreeing to shrink the footprint of the parking structure while increasing the height of the garage to enable the restoration of the Masonic Temple building. But construction on the project did not begin until May 2004, after the parking lot was completed.
