CASE STUDY: The American Tobacco Project: Handling HRTCs in Multiphase
By Caitlin Jones & A. J. Johnson
7 min read
Tax Credit Advisor March, 2006: For developers, large mixed-use projects pose special challenges. These challenges become even more daunting when the projects involve an adaptive reuse funded with Historic Rehabilitation Tax Credits (HRTCs). This is so because the National Park Service treats multiple-building projects it considers to be “functionally-related” as a single property when certifying the HRTC. Accordingly, developers are often forced to wait for many years, as all the buildings are rehabilitated, and then certified, before their tax-credit syndicator provides full funding.
One way to lessen this problem is to divide the project among different owners, permitting separate certification of the tax credits, and quicker delivery of full financing.
A good example of this is the American Tobacco project, the adaptive reuse of a multi-building cigarette processing factory built in Durham, N.C., between 1874 and 1954. The project was launched in 1999 by Capitol Broadcasting Company, a family-owned media company that owns radio and television stations throughout North Carolina.
In Dec. 2005, CBC finished Phase I of the $200 million project, five buildings in the southern portion of a 16-acre historic district (See American Tobacco Campus Map, page 11). Phase II has recently been taken up by another developer, Baltimore-based Struever Brothers, Eccles & Rouse Inc. CBC sold the northern part of the historic district to Struerver Brothers in 2004.
This multiple phase approach has helped solve the problem of funding with HRTCs, says CBC’s general counsel, Mike Hill, who oversaw the development of Phase I.
“One of the big issues we struggled with was phasing development of the properties, and it’s tough when full tax credit equity does not come in until all the buildings are completed,” Hill said. “But we never felt it necessary to do this project all by ourselves,” he continued, “and having Struever take on Phase II has been worked out well.”
Hill said that before selling the northern portion of the historic district, CBC imposed a set of covenants on the property and set up a property owner’s association which it controls. “This helped us feel more comfortable about giving control to another developer,” he said
Phase I: CBC Lays the Groundwork
In many ways, the American Tobacco project was a home-town effort for Capitol Broadcasting, says Hill. Although the company is headquartered in nearby Raleigh, N.C., it has a deep commitment to Durham, initially through its ownership of WRAZ-TV in that city, but also because of its purchase in 1991 of the Durham Bulls, a triple-A minor league baseball team.
Soon after the American Tobacco Co. closed its cigarette factory in 1987, CBC began to consider developing the property, which directly faces the Bull’s ballpark across Blackwell Street in downtown Durham. The media company began talks with the city and county in earnest in 1998, and in 1999 obtained an option to buy the property. In April 2002, after three more years of negotiating, CBC arranged to have the property bought for $4.75 million by the A.J. Fletcher Foundation, a nonprofit formed in 1948 by the company’s founder. Under the terms of the deal, the foundation extended a long-term lease to CBC.
As the project evolved, CBC chose to develop the properties in the southern half of the historic district. This provided a total of 550,000 square feet in five buildings that had mostly been American Tobacco’s processing, storage areas, or administrative offices: Reed, Strickland, Crowe, Fowler, and Washington. (See map.) CBC also took on the restoration of American Tobacco’s Lucky Strike water tower and the smokestack, two iconic landmarks in Durham. In addition, Phase I included two parking lots, one at the north end of the historic district and the other at the south end.
Hill said that in 2001, CBC received Part I certification for the whole historic district, following its listing on the National Registry of Historic Places in 2000. Part II approval, submitted in 2001, was finally approved in 2003. Part III certification occurred in December 2005.
Total Phase I development costs were $118.8 million, which included $24.7 million for the two parking garages. The parking decks were funded by the City of Durham and Durham County, through a bond issue backed by a one-cent increase in the local sales tax.
Claudia Robinson of the Bank of America’s Community Development Direct Equity Investment Group, said that tax credit equity totaled $27.5 million, divided between two sub-phases, Ia and Ib, involving separate properties within CBC’s project because different investors were involved. The HRTC equity for the project totaled $22.1 million, comprised of $14.2 million in federal HRTCs, and $7.9 million in North Carolina HRTCs. The HRTCs were enhanced with $5.4 million of New Markets Tax Credits (NMTCs). Of the total HRTC tax credit equity, $706,000 was withheld until Part III certification occurred, she said.
The NMTC allocation, she noted, is limited to the expected HRTC equity delivery. The National Trust for Historic Preservation has provided the NMTC allocation for Phase Ia, while Bank of America has provided the NMTC allocation for Phase Ib.
Self-Help Ventures Fund, which is based in Durham, provided a permanent loan for Phase IA and SunTrust Banks, based in Richmond, Va., provided a construction loan for IB. Hill declined to detail terms of the loans and other financing covering the balance of the costs of the project.
In June 2004, after five years of development, the American Tobacco project welcomed its first tenant, drug maker GlaxoSmithKline, which moved into the Crowe Building. The five completed structures comprising the first phase of the American Tobacco project currently are home to more than 30 other tenants, including Duke University; Morgan Stanley; Compuware, a Detroit-based software firm; and McKinney + Silver, a large advertising agency based in Raleigh.
Phase II – Completing an Adaptive Reuse
Struever’s Phase II rehabilitation plans involve six buildings at the northern end of the historic district. From North to South, they are: the Hill, Old Bull, Coal Shed, Noell, Lucky Strike, and the Power Plant. Altogether, these rehabilitations will cost about $65 million, and will add about 250,000 square feet of commercial and residential space to the mix.
Ken Reiter, the project’s senior development director at Struever, said that most of the construction for Phase II began in late 2005 and will be completed by the end of 2006. He said the Lucky Strike and Hill buildings will house a single commercial tenant, Duke Corporate Education. Old Bull and Noel will be residential properties, while the Shed and the Power Plant will contain retail space.
Although Reiter declined to offer financing details, Aimee Worsley, a vice president at Wacovia Bank, provided some information about rehabilitation funding for the 60,000 square-foot Lucky Strike Building, where the cigarettes themselves were manufactured. Duke University will be the building’s anchor tenant.
She said that the developmental costs of this project are about $14.5 million, with funding including approximately $4 million in equity proceeds from federal and state historic tax credits, and an $8.5 million New Markets Tax Credits-enhanced loan.
Architectural Details
Each of the buildings in Phase I have been rehabilitated to maintain their brick facade. Lobbies have been added to each building, and are decorated with an eclectic art collection that includes old blueprints from the American Tobacco Company’s files, old photos of the buildings, and contemporary art from regional artists.
A landscaped courtyard has been developed between the two long rows of buildings that comprise the historic district. The courtyard includes an artificial stream, the Old Bull River that begins at the north end of the complex and ends in a series of waterfalls opposite the Fowler Building. CBC’s Hill said the stream helped bring in restaurant tenants. The district also has a fitness center and walking trails.
