Changing Neighborhood Changes Building Usage: Historic Tax Credit Saves St. Paul Landmark

6 min read

The Rayette Building in the Lowertown section of  St. Paul, Minnesota has been a lot of things over the last 100 years, starting as a hat and clothing wholesaler in 1911. It became the Raymond Rayette Laboratories in 1936, where scientists developed products like Aqua Net, once the most popular hairspray in the U.S. In the mid-1990s, the building changed again into a giant, seven-story parking garage, with room for 300 cars.

But its latest transformation took 12 years, according to Chris Sherman, a development and project manager for Sherman Associates.

In October, the Minneapolis-based developer opened 88 luxury apartments in the renovated, historic landmark. It took a new state historic tax credit and a renaissance in the surrounding neighborhood to make the redevelopment work.

A history of transformation

Sherman Associates bought the parking garage a dozen years ago. “It was a good opportunity to invest in a building that could be converted eventually,” says Sherman. The developer would operate the property as a parking garage for ten years before construction began in 2013.

Since the 1990s, Sherman Associates has converted historic buildings into apartments. For example, in 2012 it finished the rehab of 1,303 affordable apartments at Riverside Plaza, as part of a $135 million plan to refinance and redevelop the landmark 1970s high-rise complex.

The builder has also developed 50 affordable housing communities. At first, it considered turning the Rayette Building into affordable housing, too.

But with room for just 88 apartments, the landmark wasn’t the best size for the programs that subsidize most affordable development. It was likely too large to win a subsidy in Minnesota’s extremely tough competition for federal low-income housing tax credits (LIHTCs). It would also probably be too small to finance with non-competitive 4 percent LIHTCs and tax-exempt bonds, because of the high cost of issuing bonds.

Lowertown’s renaissance

The changing neighborhood around the Rayette Building created an opportunity to transform the crumbling parking garage into luxury rental housing.

Over the years, tech startups and working artists crowded into St. Paul’s Lowertown neighborhood close to the Mississippi River, drawn in part by easy access to mass transit and the neighborhood’s collection of ornate, empty factory buildings and warehouses, perfect for conversion to loft-style housing.

Upscale restaurants, higher rents and large-scale development followed. In late 2013, USA Today named Lowertown one of “ten up-and-coming neighborhoods around the USA.”

Rayette Lofts is close to local landmarks like The St. Paul Farmers Market, just across the street. The historic Union Depot Station is just two blocks away. “It’s the major historic rail depot in St. Paul,” says Sherman. The train station is connected to several train and bus lines and Minneapolis/St. Paul’s growing network of light rail lines.

In 2015, the St. Paul Saints professional baseball team will open its season at CHS Field, a new stadium on the site of the former Gilette/Diamond Products plant.

“Lowertown has seen a lot of investment over the last few years,” says Sherman.

Minnesota’s new tax credit

Even the rising rents in Lowertown wouldn’t have been enough to support the redevelopment of Rayette Lofts, however, without a new state historic tax credit, signed into law in 2010.

The Minnesota Historic Structure Rehabilitation Tax Credit offers a 20 percent state tax credit for qualified historic rehabilitations and parallels the existing federal tax credit. A local tax credit syndicator, the Preservation Alliance of Minnesota (PAM), paid $3.6 million for the tax credits from Rayette Lofts. National Trust Community Investment Corporation syndicated $4.2 million for federal historic rehabilitation tax credits from the property.

Those millions are just a fraction of the $25 million total cost to redevelop the Rayette Building. But the new tax credit made a critical difference.

“We could not have done the project without the state tax credit,” says Sherman.

Sherman Associates also provided nearly $5 million of its own money to the redevelopment, including a $3.1 million deferred developer fee and $1.7 million of equity from Sherman. The project also received a $12 million construction loan from Associated Bank. Other financing included $570,000 in grant money from the Metropolitan Council to help pay for environmental remediation and $100,000 from local utilities to help pay for energy improvements at the property.

Historic surprises: extra environmental remediation

Work began on the building in July 2013, tearing out the massive ramps that helped cars move through the parking garage.

“We thought that was going to be the hardest part of the building,” says Sherman.

But historic rehab always provides some surprises. Rayette Lofts needed more than $750,000 in extra remediation of environmental contamination. When workers pealed back layers of flooring, they found a layer of newspaper-like material laid down when the building was a chemical laboratory inventing new kinds of hair spray. The material had to be carefully removed to comply with Minnesota’s tough standards for environmental remediation.

The work took extra time, so that less of the building was enclosed than planned when the temperature dropped in late 2013 during one of the coldest winters in Minnesota history.

The brickwork had also suffered more damage than anticipated over 100 years. Repairing the damage to details, like the parapet, cost $125,000 more than anticipated.

Extra demand for apartments

Rayette Lofts opened in late October 2014, more than a month later than originally planned. Thanks to strong demand, Sherman Associates’ leasing team has already made up for lost time — even though Minnesota’s brutal winter is usually a slow season for renting apartments. By the end of January, about 40 percent of the 88 apartments had leased.

“We are on schedule, and it is the middle of winter,” says Sherman, who expects the building to be fully-occupied by June. “There is a large demand for these units.”

The rents are also strong. When Sherman Associates planned Rayette Lofts, the developer anticipated the apartments would earn rents of $1.60 per square foot. “Rents are now up 10 percent compared to what we estimated,” says Sherman.

A prime tenant has even signed a lease for a 2,564-square-foot, first-floor commercial space with 18-foot ceilings and huge windows.  “It’s a beautiful space for a restaurant,” says Sherman.

The owners of a famed local steak house, Strip Club Meat & Fish, plan to open a new restaurant called Saint Dinette this year with seating for 80 people.