A Major First Dominium Makes First Use of New Markets Tax Credits in Redevelopment of Historic Office Towers in St. Louis

5 min read

Some say to keep it simple when trying something new.

Others defy conventional wisdom.

Dominium, a Minneapolis-based developer of multifamily rental housing and mixed-use projects, is in the latter camp. The company is utilizing federal new markets tax credits – for the first time – in a $118 million project that will redevelop two historic high-rise former office towers in downtown St. Louis into a modern new mixed-use complex. Moreover, the funding package also includes historic and housing tax credits.

Five community development entities (CDEs) are providing new markets tax credit allocation for the project. They are affiliated with U.S. Bank, St. Louis Development Corporation, National Trust Community Investment Corporation, Enterprise Bank & Trust, and Central Bank of Kansas City.

Mixed-Use Development

The project will involve the historic rehabilitation and adaptive re-use of two separate but connected former office buildings, known collectively as the Arcade Building or Arcade-Wright Building. The 18-story Wright Building was constructed in 1906.

The Arcade Building, constructed in 1919, wraps around the Wright Building in an L-shape and is 14 stories on Pine Street and 16 stories on Olive Street. The Arcade Building was famous in its heyday for its interior two-story retail arcade, with 200 shops, a ribbed vaulted ceiling, and marble-tile floors, and was the forerunner to the modern shopping mall. The upper floors contained offices.

The Arcade Building was named a city landmark in 1980 and was listed on the National Register of Historic Places in 2003. A local developer acquired the building and planned to convert it into luxury condos, a hotel, and office space. However, the developer went under in 2008 and the property eventually wound up in the hands of the city. In June 2013, Dominium signed an agreement to purchase the Arcade Building. By this time, the building had been vacant for several decades and suffering from deterioration.

The new 500,000-square-foot development – not yet been named – will be a mixed-use complex. The first two floors and mezzanine will be leased to Webster University, a local college, for classrooms, offices, a 170-seat auditorium, community kitchen, and art gallery. The new facility will expand Webster University’s downtown campus from 33,000 to 85,000 square feet and accommodate up to 1,000 students.

The upper floors will contain 202 affordable and 80 market-rate apartments ranging from one to three bedrooms. The affordable apartments, all low-income housing tax credit units, are designed to meet the needs of artists. The building will also have more than 13,000 square feet of artist studio space.

The property will have 130 underground parking stalls.

The transaction closed on August 8, and construction began the day after. Dominium expects the university to be able to move in as early as December 2015, with construction on the remaining space finishing up in January 2016.

Dominium Partner Jeff Huggett says the building is “a physically beautiful space. There’s a lot of marble, terra cotta, woodwork, glass and wrought iron. It’s a stunning building. We plan to do a really good job of restoring it.”

He said the project has had some design challenges. For instance, not all of the floors of the two buildings attach at the same level. “And then the rest is trying to put good real estate into a 100-year-old building and make it something that the local marketplace would want to live and work in.”

Multiple Financing Sources

The development has been structured as two separate condominiums, each with its own financing package. One condo will incorporate the market-rate apartments and the commercial space, while the second will contain the affordable apartments (i.e., the LIHTC project).

Dominium decided to use new markets tax credits as part of the financing package for the development, says Huggett, because of the “sizable commercial portion…It made good sense.”

Much of the project’s cost will be financed by equity generated by federal housing and new markets tax credits and federal and state historic tax credits. The 4% federal housing credits stem from the St. Louis Industrial Development Authority’s issuance of tax-exempt bonds to help finance the affordable apartments.

U.S. Bank is providing most of funding for the development. On August 11 it closed on several tax credit financing packages of more than $77 million with Dominium, raised through the bank’s investments in the new markets and historic tax credits, and a separate investment arranged from federal housing tax credits. In addition, U.S. Bank Community Lending Division provided a $44 construction loan, partially bridging the equity provided by U.S. Bancorp Community Development Corporation (CDC). BMO Harris Bank provided bridge and permanent construction financing, Cornerstone Permanent Mortgage Fund (Boston Capital Finance) is making a permanent loan, and the city of St. Louis has a $4.8 million loan. A local corporation also made a donation.

The Missouri Housing Development Commission provided a loan and awarded federal housing credits and Affordable Housing Assistance Program tax credits.

Huggett said it also took a while to put the deal structure together to comply with the Historic Boardwalk Hall decision and fall within the “safe harbor” of IRS Revenue Procedure 2014-12, which laid out parameters for real estate transactions utilizing federal historic rehabilitation tax credits.

Comments on Project

“Tremendous persistence, commitment, and a deep desire to support the emergence of downtown St. Louis as an arts and innovation community kept our team motivated to mark this development come to fruition,” said Zack Boyers, Chairman and CEO of U.S. Bancorp CDC.

“Redevelopment of the historic Arcade Building wouldn’t have been possible without the partnership of these organizations and the availability of tax credits, especially new markets tax credits,” said St. Louis Mayor Francis Slay.“Breathing new life into this century-old building will move the city forward in our goal of making downtown a hub of residential and commercial activity for the region.”

Huggett said the Arcade development is the third artist loft project in St. Louis that Dominium has partnered on with U.S. Bancorp CDC.