SPRING 2002

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Lofts Seed Downtown Redevelopment

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Lofts Seed Downtown Redevelopment

By Linda Fischer
Assistant Editor
Community Affairs

Where can you go to "forget all your troubles, forget all your cares"? Where all the lights are bright, of course. Downtown.

At least that's what the song says. The reality may be different. Ask mayors of many U.S. cities and see if they agree with Petula Clark's assessment.

The Glassworks Lofts offer space for businesses as well as residences.

Revitalizing deteriorating downtowns has been a problem faced by mayors for decades. How to convince existing businesses to stay, how to attrat new businesses, what to do with vacant buildings and--maybe more importantly--how to get housing and attract residents to the core of cities are all enormous challenges for city governments.

Ironically, as the migration of residents from cities to suburbs fans out ever farther into outlying areas, city officials are realizing that persuading people to live in downtown areas may be the key to revitalizing them.

Among the many cities trying to breathe new life into their downtowns, three that have seen varying degrees of success are St. Louis, Little Rock and Louisville.

Developers there are resolving two issues--what to do with vacant, deteriorating buildings and how to entice residents to move downtown--by rehabbing historic buildings as loft apartments. While much still needs to be done, these projects are a start.

We talked to those involved in ambitious loft projects in each of these cities about how and why their developments came about.

What incentives are there for a developer to take on a project in a desolate area that has been abandoned by others?

One of the major motivations for renovating old buildings is the availability of federal and state historic preservation tax credits, developers say.

In 1997, a Missouri coalition of urban and rural interests worked to get legislation passed that provides a 25 percent tax credit for the total cost of rehabbing a historic property. The tax credit, which is transferable and has no cap, has been instrumental in spurring development in large cities and small towns.

"Missouri's historic preservation tax credit is so flexible, other states have modeled theirs on it," said Vihar Sheth of the Downtown St. Louis Partnership.

ArtLoft Rent: $435-$595 Units: 63 Size: 1,200-2,100 square feet Amenities: stove refrigerator, rooftop patio, community room and laundry room Block 2 Lofts Rent: $436-$1,100 Units:145 Size: 735-1,227 square feet Amenities: pets allowed, disability access, furnished units available, covered parking, dishwasher, view, on-site laundry, fully equipped kitchens Glassworks Lofts Rent: $750-$2,300 Units: 36 Size: 782-1,400 square feet Amenities: internal, high-speed telecommunications system providing Internet and telephone connections; 24-hour security; stove, microwave oven, refrigerator and dishwasher; painted walls and floors; triple-glazed windows

Because the state's tax credit wasn't in place when Tim Boyle of City Property Co. was developing ArtLoft, a warehouse rehabbed as live/work loft apartments in downtown St. Louis, he relied on federal historic tax credits and low-income housing credits to get the job done.

"There was no way to finance $6 million (the cost of the project) without the low-income credits," he said.

However, low-income tax credits are extremely complicated and much riskier than historic tax credits, Boyle said.

The ArtLoft project also received a 10-year tax abatement from the city.

In Arkansas, Vanadis Group also took advantage of low-income and historic tax credits to build Block 2 Lofts. This mixed-use redevelopment project consists of three historic buildings that house 145 lofts and six businesses in the heart of Little Rock's Rivermarket Entertainment District. Developer Paul Esterer said his firm is willing to rehab historic buildings, rather than build new ones, because of the historic tax credit.

In addition, the city of Little Rock was supportive and provided money in the form of funds from the Targeted Neighborhood Enhancement Program. The program was designed at the time to provide up to 20 percent of the cost of building or rehabbing apartments or houses in the downtown and other designated areas.

In Louisville, developers were able to take advantage of a little more than $2 million in historic tax credits to convert the old Snead Manufacturing Co. into Glassworks Lofts. The building has been transformed into a combination of offices, loft apartments, glassmaking studios and galleries, and a cafe where customers can dine and watch glassmakers work.

The project was the brainchild of architect Bill Weyland and architectural art glass designer Ken von Roenn. A collaboration of public and private entities injected the project with local, state and federal incentives that allowed the developers to compete with suburban developers, Weyland said.

In addition to the historic tax credits, incentives included:

• zero sales taxes on building materials because the building is located in an Enterprise Zone;
• Downtown Housing Fund money, a combination of city and private loans with zero interest on the city portion and a below-market rate on the private loan, with an average rate of about 4 percent;
• a five-year tax abatement and infrastructure improvements from the city; and
• $3.8 million in tax credits from the Kentucky Tourism Development Cabinet, of which 25 percent of the cost ($970,000) will be returned to developers through tax refunds over a 10-year period.

Why are lenders willing to invest in such projects?

Although downtown lofts are fairly new ventures in St. Louis, Little Rock and Louisville, lenders know such projects have proven track records in other cities. Lenders also don't go it alone--they are part of a group of investors, all taking a portion of the risk.

For example, ArtLoft in St. Louis was modeled after a similar project in St. Paul, Minn., and many financing experts were involved, Boyle said.

The St. Louis project "did not work financially without a lot of mechanisms to make it work," Boyle said. "We had a large team of very sophisticated real estate people and finance people."

One of those finance people was Kathy Bader of Mark Twain Bank (now U.S. Bank), which provided the construction/lease-up loan on the project. Since that time, the bank has been very involved (both in terms of loans and equity investments) in many of the projects in the St. Louis loft district.

"We view the success of the loft area as critical to the further development of the downtown community at large," she said.

"Our reasons for investing are that there seems to be strong demand for the units generated from the development (both rental and for-sale), the rehab of the buildings has made a huge difference in the neighborhood by providing quality housing (both market rate and affordable) and the residential development is attracting other investments to the area."

Plenty of windows brighten an apartment in the Glassworks Lofts.

In Louisville, the Downtown Housing Fund participated in the Glassworks Lofts for several reasons, said Kelly Downard, who was chairman of the fund at the time.

Although this was the first mixed-use development the fund had participated in, Downard said several other downtown housing projects had already proved highly successful. "Across the country, downtown housing has been a critical ingredient in revitalizing cities," he said. "Lofts and condos in downtown areas are well-accepted and have a proven track record. In the future, as the success of downtown housing grows, the need for the Downtown Housing Fund…will become less and less."

Other reasons they participated were: the pre-leasing of apartments, the commitment of an established design and engineering firm as a commercial tenant, and the location of the building.

Zack Boyers, vice president of Firstar (now U.S. Bank) Community Development Corp. (CDC), said the strength, vision and expertise of Weyland, the architect, was one reason the CDC invested in Glassworks. Also, the bank CDC has increased its participation in historic tax credit deals. This allows the CDC to expand the development of market-rate housing as opposed to low-income tax credit deals, which create affordable housing units. He said downtown areas need a mixture of retail and other businesses and a critical mass of housing to support those businesses, all of which the Glassworks contains.

What difficulties might developers need to overcome besides finding financing?

For Weyland, the mixed-use Glassworks development presented its own kind of difficulties. Working out parking for tenants was one problem. Tenants now park in an underground garage. Mechanical and electrical necessities for the mixed-use design had to be met while preserving the historic nature of the building. At times, the process was slowed as a result of being the first project in Jefferson County to participate in Kentucky's Tourism Tax Credit Fund and Louisville's Downtown Housing Fund. The boards of directors involved had to be educated regarding the unique issues this type of mixed-use project entailed.

After ArtLoft in St. Louis was occupied, there were some initial problems with the renovated building. Boyle was able to get those resolved early on, he said.

One challenge common to many of these projects is dealing with lead-based paint and asbestos in the old buildings. But those problems don't slow down Little Rock's Vanadis Group. "We love revitalization of historic buildings," said Esterer, the developer. "By using the low-income and historic tax credits, we are able to absorb any extra cost associated with lead paint and asbestos abatement."

Considering the complex nature of this type of development, are there other incentives to do them in addition to tax credits and profits?

An important ingredient for success with such developments is a commitment to improve a neighborhood, Boyle said.

If all the developer worries about is the bottom line, the project won't work. "You have to be committed beyond the finances," he said.

"I expected to make some money on this project and own it, but the primary reason I was driven to do it was I felt like somebody had to be first, and I thought I had the formula to do it," he said.

"This building was about economic development and doing something new and different and breaking the barrier for downtown," he said. "Fortunately, the majority of the people that were key and got involved understood that, and so they persevered."

Who are the lofts marketed to?

Artists, young professionals and empty nesters have shown great interest in living in downtown buildings.

ArtLoft was marketed specifically to artists. "They bring a willingness to colonize an area that others don't find acceptable," Boyle said. "They also bring a character and a passion to a neighborhood. They help bring an area back to life by just living there and doing what artists do."

Artists typically don't have a lot of money, but need large rooms for studios, he said. A number of artists with this dilemma were already living illegally in vacated downtown buildings with the blessings of the owners, he said. Part of the market for the loft apartments was already in place.

"These are the artists' living quarters," Boyle said. "The fact that they can use their living quarters as a place to practice their artistry allows them to combine two rents into one."

Esterer said his project in Little Rock targets young professionals between the ages of 22 and 35. However, "young professionals" means a range of incomes. "Some young professionals may be free-lance photographers or reporters for the local paper working for around $10,000 per year," he said. "Therefore, the property was set up as mixed-use and mixed-income lofts. One-half of the lofts are market rate and one-half are affordable. We have investment bankers, bartenders, free-lance photographers and reporters living in the lofts."

In Louisville, the Glassworks Lofts has attracted empty nesters, young married couples and young urban professionals who want to live close to work.

Are these projects successful?

Developers in all three cities agree that their loft apartment projects have been successful. ArtLoft, Block 2 and Glassworks are all 100 percent leased. Even more important than their individual successes may be the impact their projects have had on economic development in their respective downtowns.

"We have been extremely pleased with the success (of Block 2)," Esterer said. "We were able to save three historic buildings, housing almost 200 folks who did not previously live downtown."

Together with the commercial property, the project has created 200 jobs, produces $6 million in sales revenue and has increased property tax revenue by $70,000 annually, he said.

Vanadis Group is continuing its work downtown with Phase II of the Argenta Lofts, which will have 56 units. Leasing of the $5 million project will begin in 2003. The building will be strictly lofts and will be new construction, but will mirror the historic buildings in the area. In January, the developers opened Eastside Lofts, a $3.6 million renovation of a school building into 41 loft apartments for people with and without disabilities.

Weyland will use the same mixed-use development strategy in Louisville when he builds Glassworks II, which will redevelop the old River City Corrections property across Market Street into 36 rental units. Future plans include extending the project south for two blocks of mixed-use retail, commercial and residential development that could ultimately provide 500 additional housing units.

Since Boyle broke the ice and opened ArtLoft in 1996, there has been a flurry of activity in downtown St. Louis by other developers. There are currently 150 market-rate loft apartments ranging in rent from $900 to $3,000 a month. This does not include affordable or low-income lofts. All are full. Most have waiting lists.

"If it's a loft rental, it's completely full," said Sheth, of the Downtown St. Louis Partner-ship. "There's not one residential unit open in any building."

Twenty-five buildings are in some state of renovation for designated housing uses, including loft condominiums that sell for $150,000 to $500,000.

Maybe something Boyle said sums up what all these developers have done:

"This project was very much a seed project," he said. "My mission was to create an interest in downtown living--and it worked."

Community Affairs analysts Faith Weekly and Lyn Haralson contributed information for this article.

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