MINNEAPOLIS - The Midtown Exchange, Minneapolis’ second largest building, contains one of the most complex tax credit deals in Sherman Associates’ 28 year history.
Built in 1928 as a mail order center for Sears and Roebuck, the one million square-foot building sat vacant for more than a decade after Sears relocated in 1994.
After the project’s lead developer, the Ryan Cos., located a large commercial tenant to occupy 40 percent of the structure, it struggled with how to fill the other 60 percent. One multifamily developer had already pulled out of the deal, unable to make the financing work, so at the advice of the city council, the Ryan Cos. called well-known local developer Sherman Associates late in the game.
“They said, ‘We have almost no time left to work on this—if we’re not under construction in six months, our tenant said they’re moving,’” said George Sherman, president of Minneapolis-based Sherman Associates. “Within 30 days, we had both the blessing of the city and Ryan to take on almost 600,000 square feet.”
The timetable was ambitious, especially for a $49 million tax credit deal, said Sherman. “We proposed it in 30 days, were able to secure commitments for it in 120 days, and were able to close on it in eight months,” he said. “We had phenomenal cooperation with the contractor, the city, our syndicators, and we also had a very cooperative first lender.”
The majority of the resulting Midtown Exchange Apartments’ units are affordable—62 units are set aside for those earning up to 50 percent of the AMI, and 116 for those earning up to 60 percent of the AMI, with rents for the affordable units ranging from $525 to $1,000.
The need for affordable housing was great, given the proximity to two of the city’s largest employers, Abbott Northwestern Hospital and a Wells Fargo campus. “We knew we had a large captive audience,” said Sherman. “But affordable housing could not carry its cost of redevelopment.”
The company decided to develop some market-rate units to offset the costs, and concurrently produced the 89-unit Chicago Historic Lofts on the Greenway, also a part of the Midtown Exchange.
The project received equity of $14.5 million from the sale of LIHTCs, and also netted $8.5 million in historic tax credits; PNC MultiFamily Capital was the syndicator. The company still had to use various complex financing structures to make the deal work.
“We did a sandwich historical lease, which was one of the largest and one of the first 10 done in the country, and the first one that PNC did,” Sherman said. That lease separated the historic credits from the low-income housing tax credits, thus maximizing the amount of credits the development was eligible to receive.
“If we had not done the sandwich lease, we would’ve probably ended up with $4 [million] or $5 million less of low income credits,” Sherman said.
Additionally, Sherman Associates had to take out a $13 million bridge loan since it was still procuring financing when it started construction, “and U.S. Bank took a real leap of faith and did both an A and a B bond,” said Sherman.
Other sources of financing include almost $5 million from the city of Minneapolis’ Community Planning and Economic Development department; $3 million from the Minnesota Housing Finance Agency; and $1 million from local nonprofit the Family Housing Fund.
The Midtown Exchange Apartments were placed in service Jan. 6, 2006, and by December all of the LIHTC units were occupied.
Additional project information, as provided in application by the nominator.
Q. Why does the nominated project deserve to be recognized based on the award criteria of this contest?
A. Midtown Exchange is an historic property in Minneapolis, Minn. that was recently rehabilitated by Sherman Associates, Inc. to include a total of 219 residential rental units. The project represents a unique, creative, and outstanding use of low income housing tax credits in a mixed-use setting, as well as an excellent nominee for the 2007 AFFORDABLE HOUSING FINANCE Readers’ Choice Awards. We feel that the project deserves serious consideration based on its urban location, its use of an existing Minneapolis landmark, and the extraordinary support the project received from the community.
Q. How does this project represent an innovative solution to a specific development challenge?
A. The building utilized for the Midtown Exchange project was originally constructed in 1928 by Sears Roebuck & Company, and served as one of nine mail-order and retail centers erected nationally by the company between 1910 and 1930. The “Sears Tower” served as the center of retail activity in the Lake Street corridor for over 50 years, though the area surrounding the building suffered during the late 1980s and early 1990s when Sears ceased operations at the site. The building sat vacant for over a decade as the neighborhood, city, and many developers worked toward an acceptable reuse of the building. Many significant redevelopment proposals were attempted; however, because of the unique challenges of the site and sheer size of the building, those efforts were not successful. The city of Minneapolis eventually acquired the site in 2001, and then selected a mixed-use redevelopment proposal from Ryan Companies (master developer) and Sherman (housing developer) in 2004.
Midtown Exchange consists of six studio units, 146 one-bedroom units, 57 two-bedroom units, and 10 three-bedroom units in an elevator-serviced, 15-story building on 10.88 acres. The rental units utilize seven floors of the 15-story building, and target families at 50 percent and 60 percent of area median income. Forty-one units are rented at market rates. The remainder of the building consists of 89 for-sale condominiums (also developed by Sherman), the corporate headquarters of Allina Hospitals & Clinics (in excess of 1,800 employees on site), Midtown Global Market—an internationally themed fresh- and prepared-food market that includes a mixture of start-up, second-stage and anchor businesses providing jobs and opportunities for the ethnic communities in the Midtown District—and a new, 128-room Sheraton Hotel.
The project has made the most of existing market opportunities for reuse of the building by combining office, retail, residential, and service space on site. The project has utilized and enhanced existing transit connections without unduly impacting the ability to provide adequate parking to support redevelopment of more than 1 million square feet. Additionally, the project has optimized the relationship between Midtown Exchange and Abbott Northwestern Hospital (connected via skywalk) in an effort to support the hospital’s continued commitment and expansion in the Midtown District. The redevelopment of the former Sears Roebuck building into the Midtown Exchange has been a major redevelopment success for the City of Minneapolis, Hennepin County, and the State of Minnesota, and serves as an economic catalyst for the community.