Revitalizing the Core

In Worcester, Mass., a former industrial city of 181,000 battered for decades by population and job losses, the federal new markets tax credit is helping to finance the redevelopment of five vacant downtown buildings once used by the local daily newspaper into a new urban education and business center.

The project’s sponsor is the Worcester Business Development Corporation (WBDC), a nonprofit that promotes local economic development and business and job growth.

Four community development entities, led by the Massachusetts Housing Investment Corporation, provided a total $33.55 million in new markets tax credit allocation for the $37.2 million project. The transaction is also benefiting from the less commonly used 10% federal historic rehabilitation tax credit.

Redevelopment of Newspaper Complex

Expected to be completed this fall, the project involves the acquisition, gut renovation, and adaptive reuse of five interconnected low-rise buildings occupying 135,000 square feet, plus expanded surface parking. “It’s the most significant revitalization project being undertaken in downtown Worcester,” says Andrea Daskalakis, Chief Investment Officer at the Massachusetts Housing Investment Corporation (MHIC).

From the early 20th century until 2008, the buildings were used for the offices, printing presses, and distribution center of the Worcester Telegram & Gazette. The newspaper was purchased by The New York Times Company and relocated elsewhere. The Times Company sold the real estate to WBDC in November 2011.

The site, across the street from City Hall and the Worcester Commons, is near The Hanover Theatre, which reopened in 2008 after being renovated by WBDC using NMTC financing from MHIC, DEI, Citibank, and the Nonprofit Finance Fund. The theater restoration and current project are part of WBDC’s plan for revitalizing a 35-acre section of downtown Worcester.

The five buildings were constructed over decades, starting in the 1890s. Four, comprising 69% of the total space, were built before 1936 and thereby eligible for the 10% tax credit for rehabilitation expenses.

The completed facility will include:

A new campus for Quinsigamond Community College, the anchor tenant. Relocating from the outskirts of Worcester, the college will utilize most of the complex’s space for offices and classrooms for its Healthcare and Workforce Development Training Center;
A private digital solutions provider relocating from a suburb, bringing 15 new jobs to downtown;
A business incubator (the Technology & Idea Exchange Incubator);
An anticipated 300-seat theater, ground floor café, and store; and,
Surface parking for 250 cars.

Project’s Appeal, Funding Sources

According to Daskalakis and MHIC Director of Capital Development Peter Sargent, the project was attractive to MHIC because of WBDC’s track record, the prior success working together on The Hanover Theatre, and the potential community impact – to further revitalize downtown Worcester and create jobs.

Worcester, the second largest city in New England, was a major center for textile mills and factories in the 1800s, but suffered heavy population and job losses in the second half of the 20th century, together with a decline in its central business district. “The city had not always necessarily risen with the high tide,” says Sargent.

There were several hurdles that the deal had to overcome.

“It was a very challenging development to undertake because you had to find a big user,” says Daskalakis. This major user turned out to be the community college, which pre-leased 80,000 square feet of space.

In addition, because of the project’s size, it was necessary to find more than one CDE to provide NMTC allocation. Individual CDEs usually don’t have enough allocation to fund a large project alone and/or wish to reduce their risk and fund more projects. MHIC already had the Worcester deal in its project pipeline but didn’t have enough remaining NMTC allocation for the entire project. “You only have so much authority and you have to spread it out,” says Sargent. “We didn’t have any more left.”

The four CDEs committing NMTC allocation authority were: MHIC, $16.4 million; MassDevelopment, $12 million; U.S. Bancorp Community Development Entity, $2.65 million; and The Community Builders, $2.5 million. The four CDEs reduced transaction costs by sharing the same legal counsel, Nolan Sheehan Patten LLP.

Other funding sources included equity from U.S. Bancorp Community Development Corporation (USBCDC) generated by the new markets and 10% historic rehabilitation tax credits; a leverage loan from a WBDC affiliate; a HUD Section 108 loan from the city; several grants; and cash from WBDC. MassDevelopment and Property and Casualty Initiative (a consortium of Massachusetts insurance companies) provided bridge financing. Nearly $13.8 million of the leverage debt came from a consortium of seven local banks: Fidelity Bank, the lead agent; Unibank; Webster Five Cents Savings Bank; Middlesex Savings Bank; Bay State Savings Bank; United Bank; and Commerce Bank.

The credit pricing paid by USBCDC was 85 cents per dollar of tax credit for the new markets tax credit and $1.05 per dollar of tax credit for the 10% historic tax credit, according to Daskalakis.

While the 10% credit generates only half the equity of the commonly used 20% tax credit for rehabilitation of certified historic buildings, the paperwork required to qualify the Worcester buildings for the smaller incentive was worth the effort, says Sargent. “It was important enough a source of funding for the deal.”

Chimeka Gladney, Director of Project Management at U.S. Bancorp CDC, says U.S. Bank was interested in providing NMTC allocation and tax credit equity for the Worcester project for several reasons.

“We have a strong pipeline of deals that we’ve done in Boston and the Greater Boston area,” she said. In addition, Gladney noted that the bank has had strong relationships with the three other CDEs participating in the Worcester deal, and the project itself “is a great community benefits story…This project will be a strong catalyst for the neighborhood and the community.”

“The financing was a challenge but we couldn’t have asked for a better group to work with to get this project closed,” said WBDC President and CEO Craig Blais. “From the local banks to MHIC, U.S. Bank, MassDevelopment, and The Community Builders, everyone pulled in the same direction to accomplish this great task. Downtown Worcester is turning a corner and has seen many successes.”

Blais said the new development “will anchor an area of downtown that has been lacking in activity and job opportunities since the newspaper downsized,” and will create jobs, expand Worcester’s tax base, and promote new opportunities.

Transaction Structure Adjusted

A final challenge for the transaction was grappling with IRS Revenue Procedure 2014-12, issued December 30, 2013. This long-awaited guidance laid out “safe harbor” parameters for partnership structures for transactions planning to utilize federal historic tax credits, in order to be deemed safe from challenge by the IRS.

The closing of the Worcester transaction was delayed from December 2013 until March 2014 in order to revise the structure to fall under the revenue procedure’s safe harbor, likely making it among the first historic deals to close in the wake of Rev. Proc. 2014-12.

Edwards Wildman Palmer LLP, the legal counsel for WBDC, provided the historic tax credit, QALICB, and true debt opinion letters for the transaction, according to Kathryn Galbraith Day, an attorney at the law firm.

She said the structure for the transaction differed in several respects from the structure of typical “twinned” NMTC-historic tax credit deals prior to Rev. Proc. 2014-12. While the Worcester transaction still uses a master tenant and master lease, these differences include:

The use of a “flip.” During the initial five-year historic credit recapture period, the investor has a 99% interest in the master tenant and the sponsor a 1% interest. At the end of five years, the investor’s interest falls to 30% while the sponsor’s interest increases to 70%. As a result, the investor receives most of the cash flow from the project during the first five years only.
No “call” option. The investor has an option to put (sell) its interest to the sponsor for fair market value after five years. However, if the investor doesn’t do so, there is no call option under which the sponsor can buy out the investor’s interest. Rather, the investor stays in the deal and continues collecting 30% of the cash.

The transaction’s participants said it took some time to understand and work through the nuances of Rev. 2014-12 and adjust the deal structure in a way that was satisfactory to all parties.

“This project turned out for me – and I think for everybody that worked on it – to be a labor of love,” says Gladney.

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