Property Developer: Structured Financing Meets Structured Risk

SPONSORED: Statler Hotel and Residences & DFW Risk Management Experts - Arthur J. Gallagher & Co.



I know it’s cliché, but real estate is truly booming in Dallas. On your next drive downtown, look around and count the cranes. About 4,600 units announced or under construction in the 15 districts of Downtown Dallas. But we are not just looking at new building construction. Renovations, redevelopment, adaptive reuse, reconstruction and facadism are booming as well, resulting in immeasurable benefits and contributions to the innovative movement happening in our city. The Statler is emblematic of mid-century buildings in large urban areas that are less suitable for their programmatic requirements as progress, technology, politics and economics move faster than their built environment.

Redevelopers can expect that a high cost investment is necessary to reconstruct and rejuvenate these structures, and most decide to completely demolish and build from scratch. For the 59 year old Hilton, however, a great team of visionaries chose to maintain the value of its iconic history for the next generations to come - at a $175 million dollar price tag. This alternative route is complicated, requiring the leverage of public and private funds necessary to increase cash, resulting in improved IRR and decreased risk. Historical building redevelopment projects, specifically, introduce unique issues and challenges that equally require the right experts, ideas and alternative sources of capital.

THE ISSUE: Unlike a colonial governor’s home or storied battlefield, structures of relatively recent vintage have not engendered similar levels of appreciation. The cost of redevelopment simply can’t yield the returns necessary to finance the project. In an effort to protect the Statler, the development team worked to secure its inclusion in the designation of a potential historic district. Through public-private structured financing, the developer was able in find incremental cash flow from non-traditional sources of capital allowing the project to pencil out. What developers and owners will also discover is these sources of cash and alternative capital require specific needs for protection from performance, catastrophic events and inherent design, development and construction risks.

THE CHALLENGE: Years of neglect and aging, resulting in minimal structural decline and water damage, add challenges to any renovation the size of this large real estate project. In 2013 a Dallas based developer diligently pursuing purchase of the property, indicated the deal fell through because they could not make the financials work. Centurion American, the awarded developer primarily managing the development process, had taken several years to structure the transaction. Centurian American was able to secure all the financing, which included significant equity to be generated by state and federal historic rehabilitation tax credits.

Original plans called for the historic rehabilitation to provide solutions for its physical renovation including a fully modernized interior. As conversations in planning progressed, questions like, “What if construction was underway and we experience a sudden fire that ravages the building?” arose among the group. Commonly, most of the attention is focused on structuring the transaction, building the project and setting up mechanisms to ensure adequate compliance with local, state and federal financing authorities. But what happens if a disaster like a fire, hail or windstorm or damages the project during construction, or before the end of the tax credit recovery period? As important as it is to plan all aspects of a redevelopment property’s physical structure, developers must plan to have a structured risk solution to cover the investment and project stakeholders before, during and after the project is complete.

THE SOLUTION: You should know that structured risk is a process of integrating insurance products with development risk management techniques which weave the solution into the development, construction and financing documents. Expertise in development operations, construction process, contracts and helping all the parties understand how the risks of the project will be financed and allocated requires a diverse and collaborative team of experts. Arthur J. Gallagher’s local development and construction team along with othern project partners designed and implemented a multi-party integrated risk management and project insurance  delivery plan. Our solution needed to protect the design, development, construction, financing and tax incentives that would support the success of the Statler’s reimaging work.

Since the property was approved as a local landmark, this allowed for financial incentives such as Federal Rehabilitation Tax Credits, as well as State Incentives to potential buyers. In addition, the visa exchange program “EB 5” introduced additional capital. The structured solution for the Statler included liability, property, environmental, historical tax credit and recapture protection.

As with any property, the right solution will be a tailored program that perfectly fits the property’s planned needs, and in essence protect:

• Investment

• Capital (debt and equity)

• People

• Physical Assets

• Cash Flows

• Surrounding buildings

• Reputation of the project stakeholders

 

Several sources of capital contributing to the success of the project include:

•  TIF is a form of financing (Tax Incremental Finance)

• Tax Districts

• State Historical Tax Credits

• Federal Historical Tax Credits

• HUD Guaranteed Loans

This is an exciting time for Dallas. The number of people living downtown has increased from 300 in the mid 90’s to nearly 10,000 by the end of 2015. Our development team here at Gallagher looks forward to supporting the city, local developers and the construction community at large to continue to transform and shape our urban community.

To learn more about how our community continues to evolve through redevelopment, adaptive reuse and the unique world of public-private structured finance and structured risk, register for the Develop Dallas Panel hosted by Arthur J. Gallagher and our partners this upcoming spring 2016. www.AJG.com/DallasBuildersPane

Property and Casualty Broker

Steve Pierce

5420 Lincoln Center, Ste. 400

Dallas, TX 75240

Phone: 972.663.6157

www.AJG.com/Dallas