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Maritime Building in 1956.
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Wisznia Associates
Maritime Building in 2008.
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Marcel Wisznia, President, Wisznia Associates
To help New Orleans recover from the devastation caused by Hurricane Katrina, Wisznia Associates, an architectural design and real estate development firm headquartered in New Orleans, decided to use its design capabilities and business experiences to help shape a smarter redevelopment strategy for the city.
In doing so, the firm developed and applied a creative technique for combining different federal funding programs that previously were rarely combined due to conflicting programmatic requirements. Wisznia combined federal historic tax credits (HTC), federal new markets tax credits (NMTC), and Federal Housing Administration (FHA) financing -- together with state programs -- to support the adaptive reuse of multistory commercial buildings into mixed-use structures with the residential units safely above the flood zone.
As a cornerstone to implementing this strategy and as a first application of its creative financing, Wisznia decided to transform the historic Maritime Building -- a vacant, storm-damaged, 10-story commercial structure -- into offices for the firm, plus additional offices available for lease, ground-floor commercial space, and 105 market-rate apartments.
Restoring the Maritime Building is the first of several adaptive reuse, mixed-use projects on Wiznia's agenda. Its strategy is simple -- focus development opportunities in areas that remained high and dry in Katrina's aftermath and adapt and reuse existing historic multistory structures by providing new housing units on upper floors and commercial space on lower floors.
Downtown New Orleans clearly fits the strategy Wiznia had in mind because this is where the multistory and historic structures are located. It also presents a chance to maximize tax credits as a source of equity.
Creatively Combining Funding Sources
Nearly the entire Downtown Development District falls within two historic districts, and, as a result, development projects in this area may apply for federal HTCs and Louisiana HTCs. Because of the devastation caused by the hurricane, most of this same area falls within census tracts that qualify for federal NMTCs (see sidebar on how recent changes to the federal NMTC program expanded the number of eligible tracts inside the GO Zone). Louisiana has implemented its own NMTC program, which is also available in this area.
Using multiple federal and state tax credits to raise equity is an essential element in Wiznia's development projects, as is FHA financing (specifically Section 220 and 221(d)(4) insured loans, which are based on a 40-year non-recourse, fixed interest rate that is assumable), because construction costs increased after Hurricane Katrina by roughly 40 percent. The prime reason for these higher construction costs was the increased cost of supplies and labor. Additionally, insurance rates climbed as much as 500 percent.
The technical requirements of the FHA loans and the NMTCs and HTCs, which conflict in some respects with each other, compounded the complexity of this financing package. Federal HTC projects typically incorporate a master lease structure. This means that the real estate owner borrows the project debt and undertakes the rehabilitation activities, and the master tenant operates the project and enters into subleases with end users/occupants of the individual units. A "pass-through" provision of the Internal Revenue Code (Section 50(d)) permits the owner and the master tenant to share the federal HTCs. Maximizing the benefit of the HTC requires that investors have a primary interest in profits associated with the project.
The structure of the NMTC differs considerably from that of the federal HTC. Under the NMTC program, a community development entity (CDE) receiving the NMTCs lends to, or invests in, qualified low-income community businesses (QALICB) that are "unrelated" to the CDE. The NMTC system prohibits investors from owning more than half of the profits or capital interest in the business receiving the investment.
The pass-through lease structure allows the CDE to make NMTC-qualified loans or investments directly to the real estate owner/QALICB. At the same time, the CDE owns all or most of the profits or interest in the master tenant entity and thus avails itself of the HTCs passed through by the real estate owner (see April 2008 issue of the Novogradac New Markets Tax Credit Report). In this way, the benefits of the NMTC and HTC programs are combined.
Previously, the Department of Housing and Urban Development (HUD) did not allow properties with master leasing structures to use FHA-insured loans because HUD required a mortgagor to own and operate the property, subject to the HUD Regulatory Agreement. Wiznia successfully petitioned HUD to allow the company to use a master lease ownership structure so that it could combine HTCs, NMTCs, and FHA financing.
Maritime Building Project
Restoring the Maritime Building supports the revitalization of New Orleans' downtown area by helping to replace the dwindling supply of rental housing in this area as well as by replenishing the supply of market-rate housing units in the New Orleans metropolitan area.
The number of downtown rental residential dwelling units has declined over the past six to eight years, as many historic buildings have been converted from rentals to condominiums. This conversion process, combined with the destruction of tens of thousands of single and multifamily units throughout greater New Orleans by Hurricane Katrina, has created a tremendous need for affordable rental housing.
Since the hurricanes of 2005, most developers have focused on mixed or low-income developments but few 100 percent market-rate projects have begun construction. Maritime will be only the fourth downtown market-rate residential development announced since the storm (two have been completed and construction on the third has just begun); all four projects total only 400 units.
The residential density in downtown New Orleans must increase dramatically because it is one of only a few areas in the city on higher ground. Additionally, the existing urban condominiums and rentals need more downtown amenities, such as restaurants, grocery stores, and bookstores. The Maritime Building's ground floor will include a regional bank, a coffee shop/bakery, and a pizza restaurant -- all of which will add to the fabric of the neighborhood and vibrancy of the historic downtown district.
The Maritime Building project uses an acquisition bridge loan from Wachovia Bank, which assisted in maintaining site control as the additional financing was arranged. Project financing consists of equity from the state and federal NMTCs and HTCs described above and permanent/construction financing in the form of FHA 221(d)(4) and 200 loans. Wachovia also will be the FHA lender. A local community bank partner, Omni Bank, is providing tax credit bridge financing. (See chart for financial details.)
This financing effort has taken a year longer to accomplish than the traditional 6 to 12 months required for the preliminary and final applications that are typical in the FHA lending process. Wachovia's patience as the acquisition bridge lender has been essential. The relationship with Wachovia began with the bridge loan to purchase the building and will ultimately culminate in a HUD closing through Wachovia. The project is on pace to close in fall 2008 and construction will be completed in 2009.
Wiznia has two other projects planned, totaling another $65 million in downtown New Orleans development -- part of the continuing recovery of a great American city.
For more information, e-mail Marcel Wisznia, Wisznia Associates.
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