Similarities in Foreclosed NC Deal and Fort Wayne’s ‘Electric Works’

March 15, 2018

by Jason Arp

In 2003, Capitol Broadcasting in concert with the city of Durham, North Carolina, put forth an effort to reinvigorate downtown Durham by redeveloping the American Tobacco Company properties there into apartments, retail space and offices. The project, costing far more than its real market value, reportedly ended in bankruptcy. Now we learn there are troubling similarities with a project proposed for Indiana.

The  $260-million North Carolina project had roughly 1 million square feet of private office, retail and residential commercial property as well as two parking garages. The project used $100 million in New Markets Tax Credits, $43 million from the local governments of Durham (city and county) and a mix of state and federal historic tax credits.

Seven years after construction, however, the developers Struever Bros., Eccles & Rouse of Baltimore or (SBER), filed for bankruptcy relief according to the Commercial Property Executive, a magazine reporting on the finance, sustainability and legal issues of the commercial real estate industry

Since then, the properties that made up the bulk of the first $170-million phase of the project have traded hands (as recently as 2014) finally being repurchased by the instigator, Capitol Broadcasting, for $50 million, or less than one-third of the original financed costs, according to Durham County tax records.

Today, this same developer comes to Fort Wayne reorganized as Cross Street Partners at the invitation of the city’s politically powerful economic development corporation, Greater Fort Wayne, Inc.

Capital Stacks Comparing Fort Wayne’s ‘Electric Works’
to Durham’s ‘American Tobacco Campus’

Cross Street (formerly SBER) joined forces in Indiana with developers Green Street and Biggs Development to create a new “special-purpose” entity supplying the initial capital of about $18 million to fund “Electric Works,” a $440-million public-private venture to redevelop an old motor factory in Fort Wayne into 1.2 million square feet of apartments, retail and office space.

The Electric Works space should lease for $15 a square foot for Phase I, as confirmed by the developer’s representative at the Feb. 27 Fort Wayne City Council meeting. This should generate about $19 million in annual rental revenue with a net of $9.5 million assuming a generous 50 percent operating margin.

Using an industry standard, if you discount these cash flows in perpetuity at 6 percent (simply divide) you arrive at an estimated $157-million market value, a value similar to the developers’  estimate. In other words, the developer would be arranging $440 million of financing to build something that would be worth roughly a third of that. Once more, there is a similarity with the American Tobacco Campus.

Electric Works would require $85 million of federal tax credits, another $65 million of state tax credits and $100 million of local financing for the entire two-phase project. In addition, the city council has been approached for $65 million for Phase I and $35 million for Phase 2. The balance would be made up of $49 million of equity from multiple investors included at least $18 from the developer, and $141 million in debt financing from yet to be disclosed sources.

Because Indiana state law protects the privacy of limited liability companies it is difficult to identify the true owner in these types of investments. If it were a private transaction that privacy would be acceptable as long as the participants agreed to the conditions. When public money is involved, however, a city council should be made aware of any conflicts of interest. In the case of the Electric Works, it is possible that hidden instigators or even government officials would be positioned to benefit directly. Here’s how that could happen:

  1. The $440 million would go toward a variety of costs in the Electric Works project, including the developer’s $15-million development fee. This repayment of the development fee would mean that the owner of the project at the end of construction would have substantially zero equity in the investment.
  2. The financing from the city appears to be a mix of: 1) County Economic Development Income Tax grants; 2) Tax Increment Financing bonds; and 3) a loan from the city’s Legacy Fund (undetermined as of now). All of this would fall short, so a loan from the Capital Improvement Board would be needed. Moreover, the federal New Markets Tax credits take up to seven years to “season” (the credits being applied by the U.S. Treasury in nearly even increments over seven years to repay the investors. Also, changes in the structure prior to earning all the credits could cause a technical default.)
  3. The “special purpose” entity could be split off from the in-the-know senior investors to perform its “special” purpose — to file bankruptcy on hapless others, in this case the public partners in the public-private partnership, e.g., the city of Fort Wayne. Finally, the project could be sold by the bank at its real and not inflated value, as Capital Broadcast was able to repurchase the predictably overextended American Tobacco Campus for 30 cents on the dollar.

Again, when private investors agree to such a deal, any loss is on them. But when an unknowing public is asked to pay for what amounts to a real estate scheme, fashioned in the dark, it should be a matter of serious concern and investigation.

Jason Arp, for nine years a trader in mortgaged-backed securities for Bank of America, represents the 4th District on the Fort Wayne City Council.


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