The credit crunch could not have come at a worse time for the 1,303-unit Riverside Plaza in Minneapolis. In 2007, efforts were well under way to raise millions of dollars to pay for a sorely needed rehab at the aging affordable housing complex. Those funding sources evaporated in the wake of the meltdown in the capital markets.
Four years later, Minneapolis-based Sherman Associates Inc. has pulled off a major coup in cobbling together financing a second time. The developer has secured $132 million from a dozen different sources to pay for a major rehabilitation and refinancing of the 1.8 million sq. ft. property.
Funds will pay for $65 million in improvements and $50 million in project refinancing. The remaining $17 million is earmarked for developer fees, financing expenses and contingency construction costs.
“We were sweating bullets to get this deal done,” says George Sherman, owner and president of Sherman Associates. The firm has served as the property's general partner and manager since it acquired the affordable housing project in 1988.
The financing delay almost brought the historic Riverside Plaza to its knees. The property has played a vital role in serving Twin Cities' immigrant groups over the years, ranging from the Vietnamese to Somalians.
Built in the mid-1970s, the project was in desperate need of mechanical repairs and other improvements. The plumbing, in particular, was on the verge of collapse due to poor installation. “Over the last 35 years, the piping has deteriorated to the point where you could literally crush it in your hand,” says Sherman.
Repairs had clearly reached a critical point in January 2010 when a rusted water main flooded the entire main level of the 11-building complex and caused an electrical fire that knocked out power for more than 72 hours.
“At one point, there were conversations about whether or not we were going to have to vacate 6,000 people and find alternative places for them to live,” says Sherman. “After that there was a lot of worry about what was going to be the next thing to go,” he adds. The failing plumbing system was continuing to produce floods somewhere in the complex about every two months.
Riverside Plaza represents one of the largest tax credit rehab projects under way in the country with $28 million in Low Income Housing Tax Credits (LIHTC), $22 million in federal historic tax credits and another $20 million in state historic tax credits.
Sherman Associates is spending roughly $50,000 per unit on a major overall that includes everything from completely replacing plumbing and rooftops to new flooring, cabinets and appliances in individual units. “About all we're keeping is the physical structure,” says Sherman. All of the construction work is scheduled to be complete by Jan. 1, 2013.
Historic status pays
From the start, Sherman Associates has been committed to keeping this landmark project on its feet, and the developer is ideally suited for the task. Sherman Associates has been active in urban development and historic preservation since the late 1970s, and the company has developed more than $1.5 billion in residential and commercial projects throughout the Midwest.
Ultimately, Sherman Associates was able to assemble $70 million in equity through the sale of tax credits, secure a $50 million HUD mortgage, and line up another $12 million in low-interest loans from eight additional sources.
Riverside Plaza's crucial second chance at financing came with Minnesota legislation for a new state historic tax credit program that was passed in April 2010.
But in order to land the $20 million in state historic tax credits, and another $22 million in federal historic tax credits, Riverside Plaza had to overcome a significant obstacle — obtaining official historic status with the National Register of Historic Places.
Although Riverside Plaza is recognized as an iconic development in the Twin Cities, the age of the property falls well short of the usual 50-year minimum required to be considered for the National Register.
The fact that Sherman Associates was able to get a waiver for its relatively young age of 37 and obtain that federal designation — all in an astounding eight-month period — is a testament to the firm's tenacity as much as the historical significance of the project.
Although selling that staggering volume of tax credits could have become its own Herculean task, Google stepped in to buy all of the low-income housing tax credits and the federal historic tax credits as part of its corporate commitment to being socially responsible.
And while Sherman Associates owns less than 1% of the property, the firm is putting its money where its mouth is to purchase the $20 million in state historic tax credits.
Were there doubts as to whether Sherman Associates could pull together the financing for such a large project? “Absolutely,” says Mike Christenson, director of the Minneapolis Department of Community Planning and Economic Development Agency.
Yet, Sherman quickly earned the support of the city of Minneapolis, including $7 million in financing from the Community Planning and Economic Development Agency. “We are confident that he is going to do what he says he's going to do,” says Christenson.
The agency has worked with Sherman Associates on several projects over the years, including the redevelopment of the historic 1.2 million sq. ft. Sears, Roebuck & Co. building in South Minneapolis.
Riverside Plaza was constructed between 1974 and 1976 as part of a HUD pilot program called “New Town, In Town.” The original design was based on a grandiose plan to build a massive housing complex with 10,000 units of both affordable and upscale luxury units that would revolutionize urban living.
It was built within blocks of both the University of Minnesota and downtown Minneapolis. The late architect Ralph Rapson, who was recognized nationally and internationally as a major voice in modernism architecture during the 1970s, designed the project.
Ironically, the sizable project that exists today represents only phase one of the original design. “There was a vision that it would keep rolling out and there would be a phase one, two, three, four and five,” recalls Sherman. However, a lack of federal funding and litigation from the neighborhood stalled the project after the first phase was constructed. “The final death knell is that the project financially didn't work,” he adds.
Sherman Associates stepped in as the head of a new ownership group that bought the property out of foreclosure in 1988 and quickly moved to get the property operating in the black. The property has maintained a roughly 95% occupancy rate since Sherman Associates took over management. The majority of units operate under either Section 8 or Section 42 subsidies. Some 129 units, or 10% of the project, are offered at market rate.
Part of Sherman's commitment to the project over the past two decades also reflects the important role that Riverside Plaza plays in Minneapolis. The apartment complex has emerged as a community within a community, particularly among Twin Cities' immigrants.
In addition, Riverside Plaza provides more than just residential units. The complex features about 60,000 sq. ft. of common area space that houses everything from a small grocery store and post office to a charter school, day care facility and community meeting rooms.
Although Riverside Plaza hosts a variety of ethnic groups, it currently serves as a major base for the Twin Cities' Somali community. About 70% of the residents are from the East African country of Somalia.
“We welcome immigrants and we love what they do for our community,” says Christenson. “For us, this has been an important project because we want to grow the city with upwardly mobile citizens, and we know there are a lot of those at Riverside Plaza.”