For years, it brewed some of the Twin Cities’ best-known beer. Unfortunately, in 2002, Schmidt Brewing Company made its last keg. For the next two years, the building was occupied by an ethanol company but by 2004, the historic building — a noteworthy St. Paul landmark since 1855 — remained imposing, hollow and vacant.
That’s when Dominium, a Minnesota-based developer specializing in affordable housing, decided to purchase the site and transform it into a $130 million redeveloped housing project for local artists.
Dan Smith, senior vice president with U.S. Bank’s Community Lending Division, explains how a former beer house became a thriving artistic hub using an intricate combination of public and private financing.
“I would say that demand for affordable housing is always high,” Smith said, especially in urban areas like Minneapolis-St. Paul. Normally, affordable housing works on a rent-restricted model, which applies to those people who make less than 60 percent of the area’s median income.”
Real estate developers who specialize in affordable housing, like Dominium in the case of the Schmidt project, will often be the ones to spearhead the process of development. The developers will go out and scout a site — a historical building that’s been vacant for years, for instance — and begin the process of purchasing it for conversion.
This process is often facilitated through capital markets, which gives companies the access to raise sufficient capital for real-estate investments.
Purchasing a property, however, is not always easy. Because of challenges, such as zoning restrictions, developers will often have a number of hurdles to cross before they can buy the site and transform it.
“In the larger cities, the zoning processes are more accustomed to dealing with density and rent restrictions than some of the suburban communities,” Smith said. “That’s a big risk for developers.”
The process of purchasing a site like Schmidt begins with the developer seeking public finance options, Smith said. These often take several forms and are made possible through municipal, state and even federal dollars.
Low-Income Housing Tax Credits are federally distributed and allow financing partners like U.S. Bank to enjoy a federal tax credit in return for investing in a low-income housing project. Forgivable loans, another financing option that comes out of the public treasury, don’t start accruing interest for at least 30 years and behave almost like grants, Smith said.
“Once [the developers] have all that, they come to a lender and try to sell their tax credits to an investor,” Smith said. “Then they get money from the investor and from us — the lender — to build the project. U.S. Bank gets repaid through an amortizing mortgage or investor equity.”
The Schmidt Brewery Artist Lofts were completed in May 2014 and will house 260 units specially designed for artists, with performance spaces, pottery studios and various gallery spaces. The Schmidt project, in addition to using federal tax credits and forgivable loans, was also funded by tax-increment financing.
“Tax increment [financing] is where a local community will give a long-term break on property taxes — In Minnesota it’s a 25-year break from property taxes — in exchange for completing a redevelopment project,” Smith said. “What that does is give the project additional cash flow, which can be financed and rolled into a mortgage.”
The city also issued tax-exempt conduit bonds, which allowed the developer to get tax-exempt interest on the mortgage for the property. Those tax-exempt bonds were also bundled with tax credits allocated by the federal government specifically for noteworthy historical sites. Although tax-exempt bonds come with this added benefit, they still aren’t risk free: the bonds may still default and are still subject to rising interest rates.
“Schmidt is really a classic urban redevelopment project in almost every sense of the term,” Smith said. The building is a historically significant site that had become economically obsolete. “That was a very high-impact project for the city of St. Paul. It’s a prominent site, it’s a building that everybody in town knows, it’s right on a key transit corridor, it’s close to downtown and it’s a big site.”
Smith said that the partnership among the government, Dominium and U.S. Bank, which bought Dominium’s tax credits, is a demonstration of how public-private partnerships can dramatically expedite the redevelopment of important parts of the city.
“I think old cities that are redeveloping that have industrial sites are always looking for ways to reuse those sites,” he added.