Beyond Due Diligence: Bridging The Gap

By Bret Stuntz

In this economic climate, financing the redevelopment of legacy, Brownfield and tax reverted properties can prove difficult.

Complex programmatic hurdles create fear and uncertainty that can become costly and time-consuming. As a result, these sites often languish, forgotten in plain view, while further hindering the process of economic and community development.

Incentives to Support Project Packaging

In Michigan the typical loan-to-value ratio is currently at 60-70%. This loan structure requires greater equity participation from developers at a time when capital is scarce. These terms are even less favorable for projects with legacy costs, significant Brownfield conditions, or environmental concerns.

The end result: many projects never get off the ground because developers can’t meet their equity requirement.

Incentives help to fill this gap in the credit industry. Financing can range from thousands of dollars to many millions, and programs can take the form of cash grants, low interest or forgivable loans, tax increment financing, and tax abatements and credits.

Gap Financing Programs

An increasingly popular financing mechanism in which developers can secure a loan to finance their equity requirement within a larger loan structure, gap financing is a vital component of loan structures where the developer would not otherwise be able to meet their equity obligation. However, negotiating Federal, State and local incentives is often a daunting task for those without intimate legislative and policy/procedural experience.

Transforming Traverse City’s Old Warehouse District: The Hotel Indigo

Hotel Indigo

The Hotel Indigo

In 2011 we were selected by Grand Traverse County’s Brownfield Redevelopment Authority to help with the The Hotel Indigo mixed-use project, a $16M redevelopment of The Hotel Indigo in Traverse City’s Old Warehouse District. The project will construct a 107,862 square foot boutique hotel with 105 rooms, a 3,000 square foot conference space, restaurant, and underground parking. We were able to help secure over $2M though the following gap financing incentives.

  • $1 million — Community Revitalization Program Loan (pending).
  • $620,000 — US EPA Revolving Loan Fund Loan
  • $455,000 — Local Site Remediation Revolving Loan Fund

We were also able to assist in securing and maintaining additional funding for the project valued at nearly $5 million. The Hotel Indigo opens it’s doors in the Spring 2014.

While incentives like gap financing can be a powerful tools for development, they require expertise to structure the loans effectively. Extensive knowledge of the programs is required, and most firms don’t yet have the experience with the application process, different types of financing, and timing that it takes to make these programs loans work.

What To Look For

When selecting a firm to help you guide you through the incentives process, make sure to look for certified full-time economic development specialists with the extensive experience integrating incentives. Economic development financing professionals should be able to navigate the complexities of existing legislation and policies for securing appropriate incentives to make your project financially viable. This requires the expertise to evaluate each potential incentive’s true value as well as package it together with others in order to reduce your project cost and limit lender risk.

What To Avoid

The most common shortcoming we find in economic development consulting services is inexperience. You’ll want to make sure your consultants aren’t learning as they go (and on your dime). Ask about similar projects they’ve worked on in the past and pay attention to how they’ve structured and managed those incentive programs. Experience matters.

Our Firm

In order to help our clients get their projects out of the ground, we built a team of full-time economic development and financing practitioners with the skill and experience to maximize incentive and project financing opportunities. Our certified specialists have longstanding relationships with federal, state and local program decision-makers and include former managers of public incentives programs.

Contact us today to learn how we can help with your next project.

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