Building Capital Stack in Multi-Family Urban Redevelopments

Redeveloping abandoned or underused buildings or properties in downtown cores and transitioning neighborhoods is an enticing prospect for many developers in today’s financial and social environment. The millennial-driven demand for the live/work/ play lifestyle has accelerated the pace of these projects. However, owners and developers often find that in order to make the numbers work for an urban redevelopment project, they have to creatively augment the traditionally available capital sources of debt and equity.

Although debt remains relatively cheap and investment capital remains relatively plentiful, the additional risks and inherent complexities of such projects often make appropriately balanced risk/return financial models hard to pencil out. Therefore, developers must investigate new capital sources to complete the capital stack. Often, these new capital sources come in the form of governmental incentives. While political debates rage about the fairness and value of many such incentives, they are often essential for a project’s financial viability.

Local Government Incentives

The most common incentives from local governments come in the form of payment-in-lieuof- tax (PILOT) tax abatements or tax increment financings (TIF).

In a typical PILOT, the governmental entity will agree to abate some portion of post-development property taxes for a set period of time. The amount and length of abatement will vary depending on the type of redevelopment (new development, redevelopment, office, housing, mixed-use, etc.) and are often based on criteria such as capital invested, jobs created and diversity of contractors.

With TIFs, a portion of the incremental increase in real and personal property taxes within a specially designated geographic area can be allocated to fund public improvements and infrastructure in the area for a redevelopment. Developers can often find lenders willing to lend against the revenue stream from such taxes and add those borrowed funds to the capital stack for the qualifying infrastructure work.

Further, many local governments or governmental agencies have other incentive programs such as grants or low interest loans for certain types of redevelopment.

Federal Tax Programs

In addition to local incentives, developers should also consider federal programs. For example, the Federal Historic Tax Credit (HTC) program, administered by the National Park Service and the Internal Revenue Service in partnership with various state Historic Preservation Offices, can provide a valuable form of additional project equity. For buildings qualified as historic structures, an income tax credit is available for “qualified rehabilitation expenses”, i.e. those development costs that are directly related to the repair or improvement of structural and architectural features of historic buildings. Some states have state tax credit programs similar to the federal program. Often a developer will sell these credits to third parties in return for capital that can be immediately put to use in the redevelopment.

Developers should also consider the New Markets Tax Credit (NMTC) program run by the US Department of the Treasury. These credits are competitively allocated to Community Development Entities (CDEs) that invest capital in projects located in qualifying low-income communities. If the project meets the NMTC requirements for a seven-year compliance period, developers immediately use the CDE’s invested capital for redevelopment purposes.

Choosing Your Capital

Ultimately, owners and developers will have to consider each available capital source to determine how to best build the capital stack for any individual project. Time and effort must be spent determining what incentives are available and how the requirements that come with each incentive will impact the overall project. Further, developers must consider each component of the capital stack when evaluating the use of multiple different incentives on the same project—for example, how will the HTC structure impact the terms of a secured loan and/or TIF financing? Such capital stack structuring is seldom as fun as visioning a new, transformative, profitable redevelopment and will often require attention to mind-numbing detail; however, many redevelopments will never get out of the visioning stage without these additions to the capital stack. Building a multi-layered capital stack in a complex, urban redevelopment requires that the developer be creative, knowledgeable, open-minded and surrounded by a good team of partners, contractors, bankers, architects and lawyers.

T. Gaillard (Gil) Uhlhorn, V is a member in the Memphis, Tenn. office of Bass, Berry & Sims PLC. He represents publicly traded REITs and commercial real estate owners in the acquisition, disposition and financing of real estate assets. He may be reached at

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