Healing a neighborhood: perseverance and a creative financial plan helped convert a landmark hospital in St. Louis into a popular apartment community for seniors that also has initiated a neighborhood revival.

The task was daunting: Convince seniors to move into a nearly 70-year-old former hospital building that stood vacant for more than 20 years, in a neglected neighborhood where one in four buildings is torn down or abandoned. Then, convince them to begin moving in while it is still under construction, and convince investors and lenders that the project will provide fair returns.

It was no easy task transforming the historic Homer G. Phillips Hospital into 220 apartments for low- and moderate-income seniors. The St. Louis landmark has a rich 70-year history as one of the first African-American hospitals in the country. In 1979, despite picketing, sit-ins and a class-action lawsuit, the city closed the hospital in save money. By 2001 the building stood dilapidated in a neighborhood that many had abandoned.

To successfully restore the historic building to its former pride and revive the neighborhood, developers had to craft a feasible financial structure that would provide a fair return and show seniors that the building that held a special place in the community's history could be their new home.

Travis Harris, a community manager at the Homer G. Phillips Senior Living Community said, "This building has brought back a sense of pride that was missing in the Vill community for many years."

Vivian Wilson a resident said living there has improved her life.

"It has removed all the stresses of keeping up with home maintenance; I feel I can live a longer life because the stress is gone."

Financial Feasibility

The late developer William Thomas. founder of W.A.T. Dignity Corp., first thought to restore the hospital in 1989. He was later diagnosed with cancel: so he turned the project over to his daughter, Sharon Thomas Robnett, who is now president of the company. As the $42 million project grew more complex, W.A.T. teamed with Minneapolis-based Dominium Development and Acquisition LLC because of Dominium's experience in affordable housing.

The team created a construction budget that was adequate to renovate the building after 20 years of deterioration and create 40,000 square feet of common-area amenities, including dining rooms, an exercise room, a computer lab and library, a salon, game room and convenience store. The plan had to consider the high cost of remodeling a historic building, with unknown structural and environmental issues, but at the same time it had to keep rents affordable.

The property's rental stream could only maintain $4.5 million in permanent debt. The team worked with investment banker Piper Jaffray Co. and determined that a public sale of volume-limited, tax-exempt bonds with credit enhancement, rather than an unenhanced private placement, would keep financing costs lower. U.S. Bank, which has extensive experience in affordable apartment loans, provided credit enhancement. Piper Jaffray also suggested lowering costs and satisfying the investor's interest rate risk aversion through lower floater debt and a swap to get a fixed rate.

The equity financing was even more complex, involving five streams of tax credits--each crucial to the project and each with its own set of rules. To raise $36 million in equity, five tax credits were sold: federal low-income housing, state low-income housing, federal historic, state historic and state brownfield tax credits. Federal credits were sold for more than the high rate of 91 cents for each dollar. (Standard pricing is probably between 75 cents and 80 cents.)

To compensate investors for this aggressive pricing, equity payments were staged over a period of almost four years to provide an adequate return and to provide equity "just in time" for project uses.

Investors were also concerned with the project's ability to deliver projected tax credits. Tax credit rules require all apartment homes to be leased by the end of the first year in which credits are claimed. The choice was either to guarantee a six-month lease--up too aggressive for 220 apartment homes in this market--or delay credits for a year and destroy the project's financial feasibility. The solution was to divide the building into 17 separate condominiums, or small blocks of apartments, so investors could receive tax credits in smaller amounts as apartments were leased.

The team partnered with tax-credit syndicator Paramount Financial Group to find investors for such a unique and complicated plan. Originally, Paramount only committed to finding a buyer for the federal tax credits, due to the complexity of the plan. However, it was able to arrange for one purchaser for the state historic and brownfield credits, and a Fortune 500 company for the remaining credits.

With equity purchasers lined up, Paramount still needed to arrange a $9 million bridge loan through its parent corporation, GMAC, to meet U.S. Bank's equity requirements at closing. The city of St. Louis also provided a $650,000 environmental improvement loan to complete the financing.

Although pieces of the financial structure are commonly found in many projects, the overall structure, using five tax credits together, is unusual. To manage the enormous complexity of this financing plan, the team worked with tax consultant Novogradac & Co. and legal counsel Winthrop & Weinstine.

Overcoming Challenges

Seniors would have to more to a neighborhood where nearly one in four structures were abandoned or torn down, leading many to perceive the neighborhood to be more dangerous than it actually was. To overcome initial hesitancy, the team kept rents lower than the normal market price, while providing above-market quality.

The team also asked local Marketing Solutions to conduct focus group interviews of those who lived in the area and those who used to live in the area but had moved away. The groups said that they were attached to the building and the neighborhood's rich history, and many returned regularly to attend one of the 17 churches within a six-block radius of Homer G. Philips Senior Living Community.

Security and design were important to those interviewed. The remodeling needed to be high quality for seniors to return to the neighborhood. Many said that they had trouble picturing how a hospital would be converted to housing, so the team had to liter ally draw the picture for them. Interior renderings and online virtual tours helped convince seniors that the project would create high-quality apartment homes.

Creating a Legacy

The next hurdle was convincing seniors to move in while the building was still under construction. The project called for an 18-month construction timeline, but the first apartments had to be available for occupancy after 12 months.

To create momentum and encourage seniors to sign-on early, Dominium created the Pioneers' Club for the first 50 residents who moved into the building, providing special more-in benefits, an exclusive welcome party, resident influence over food service menus, and residents' names engraved on the Pioneers Plaque that was displayed in the building's lobby. The plaque was a draw because the seniors were excited to have a special legacy in the historic building.

Potential residents were invited to Hard Hat Parties throughout construction to view progress. They were able to ride up in the construction elevators, talk with construction workers and see the progress on their apartments, further solidifying the experience. Soon, word of mouth bolstered interest. Partnerships with local churches and seniors clubs also spread the word.

Exceeding Expectations

The results were beyond expectations. With rents ranging from $325 to $625 per month, the building (with apartment home size ranging from 500 square feet to 1,090 square feet) was highly affordable and high quality. Seniors were eager to more in. The first residents who moved into the building in December 2002 were greeted with chandeliers, plush carpet, fireplaces and stylish furniture, with many more amenities transforming the hospital into a home. The project was finished in June 2003, and within six months of opening, the building was fully leased.

The development team's creative marketing and financing, and its determination, gave investors confidence to support the unique and risky project. Today, the new Homer G. Philips Senior Living Community provides seniors with quality affordable housing, encourages future development in the neighborhood and stands as a tribute to the neighborhood's rich history.

Resident Comforts

Residents of the landmark hospital enjoy many amenities in their individual apartments and community, Apartment amenities include dishwashers, central air conditioning, oversized windows, cultured marble window sills, level door handles, electric ranges with hoods, window treatments, hardwood cabinets, emergency call systems, wall-to-wall plush carpet, vinyl in kitchen and bathrooms.

Community amenities include 30,000 square feet of common area, state-of-the-art camera and alarm system. computerized control access system, 24-hour central security desk, gated parking, dining room wellness center. beauty and barber shop, solarium library, arts and craft room media room with big screen TV, additional storage, laundry rooms on each floor, 24-hour emergency maintenance, scheduled activities, commercial kitchen, fitness center, chapel, card and game room, sundeck, computer center, private dining rooms, large multi-purpose rooms. two trash shoots per floor, two covered drop-off locations. onsite professional management, monthly resident newsletters, bus trip and outings.

Jeff Huggett is a Project Partner with Dominium Development and Acquisition LLC, Minneapolis. He can be reached at 763/354-5624 of e-mail [e-mail].