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Project Finance: Reviving and Restructuring
a Stalled Project
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THE CHALLENGE
Craddock-Cunningham Architectural Partners had been trying for
several years to redevelop two historic industrial buildings in
downtown Lynchburg, Virginia, when the project had hit a financing
roadblock. Located in the Lower Basin Historic District, the 55,875
square-foot project seemed great on paper: The crown jewel was
a proposed 44-room, four-star hotel called the Craddock Terry
Hotel and Conference Center. Located in a historic district with
access to major local and regional businesses, and surrounded
by two restaurants and a microbrewery, the hotel had all the earmarks
of a profitable, high-quality downtown hotel. Local investors
were keen on the project, but commercial loan underwriters and
tax-credit investors were more skeptical. At the behest of the
National Trust for Historic Preservation, Bluffwalk, LP, the development
partnership in which Craddock-Cunningham was the general partner,
called in Tetrault & Associates.
THE SOLUTION
Our first step was to look back over the project’s twelve-year
history to determine what the challenges were and how we might
solve them. We found that, as inexperienced developers, our clients
were mistakenly promoting the hospitality side of the business—which
was absolutely the wrong direction given the chill that had descended
over the hotel and restaurant industry in the wake of the September
11th attacks. The client had also packaged the real estate development
and the businesses in it as one single project, making it much
harder to finance. Instead, we recommended that the client restructure
the project into two distinct parts. The first was a real estate
deal involving two valuable historic buildings in an active market.
The second comprised the leases held by four tenants. The leases
anchored the project and improved the cash flow, but the tenants
could also be replaced if the businesses failed. We also persuaded
our client to increase the budget in order to show a respectable
development fee. The client had initially thought that deferring
their development fee would contribute to the bottom line, but
we pointed out that loan underwriters and tax-credit investors
would have little interest unless the project could demonstrate
significant potential profits. Finally, we worked with the client’s
legal and accounting team to develop a sophisticated finance and
accounting structure, helping to underwrite the $21-million project
with federal preservation tax credits, new market tax credits,
a HUD 108 loan, and $3 million from local private investors.
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