DOWNTOWN DILEMMA
Developer asks for longer tax freeze on Court Square Center.
Landmark Downtown revitalization project Court Square Center could be headed toward foreclosure, jeopardizing repayment of a city loan, unless additional tax relief is granted.
City officials and owners of the mixed-use development at Main and Jefferson have asked a Downtown Memphis Commission financing board to freeze property taxes through 2026 to keep the project afloat and protect the city’s $8.5 million investment. The application is scheduled to come before the Center City Revenue Finance Corp. board Tuesday.
The $50 million project, completed in 2009, combined renovations of the historic RhodesJennings Building and Lincoln American Tower with construction of the new Court Annex 2 building facing Court Square. The project at 66 N. Main yielded 75 apartments, offices and commercial space and won accolades for preserving history and sparking other development on Main Street during a crushing recession.
Developers John Basek, Willie Chandler and Yorke Lawson asked for and received a 10-year
property tax freeze in 2005, when they intended to convert apartments to condominiums after seven years. Condominiums aren’t eligible for tax abatement.
But the recession hammered Downtown’s condo market, along with the housing market at large, and wrecked the timeline for condo conversion. Now the developers are waiting for the condo market to rebound while staring at a looming deadline to replace the project’s primary financing, an $8 million, interest-only loan.
The current freeze ends in 2016. If the request is granted, it would be another decade before city and county governments can tax the property at full value. Developers had not submitted a calculation for how much they would save on taxes if the request is approved.
Basek said developers are caught in a bind.
Without the 20-year tax freeze, they don’t believe the project would qualify for a new mortgage to replace the $8 million loan, which is subject to a balloon payment due in the year starting Dec. 21.
If new financing isn’t secured, the project could go into foreclosure, putting at risk an $8.5 million second mortgage supplied by the city of Memphis from federal funds.
The city loan was to be repaid from condo sales after the conversion, Basek said. If the development remains rental housing, the agreement provides for the city and developers to split free cash flow 50-50, he added.
The apartments’ occupancy rate has been at about 95 percent since opening in three phases: Lincoln-American Tower in 2007, Rhodes-Jennings (the renamed Lowenstein Building) in 2008 and Court Annex 2 in 2009.
Downtown commission policy limits a tax freeze, formally known as payment in lieu of taxes, or PILOT, to 15 years but provides for 20-year terms in exceptional cases, at the board’s discretion.
The Court Square project graded out to the equivalent of 28 years, well over the legal limit, when PILOT applications were approved in 2005, Basek said.
City Division of Housing and Community Development Director Robert Lipscomb has asked the Center City board to approve the longer term. “(A) request for an adjustment of the term is necessary to ensure the continued viability of the project ... please accept this correspondence as a show of support for the current request for a term adjust- ment to the Court Square PILOT to the original eligible term.”
In a June 10 letter to Lipscomb, Basek wrote that economic conditions and delayed condo conversion “severely constrain our present ability to refinance private debt, which, in turn, threatens the viability of the Court Square Center redevelopment and the investment of the city of Memphis.”
A Downtown commission staff analysis noted that approval of the request doesn’t guarantee the project would remain solvent, or that the city loan would be paid off.
Director of development Jay Goff took note of the city’s strong support for the request and commented, “The chances of the city not recovering this loan increases exponentially if the PILOT term is not amended and refinancing of the primary debt doesn’t follow.”