$100M Meier & Frank Redo Revived with Tax Credit Allocation

PORTLAND-Hopes for the near-term restoration and renovation of the historic Downtown Meier & Frank department store building here were revived Thursday when the federal government granted Sage Hospitality Resources what amounts to about $20 million in support of its $100-million plan to buy and convert the upper 10-floors of the 16-story, 650,000-sf structure into a high-end hotel. May Department Stores Co., which owns the white terra cotta-clad building, would use revenue from the sale of the upper floors to renovate and compress its Meier & Frank store into the five lower floors.Denver-based Sage Hospitality is a specialist in the restoration and conversion of historic structures into hotel properties. The company has completed six around the nation already and is looking for more. Sage Hospitality executive vice president Ken Geist tells GlobeSt.com the company did not announce the funding itself because it is only a first step in a year-long trek toward determining if the company’s idea will turn into an actual construction project. When asked if there were any “deal breakers” lurking in the building, Geist responded, “There’s probably a hundred. These historic redevelopments are very complicated. We’ve done six around the country and we are very good at it but we also realize there are lots of things that could go wrong between now and the end of the year; we’re nine- to 12 months from announcing it’s a go.” Nonetheless, with the tax credit allocation having been awarded, Geist says Sage now has the property under contract and can work toward completing the architectural design and rounding out the financing package. “And early next year when it’s all coming together nicely, then we will announce our plans to redevelop it into a mixed-use building that includes a 325-room Renaissance hotel,” he says.Renaissance is a high-end brand of Marriott, with which Sage is in conversations regarding the Portland project. The two have joined forces on at least one previous project. The Meier & Frank building would be the first Renaissance-branded hotel in the Portland market. Geist says the best-case timeline has construction beginning is early 2005 and winding up in 2007, which gives the city some time to absorb the recent additions to the Downtown hotel market. Major components of the project include a full-scale seismic upgrade and cutting a hole down through the middle of the building in order to break up its massive 40,000-sf floor plates and flood the building with light, thereby allowing for the creation of interior-facing hotel rooms. Sage created a similar atrium in a conversion completed in its hometown of Denver.Of course, to make all the changes Sage will have to obtain approvals from both state and national historic preservation agencies, and it cannot start that process until the designs are done, which will take another three- to six months, says Geist. “A lot of things have to happen in sequence,” he says. “That’s why it takes so long.” The estimated $20 million Sage is receiving from the federal government is in the form of $72.5 million in New Markets Tax Credits from the US Department of Treasury, which awarded the city another $100 million in tax credits. The Portland Development Commission, the city’s redevelopment agency, is announcing today what other projects will benefit from the allocation.Geist says the tax credits are worth about $0.39 cents on the dollar, which means Sage really has about $28 million worth of tax credits to trade for cash and, because of the time value of money, the credits, which must be spread out over a number of years, will sell for about $20 million. That money will be used to offset the fact that historic renovation projects like this typically don’t appraise out at what it costs to build, says Geist. “If we build it for $100 million, it could only appraise out at $70 million, which means we may only be able to obtain a $40-million loan,” he says. “That gets us to $60 million, which means we still need $40 million in equity, and that’s where we come in.”The first real sense that the Meier & Frank project was a real possibility came in August 2002, when the city and May announced they were negotiating an agreement wherein the city would assist in the process by putting out an RFP for its redevelopment and throwing $3 million into the kitty. One month later, May backed out of the deal, saying it had not seen economic models that show it could get the necessary return on its capital investment. Now, with Sage potentially assuming most of the risk, May is apparently more comfortable with the idea. “We’re really excited about this for us, for the city,” a May spokesperson tells GlobeSt.com. “We think it’s going to be a great boost to Portland’s redevelopment plans and our efforts to mare sure our store continues to serve people in the Downtown market.”Designed for Meier & Frank by A.E. Doyle, the steel-framed structure was built in phases between 1909 and 1932. The building is Oregon’s earliest example of the white terra cotta Commercial style department store. It was added to the National Register of Historic Places in 1993.