HUD officials reviewing Heer's

Six months after announcing his plan to pursue a loan backed by the U.S. Department of Housing and Urban Development, Heer's developer Kevin McGowan is rounding out the pre-application process.

"My expectation is that we will break ground on the Heer's building before the end of the year," said McGowan, president and CEO of St. Louis-based Blue Urban LLC.

McGowan said he should receive a letter from HUD by early July inviting Blue Urban to submit a formal loan application. McGowan is seeking an $11.8 million loan through HUD's Section 220 program, which insures lenders against losses on mortgage defaults for multifamily housing projects in urban renewal areas. The balance of the $27 million project will be funded with historic preservation tax credits and local incentives.

McGowan told Springfield Business Journal in December that traditional lenders, pulling back in response to the worsening credit crisis and diminishing market for center city condominiums, were uninterested in financing a Heer's renovation. At the time, McGowan had hoped to transform the former department store in downtown Springfield into roughly 40 for-sale condominiums above a Mike Shannon's Steaks and Seafood Restaurant, which has since signed a lease for the building's ground floor.

Blue Urban responded to the market by abandoning the condo concept in favor of 61 loft apartments with monthly rental rates ranging from $600 to $1,200. Tenants would be able to choose from one-, two- and three-bedroom units.

The redesigned project was well received by officials at HUD's Kansas City office, and Blue Urban filed its pre-application package with the department in mid-May. HUD is now conducting its technical review, which includes an on-site visit by a team of appraisers, said department spokeswoman Dale Gray.

"We have 45 days to determine if we consider it a viable project, if there's a market for it, if we think it's going to work," she said.

McGowan and Tim VanMatre, Heer's project manager for Blue Urban, are confident HUD officials will conclude that the long-awaited redevelopment project is financially feasible and issue an invitation letter within the next two weeks.

"They told us what we can expect to get for a rental rate, and we agreed," McGowan said. "We saw eye-to-eye on both rates and lease-up projections."

VanMatre believes market demand for the Heer's apartments will mirror demand in St. Louis and Kansas City, where Blue Urban has successfully converted for-sale condo projects into leased apartments. He pointed to the GW Lofts in St. Louis, which were completed a year ago and are fully occupied. The Motor Lofts, also in St. Louis, were divided into 20 condos, all of which have been sold, and 55 apartments, 38 of which have been leased, VanMatre said.

Blue Urban has 120 days after the letter is issued to submit to HUD detailed architectural drawings, revised cost estimates and third-party reports, Gray said, but Blue Urban officials are planning a much quicker turnaround of about 45 days, because architectural plans are 95 percent complete, VanMatre said.

"We're actually ahead of where most people are when they submit the pre-application," he added.

If HUD approves the "firm" application and Springfield City Council subsequently signs off on McGowan's requested incentives, the loan could be closed in October, VanMatre said, adding that construction on Heer's would begin immediately.

Kevin Kozminske, a mortgage banker with Capmark Financial Group Inc. in St. Louis who is assisting McGowan, also is optimistic the loan could be closed this fall. Kozminske said the market-rate loan, which has a 40-year amortization schedule, would essentially serve two functions.

"It's interest-only during the construction period and then it rolls over automatically to a permanent loan," he said. "You lock your interest rate on the front end."

The loan terms also prohibit the lender from holding McGowan personally liable if the Heer's project falls through - something he says isn't likely to happen.

"It's certainly a priority for Springfield; it's certainly a priority for Blue Urban," he said. "Our interest in this project hasn't waned a bit. ... I think it will be a huge success."

Construction on Heer's is expected to last about a year, and VanMatre said there's plenty of interior work that can be done during winter months. Selective demolition and building cleanup will come first, followed by core utility work, he said. If the schedule holds, pre-leasing could begin in late summer 2010, VanMatre noted.[[In-content Ad]]