Heer's developer seeks HUD-backed loan

St. Louis developer Kevin McGowan is attempting an end run around the frozen credit markets to secure federally insured financing to renovate the Heer's building as apartments.

A Department of Housing and Urban Development-backed loan is emerging as his best option, McGowan said, after traditional lenders balked at his original plan to transform the former department store in downtown Springfield into roughly 40 for-sale condominiums above a Mike Shannon's Steaks and Seafood Restaurant.

McGowan, president and CEO of Blue Urban LLC, in October faced the same dilemma as virtually every other developer in the country: The lending spigot had been shut off as banks pulled back in reaction to the global financial crisis. Most lenders now view for-sale condo projects as nonstarters, McGowan said.

"There weren't any takers (for the Heer's condo project)," he said. "We went literally all over the world. We were in Europe. We were in Asia. We were all over the United States. We used brokers. We went direct to lenders. I'm sure there are thousands of banks we didn't contact, but we did contact hundreds."

To make the Heer's project more attractive to lenders, McGowan has abandoned the condo concept in favor of apartments - 61 to be exact. Monthly rental rates for the one-, two- and three-bedroom units will range between $600 and $1,200, he said, or about $97 per square foot.

"Two or three years ago, lenders weren't interested in lending ... for this type of rental development; they all got on the condo-for-sale bandwagon," McGowan said. "Now, the pendulum has swung completely back to rentals."

McGowan said he's pursuing financing through Capmark Financial Group Inc., formerly known as GMAC Commercial Mortgage Corp., and that HUD officials in Kansas City have agreed to insure the loan. Through its Section 220 program, HUD insures lenders against losses on mortgage defaults for multifamily housing projects in urban renewal areas. Apartment projects financed through the program don't include subsidized or Section 8 housing.

McGowan said the market-rate loan available through Capmark is attractive for a couple of reasons, not the least of which is a 40-year amortization schedule. The loan terms also prohibit the lender from holding the developer personally liable if the $27 million project falls through, he noted.

Kevin Kozminske, a Capmark mortgage banker in St. Louis who is assisting McGowan, said the HUD-guaranteed loan would serve as the construction loan and then roll over into a permanent mortgage.

"Developers - even on a refinance basis - are looking for HUD-insured financing because it's high-leverage," he said. "Really, on the multifamily side from a refinance standpoint, your only players in the market today are going to be Fannie, Freddie or HUD. And for new construction, HUD's really the only game in town at this point."

Kozminske said Capmark - the largest lender in the country insured by the Federal Housing Administration - originated roughly $500 million in federally backed loans for apartment projects and health care facilities last year.

Provided the appraisal meets expectations and HUD approvals don't hit any snags, McGowan said the financing could be in place within nine months, setting the stage for construction to begin in fall 2009. Right now, Blue Urban is taking bids from contractors to board up the building's windows, which were covered months ago with plastic tarps that are now tattered.

City Council could review a set of revised Heer's deadlines and requested developer incentives, which will include tax increment financing, as early as next month.

Mary Lilly Smith, the city's economic development director, said her department is eagerly awaiting McGowan's suggested amendments to the redevelopment agreement, which currently requires him to start construction on Heer's by Feb. 1.

The revised Heer's redevelopment plan isn't all that different from what McGowan proposed almost exactly a year ago.

McGowan said Shannon's - owned by his father-in-law and former St. Louis Cardinal Mike Shannon - is still committed to the project as the ground-floor tenant, but the city no longer plans to lease space in the building for its traffic management center and TV23 operations, making more room for apartments. Interior finishes for the apartments will be the same as those planned for the condos, McGowan said.

A swanky bowling alley similar to the Lucky Strike Lanes in Kansas City's Power & Light District also is planned for the first floor of the Heer's annex on the building's north side, McGowan said. Gone, though, is a penthouse suite that would have partially occupied the building's signature tower.

A rooftop swimming pool, a large fitness room and two lounges also remain intact.

"We think we're going to draw a heavy college/young professional crowd," he said.

Parking secured for tenants comprise 75 spaces in a basement garage and another 80 spots in the newly constructed parking deck just west of Heer's.

Streetscape improvements under way around the square will dovetail nicely with the Heer's project, McGowan said, adding that the upgrades have been viewed favorably by HUD officials.

"That was a big vote of confidence for the Heer's building," he said. "They like the commitment the city of Springfield has made to that building."[[In-content Ad]]This story has been corrected. It initially misspelled Kevin Kozminske's name.