A day of reckoning for Heer’s developer Kevin McGowan has passed.
Despite claiming to have a deal in place with his loan company to meet the Nov. 30 deadline for an $11.8 million U.S. Department of Housing and Urban Development-insured loan to help redevelop the Heer’s building, St. Louis developer McGowan balked.
“I made the decision yesterday not to submit the application,” McGowan said Dec. 1.
After three years of attempting to secure financing for his $29.3 million Heer’s Tower plan, the
St. Louis developer said last week the risk outweighed the reward.
“All of the financing was in place. Yes, we could have been approved for the project, but I don’t think there’s anybody in the state that’s going to take $30 million on for so little return. And I’m not willing to do it,” he said.
HUD spokeswoman Dale Gray said a representative of McGowan’s loan company, Berkadia Commercial Mortgage, asked the morning of Nov. 30 for another extension. HUD immediately denied the request, Dale said.
McGowan said he was unaware of Berkadia’s request for another extension and wouldn’t have approved of it.
Berkadia missed HUD’s original Oct. 6 deadline and then missed a self-imposed Oct. 15 date.
“It’s a $30 million deal and for myself and for others, we’ve got guarantees going out for more than 20 years in some cases for a very, very slim return,” McGowan said. “There just isn’t any margin for error in this project. If it doesn’t work, it’s all on me and I’m not comfortable with that.”
McGowan, who develops under Blue Urban LLC, released a statement Nov. 30 regarding the Heer’s project and confirming the decision not to move forward.
“The reality is, with the risks that are involved, the reward is just not commensurate,” McGowan said by telephone the next day, adding no developer would be interested in the project.
“There’s so little return in this, nobody will do this deal right now,” he said.
“I guess we so much wanted to get this done we were blind to that aspect for a little bit. Finally, just yesterday as a matter of fact, I just kind of looked at it all and said, ‘This is not a deal that we ought to be doing.’”
Financial fallout
The HUD loan was the largest piece of the Heer’s project financing puzzle.
In August, Springfield City Council approved a term sheet and resolution that included a $2 million small-business development loan from the city to Heer’s Building LLC and McGowan.
City Manager Greg Burris expressed disappointment but said city officials knew it was an uncertain issue given the current recession.
“We didn’t know,” Burris said. “It was Kevin’s decision.”
The city’s term sheet with McGowan expired Dec. 1, and the money will remain in the small business loan fund, Burris said.
“The term sheet was created in such a way to really protect the citizens in that it was an all-in or nobody’s in,” he added. “That was a deal point that we insisted on. There would be one massive closing and everybody would go in at the same time but only if all the dominoes fell into place.”
The term sheet lays out these funding sources and their terms for the $29.3 million project:
• $11.8 million HUD loan at 6.35 percent interest for 40 years;
• $5.2 million federal historic tax credit at 7.5 percent interest, not to exceed three years;
• $4.9 million state historic tax credit bridge loan at 7 percent interest for 18 months or until the project is complete;
• $4.4 million from the developer;
• $2 million city small business development loan at 5 percent for 23 years; and
• $1 million Missouri Development Finance Board loan through the city at 5 percent for 23 years.
McGowan now will be required to go back to the preapplication process should he choose to renovate the building, Gray said.
“If Kevin keeps the building and decides later that he wants to renovate it again and submit another proposal we’ll essentially start over,” Burris said.
Burris emphasized that the city does not own the building.
“So many people think the city owns the Heer’s building,” Burris said.
“It’s not our building. We’re not going to tear it down. We have people who say ‘Well, you really ought to tear it down.’ I don’t think they want the government to go in and start tearing down private buildings.”
Indian Wells, Calif.-based Chouteau Properties Inc., which has Missouri and Illinois locations, owns the Heer’s building, according to Greene County assessor data.
McGowan reportedly bought the property from the city for $3 million in 2007, but the assessed value of the property now is $1.38 million, according to
www.greenecountymo.org/assessor.
Former business partner Nat Walsh said Chouteau Properties would purchase properties and hold them during the development process with an agreement that McGowan would buy them upon project completion.
The next stepAs to whether the Heer’s building will be kept, sold or go into foreclosure, McGowan said each scenario is possible.
“For the immediate future, it’s going to go nowhere,” McGowan said.
“We’ll board it up and weather-proof it and go back to attacking this thing after the first of the year, kind of reassessing the entire project.”
He refused to speculate how long the project might be on hold.
Selling the property is a possibility, he said, but doubted whether any interested buyers would pay what McGowan did for the building.
“If there was a buyer for the building, I’d certainly be interested in talking with them but in this market, the building is probably worth about one-third what we paid for it,” McGowan said.
As for the foreclosure possibility?
“I suppose that possibility exists for every property in the world,” he said. “We currently make our payments and we intend to continue to make our payments on this property. Unlike a developed building, the carrying costs for an empty building are relatively small.”
McGowan faces legal issues with other projects.
A pair of foreclosure notices was filed by Bank of America against McGowan/Walsh St. Louis projects Ballpark Lofts I and Ballpark Lofts II, as well as an $85,086 federal tax lien filed Sept. 10 against McGowan. A foreclosure sale for the downtown loft buildings is scheduled for Dec. 7.
McGowan plans for the eight-story, 150,000-square-foot Heer’s building called for a Mike Shannon’s Steak & Seafood restaurant, bowling alley, indoor pool, fitness center and 61 apartments.[[In-content Ad]]
