$75M Government Subsidy Apparently Not Enough for Luxury Center City Hotels

Rendering courtesy of the Tierney Agency

In 2013, Philadelphia’s City Council approved a $33 million tax-credit package to help developer Brook Lenfest build two boutique hotels on a vacant lot at 15th and Chestnut in Center City.

The deal was meant to offset the cost of the construction, which was estimated at $280 million, using something called “Tax Increment Financing.” Lenfest also secured other state and federal grants worth an additional $42 million, bringing the total public subsidy of the hotel project, which is supposed to include a W hotel and an Element hotel, to $75 million.

But apparently Lenfest, son of the former Inquirer and Daily News owner H.F. “Gerry” Lenfest, is still struggling to pull together all the money he needs. Last week, Councilman Bill Greenlee introduced a bill on behalf of Council President Darrell Clarke that would create a “Neighborhood Improvement District” on just that one property alone. That would allow the developer to secure a private loan against the value of the subsidy.

Usually, Neighborhood Improvement Districts, or NIDs, are established across whole neighborhoods (hence the name). They’re used to assess property owners with an extra levy that’s then directed to special services like lighting, cleaning or security personnel. The Center City District is the biggest NID in Philadelphia.

Lately, developers have been looking to use NIDs as insurance on TIFs.

Before we get into that, a quick primer on TIFs: TIFs work by freezing certain local and state taxes, including property taxes, on specific properties for 20 years, while new development gets started. But during the ensuing years, the actual tax assessments continue to grow while the project is developed. There will be a difference between a property’s value in 2015 (say $5 million) and its value in 2025 (say $10 million). The city continues to collect the total amount of property taxes owed on a TIF property during that time, but it gives the difference between the year-one tax bill and the year-10 (or year-whatever) tax bill back to the owner to pay down debt. In essence, the tax increment is redirected from the city to the private lender. The property owner in this scenario would owe $67,000 in property taxes in 2015 and $134,000 in 2025. But the city would still get just $67,000 in every year of the TIF. The owners of those properties then use the TIF as leverage to borrow money on the private market, showing lenders that they have a certain amount of savings from the city over the next couple decades and can therefore be relied on to pay back the debt.

Using a NID adds a layer to that process, by letting developers assess their own tenants in order to make up the difference in case the tax increment doesn’t rise fast enough to pay down whatever they’ve borrowed. In this case, according to PIDC President John Grady, the NID is being used to allow a lender to create a lien on the property to recoup his or her loan in case the tax increment doesn’t increase at the necessary rate. (Indeed, a PlanPhilly analysis showed that the projections tend to be overly optimistic.)

Grady said that this new kind of NID-backed TIF financing structure could become a trend. TIFs are supposed to provide insurance to lenders that borrowers will be able to pay down their debt, since the borrower saves so much money on taxes. But lenders lately have been looking for an extra level of insurance on those loans. Grady calls it the “belt-and-suspenders approach in terms of security for the lender.”

Last year, the city and school district approved a $55 million TIF to help push along the redevelopment of the Gallery at Market East. Later, they approved a NID that only includes the area within the mall. The NID would allow the property owners to charge their own tenants a special assessment — not for the purposes of extra services, but so the owners can pay down the debt on the TIF if they’re short on money.

The 1441 Chestnut Street NID would be the first single-property NID in Philadelphia. Lenfest said on Monday that the TIF alone wasn’t sufficient to secure the borrowing he needs to complete the project.

“We couldn’t sell the TIF for near the $33 million it was supposed to provide,” Lenfest wrote in an email. “The NID is to correct the defects that made it worth less than $33 million.”

Darrell Clarke, whose district includes the hotel property, said last week that he was willing to sponsor the NID so that Lenfest could finance the project, but that the $33 million TIF was plenty generous in terms of public subsidy, and there wouldn’t be any more money forthcoming. Lenfest wouldn’t name the size of his financing gap.

This article has been updated to include more information about the financing structure.

Follow @jaredbrey on Twitter.