Since unveiling his NorthSide plan in May, Paul McKee has done a lot of pitching.
He’s pitched to the neighborhoods he wants to rebuild. He’s pitched to city officials who must approve the plan. He’s pitched to the media, to business groups, to anyone who will listen.
But the people he really needs to pitch to are the guys with the money: Bankers. Investors. The people with the cash to get his vision off the ground. That may be his toughest pitch of all.
The plan to rebuild 1,500 acres of north St. Louis is projected to cost $8.1 billion. In filings with the city, McKee’s McEagle Properties has said it hopes to borrow $6 billion of that and raise most of the rest in the form of equity from investors and partners. And he’ll need to do it in the toughest credit market in decades.
It is worth noting that McEagle won’t need to borrow $6 billion all at once. It plans to "recycle" capital over the course of the 20-year project, and use profits from the early stages to help fund the later ones. But the first four years alone call for nearly $1 billion in expenses, and that money will have to come from somewhere.
Meanwhile, the market for financing big commercial real estate projects keeps getting worse.
The $3.5 trillion industry of office buildings and shopping centers in this country has lost 39 percent of its value in the past two years, according to the MIT Center for Real Estate. Couple that with a wave of commercial mortgages coming due — nearly half will expire in the next five years — and experts worry about a flood of foreclosures and costly refinance deals. That could suck up a lot of cash which might otherwise fuel projects such as NorthSide.
When you figure in the long time frame and complexity of McKee’s project, local finance experts say, raising the money to get it off the ground becomes a very tough sell indeed.
"It’s almost unimaginable," said Edward Lawrence, a finance professor at the University of Missouri-St. Louis. "There are some really knotty issues."
For one, NorthSide will take two decades, starting with a few office buildings and rolling out to include 10,000 homes. That means the project can build on early successes, which is good, Lawrence notes, but it also leaves a lot of time for things to go wrong. "This thing can fall apart at any point," he said.
Then there’s uncertainty about all the different pieces that must come together, from thorny political approvals to an unfunded highway interchange at 22nd Street, to a new $640 million bridge across the Mississippi. And questions about who will fill 4.5 million square feet of new office space in a city where downtown vacancy remains stubbornly high.
The project carries a lot of risk in an environment where many banks don’t want any, said Joe Monteleone, executive vice president of Q10 Triad Capital Advisors, a commercial real estate firm in Creve Coeur.
The way to ease that risk, Monteleone said, is for McEagle to attract a lot of equity — to bring cash to the table and keep its borrowing to a minimum. But that’s no easy task.
"Right now, attracting equity is just very difficult on all projects," he said. "In a very large deal like this, it just becomes that much more difficult."
In documents filed with the city, McEagle says that it and its partners expect to kick in 20 percent, or about $1.7 billion. Then there’s the 75 percent funded through borrowing. The rest would come from tax credits and other government incentives, especially in the first few years as NorthSide gets off the ground.
Most large urban redevelopment projects — such as Atlantic Yards in Brooklyn — have dialed back in this recession, said Stephen Blank, a senior fellow who studies real estate capital markets for the Urban Land Institute. The money just isn’t there right now.
Debt markets are basically frozen. There’s no appetite for commercial mortgage-backed securities. And no one really knows where prices are going, so it’s hard to find buyers for buildings. Simply having a great vision isn’t enough to make a deal happen instant payday loan.
"I don’t know how you could possibly do this," Blank said. "This could be a game changer (for St. Louis), but I don’t see it in today’s environment."
Still, some local banking experts were more optimistic.
Generally speaking, St. Louis banks haven’t been burned like some of their counterparts elsewhere, said Joe Stieven, a longtime bank analyst who heads Stieven Capital Advisors. Some banks have capital, and are willing to lend it, but on their own terms for a change.
"The boring old banking industry — not ’shadow’ banking or investment banking — is willing and able to finance projects," Stieven said. "If you have a good project, you can get it financed."
But so far, just two banks have committed publicly to McEagle’s NorthSide project. And one is defunct.
That’s Corn Belt Bank, which was based in Pittsfield, Ill., and had a branch in Clayton. In 2007, it gave McEagle $3 million in financing, according to deeds filed with the city. But in February, it was shut down by federal banking regulators, and now that note is held by the FDIC, which plans to sell it. McKee said he hoped to extend or refinance that loan with whoever buys it.
The other lender is Bank of Washington, in Washington, Mo., which lent McEagle $27.6 million in December and submitted a letter to city officials pledging to help finance the first two phases of NorthSide if they approve $398 million in tax increment financing.
The bank’s chairman, L.B. Eckelkamp, acknowledged that tough credit markets meant the project might not start as fast as it would have two or three years ago, but he was confident it would succeed. "It’s a wonderful plan," he said. "It does a lot for the city."
McKee says that his capital efforts have been "much more extensive" than just those loans, that he’s talking with banks, private capital groups and institutional investors. He was bullish on his chances.
"We think this project will attract attention from all over the U.S. and foreign investors as well," he wrote in an e-mail interview.
But that money won’t come off the sidelines, he said, until "public commitment to this is evident." In other words, until the city signs that TIF, and grants McEagle the redevelopment rights that will let it start tapping tax credits.
It would certainly help, he said, if the city agrees to back half the cost of that TIF — just under $200 million. In this climate, McKee said, his company can’t afford to carry the full cost of the massive road and sewer upgrades it’s planning for NorthSide. And because the city will benefit from the improvements, he said, it ought to share in the risk.
But city officials are skeptical.
They’ve only backed three other TIFs in recent years, and wound up on the hook each time. And with a tight budget and pension obligations looming, there isn’t much room to pay down bonds if new tax revenue from NorthSide can’t.
Even if Mayor Francis Slay’s office agrees, it’s not clear that there are enough votes on the Board of Aldermen.
"I’m not more of a financial expert than the banks that are looking at this," said Alderman Antonio French. "If they’re still passing on it, who are we to say it’s a good deal?"
Still, in this economic climate, the way to sell the money people on NorthSide may be through the political process, Monteleone said. Lining up public support, and putting down a lot of equity, is the only way to instill enough confidence in a project this big.
"It’s just a difficult project to conventionally finance," Monteleone said. "It’s going to take a lot of public finance. It’s going to take a lot of political clout. I think if anybody is going to be able to pull it off, it’s Paul."
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