The Englewood Square project exemplifies the use of the NMTC program to provide vital gap financing for a multi-tenant commercial real estate project that will revitalize a highly strategic long-vacant corner in a deeply distressed community. Once the second busiest shopping district in Chicago, the 63rd and Halsted intersection in the South Side neighborhood of Englewood had become a blighted eyesore, sitting vacant for decades. NMTC financing helped bring a high-quality Whole Foods-anchored shopping center to a neighborhood that is decidedly not experiencing gentrification, with poverty rates of more than45 percent and an unemployment rate almost triple the national average.
This project would also qualify as a metro-area QLICI, and we would be happy to be considered for that instead.
Brief Description of Development
Chicago Development Fund (“CDF”) and PNC Community Partners Inc. (PNC) provided $13.5 million in allocation ($13.29 million in QLICI debt) to Englewood Square, LP to finance the $15.8 million, 5-acre/49,300-square-foot shopping center anchored by a 20,000-square-foot Whole Foods Market that will emphasize local hiring, locally-produced goods, and a full array of fresh foods at price points that will be competitive for the neighborhood.
The project site and surrounding neighborhood are deeply distressed; the project’s Census tract has a median family income of 42.3 percent of the regional figure, an unemployment rate of 18.8 percent and a poverty rate of more than 42 percent. All Census tracts within the store’s anticipated primary trade area are Low-Income Communities, and 70 percent of trade area residents live in USDA Low-Income Low-Access (LI/LA) areas.
Returning national retail tenants to a community that has long been plagued by corporate disinvestment, the project is expected to create approximately 120 FTEs including more than 100 full-time positions with average wages of $48,500; 98 percent of which are anticipated to be eligible for benefits.
Englewood Square, an innovative public-private partnership, is the highly catalytic first phase of a 13-acre redevelopment at 63rd and Halsted, a long-vacant corner in the heart of Englewood, one of the most distressed neighborhoods on the South Side of Chicago; for more information, please see the “Englewood Rising” video at http://www.englewoodsquare.com/videos/.
Englewood Square was literally unable to start construction until the coordinated closing of the NMTC transaction and senior/junior leverage debt—a situation sometimes referred to as a “hard but for” in NMTC circles.
The primary financing challenges for the project were its low rents relative to the substantial development costs of delivering a top-quality shopping center on a blighted urban redevelopment site. Underscoring the difficulty of getting the project financed, Englewood Square is the culmination of 40 years of revitalization efforts at this corner that commenced with Sears Roebuck’s departure in 1976. A detailed valuation of the project based on the project’s specific tenants and contracted rents indicated at most $8.6 million in up-front estimated value assuming a 7 percent cap rate (highly aggressive for a multi-tenant project on the South Side of Chicago). This value was substantially exceeded by the $13.29 million in QLICI debt.
The NMTC financing package was carefully underwritten in coordination with the City of Chicago’s TIF financing and land write-down assistance to verify that the project’s developer and equity investors are only expected to achieve the minimum level of returns that would be generally acceptable in the marketplace for a project of this type.
Given the extreme tightness of the deal, the low fee structures provided by CDF and PNC were essential to deliver as much NMTC subsidy as possible per dollar of allocation. Overall, the two CDEs’ upfront fees and seven-year asset management fees combined equal only 4.3 percent of the QEI.
In the early to mid-twentieth century, the 63rd and Halsted commercial corridor in the heart of Englewood on Chicago’s South Side was the second busiest shopping district in Chicago, only outpaced by the downtown Loop shopping area. However, the national trend of white flight and redlining hit Englewood particularly hard in the 1940s and 50s. The population eventually declined from nearly 100,000 at its peak to its current 30,000 residents. Englewood has a 45 percent poverty rate and is among the City’s highest rates of crime and food insecurity. By the 1980s, the 63rd/Halsted site had fallen largely vacant and was ultimately assembled by the City of Chicago.
In November 1999, President Bill Clinton spoke at Englewood High School—four blocks east of the Englewood Square site--as part of his efforts to lay the groundwork for the creation of the NMTC program. Clinton’s remarks included the following: “what this new markets name means is that if Englewood still has a poverty rate more than 2.5 times the rate of Chicago, if the median household income in this community is barely more than half of Chicago, if there are still boarded-up brownstones and shut-up storefronts, that means this is not just a problem; this is an opportunity. This is a new market, and everybody in America ought to…do what can be done to advance it.”
Englewood Square exemplifies these principles by causing three of America’s strongest retail brands—Whole Foods, Starbucks, and Chipotle—to invest in a catalytic, highly inclusive manner to bring opportunity to a community long plagued by corporate disinvestment. The project’s 49,300-square-foot of retail space is anchored by a 20,000-square-foot Whole Foods Market that will emphasize local hiring, locally-produced goods, and fresh foods at competitive prices. The 5-acre project is the first phase of a 13-acre mixed-use development on Cityowned land that will reinvigorate the 63rd Street Corridor in Englewood.
As described below, the project achieves multiple local and citywide goals. It is nearing construction completion; the first tenant opened for business on 7/1/16 and Whole Foods is on track for opening on 9/28/16. The project will open 100 percent preleased, having fully achieved its pro forma rents.
- Healthy Foods. Whole Foods brings healthy high-quality food options to a neighborhood where $20.2 million annually (75 percent) of local grocery spending occurs in convenience stores, which typically have high prices and limited fresh items. The store is located in a USDA Low-Income/Low Access (“LI/LA” or “food desert) area. Of the 59,600 residents in the store’s primary trade area, 100 percent live in Low-Income Communities and 70 percent live in USDA LI/LAs. Over 40 percent of Englewood is food insecure—one of the highest rates in Chicago.
- Local Hiring. The project is expected to create approximately 120 FTEs, including over 100 fulltime positions with average wages of $48,500 (98 percent anticipated to be eligible for benefits). Whole Foods has committed to hiring at least 30 percent of permanent FTEs from the neighborhood in partnership with Greater Englewood CDC and other organizations. Starbucks strongly emphasizes community hiring, and is partnering with neighborhood organizations to provide customer service and retail “soft skills” training for local youth. All of the project’s estimated 122 construction jobs pay prevailing wage, and more than 50 percent have gone to local residents.
- Local and Minority Businesses. The developer is DL3 Realty, an African-American-owned development firm focused on healthy food, medical care and education projects on the South Side of Chicago. The general contractor, Ujamaa, is also African-American-owned, and more than 40 percent of construction spending is with MBEs. Whole Foods has been working closely with Greater Englewood CDC to hold workshops and provide technical assistance for local businesses wishing to become Whole Foods vendors; 25 businesses have already achieved certification and will be selling their products in the store.
- Sustainability. The project site, a former brownfield that required substantial remediation, features a LEED-certified building and a “green roof” to improve on-site stormwater retention and reduce cooling loads. The site is located 1 block from a Chicago “L” station and adjacent to multiple bus routes.
- Implementing Community-Supported Plans. The project implements key site-specific and citywide goals from multiple planning efforts including Chicago Neighborhoods Now and “a Recipe for Healthy Places.” With substantial community input, the grassroots New Communities Plan identified the site as a priority location for a high-quality grocery store offering substantial produce.
Chicago Development Fund (“CDF”) and PNC Community Partners, Inc. provided the QLICI Loans, and PNC Bank provided NMTC equity and senior leverage debt. CDF, a nonprofit formed in 2005, is controlled by the City of Chicago and closely coordinates with the City’s community and economic development financing efforts. CDF prioritizes Chicago’s most highly distressed South and West Side neighborhoods, and development of grocery-anchored retail in “food deserts.” The NMTC structure was integrated with two additional City of Chicago financing opportunities—a write-down of the land cost to $1 and Tax Increment Financing (TIF) for the remediation and sitework. Consistent with CDF’s and PNC’s missions to provide NMTC financing efficiently with minimal cost, total upfront and 7-year asset management fees were 4.3 percent of the QEI, substantially below industry levels.
The financing structure incorporated several innovative elements. A portion of the developer’s equity and NMTC leverage was raised through the crowdfunding platform Fundrise—the first use of this emerging tool in Chicago. TIF financing was creatively structured to fund the foundations of Englewood Square’s buildings prior to transfer to the developer, maximizing the TIF-eligible costs. The coordination of these necessary resources occurred through the creativity and experience of DL3, CDF’s close integration with the City of Chicago, and PNC’s diligent efforts. The team’s noteworthy collaboration around project timeframe overcame the “chicken or the egg” dynamics that plague multi-tenant projects in highly distressed communities. CDF and PNC intentionally committed their NMTC financing in October 2014 during sitework and pre-leasing—11 months before QLICI closing was anticipated. The certainty of the NMTC financing allowed DL3 to attract a strong national tenant mix that includes Starbucks, Chipotle, and a primary care health provider.