Pittsburgh’s Thriving Downtown: New Markets Tax Credits Drive New Mixed-Use Real Estate Project Rising on Market Square

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On Forbes Avenue in downtown Pittsburgh, just blocks from where the Monongahela and Allegheny Rivers join to form the Ohio, a Western Pennsylvania company is developing a nearly $105 million mixed-use real estate project that will further revitalize the city’s central business and retail district as a vibrant place to live, work, and play.

The Gardens at Market Square, developed by Millcraft Investments, Inc. of Washington, Pa., is funded in part by federal new markets tax credits from two community development entities. These include a $7 million allocation from Pittsburgh Urban Initiatives LLC, an affiliate of the Urban Redevelopment Authority of Pittsburgh, and a $5 million allocation from Commonwealth Cornerstone Group, a nonprofit corporation created by the Pennsylvania Housing Finance Agency (PHFA).

When completed in late 2015, The Gardens at Market Square – or “The Gardens” as it is called – will include:

 

  • A 198-room Hilton Garden Inn hotel;
  • 128,000 square feet of Class A office space;
  • A 330-car above ground parking garage; and,
  • 14,000 square feet of retail and restaurant space

 

The hotel will occupy one tower and the office space a second, 18-story tower. The latter will be atop the parking garage, which in turn will be above the ground-floor restaurants and retail businesses. The largely glass-faced project is designed to achieve LEED Silver certification or better.

“I’m very proud of our team and what we have accomplished and I can’t wait to see The Gardens in the skyline 22 months from now,” says Brian Walker, chief financial officer of Millcraft Investments, a 50-year-old family firm that originally manufactured steel products before expanding into commercial real estate. “To our knowledge there hasn’t been a private owned mixed-use skyscraper built in Pittsburgh in the last 30 years.”

Walker said a number of challenges had to be overcome to bring the project to fruition: a lengthy entitlement process, an odd-shaped site, the expensive cost of building downtown, altering the traffic flow, finding all of the necessary financing, and designing the development and limiting its height so it will fit in with the neighboring buildings, many of which are historic.

“From the top down we had a vision of what we wanted and were willing to take the risk,” he says.

The Gardens will front on historic Market Square, an open tree-lined public plaza dating back to 1784 that was transformed into a European-style piazza in a $5 million makeover by the city completed in 2010. Today, Market Square bustles day and evening with office workers, shoppers, a growing number of downtown residents, and tourists – a contrast to not too many years ago when Pittsburgh’s core business and shopping district was empty after dark.

The Gardens is the most expensive Pittsburgh project so far by Millcraft Investments, which ventured into the local market around 2006 when Chairman Jack Piatt approached the mayor with proposals for several bold real estate projects to redevelop vacant or underutilized properties in the Forbes and Fifth district. At the time, the Urban Redevelopment Authority (URA) of Pittsburgh was stepping up efforts to try to attract developers with proposals for major real estate projects on sites acquired and assembled by URA for redevelopment.

Site Assembled by URA

The Gardens is being built on vacant land sold to the developer by URA, which assembled the site from seven separate parcels it purchased over a 10-year period, according to URA Acting Executive Director Robert Rubinstein.

“Some of the parcels were vacant land used for surface parking,” he says, “while others had pretty decrepit buildings whose owners hadn’t reinvested a dollar in them in probably 50 years. One or two fell down and we had to demolish the rest before we had any redevelopment plan just because they were public safety hazards.”

Rubinstein said The Gardens will bring much-needed hotel rooms and additional Class A office space as well as new retail to downtown Pittsburgh, filling in the missing redevelopment piece on Market Square.

Besides a new markets tax credit (NMTC) allocation from Pittsburgh Urban Initiatives, URA has provided a loan for The Gardens and helped arrange tax-increment financing. Other funding sources for the transaction, which closed in December 2013, include the NMTC allocation from Commonwealth Cornerstone Group, multiple senior and soft loans, county and state grants, and developer equity. A number of the sources were run through a leverage loan.    Walker and Rubinstein said the NMTC was essential for the viability of The Gardens. Walker said it helped close much of a $25 million funding gap in the project. “We probably spent two years trying to fill that gap,” he says.

Proven Record of Success

Rubinstein indicated that URA favored providing the site, a new markets allocation, and other support for The Gardens because of confidence in Millcraft Investments as a developer and because of the company’s three previous successful projects in downtown Pittsburgh. These were:

  • Piatt Place, an $80 million, LEED-certified development completed in 2009, using new markets tax credits, which renovated the four-story vacant former Lazarus department story building and added three floors above to create 50,000 square feet of street front retail, 180,00 square feet of office space, and 65 luxury condominiums.
  • Market Square Place, a $43 million LEED Gold project adjoining Market Square, completed in 2010 and using federal new markets and historic tax credits, which combined and renovated seven historic buildings, including the G.C. Murphy Company building, to create 35,000 square feet of street front retail, 45,000 square feet of space above for a YMCA, and 46 loft apartments on upper floors.
  • River Vue, a $45.5 million LEED Gold development completed in 2012 that renovated and converted a 16-story, 295,000-square-foot former state office building into 218 luxury apartments.

 

URA provided the sites and financial support for Piatt Place and Market Square Place. Commonwealth Cornerstone Group provided a new markets allocation for Piatt Place.

Praise from Participants

The Gardens development has drawn praise not only from URA but other partners.

“It rang all our bells and whistles,” said Brian Hudson, Sr., chairman of Commonwealth Cornerstone Group and executive director and CEO of PHFA. “We believe this project has tremendous potential to support the continued revitalization of downtown Pittsburgh, with all the accompanying jobs and increased tax revenue associated with such new construction.” He said the building will also be environmentally friendly.

U.S. Bancorp Community Development Corporation, the new markets tax credit investor, similarly hailed the project and its sponsor. “We’ve long been committed to The Gardens at Market Square, having previously partnered on successful new markets and historic tax credit projects in the immediate area with Millcraft Investments, a strong developer,” said Jennifer Westerbeck, assistant vice president of U.S. Bancorp CDC. She said The Gardens, Piatt Place, and Market Square Place “are part of a larger master redevelopment plan that’s transforming blighted buildings in Market Square into vibrant, mixed-use properties that are bringing much-needed rental housing, commercial, retail, and hotel amenities to the area and creating strong jobs with good wages and benefits.”

Walker indicated that The Gardens will create 1,777 direct and indirect jobs and generate substantial tax revenues.

The NMTC and Pittsburgh

Rubinstein and Rebecca Davidson-Wagner, URA manager and president of Pittsburgh Urban Initiatives (PUI), said new markets tax credits have been used for a large number and wide variety of impactful projects in Pittsburgh that have received NMTC allocations from PUI and other CDEs.

PUI, which has landed $90 million in NMTC allocation awards since 2011, has closed seven new markets tax credit projects so far and has another six in the pipeline, says Rubinstein. Closed projects include a new grocery store in a “food desert,” a LEED-certified homeless shelter bringing together 45 separate services programs under one roof, a soccer stadium whose professional players provide soccer clinics for public school students, an energy innovation center, and multiple mixed-use real estate projects.

URA has participated in an additional 10 to 12 NMTC projects as a leverage lender.          PUI has applied for another NMTC allocation award in the current funding round, which could be the last if Congress doesn’t pass legislation to reauthorize the program. The current authorization lapsed at year-end 2013.

“I can’t emphasize how important this program has been to our revitalization efforts in Pittsburgh and to our ability to help low-income communities with jobs and other resources,” says Rubinstein. “We strongly encourage that this program continue and be made permanent.”